In the Matter of the Application of the City of Buffalo to Extend its Assigned Service Area into the Area Presently Assigned to Wright-Hennepin Cooperative Electric Association.

In the Matter of the Application of the City of Buffalo to Extend its Assigned Service Area into the Area Presently Assigned to Wright-Hennepin Cooperative Electric Association. A05-1410, Court of Appeals Unpublished, May 9, 2006.

This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480 A. 08, subd. 3 (2004).

 

STATE OF MINNESOTA

IN COURT OF APPEALS

A05-1410

 

 

In the Matter of the Application of the

City of Buffalo to Extend its Assigned

Service Area into the Area Presently Assigned to

Wright-Hennepin Cooperative Electric Association.

 

 

Filed May 9, 2006

Affirmed

Halbrooks, Judge

 

 

Minnesota Public Utilities Commission

File No. E-221,148/SA-03-989

 

 

Kathleen M. Brennan, Andrew J. Shea, McGrann Shea Anderson Carnival Straughn & Lamb, Chartered, 800 Nicollet Mall, Suite 2600, Minneapolis, MN 55402-7035 (for relator City of Buffalo)

 

Harold LeVander, Jr., Felhaber, Larson, Fenlon & Vogt, P.A., 444 Cedar Street, Suite 2100, St. Paul, MN 55101-2136 (for respondent Wright-Hennepin Cooperative Electric Association)

 

Mike Hatch, Attorney General, Kari Valley Zipko, Assistant Attorney General, 1100 Bremer Tower, 445 Minnesota Street, St. Paul, MN  55101 (for respondent Minnesota Public Utilities Commission)

 

Gary A. Van Cleve, Molly McKee, Larkin Hoffman Daly & Lindgren, Ltd., 7900 Xerxes Avenue South, 1500 Wells Fargo Plaza, Bloomington, MN 55431 (for amicus BATC)

 

            Considered and decided by Shumaker, Presiding Judge; Halbrooks, Judge; and Crippen, Judge.*

U N P U B L I S H E D   O P I N I O N

HALBROOKS, Judge

            In this certiorari appeal from a Minnesota Public Utilities Commission order, relator City of Buffalo challenges respondent Minnesota Public Utilities Commission's decision on several grounds.  First, relator asserts that the commission erred by granting respondent Wright-Hennepin Cooperative Electric Association a loss-of-revenue compensation award based on future customers.  Second, relator argues that the commission erred by failing to consider the cooperative's avoided costs.  Third, relator argues that the commission's compensation award is unconstitutional because it is unreasonable, arbitrary, and capricious.  Finally, relator claims that the commission's order is not supported by substantial evidence and that the commission used an unlawful procedure in arriving at its decision.  We affirm.

FACTS

            In July 2003, relator City of Buffalo (city) filed a petition with respondent Minnesota Public Utilities Commission (commission) requesting authority to extend its assigned electrical-service area to include three annexed areas.  All three of the annexed areas were part of respondent Wright-Hennepin Cooperative Electric Association's (cooperative) assigned electrical-service area.  The city also requested that the commission grant it interim service rights for the three annexed areas.

            The commission denied the city's request for interim service rights and issued an order for a contested-case hearing regarding the amount of compensation that the cooperative is entitled to as a result of the city's extension.  In the interim, the city annexed four additional areas and requested that those areas be joined with the previous three for the purposes of the contested-case hearing.  The commission granted the city's request and joined the four additional annexed areas.  In May 2004, the administrative law judge (ALJ) conducted public and evidentiary hearings, following which the parties filed post-hearing briefs.

            The cooperative currently has a three-phase primary overhead line running in the vicinity of the annexed areas that serves the eight existing customers there and other customers in the area.  Therefore, the ALJ determined that because under Minn. Stat. § 216.44 (2004) the annexed areas are receiving electric service from the cooperative, the cooperative is entitled to loss-of-revenue compensation.  The ALJ then analyzed the annexed areas to determine whether and to what extent the city was required to provide compensation for loss of revenue to the cooperative for future customers.  The ALJ determined that the cooperative is entitled to compensation for future loss of revenue in one annexed area only.  Finally, the ALJ determined that the mill rate for existing customers is 11.55, which calculated over a 10-year period amounts to $27,750, and the mill rate for the future customers in the one annexed area should be calculated at a mill rate of 11.22. 

            The cooperative filed exceptions to the ALJ's report, and the city responded to those exceptions.  The cooperative's exceptions concerned the ALJ's findings on compensation for future customers; avoiding certain system upgrades, including contributions in aid of construction in its avoided costs; the ALJ's use of the allocation method of calculating compensation instead of the incremental approach; and the timing of the investment.  In March 2005, the commission held a hearing on the exceptions.  The commission affirmed, modified, and reversed portions of the ALJ's report.

