In re Central Vermont Public Corp.

In re Central Vermont Public Corp. (2005-287); 180 Vt. 563; 905 A.2d 616

2006 VT 70

[Filed 18-Jul-2006]

                                 ENTRY ORDER

                                 2006 VT 70

                      SUPREME COURT DOCKET NO. 2005-287

                             JANUARY TERM, 2006


  In re Appeal of Investigation        }         APPEALED FROM:
  into the Existing Rates of           }
  Central Vermont Public Service       }
  Corp. and Tariff Filing of Central   }
  Vermont Public Service Corp.         }         Public Service Board
                                       }  
                                       }
                                       }         DOCKET NO. PSB 6946 & 6988


             In the above-entitled cause, the Clerk will enter:

       ¶  1.  In this appeal, Central Vermont Public Service Corporation
  (CVPS) asks this Court to review four aspects of the Public Service Board's
  May 29, 2005 order setting the company's rates.  We find no cause for
  reversal and thus affirm the Board's order.

       ¶  2.  A review of related past Board dockets is helpful in setting
  the context for the instant appeal.  In 2001, CVPS and the Department of
  Public Service settled the company's prior rate increase requests through a
  memorandum of understanding (MOU) that allowed CVPS to raise its rates by
  nearly four percent but set a cap on its rate of return and required the
  company to return to ratepayers any earnings above that cap in the years
  2001, 2002, and 2003.  The Board accepted the 2001 MOU to protect CVPS's
  economic viability while ensuring that the company would not profit
  unreasonably from the Board allowing rates over and above what normally
  would have been allowed through application of traditional ratemaking
  methodologies.  The parties later negotiated another MOU related to CVPS's
  sale of the Vermont Yankee Nuclear Generating Station.  The Board approved
  the MOU subject to certain conditions.  When CVPS objected to the
  conditions, the Department asked the Board to investigate the company's
  rates.  CVPS then sought another rate increase, which caused the Board to
  open another docket and consolidate it with the previous one.  With respect
  to these dockets, the Board determined that calendar year 2003 would be the
  test year.  On May 29, 2005, following discovery, briefing, and two rounds
  of evidentiary hearings, the Board issued a 179-page final order.  The
  following month, the Board denied CVPS's motion for reconsideration.

       ¶  3.  On appeal, CVPS challenges four aspects of the Board's order,
  to which we apply a deferential standard of review.  Board orders directed
  at proper regulatory objectives enjoy a strong presumption of validity.  In
  re Citizens Utils. Co., 171 Vt. 447, 450, 769 A.2d 19, 23 (2000).  We
  accept as true all of the Board's findings that are not clearly erroneous,
  and, in reviewing the Board's conclusions, we defer to its particular
  expertise and informed judgment.  Id.
   
       ¶  4.  CVPS first argues that the Board unlawfully engaged in
  retroactive ratemaking by interpreting the 2001 MOU in a way that required
  the company to refund past profits to its customers from years 2001-2003. 
  "Retroactive ratemaking occurs when rates are set at a level that permits a
  utility to recover past losses, or that requires it to refund past excess
  profits, that resulted from a disparity between projected expenses of a
  prior rate base and actual incurred expenses."  In re Green Mountain Power
  Corp., 162 Vt. 378, 387, 648 A.2d 374, 380 (1994).  The Board may not
  require a utility to refund to customers a portion of its previously earned
  profits because "the Board has no statutory authority to make whole either
  the utility company or its customers for inequities that existed in the
  past."  In re Cent. Vt. Pub. Serv. Corp., 144 Vt. 46, 53, 473 A.2d 1155,
  1159 (1984).  In this case, the Board stated that it was not retroactively
  changing the rates established in 2001, but rather applying those rates by
  enforcing the terms of the 2001 MOU.  Thus, according to the Department,
  the Board merely enforced an MOU under which the parties, including CVPS,
  agreed that the company's earnings would be capped prospectively over the
  following three years.

