Opposition Brief — Northwestern Bell Telephone Co. v. Minnesota Public Utilities Commission
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Supreme Court of the Anited States
OCTOBER TERM, 1988
NORTHWESTERN BELL TELEPHONE COMPANY,
Petitioner,
Vv,
MINNESOTA PUBLIC UTILITIES COMMISSION,
Respondent.
ON PETITION FOR WRIT OF CERTIORARI
TO THE MINNESOTA COURT OF APPEALS
APPENDIX FOR BRIEF IN OPPOSITION TO
PETITION FOR WRIT OF CERTIORARI
HUBERT H. HUMPHREY, III
Attorney General
State of Minnesota
MICHAEL J. BRADLEY
Assistant Attorney General
(Counsel of Record)
840 Bremer Tower
Seventh Place &
Minnesota St.
Saint Paul, Minnesota 55101
Telephone: (612) 297-4609
GARY R. CUNNINGHAM
Special Assistant
Attorney General
340 Bremer Tower
Seventh Place &
Minnesota St.
St. Paul, Minnesota 55101
Telephone: (612) 297-4611
(See inside front cover for balance of Attorneys.)
224-7651 — Review Publishing Co., 287 E. 6th St., St. Paul, Mim. 55101 — 224-7631
KARL W. SONNEMAN
Special Assistant
Attorney General
780 American Center Building
150 East Kellogg Boulevard
Saint Paul, Minnesota 55101
Telephone: (612) 296-0410
Attorney for the Minnesota
Public Utilities Commission
1100 Bremer Tower
Seventh Place &
Minnesota St.
Saint Paul, Minnesota 55101
Telephone: (612) 296-3301
Attorney for the Minnesota
Department of Public Service
APPENDIX INDEX
TABLE OF CONTENTS
. Initial Northwestern Bell Court of Appeals
ES a A-l
. Initial Northwestern Bell Court of Appeals
A
. Petition for Supreme Court Review ere A-103
A-l
APPENDIX 1
C7-87-1296
STATE OF MINNESOTA
IN COURT OF APPEALS
NORTHWESTERN BELL TELEPHONE COMPANY,
Relator,
v.
MINNESOTA PUBLIC UTILITIES COMMISSION,
Respondent.
BRIEF AND STATUTORY APPENDIX OF
NORTHWESTERN BELL TELEPHONE COMPANY
TABLE OF CONTENTS
Page
ges a oa eh kn a os been iii
ee Sree a ape iv
I 255s bx din A'o Ship oe Od wees I 1
TEE OP ECE LE Oa Op ore
Argument... 17
I. The Canteen Erred In . Finding That North-
western Bell Engaged In Illegal Contacts Which
Affected The Commission’s Rate Case Delibera-
Cs EG. i oss Bac as eee 17
A. There Was No Illegal Cintas Roveiend in
Any of NWB’s Contacts With The Commis-
ok ee bee eee 17
B. The Contacts Were Not Prohibited Ex Parte
Contacts joa alee ieee os heen yes 21
A-2
C. The Commission Made Several Other Findings
Regarding NWB’s Conduct Not Supported by
Evidence in the Record 23
D. The Contacts Did Not Affect the Rate Case
Deliberations or Order 25
II. The Commission Has No Express, Implied Or In-
herent Authority To Reopen And Vacate A Final
Rate Case Order Which Is Over 2%, Years Old 27
A. There Is No Statutory Nor Inherent Author-
ity 27
B. The Authority Relied Upon by the Commis-
sion Is Not Controlling in this Case 30
III. The Minnesota Supreme Court’s Determination In
Henry v. MPUC That Northwestern Bell’s Rates
Are Just And Reasonable Bars The Commission’s
Action Under The Doctrine Of Res Judicata 41
IV. The Commission’s Order To Vacate, Reopen And
Redeliberate A 2% Year Old Final Rate Case
Order Violates The 10 Month Rule Of Minn. Stat.