            The commission found that the cooperative was providing service to the seven annexed areas and, as a result, was entitled to compensation for future losses of revenue in each of the annexed areas.  It also found, consistent with the ALJ's report, that the compensation period should be ten years.  The commission stated that the proper method used to calculate avoided costs is the incremental approach, not the averaging/allocation approach advocated by the city and adopted by the ALJ.  Further, the commission found that the avoided costs should not include any contributions in aid of construction, as the ALJ included.  The commission set the compensation amount for existing customers at 17.9 mills per kilowatt hour; but the commission did not set an amount for future customers because it believed that the parties should be the first to make this determination.  Finally, the commission concluded that the compensation period should begin when the investments are actually undertaken, not from the point of the annexation.  Subsequent to the commission's order, both parties filed motions for reconsideration, but the commission failed to reconsider the matter.  This appeal by the city follows. 

D E C I S I O N

I.          Did the commission err by awarding respondent utility company compensation for future customers?

 

            "We review questions of statutory construction de novo."  Houston v. Int'l Data Transfer Corp., 645 N.W.2d 144, 149 (Minn. 2002).  But

[w]hen reviewing agency decisions we adhere to the fundamental concept that decisions of administrative agencies enjoy a presumption of correctness, and deference should be shown by courts to the agencies' expertise and their special knowledge in the field of their technical training, education, and experience.  The agency decision-maker is presumed to have the expertise necessary to decide technical matters within the scope of the agency's authority, and judicial deference, rooted in the separation of powers doctrine, is extended to an agency decision-maker in the interpretation of statutes that the agency is charged with administering and enforcing.  We defer to an agency's conclusions regarding conflicts in testimony, the weight given to expert testimony, and the inferences to be drawn from testimony.

 

In re Excess Surplus Status of Blue Cross & Blue Shield of Minn., 624 N.W.2d 264, 278 (Minn. 2001) (footnote omitted) (quotation and citations omitted).

            There are two controlling statutes at issue here:  Minn. Stat. § 216B.40 (2004) and Minn. Stat. § 216B.44 (2004).  The first states that, with certain exceptions, "each electric utility shall have the exclusive right to provide electric service at retail to each and every present and future customer."  Minn. Stat. § 216B.40 (emphasis added).  The second statute provides:

[W]henever a municipality which owns and operates an electric utility (1) extends its corporate boundaries through annexation . . ., the municipality shall thereafter furnish electric service to these areas unless the area is already receiving electric service from an electric utility, in which event, the municipality may purchase the facilities of the electric utility serving the area.

 

Minn. Stat. § 216B.44(a).

 

            An electric utility receives compensation for services taken over by a municipality only if the annexed areas were currently "receiving electric service."  See Minn. Stat. § 216B.44.  This court has interpreted the phrase "receiving electric service" as "synonymous with a situation where the utility serving the area ‘has facilities in place capable of providing [the area] with service."  In re Kandiyohi Coop. Elec. Power Ass'n, 455 N.W.2d 102, 105 (Minn. App. 1990).  We affirmed that interpretation shortly after Kandiyohi when we concluded that an electric utility was providing service to an area even when it had no existing customers.  In re Annexation of a Portion of the Serv. Terr. of People's Coop. Power Ass'n, 470 N.W.2d 525, 530 (Minn. App. 1991), review denied (Minn. July 24, 1991).  In so doing, we stated that the electric utility was entitled to future loss-of-revenue compensation, as "any appropriate consideration of revenue losses will look to future expectations, not past revenues only."  Id. at 529.  "[N]othing in the rationale of the compensation statute precludes factfinding using loss of anticipated future revenues as a tool to determine waste of investments outside the annexed territory caused by the loss of part of the utility's service territory."  Id.

            Here, some, but not all, of the annexed areas contained existing customers for the cooperative.  Regardless, precedent is clear that the cooperative is entitled to loss-of-revenue compensation for future customers in all of the annexed areas because it is currently providing electric service to all of the areas.  The commission properly rejected the ALJ's consideration of whether the facts surrounding the displaced utility's service to the area and the municipal utility's acquisition of the area entitle the displaced utility to lost revenue for future customers. 

II.        Did the commission err by incorrectly determining the compensation amount?

 

            The compensation that a municipality must provide an electric utility upon annexation is "the appropriate value of its properties within the area . . . .  In making that determination the commission shall consider the original cost of the property, less depreciation, loss of revenue to the utility formerly serving the area, expenses resulting from integration of facilities, and other appropriate factors."  Minn. Stat. § 216B.44(b).