       ¶  5.  In response, CVPS argues that the Board engaged in
  retroactive ratemaking by applying a never-before-used methodology for
  calculating overearnings.  In making this argument, CVPS acknowledges the
  legality and enforceability of the Board's order incorporating the 2001
  MOU, explicitly stating that it "did not ask below, and does not ask here,
  to be released from its obligations thereunder, as CVPS reasonably
  understood those obligations."   Thus, CVPS challenges the 2001 MOU,
  including its earnings cap provision, only "to the extent that it required
  a refund in excess of the amount of overearnings calculated and offered by
  the Company as a benefit to ratepayers."  In short, CVPS is challenging the
  Board's authority to enforce the 2001 MOU in a manner that estimated its
  earnings beyond what CVPS reasonably expected when it signed the MOU.

       ¶  6.  We find CVPS's position untenable.  By enforcing the 2001
  MOU, the Board was merely construing its terms, not resetting the rates
  established under that agreement.  CVPS accepted the earnings cap and does
  not challenge it as retroactive ratemaking.  The only issue is whether the
  Board committed reversible error in using a particular methodology to
  interpret and enforce the terms of the agreement.

       ¶  7.  According to CVPS, the Board erred because (1) the 2001 MOU
  contains no specific methodology by which overearnings would be calculated;
  (2) in a 1994 docket, the Board explicitly rejected a methodology similar
  to the one it adopted here; and (3) in previous dockets, the Board accepted
  a methodology similar to the one proposed by CVPS in this case.  CVPS
  contends that, under these circumstances, it was, at minimum, unreasonable
  for the Board to enforce the 2001 MOU by applying a previously rejected
  methodology.  See Breslauer v. Fayston Sch. Dist., 163 Vt. 416, 426, 659 A.2d 1129, 1135 (1995) (citing Restatement (Second) of Contracts § 204
  (1981) for proposition that when parties have reached agreement
  sufficiently defined to be contract but have omitted essential term, court
  must fill in reasonable term under circumstances). 
        
       ¶  8.  We disagree.  The Board stated that it had to determine what
  methodology should be applied to calculate CVPS's overearnings in 2001,
  2002, and 2003, given the language of the 2001 MOU.  After carefully
  examining the specific language of the MOU and considering the parties'
  arguments, the Board accepted the Department's cost-of-service-based
  methodology rather than CVPS's equity-based methodology.  The Board
  acknowledged that CVPS "may have had some reason to believe that its
  recommended methodology is consistent with prior Board practice," but noted
  that the Board's rejection of the Department's proposed methodology in 1994
  was because of "an evidentiary failure" rather than a substantive analysis. 
  The Board also pointed out that at the time the 2001 MOU was reached,
  CVPS's chief financial officer made statements suggesting that the earnings
  cap provision "should be applied in a manner that ensures that ratepayers
  do not pay more during the 2001-2003 time period than they would have under
  cost-of-service ratemaking," as advocated under the Department's proposed
  methodology.  According to the Board, in contrast, accepting CVPS's
  proposed methodology would require ratepayers to provide a return on items
  traditionally excluded from rates, "including millions of dollars of unused
  cash and the $9 million writeoff that CVPS agreed to make as part of the
  2001 MOU."  We conclude that the Board's adoption of a
  cost-of-service-based methodology for calculating overearnings pursuant to
  the 2001 MOU was reasonable under the circumstances, consistent with both
  the record and principles of contract law, and thus entitled to deference. 
  Accordingly, we reject CVPS's first claim of error.

       ¶  9.  Next, CVPS argues that the Board erroneously credited
  ratepayers twice for revenue the company earned from the sale of surplus
  power formerly sold to the company's New Hampshire subsidiary, Connecticut
  Valley Electric Company (CVEC).  In December 2002, CVPS agreed to sell
  CVEC's assets to a New Hampshire utility for value plus $21 million, which
  represented an estimate of the loss of revenue resulting from CVPS
  retaining power no longer used to serve CVEC's customers and not necessary
  to serve its Vermont load.  Thirteen months later, at the closing on the
  CVEC sale, the estimated loss was only $14.351 million, meaning that CVPS's
  revenue from selling surplus power would be $6.649 million more than
  originally estimated.  According to CVPS, the Board credited ratepayers
  twice for the sale of the surplus power by giving them the benefit of a
  portion of the estimated revenue from future sales of surplus power and
  also crediting them with the revenue from the actual sale of the same power
  that occurred after the CVEC sale.  In the alternative, CVPS argues that
  this Court should remand the matter for the Board to take into account tax
  liabilities and the writeoff of other unrecovered costs associated with the
  CVEC sale that would significantly reduce its $6.649 million gain.

