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IECG v. PUC
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MAINE SUPREME JUDICIAL COURT					Reporter of Decisions
Decision:	2001 ME 94
Docket:	PUC-00-633
Argued:	May 17, 2001
Decided:	June 22, 2001

Panel:	WATHEN, C.J., and CLIFFORD, RUDMAN, DANA{1}, SAUFLEY, and CALKINS, JJ.



INDUSTRIAL ENERGY CONSUMER GROUP v. PUBLIC UTILITIES COMMISSION et al.


RUDMAN, J.

	[¶1]	The Industrial Energy Consumer Group,{1} ("IECG") appeals from
an order issued by the Public Utilities Commission approving a Stipulation
between the Central Maine Power Company ("CMP") and the Office of Public
Advocate providing for an Alternative Rate Plan.  We affirm the Commission's
order.
I. BACKGROUND
	[¶2]	In 1991, Title 35-A M.R.S.A. § 3195{2} was enacted, conferring on
the Commission the authority to establish reasonable rate-adjustment
mechanisms that promote efficiency in the transmission and distribution of
utilities. 
	[¶3]	In 1995, the Commission approved a stipulation, thereby
implementing CMP's proposed multi-year alternative rate plan.  That plan,
referred to by the parties as "ARP 95," expired on December 31, 1999. 
When ARP 95 was implemented, CMP was an integrated utility providing
generation, transmission, distribution, billing, and metering services.
	[¶4]	In 1997, the Legislature enacted Maine's Electric Industry
Restructuring Act.  See 35-A M.R.S.A. § 3201, et. seq.  The Legislature also
enacted 35-A M.R.S.A. § 3202, which deregulated electrical generation and
provided that "[b]eginning on March 1, 2000, all consumers of electricity
have the right to purchase generation services directly from competitive
electricity providers."  35-A M.R.S.A. § 3202(1) (Supp. 2000). 
	[¶5]	Because the generation function was deregulated and since ARP
95 would soon expire, CMP filed a successor alternative rate plan, known as
"ARP 2000," on September 20, 1999.  No action was taken on CMP's filing
by the Commission until March 2000.  At that time, the Commission issued a
Notice of Proceeding that provided interested parties with the opportunity
to intervene.  IECG was one such intervenor.
	[¶6]	ARP 2000 applies only to CMP's distribution delivery rates and
services and includes both productivity offsets and an earnings sharing
provision.  Although the ARP 2000 does not provide for a "top end" earnings
sharing, it does provide that earnings below a specified return on equity
from the prior calendar year are to be shared fifty-fifty between shareholders
and ratepayers.  
	[¶7]	The ARP 2000 Stipulation also includes eight service
indicators.{3}  In the event that CMP's performance does not meet the
established baseline for any indicator in a given year, CMP may be subject to
considerable monetary penalties.  
	[¶8]	After considering all proposals and testimony presented at the
technical conferences, the Commission's advisory staff filed a 174-page
Bench Analysis on June 22, 2000.  The Commission subsequently received a
stipulation signed by CMP and the Office of Public Advocate.  The stipulation
incorporated many of the recommendations contained in the Bench Analysis
and provided for CMP to furnish distribution services for seven years, from
January 1, 2001 through December 31, 2007.  
	[¶9]	The Commission issued a procedural order allowing all non-
signing parties to file objections to the stipulation.  Pursuant to that order,
IECG objected to the ARP 2000 Stipulation, but the Commission,
nevertheless, approved the stipulation. IECG appeals the Commission's
order approving the stipulation.
II. DISCUSSION A.
	[¶10]  IECG argues that the Commission's order approving the
stipulation violates the statutory requirement that rates be just and
reasonable.  IECG contends that the only way to determine if rates are just
and reasonable is to determine a fair rate of return for the utility. 
Accordingly, if the utility receives an excessive rate of return, IECG argues,
then it follows that the customer's rates are no longer just and reasonable.
	[¶11]  We "'defer to the Commission's choice of ratemaking
methodologies or techniques.'" Quirion v. Pub. Utils. Comm'n, 684 A.2d
1294, 1297 (Me. 1996) (quoting Public Advocate v. P.U.C., 655 A.2d 1251,
1253 (Me. 1995)).  Because of this limited and deferential standard of
review, we will not lightly substitute our judgment for that of the
Commission.  New England Tel. & Tel. Co. v. Pub. Utils. Comm'n, 448 A.2d
272, 279 (Me. 1982) (citation omitted).  It is "[o]nly when the Commission
abuses the discretion entrusted to it, or fails to follow the mandate of the
legislature, or to be bound by the prohibitions of the constitution, can [we]
intervene."  Id. (citation omitted). 
	[¶12]  The Commission's authority is governed by Title 35-A, the
purpose of which is
. . . to ensure that there is a regulatory system for public utilities
in the State that is consistent with the public interest and with
other requirements of law and to provide for reasonable
licensing requirements for competitive electricity providers. 
The basic purpose of this regulatory system is to ensure safe,
reasonable and adequate service and to ensure that the rates of
public utilities are just and reasonable to customers and public
utilities.
35-A M.R.S.A. § 101 (Supp. 2000).  The basic purposes then, are to (1)
ensure safe, reasonable, and adequate services and (2) to ensure that rates
are "just and reasonable" for both the customer and the public utility.  We