            The city alleges that the commission, in arriving at the amount of compensation that the city owes the cooperative, erred by excluding the cooperative's contribution in aid of construction (CIAC) in its avoidable costs, by not including certain system upgrades in the cooperative's avoided costs, and by not deferring to the ALJ's credibility determinations.

            A.        CIAC amounts

            The cooperative has a policy "that require[s] customers requesting service to new points of delivery to pay a portion of the cost of extending facilities to provide that service"; those payments are known as CIAC.  Only new customers contribute to this fund, not existing customers.  The city argues that the cooperative should have included, as an avoided cost, the amount of money that it would have received from new electric customers, because the city contends that the statute requires that the commission look at the "original cost of the property."  Thus, under the city's argument, any future contribution from customers is irrelevant to the determination of the original cost of facilities the cooperative would have constructed in order to serve additional customers.

But the commission stated that "[i]ncluding customer-paid amounts in calculating avoided utility investments would be not only anomalous but inaccurate and unfair.  The utility does not avoid expenses it would not have paid."  The commission is correct that it is logical to exclude CIAC amounts from the cooperative's avoided costs, because the cooperative cannot avoid a cost it will not incur.  Therefore, it was not erroneous to exclude the CIAC amounts from the cooperative's avoided costs.

B.        Avoidable system improvements

The city argues that, due to the annexation, the cooperative will avoid making certain improvements and upgrades to its system and that the commission failed to recognize those as avoided costs in its compensation determination.  But the cooperative asserts that it is in need of and will institute the upgrades, regardless of the annexation.  The cooperative states that it is going to add lines and construct a substation despite losing customers in the annexed areas and that these upgrades are required for the cooperative to continue providing electric service to its other customers.

The commission's order does not address this point, but if the cooperative is adding lines and constructing a substation, regardless of the annexation, to serve the rest of its customers, then it is not an avoided cost.  The commission cannot force the cooperative to avoid the cost of the upgrades if they are unrelated to the annexation and will be constructed nonetheless.  Thus, it was not erroneous to exclude the cost of the substation from the cooperative's avoided costs.

C.        Credibility determinations

The city claims that the commission erroneously disregarded witness-credibility determinations made by the ALJ.  The city alleges that the ALJ believed its expert witness and found the cooperative's expert to be not credible.  The commission stated that

the [ALJ] found that the calculations offered by the City's expert witness were more credible than those offered by the Cooperative's.  This determination was based on her finding that the City's calculations better reflected the factual record and more fully and accurately accounted for the investment the Cooperative would avoid by not serving the area. 

 

Thus, the commission found that these determinations by the ALJ concerned the experts' methodologies, not their credibility as expert witnesses.

The commission was correct, because the ALJ clearly stated that she determined which experts' calculations were more accurate.  She stated that there were differences between the two.  She believed that the figures the city's expert relied on were more accurate, which lent credibility to the city's expert's calculations.  The ALJ came to this conclusion by reviewing the record, not by observing the witnesses as they testified.  Because the ALJ was not making witness-credibility determinations, the commission was not required to defer to the ALJ's decision, and it was not error for the commission to reach a different conclusion and to conclude that the cooperative's expert's methodology was more accurate.

III.       Is the compensation award unreasonably high?

            The city argues that the commission's compensation award is unconstitutional because it is unreasonable, arbitrary, and capricious.  The commission set the cooperative's compensation amount for existing customers at 17.9 mills per kilowatt hour but did not set an amount for future customers.  The city asserts that the commission "implied" that it accepted the cooperative's proposed amount of 31.2 mills per kilowatt hour for future customers.  We find nothing in the commission's order that reflects that.  In fact, the commission stated that the parties should be the first to determine future compensation amounts and that this would not occur until the parties made their compliance filings.  Therefore, the city's argument that the compensation for future customers is unreasonable, arbitrary, and capricious is premature because it does not appear that the commission has made such an award.

IV.       Did the commission use proper procedure and is the commission's order supported by substantial evidence?

 

In a judicial review [of a contested-case hearing] the court may affirm the decision of the agency or remand the case for further proceedings; or it may reverse or modify the decision if the substantial rights of the petitioners may have been prejudiced because the administrative finding, inferences, conclusion, or decisions are:

 

                        (a) in violation of constitutional provisions; or

                        (b) in excess of the statutory authority or jurisdiction of the agency; or

                        (c) made upon unlawful procedure; or

                        (d) affected by other error of law; or

(e) unsupported by substantial evidence in view of the entire record as submitted; or

                        (f) arbitrary or capricious.

 

Minn. Stat. § 14.69 (2004).