       ¶  10.  In response to these arguments, which were directly and fully
  raised for the first time in CVPS's motion for reconsideration, the Board
  stated that CVPS's analysis was "entirely new" and that its calculations in
  support of the analysis were not presented during the evidentiary hearings
  or in the more than 600 pages of briefs that it filed.  According to the
  Board,

    CVPS has not demonstrated how this new analysis relates to
    specific costs and adjustments included in the Company's filings
    and embedded in the cost of service that we found to be just and
    reasonable.  We do not know to what extent, if any, the costs and
    revenues presented are already recognized in the cost of service. 
    These are factual questions which parties should have had an
    opportunity to consider during the evidentiary hearings and
    explore on cross-examination.  The new analysis presents other
    significant factual issues, such as whether the specific costs and
    revenues are consistent with other assumptions used in the cost of
    service.  Without answers to these questions, as well as other
    factual questions, we cannot draw any conclusions from CVPS's new
    analysis.

  The Board concluded that "allowing CVPS to present the analysis now would
  undermine the litigation process" and likely result in depriving the Board
  of important evidence because parties would feel free to present new
  strategies during reconsideration.
   
       ¶  11.  Ironically, CVPS continues this pattern on appeal by ignoring
  the Board's rationale for rejecting its double-counting arguments until its
  reply brief, and even then failing to address head-on the Board's point
  that CVPS's new post-hearing arguments were not properly preserved because
  they required further factual development.  See Robertson v. Mylan Labs.,
  Inc. 2004 VT 15, ¶ 1 n.2, 176 Vt. 356, 848 A.2d 310 ("We need not
  consider an argument raised for the first time in a reply brief.").  
  Instead, CVPS relies on   In re Twenty-Four Vt. Utils., 159 Vt. 339,
  352-53, 618 A.2d 1295, 1303 (1992) for the general proposition that
  arguments are not waived if they are included in post-judgment motions. 
  Although we noted in that case that the appellant had failed to preserve an
  argument by raising it in a post-judgment motion, the principle we
  elucidated is that an objection should be raised promptly to allow the
  Board to respond "in a way that gave [the parties] an opportunity to
  cross-examine and rebut, and which would place all relevant information on
  the record."  Id. at 353, 618 A.2d  at 1303.  Here, the Board ruled that
  CVPS's post-hearing analysis deprived the Board of important evidence
  necessary to test it in the crucible of an adversary hearing.  CVPS has
  failed to demonstrate that the Board erred in ruling that the company's
  argument came too late to be considered in that rate proceeding.  See In re
  Green Mountain Power Corp., 147 Vt. 509, 516, 519 A.2d 595, 599 (1986)
  (statutory deadlines for completing rate proceedings impose practical
  limitations on Board, which must have control over its order of business to
  perform its statutory obligations to parties and public); cf. Hoffer v.
  Ancel, 2004 VT 38, ¶ 19, 176 Vt. 630, 852 A.2d 592 (mem.) (plaintiff
  failed to preserve argument raised only in opposition to motion to amend
  rather than in response to defendants' summary judgment motion).

