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24821 - Heater of Seabrook, Inc. v. PSC

Davis Adv. Sh. No. 26
S.E. 2d

THE STATE OF SOUTH CAROLINA

In The Supreme Court





Heater of Seabrook Inc., Appellant,

v.

The Public Service

Commission of South

Carolina, Respondent.





Appeal From Richland County

J. Ernest Kinard, Jr., Judge





Opinion No. 24821

Heard June 3, 1998 - Filed July 21. 1998





REVERSED AND REMANDED





Darra W. Cothran, of Woodward, Cothran &

Herndon, of Columbia, for appellant.





F. David Butler, of the Public Service Commission

of South Carolina, of Columbia, for respondent

Public Service Commission of South Carolina.





Elliott F. Elam, Jr., of the South Carolina

Department of Consumer Affairs, of Columbia, for

respondent Consumer Advocate.





Stephen P. Groves, Michael A. Molony, and

Stephen L. Brown, of Young, Clement, Rivers &

Tisdale, L.L.P., of Charleston, for respondent Town

of Seabrook Island.





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HEATER OF SEABROOK v. PSC





WALLER, A.J.: On appeal is an order denying Appellant Heater

of Seabrook's application for a rate increase. We reverse the Public Service

Commission's order and remand for further findings.





FACTS/PROCEDURAL POSTURE

On January 13, 1994 Heater of Seabrook ("Utility"), a water and sewer

utility, applied to Respondent Public Service Commission ("PSC") for a rate

increase. Utility sought a rate increase of 10.40% for water and 34.02% for

sewer, for a combined overall rate increase of 20.67%. The South Carolina

Consumer Advocate and the Town of Seabrook Island were granted leave to

intervene. After a public hearing, the PSC issued Order Number 94-644,

dated July 11, 1994, denying Utility's request. The denial was affirmed by

the circuit court. Utility appealed.





We reversed, citing two errors in the PSC's order: (1) the comparison

of Utility's current test year expenses with those from random prior calendar

years in deciding whether Utility's expenses had increased enough to justify

a rate increase; and (2) the treatment of availability fees as operating

revenues. We instructed the PSC on remand (1) to compare Utility's current

test year expenses only with the test year expenses from Utility's previous

rate case; and (2) to treat availability fees as contributions in aid of

construction rather than revenues. Heater of Seabrook, Inc. v. PSC, 324 S.C.

56, 478 S.E.2d 826 (1996) ("Heater I").





On remand, the PSC re-analyzed Utility's application in light of Heater

I. On February 21, 1997 it issued Order Number 97-114 again denying

Utility's request for a rate increase. The PSC supplemented its findings in

Order Number 97-251, dated March 27, 1997, denying Utility's petition for

rehearing. The circuit court affirmed. Utility again appeals.





ISSUES

I. Did the PSC employ the appropriate rate setting method?

II. Was the rate set by the PSC supported by the evidence?





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HEATER OF SEABROOK v. PSC





DISCUSSION





I. Rate Setting Method

Utility argues error in the PSC's decision to employ the "operating

margin" method1 in setting the appropriate rate of return. Instead, it argues

the PSC should have used the "rate of return on rate base" method.2





The PSC employed the operating margin method in its initial 1994

order. In Heater I, we addressed the PSC's choice, while not explicitly ruling

on it, "simply to provide the Commission with some meaningful guidance."

324 S.C. at 64, 478 S.E.2d at 830. We first noted there was no statutory

requirement that the PSC use any particular rate setting method3, and

therefore it had "wide latitude" to determine an appropriate method. We

continued:





This does not mean, however, that a particular methodology

may not be more appropriate than another under a specific set

of circumstances. In fact, the use of a methodology related to the

actual circumstances faced by a utility company may almost

guarantee the setting of a just and reasonable rate. Therefore,

although we will continue to look at whether there is substantial

evidence supporting the rate of return set by Commission and

will not analyze in isolation whether the decision to use a




1Determined by dividing the net operating income for return by the

total operating revenues of the utility.



2Determined by dividing the net income for return by the rate base.

A utility's "rate base" is defined as the amount of investment on which a

regulated public utility is entitled to an opportunity to earn a fair and

reasonable return; and represents the total investment in, or the fair value

of, the used and useful property which it necessarily devotes to rendering the

regulated services. Hamm v. PSC, 309 S.C. 282, 285, 422 S.E.2d 110, 112

(1992).





3 See Nucor Steel v. PSC 312 S.C. 79, 85, 439 S.E.2d 270, 273 (1994)

("The statutory mandate set forth in S.C. Code Ann. § 58-5-240(H) only

requires the PSC to determine a fair rate-of-return and document fully the

evidence which justifies that rate-of-return. Nothing in the plain language

of the statute requires the PSC to adopt any one particular price-setting

methodology.").





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HEAT'ER OF SEABROOK v. PSC





particular methodology is so supported, we caution Commission

to employ a methodology tailored to the facts and

circumstances of the case before it.