§ 237.075 44
V. The Procedures Used By The Commission Violated
Bell’s Constitutional And Statutory Rights 46
VI. Conclusion 49
Statutory Appendix
TABLE OF AUTHORITIES
Page
Statutes :
Minn, Stat. Chapter 10A 18,19 \|
§ 10A.01 16
Minn. Stat. Chapter 14 48
§ 14.01 ll
A-3
§ 14.63 we ve Eilatie « ¢hahdhiaeduky ee
§ 14.64 7 Piewiaiedicns ¥en
Minn. Stat. Chapter 216A ; 8
§ 216A.02 - ore | | 8
§ 216A.035 ...-19,20
§ 216A.037 anc 20, 21
Minn. Stat. Chapter 216B | |
§ 2163.04, Subd. 4 naa 29
§ 216B.25 29, 30, 38
Minn. Stat. Chapter 237 1, 8, 28, 29, 42
§ 237.01, Subd. 2 . 1,8
§ 237.075 .. | 8, 11, 48
§ 237.075, Subd. 2 ee 45
§ 237.075, Subd. 5 os 28
§ 237.081 ; - 48
§ 237.25 31
§ 237.26 verere 31
Administrative Procedure Act, 5 U.S.C. § 1037 36
Minn. Rules Parts 7830.7000-7830.8000 21
7845.0100, et seq. 8
Cases:
Anchor Cas. Co. v. Bongard’s Coop. Creamery Ass’n.,
253 Minn. 101, 91 N.W.2d 122 (1958) 30
Application of Northwestern Bell Tel. Co.,
367 N.W.2d 655, 661 (Minn. App. 1985) 30
Backus-Brooks Co. v. N.P. Ry. Co.,
(8th Cir.) 21 F.2d 4, 19 28
Bluefield Waterworks & Improvement Co. v.
P.S.C. of W. Vir., 262 U.S. 679, 43 S.Ct. 675
(1923) 49
Continental Tel. Co. of Minn., Inc.,
389 N.W.2d 910 (Minn. 1986) 48
A-4
Great Northern Railway Co. v. Public Service
Commission, 284 Minn. 217, 220,
169 N.W.2d 732, 735 (Minn. 1969) 28
H. J. Inc. v. Northwestern Bell Telephone Company,
648 F. Supp. 419 (D.C. Minn. 1986) 2
H. J. Inc. v. Northwestern Bell Telephone Company,
Minnesota Dist. Ct. Fourth Judicial Dist.,
File No. 86-24166, Judgment Docket,
June 22, 1987 2
Halloran v. Blue & White Liberty Cab Co.,
253 Minn. 436, 92 N.W.2d 794 (1958) 33
Hazel-Atlas Co. v. Hartford-Empire Co.,
322 U.S. 238 (1944) 35
Henry v. Minnesota Public Utilities Commission,
392 N.W.2d 209 (Minn. 1986) 1, 2, 41, 43
Hough Transit Ltd. v. Harig,
373 N.W.2d 327, 332 (Minn. App. 1985) 32, 42
In Re: McDonough,
296 N.W.2d 648 (Minn. 1980) 43
NWB Tel. Co. v. MPUC, C9-87-1257 7
Nelson v. Dorr,
239 Minn. 423, 58 N.W.2d 876 (1953) 43
Peoples Natural Gas Co. v. Minnesota Public
Utilities Commission, 369 N.W.2d 530,
534 (Minn. 1985) 29
Professional Air Traffic Controllers Organizations
v. FRLA, 685 F.2d 547 (D. C. Cir. 1982) 37-40
Re WORZ, Inc., 48 PUR 3rd 56 (1963) 25
Root Refining Co. v. Universal Oil Products Co.,
169 F.2d 514 (3rd Cir. 1948) 34
Standard Oil Co. v. California,
429 U.S. 17 (1976) 35
A-5
State ex rel. Corbin v. Arizona Corporation
Commission, 143 Ariz. 219, 698 P.2d 363 (1984) 36
State ex rel. Halton v. Four Lakes Tel. Co.,
141 Minn. 124, 169 N.W. 480 (1918) 34
State on State ex rel. Turnb'a y. District Court,
259 Minn. 228, 107 N.W'2a > * (1960) 30
State v. Tri-State Tel. & Te:. Uo.,
204 Minn. 516, 284 N.W. 294, 300 (1939) 27, 48, 49
Senior Citizens Coalition of Northern Minnesota v.
Minnesota Public Utilities Commission,
355 N.W.2d 295, 303-304 (Minn. 1985) 29
U.S. v. Utah Construction & Mining Co.,
384 U.S. 394, 422, 86 S.Ct. 1545, 1560,
16 L.Ed. 2d 642 (1966) 42
Universal Oil Products Co. v. Root Refining Co.,
328 U.S. 575, 66 S.Ct. 1176, 90 L.Ed. 1447 (1946) 34,35
Youngstown Mines Corp. v. Prout,
266 Minn. 450, 124 N.W.2d 328 (1963) 43
WKAT, Inc. v. FCC, 296 F.2d 375 (1961) 35, 36
LEGAL ISSUES
I. Did the Minnesota Public Utilities Commission Er ‘or
in Finding that Northwestern Bell Engaged in Illegal
Contacts Which Affected the Commission's 1984 Rate
Case Deliberations in Final Rate Order?
The Commission ruled in the negative.
A. Was there any illegal conduct involved in any of
Northwestern Bell's contacts with the Commission?