       ¶  12.  The lack of preservation is even more evident with respect to
  CVPS's third argument-that  the Board erred by taking into account the
  $6.649 million gain because the CVEC sale occurred in the interim period
  between the end of the test year and the beginning of the first rate year. 
  CVPS first suggested the argument in a footnote in its motion for
  reconsideration.  Although the motion for reconsideration went into
  considerable detail in arguing that the Board's treatment of the $6.649
  million was inequitable and based on an erroneous interpretation of the
  evidence, the motion did not argue that the gain should be excluded as
  outside the test year.  Rather, CVPS stated without elaboration in a brief
  footnote that the gain from the CVEC sale was not within the rate year and
  "arguably falls outside of the period within the Board's consideration." 
  Not only is the footnote insufficient to adequately raise the issue before
  the Board, but CVPS made statements to the Board throughout the rate
  proceeding implying its acknowledgment that revenues from the CVEC sale
  would be recognized in determining the company's rates.  We conclude that
  the issue was not preserved for review.  See In re Vt. Yankee Nuclear Power
  Station, 2003 VT 53, ¶ 13, 175 Vt. 368, 829 A.2d 1284 (to be preserved
  for appeal, issue "must be presented with sufficient specificity and
  clarity to give the tribunal below a fair opportunity to rule on it"); cf.
  In re Citizens Utils. Co., 171 Vt. at 458-59, 769 A.2d  at 29-30 (utility
  waived argument "suggested" in its motion for reconsideration).

       ¶  13.  Finally, CVPS argues that the Board abused its discretion by
  not allowing the company to include all of its additional administrative
  costs resulting from the CVEC sale.  According to CVPS, the CVEC sale
  caused a loss of economies of scale with respect to the cost of
  administrative services that it was previously able to share with CVEC. 
  CVPS argues that the Board should have allowed all of the claimed costs
  because no party offered any evidence to demonstrate that those
  administrative costs formerly shared with CVEC under the service contract
  were unreasonable or imprudent.
        
       ¶  14.  CVPS asked the Board to approve all of the "common"
  administrative costs that it had shared with CVEC as part of its service
  contract.  The Department opposed CVPS's request, arguing that, although
  some loss of economies of scale was inevitable with the CVEC sale, the
  total administrative costs should decline to some extent upon the sale of a
  significant part of the company's operations.  The Department claimed that,
  when asked to provide detail on the service contract wages, CVPS declined
  to do so because the wages were not in company rate filings.  The
  Department asked the Board to reject all of the claimed costs because
  Vermont ratepayers were not getting any additional services from those
  costs, and CVPS had failed to justify them.  In large part, the Board
  rejected the Department's request, noting that over sixty percent of the
  costs were general overhead expenses or associated payroll taxes.  The
  Board approved only about two-thirds of the claimed costs, however, stating
  that some of the costs allocated under the service contract were associated
  with specific functions that CVPS no longer provided to CVEC.  While
  acknowledging that CVPS's billing system had not changed with the sale of
  CVEC, the Board concluded that CVPS would no longer need all of the
  employees who had previously provided support to CVEC, and further would no
  longer be required to perform production, transmission, and distribution
  services for CVEC.  Accordingly, the Board refused to give CVPS all of its
  claimed additional administrative costs resulting from the sale of CVEC.

       ¶  15.  We find no abuse of discretion.  We recognize that a
  utility's administrative costs are generally deemed to be necessary and
  reasonable, but the Board provided a sound explanation for why it would be
  unreasonable to award all of the claimed costs in this circumstance.  As we
  have stated before, in reviewing Board orders, our role

    is not to reweigh the Board's balancing of consumer and investor
    interests in setting rates, but rather to assure ourselves that
    the Board has given reasoned consideration to both of those
    interests, and to consider whether, given those interests, the end
    result of the rate order is within a zone of reasonableness.

  In re Citizens Utils. Co., 171 Vt. at 462, 769 A.2d  at 32 (quotations
  omitted).  Here, CVPS has failed to demonstrate that the Board disallowed
  reasonable administrative costs.

       Affirmed.


                                       BY THE COURT:


                                       _______________________________________
                                       Paul L. Reiber, Chief Justice

                                       _______________________________________
                                       John A. Dooley, Associate Justice
     
                                       _______________________________________
                                       Marilyn S. Skoglund, Associate Justice

                                       _______________________________________
                                       Brian L. Burgess, Associate Justice

                                       _______________________________________
                                       Ernest W. Gibson III (Ret.), 
                                       Associate Justice Specially Assigned