are only concerned here with the second purpose.
	[¶13]  In determining whether a rate is "just and reasonable," the
Commission "[s]hall provide such revenues to the utility as may be required
to perform its public service and to attract necessary capital on just and
reasonable terms[,]" 35-A M.R.S.A. § 301(4)(A) (1988), and "[s]hall, to a
level within the commission's discretion, consider whether the utility is
operating as efficiently as possible and is utilizing sound management
practices, including the treatment in rates of executive compensation,"   
35-A M.R.S.A. § 301(4)(B) (Supp. 2000).  
	[¶14]  The ARP 2000 is a formula, or mechanism, that predicts
distribution costs over a seven-year period and adjusts rates accordingly. 
The traditional annual ratemaking procedure can be very costly to both rate-
payers and the utilities.  Conversely, the structure of ARP 2000, by its very
nature, removes the administrative costs associated with traditional rate-
making, as it has an agreed upon adjustment formula that occurs
automatically every year.{4}
	[¶15]  The plain language of the statute grants the Commission the
authority to authorize ARPs, such as CMP's ARP 2000, which promote
efficiency in the distribution of electricity.  See 35-A M.R.S.A. § 3195.  The
statute is permissive, i.e, "[r]ate-adjustment mechanisms may include . . .[,]" 
see section 3195(1), suggesting that the Commission has broad discretion to
promote efficiency in the transmission and distribution of electricity. 
Moreover, the statute specifically grants the Commission the discretion to
authorize positive or negative financial incentives, such as those found in the
ARP 2000.  
	[¶16]  Title 35-A M.R.S.A. § 3195 must, however, be read in concert
with 35-A M.R.S.A. § 301.  See supra note 2.  Therefore, while the
Commission may authorize ARPs, it must also ensure that the rates resulting
from such plans are just and reasonable.  IECG argues that the only way to
determine "just and reasonable" rates for consumers is to link rates to a
reasonable rate of return for the utility.  A utility's "rate of return" 
is expressed as a percentage figure and denotes the annual
return to be allowed on the value of the utility's property
devoted to public use.  It might be considered as the interest
rate which the utility earns on its investment in property serving
the public.  One of the primary functions of utility regulatory
agencies in ratemaking proceedings is to determine the
appropriate rate of return to be allowed the utilities under their
jurisdiction.
New England Tel. and Tel. Co. v. Pub. Utils. Comm'n, 390 A.2d 8, 30 (Me.
1978).  We have previously held that the rate of return should neither be so
low as to constitute an unconstitutional confiscation of private property, nor
so high as to constitute an unreasonable burden on the ratepayers.  Id.  The
order approving the stipulation noted that earnings sharing on a "50/50
basis would occur where earnings were either 350 basis points above or 350
basis points below the 10.5% ROE target established by the Commission in
Docket No. 97-580 [a/k/a ARP 95]."  The starting point, therefore, for ARP
2000 was the ARP 95, which has been adjudged to have had "just and
reasonable" rates. 
	[¶17]  The question then becomes whether the Commission, pursuant
to section 3195, may approve a performance-based rate, rather than the
traditional cost-based rate that has been the norm for decades.  We
addressed this issue in Central Maine Power Company v. Public Utilities
Commission, 382 A.2d 302 (Me. 1978) stating:
We know of no persuasive authority, however, . . . establishing a
per se rule that all utility rates must be based solely on cost
factors.  On the contrary, the regulatory case law of this State
and elsewhere is replete with consideration of issues other than
actual cost. . . . The concept of a 'just and reasonable' rate does
not signify a particular single rate as the only lawful rate but
rather encompasses a range within which rates may be deemed
just and reasonable both in terms of revenue level and rate
design.  It is within the sound discretion of the Commission to
fix the exact level and design within that range. . . .
Cent. Me. Power Co. v. Pub. Utils. Comm'n, 382 A.2d 302, 327-28
(Me. 1978) (citations omitted) (emphasis and ellipsis added).  Therefore,
contrary to the IECG's argument, the Commission may contemplate other
issues, in addition to rate of return, when determining whether a given rate
is just and reasonable.  
B.
	[¶18]  Having recognized that the statute allows for alternative rate
plans that are not exclusively cost-based, the next issue to be considered is
whether the ARP 2000 stipulation falls in "a range within which rates may
be deemed just and reasonable both in terms of revenue level and rate
design."  See id. 
	[¶19]  The ARP 2000 Stipulation implements a rate cap system which
is adjusted annually by a price index.  The stipulation does not provide a top-
end earnings sharing provision, but rather, provides that "revenue
deficiencies below 5.3% return on equity from the calendar year prior to the
price change are to be shared 50/50 between shareholders and ratepayers."
The Commission's order approving the stipulation noted that, 
. . . [w]e conclude that the lack of an earnings sharing
mechanism is not, in and of itself, dispositive of the question of
whether rates ultimately produced by a price cap plan will be
just and reasonable.