Here, the use of the operating margin, methodology

seems unusual, to say the least. Typically, that methodology

is appropriate where a utility's rate base has been substantially

reduced by customer donations, tap fees, contributions in aid of

construction, and book value in excess of investment. As the

testimony in this proceeding indicates, it is less appropriate for

utilities that have large rate bases and need to earn a rate of

return sufficient to obtain the necessary equity and debt capital

that a larger utility needs for sound operation. We caution

Commission to consider the circumstances of the case before

it when choosing a price-setting methodology.





Id. (emphasis supplied).



On remand in Order Number 97-114, the PSC again found the

operating margin method was appropriate, "as we have employed it with

other water and sewer companies similarly situated." Supplemental Order

Number 97-251 further elaborated, stating Utility was "similarly situated to

Carolina Water Service in size, for example, and we have used the operating

margin methodology properly in the past in that company's rate cases." The

PSC also stated, "[D]istinguishing factors must be pointed out before the

Commission may properly depart from its past methodology in similar

circumstances. No such factors were pointed out here. Thus, this

Commission stuck to precedent." (emphasis supplied).





Utility argues the PSC's order did not follow the court's instructions in

Heater I because its decision was not tailored to the factual circumstances of

its case. We agree. In two separate places, we instructed the PSC to

consider the facts and circumstances of the case before it in making its

decision. We also strongly suggested the PSC should consider the size of

Utility's rate base in choosing the appropriate method.





Despite our instructions in Heater I, the PSC based its decision of the

appropriate rate setting method on two things: comparison with other

utilities and prior practice. Nowhere in the orders was there a reference to

any characteristic of Utility making the operating margin method

appropriate. We have previously addressed the impropriety of relying on

precedent as the basis for factual determinations. See, e.g., Hamm, 309 S.C.





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HEATER OF SEABROOK v. PSC





at 289, 422 S.E.2d at 114 ("The declaration of an existing practice may not

be substituted for an evaluation of the evidence. A previously adopted policy

may not furnish the sole basis for the Commission's action.").





Moreover, even without the specific instructions from Heater I, the

order is too vague to allow for more than cursory appellate review. For

example, the order refers to Carolina Water Service, another water and sewer

utility, as the comparison standard. However, there is no evidence

whatsoever in the record giving any information about Carolina Water

Service. Under these circumstances, it would be impossible for an appellate

court to afford meaningful review to any comparison findings regarding this

utility. The same reasoning applies to the PSC's generic reference to "other

similarly situated" utilities.





The findings of fact of an administrative body must be

sufficiently detailed to enable the reviewing court to determine

whether the findings are supported by the evidence and whether

the law has been properly applied to those findings. Implicit

findings of fact are not sufficient. Where material facts are in

dispute, the administrative body must make specific, express

findings of fact.





Able Communications, Inc. v. PSC, 290 S.C. 409, 411, 351 S.C. 151, 152

(1986). See also S.C. Code Ann. § 1-23-350 (1986) ("A final decision shall

include findings of fact and conclusions of law, separately stated. Findings

of fact, if set forth in statutory language, shall be accompanied by a concise

and explicit statement of the underlying facts supporting the findings.");

Hamm v. PSC, 302 S.C. 132, 394 S.E.2d 311 (1990).





We have repeatedly emphasized the need for specificity in

administrative orders. The need is particularly great when complex issues

are involved, such as those generally found in utility rate setting cases.

Administrative agencies are afforded wide latitude in making decisions, as

shown in the deferential standard of appellate review.4 However, the writing




4Judicial review of PSC orders is controlled by S.C. Code Ann. § 1-23-

380(A)(6) (Supp. 1997). From this statute comes the well-settled "substantial

evidence" rule:

The findings of the Commission are presumptively correct and

have the force and effect of law. Therefore, the burden of proof

is on the party challenging an order of the Commission to show





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HEATER OF SEABROOK v. PSC





of orders without sufficient detail or analysis, coupled with this standard of

review, can make their decisions as a practical matter unassailable on appeal.





We find the PSC's order regarding the choice of rate method does not

comply with the specificity requirements for administrative orders as set forth

above.





II. Evidentiary Support for Rate Set by PSC



Utility next argues error in the PSC's finding an operating margin of

8.6% was reasonable, and in the resulting denial of the rate increase. We do

not reach the merits of Utility's argument because we find the PSC's order

insufficient for reasons similar to those discussed in Issue I.





In Order Number 97-114, the PSC stated it had moved some $66,480

(representing the availability fees collected) from revenue to contributions in

aid of construction, in accordance with the Court's order in Heater I. It then

granted Utility $66,480 in additional annual revenue to replace the

availability fee amount, approving a water rate increase of approximately

8.5% to earn this additional revenue. On the issue of the appropriate

operating margin, it stated it had re-examined the evidence in light of Heater

I and had determined that only "minimal increases in expenses" had been

incurred which were not significant enough to justify a rate increase.5


that it is unsupported by substantial evidence and that the

decision is clearly erroneous in view of the substantial evidence

on the whole record. The Public Service, Commission is

recognized as the "expert" designated by the legislature to make

policy determinations regarding utility rates; thus, the role of a

court reviewing such decisions is very limited.