           

            A.        Substantial evidence

 

            Substantial evidence is defined as "(1) such relevant evidence as a reasonable mind might accept as adequate to support a conclusion; (2) more than a scintilla of evidence; (3) more than some evidence; (4) more than any evidence; or (5) the evidence considered in its entirety."  Minn. Ctr. for Envtl. Advocacy v. Minn. Pollution Control Agency, 644 N.W.2d 457, 466 (Minn. 2002).

The substantial evidence test requires a reviewing court to evaluate the evidence relied upon by the agency in view of the entire record as submitted.  If an administrative agency engages in reasoned decisionmaking, the court will affirm, even though it may have reached a different conclusion had it been the factfinder.  The court will intervene, however, where there is a "combination of danger signals which suggest the agency has not taken a ‘hard look' at the salient problems" and the decision lacks "articulated standards and reflective findings."

 

Cable Commc'ns Bd. v. Nor-west Cable Commc'ns P'Ship, 356 N.W.2d 658, 668 (Minn. 1984) (citations omitted).

            The city argues that the commission overlooked the cooperative's alleged service "glitches" and that its electric service is unreliable.  This, the city contends, means that the cooperative cannot provide service to future customers without an overhaul of its system.  Thus, the city asserts that the cooperative is not capable of providing service to the area and, therefore, not entitled to compensation for future customers.  The city states that the commission overlooked this evidence in the record and, therefore, its decision is not supported.

            Both the commission and the ALJ came to the same conclusion on this issuethat the cooperative provides service to the annexed areas.  It had in place a three-phase line, and the existing customers were receiving their electricity from the cooperative.  The cooperative need not have the capabilities of serving the area post-development, but merely have the capabilities of servicing the area in the interim.  Kandiyohi, 455 N.W.2d at 106.  Therefore, there is substantial evidence in the record to support the commission's conclusion that the city must compensate the cooperative for its future loss of revenue.

B.        Unlawful procedure

            Additionally, the city contends that the commission engaged in unlawful procedures during the hearing and deliberation of this case.  The city asserts that the commission made no introductory statements, held no public deliberations, relied on personal experience in arriving at conclusions, and violated the open-meeting law by meeting privately before the public hearing.

            The city cites no authority in support of the first three alleged errors.  There is no law or commission rule cited that requires a commission to make introductory statements or hold public deliberations.  Therefore, this cannot be the basis for a determination that the commission used unlawful procedures.  Although a member of the commission made a remark regarding his personal experience with electrical lines, there is no evidence that it was the basis for his conclusion.  Further, there is no evidence that this information or experience had any bearing on the decision of the commission or that the member disregarded the law and instituted his personal experience instead.

            The open-meeting law states:  "All meetings . . . must be open to the public . . . of a state . . . commission . . . when required or permitted by law to transact public business in a meeting."  Minn. Stat. § 13D.01, subd. 1(a)(3) (2004).  Regarding the allegation that the commission violated the open-meeting law by meeting privately before the public hearing, the city cites Moberg v. Ind. Sch. Dist. No. 281, 336 N.W.2d 510, 518 (Minn. 1983), in support.  The legislature enacted the open-meeting law in order "to prevent public bodies from dissolving into executive session on important but controversial matters, and to insure that the public has an opportunity both to detect improper influences and to present its views."  Moberg, 336 N.W.2d at 517.

In Moberg, the supreme court held that

"meetings" subject to the requirements of the Open Meeting Law are those gatherings of a quorum or more members of the governing body, or a quorum of a . . . commission thereof, at which members discuss, decide, or receive information as a group on issues relating to the official business of that governing body. 

 

336 N.W.2d at 518.  A meeting does not include "chance or social gatherings," but "a quorum may not, as a group, discuss or receive information on official business in any setting."  Id. (quoting St. Cloud Newspapers, Inc. v. Dist. 742 Community Schs., 332 N.W.2d 1, 7 (Minn. 1983)).

The city cites two references to some preparation and study that occurred before the public hearing.  The references were made by two different commissioners, who stated, "Because when we met with staff on this to try to figure out what the difference in the columns were and what accounted for that" and "That was our problem in looking at it ourselves."  There is no evidence in the record that the commission met privately before the public meeting to conduct business on this case.  The two references imply that at least two members of the commission, which does not constitute a quorum, consulted with commission staff because they were unsure how the parties came up with their compensation figures and what accounted for the differences between the parties' calculations.  The statements merely reflect study of the evidence and preparation for the public meeting; they do not amount to evidence that a quorum of the members of the commission met to discuss the case and receive information about it.  We conclude that there was no open-meeting-law violation in this matter.

            Affirmed.

*  Retired judge of the Minnesota Court of Appeals, serving by appointment pursuant to Minn. Const. art. VI, § 10.