	. . . .

	Many price cap plans attempt to address the issue of
'overearnings,' or earnings above the most recently allowed rate
of return, through an upper-end earnings sharing provision. 
While earnings sharing provisions lessen overearnings, they are
not eliminated by such mechanisms.  First, a utility may retain all
overearnings to the extent such earnings are in the non-sharing
or dead-band area.  Second, even if overearnings exceed the
dead-band, they are not eliminated but rather are reduced in
proportion to the sharing ratio either agreed to or imposed by
the regulator.  It is possible then, depending on the
circumstances, that a utility operating under a price cap plan
with earnings sharing could have higher earnings and higher
rates than a utility that has a plan without sharing but
incorporates savings to ratepayers through a higher productivity
offset. 

	. . . Therefore, although ARP 2000 lacks an upper end
earnings sharing mechanism, ratepayers will receive[,] through
its incorporation of high productivity offsets, substantial benefits
during the course of the plan.  We thus conclude that the plan,
overall, is likely to produce rates that are just and reasonable.
	[¶20]  Traditional rate-based regulation methods cause a negative
profit incentive for utilities to invest in demand-side management, i.e.,
consumer conservation programs.  Under traditional ratemaking
methodologies, utilities were not encouraged to develop conservation
programs because every lost kilowatt hour of sales resulted in a lost profit to
the utility.  It appears, however, that the Legislature was familiar with this
conservation disincentive because it enacted 35-A M.R.S.A. § 3211.{5}
	[¶21]  In the order approving the stipulation the Commission
concluded that "the rate plan agreed to in the Stipulation, when looked at as
a whole, is fair, reasonable and in the public interest."  The Commission
further noted that "[d]uring the course of the ARP [the] productivity offsets
will serve to decrease rates in 'constant dollar' terms by 18.0%." 
Commenting on other substantive parts of the stipulation, the Commission
stated that,
. . . [t]he Stipulation moves the ARP 95 CAIDI standard of 3.0
hours to 2.58 hours and the SAIFI standard of 2.0 interruptions
per customer to 1.8 interruptions per customer. The Stipulation
includes new standards for service installation, answering both
business and outage calls and properly completing enrollments
from competitive electricity providers.  In addition, the
Stipulation increases the maximum penalty level from the $3.0
million level contained in ARP 95 to $3.6 million, despite the
fact that the Company's revenues have decreased by about one-
third as a result of restructuring.  The Stipulation also provides
for a mid-period review of service quality issues to take place in
2003.  We thus find that the service quality standards agreed to
significantly strengthen the standards from those contained in
ARP 95, . . . and helps to ensure that earnings during ARP 2000
are not enhanced by the utility's providing inadequate or
unreliable service.

	We find that the benefits of high productivity offsets and
strengthened service quality standards outweigh the detriments
alleged by the objecting parties.  Specifically, we do not believe
ratepayers are significantly harmed by the absence of top-end
earnings sharing. . . . 

	We also believe that, given the scope of this ARP, the
probability of extremely high earnings is small. . . . 
	
	[¶22]  Based on our review of the record we cannot conclude that the
Commission exceeded the authority entrusted to it, nor did it fail to follow
the mandate of the legislature, by approving the ARP 2000 Stipulation; the
plain language of the statute encourages such plans.  See New England Tel.
& Tel. Co., 448 A.2d at 279.  This determination is further supported by the
fact that the Commission held numerous hearings, crafted a lengthy bench
analysis, specifically considered and rejected IECG's concerns regarding the
ARP 2000 Stipulation, and supported its decision with numerous findings of
fact.  Under these circumstances, we defer to the Commission's expert
judgment in choosing among various ratemaking methodologies, including
those found in the ARP 2000 Stipulation.  See id.
C.
	[¶23]  The IECG also argues that "no mechanism exists in the
stipulation to reduce rates if [CMP collects excessive revenues]."  The
IECG's contentions are without merit because 35-A M.R.S.A. § 112{6}
explicitly gives the Commission the authority to question CMP, at any time,
on matters regarding the "management of [its] business" and to "inspect
and copy [CMP's] books, accounts . . .[,]" and other records.  See 35-A
M.R.S.A. § 112(1) and 35-A M.R.S.A. § 506.{7}  There is no language in the
stipulation that prevents the Commission from ordering a reduction in the
event that CMP's rate of return is excessive.  Moreover, any customer,
including any IECG client who receives distribution services from CMP, may
request a review, or file a complaint, with the Commission regarding CMP's
rates and earnings.  The only parties that cannot initiate a rate increase or
decrease are CMP and the Office of the Public Advocate.{8}
	The entry is:
Order affirmed. 
  
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