Patton v. PSC, 280 S.C. 288, 290-91, 312 S.E.2d 257, 259 (1984) (internal

citations omitted). See also Palmetto Alliance, Inc. v. PSC, 282 S.C. 430, 432,

319 S.E.2d 695, 696 (1984) (Substantial evidence is something less than the

weight of the evidence and the possibility of drawing two inconsistent

conclusions from the evidence does not prevent an administrative agency's

finding from being supported by substantial evidence).





5During the pendency of this appeal, the PSC had allowed Utility to put

its requested increased rates into effect under bond. Thus, the PSC ordered

Utility to refund $308,739, representing the difference between the increased



p.46


HEATER OF SEABROOK v. PSC





The order gave no further reasons or findings of fact upon which the

determination was based. When Utility petitioned for rehearing, the PSC

dismissed Utility's argument that Order Number 97-114 did not make specific

findings of fact:





We discern no error. In remanding the case back to the

Commission, the South Carolina Supreme Court expressed the

opinion that the $66,640 in availability fees should not have been

treated as operating revenue, because of a lack of substantial

evidence. In Order No. 97-114, we specifically granted the

Company $66,480 in additional annual rate revenue to replace

the availability fees that we formerly counted as regulated

revenue. We also noted that this was our only change from

Order No. 92-1028, wherein we fully explained our reasoning on

arriving at the 8.60% operating margin. For this reason, we

believe that all appropriate findings of fact are contained in

Order No. 97-114, as that Order fully addressed the Supreme

Court's concerns. Findings of fact supporting the operating

margin reached were fully explained in the prior Order, and

other than the matters discussed above, were fully laid out

therein.





State law requires the PSC's "determination of a fair rate of return

must be documented fully in its findings of fact and based exclusively on

reliable, probative, and substantial evidence on the whole record." S.C. Code

Ann. § 58-5-240 (Supp. 1997). See also S.C. Code Ann. § 1-23-350 (1986)

(requiring findings of fact, if set forth in statutory language, to be

accompanied by a "concise and explicit statement of the underlying facts

supporting the findings"); Hamm v. PSC, 302 S.C. 132,-394 S.E.2d 311 (1990);

Able Communications, Inc. v. PSC, 290 S.C. 409, 351 S.C. 151 (1986).

Neither of the 1997 orders make any findings of fact other than to find the

increase in expenses "minimal." Again, this type of conclusory statement,

with no supporting factual documentation, makes meaningful appellate review

impossible.6 Moreover, we are troubled by the PSC's reference to Order

Number 92-1028 as containing its reasoning for arriving at the appropriate

operating margin. This order contained the PSC's findings from Utility's


rate and the rate the PSC ultimately allowed.

6For example, it is unknown whether the PSC meant that it found the

increase in expenses minimal on their face, or in the context of how such

increase ultimately factored into a resulting operating margin calculation.





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HEATER OF SEABROOK v. PSC





prior rate case, where a rate increase was granted on December 12, 1992.

We find it inappropriate to refer to this order, which was based on evidence,

and a prior test year, completely different from Utility's financial condition

at the time of the current application.7 Finally, the only other source for the

missing findings of fact was an order we had already reversed on the basis

of improper findings and comparisons.





For these reasons, we find the PSC's order did not comply with

applicable requirements, particularly those set forth in section 58-5-240, and

therefore cannot stand.





CONCLUSION

We find Order Number 97-114, as supplemented by Order Number 97-

251, insufficient for the reasons described above. We therefore remand for

further proceedings consistent with this opinion. Regarding the choice of rate

setting method, the PSC is ordered to comply with our directive as set out

in Heater I and as again emphasized in this opinion. Regarding the setting

of an appropriate rate of return, the PSC shall be mindful of the legislative

mandates of sections 1-23-350 and 58-5-240 in writing its order.8





REVERSED AND REMANDED.

FINNEY, C.J, TOAL, MOORE and BURNETT, JJ., concur.




7Thinking the PSC may have mistakenly referred to Order Number 92-

1028 when it meant Order Number 94-644 (the original order from the

current application which was reviewed in Heater I), we specifically

questioned the PSC on this point at oral arguments The PSC affirmed it was

referring to the 1992 order.





8In light of our disposition of Issues I and II, we decline to address

Utility's due process argument. However, due to confusion in the PSC's

interpretation of Heater I, we emphasize that our decision in no way reflects

on the PSC's duty to consider this issue on remand should it arise.

Furthermore, we reverse the PSC's finding this issue is moot because the

utility has been sold to the Town of Seabrook. Clearly, determination of the

issue, should it arise, would affect Utility's duty to pay the refund ordered

by the PSC, see supra note 5.





p.48