The Commission ruled in the affirmative.
B. Were the contacts “prohibited” ex parte contacts?
The Commission ruled in the affirmative.
C. Was the Commission's Finding as to the “public's
perception” of the contacts supported by substan-
tial evidence?
II.
III.
IV.
¥.
A-6
The Commission did not rule on this issue but based
its finding on an assumption.
D. Did the contacts illegally affect the 1984 Rate Case
Deliberations and Order?
The Commission ruled in the affirmative.
Does the Commission Have Statutory or Inherent Au-
thority to Reopen and Vacate a Final Rate Order Which
is Over 23/4, Years Old?
The Commission Ruled in the Affirmative with respect
to inherent authority but did not discuss statutory
authority.
Does the Minnesota Supreme Court’s Decision in Henry
v. MPUC That Northwestern Bell’s Docket 600 Rates
are Just and Reasonable Bar the Commission’s Action
in Docket 177 Under the Doctrine of Res Judicata?
The Commission ruled in the negative.
Is The Commission’s Order to Vacate, Reopen and Re-
deliberate a 234 Year Old Final Rate Case Order a
Violation of the 10 Month Rule of Minn. Stat. 237.075?
The Commission ruled in the negative.
Were the Procedures Used By the Commission in Docket
177 a Violation of Northwestern Bell’s Constitutional
and Statutery Rights?
The Commission ruled in the negative.
STATEMENT OF THE CASE
Northwestern Bell Telephone Company (“Northwestern
Bell” or “the Company”) is a telephone company within the
meaning of Minn. Stat. § 237.01, Subd. 2. The Minnesota Pub-
lic Utilities Commission (“MPUC” or “the Commission”’) is
an administrative agency which has authority pursuant to
Minn. Stat. Chapter 237 to set Northwestern Bell’s rates for
intrastate telephone services under certain circumstances and
after following certain statutory procedures.
A-7
This case (“MPUC Docket 177”) is an appeal from an order
of the Commission which collaterally reopened and vacated
a 23/4, year old final general rate case order. '
A. Northwestern Bell’s Last Rate Case—Docket 600
Northwestern Bell’s current general telephone rates were
established in MPUC Docket No. P-421/GR-83-600 — “Docket
600” — pursuant to a petition filed by the Company nearly
four years ago on September 29, 1983. The Commission ap-
proved interim rates effective November 28, 1983 and after
lengthy and complex rate proceeding the Commission issued
a 100 page determination establishing rates on July 27, 1984
(“the 1984 Rate Order.”’)
The Commission’s 1984 Rate Order was appealed, and in
Henry v. Minnesota Public Utilities Commission, 392 N.W.2d
209 (Minn. 1986) the Minnesota Supreme Court held, among
other things, that the rates established by the 1984 Rate
Order were just and reasonable and supported by substantial
evidence on the record. (Henry, supra, pp. 215-216). Thus,
Northwestern Bell’s current general telephone rates were
established by a final order of the Commission which, prior
to the issuance of the orders here in question, have been in
effect for over 234, years.
B. The “Summary” Investigation — Docket 177.
On April 9, 1986 the Commission, in a separate docket —
MPUC Docket No. U-999/CI-86-177 (hereinafter ‘Docket
177’) — issued an order initiating a “summary” investiga-
11f the Commission’s action is not overturned, amounts up to or
in excess of $40 million which have already been collected by the
Company and expended on operational expenses, maintenance of
service, capital improvements and dividends may be subject to
unconstitutional confiscation. In addition, until corrected in future
rate proceeding up to $11.9 million per year in future rates may be
subject to unconstitutional confiscation. (MPUC Order, Apri! 3,
1987, Docket 600.)
A-8
tion. (A - 1). The Commission’s Docket 177 order noted the
existence of various newspaper reports and governmental
investigations relating to contacts alleged to have occurred
between former Commissioners and various utilities, and
stated the Commission believed it necessary to investigate
whether any prior Commission decisions may have been ad-
versely affecved by improper contacts.
The Commission, therefore, directed the Minnesota Depart-
ment of Public Service (“DPS’’) to continue an investigation
regarding these contacts which the DPS had begun two
months earlier and also to conduct an investigation on behalf
of the Commissions. (A - 2-3). On July 8, 1986 the DPS
completed its investigation and issued a report summarizing
the result of its summary investigation (“DPS Report’).
(A - 4). Attached to the DPS Report were 7 depositions taken
by the DPS during its investigation and 91 “exhibits” which
were collected by or created by the DPS investigators.
The DPS Report made a number of findings and recom-
mendations related to other parties and other dockets in ad-
dition to Docket 600 not relevant here. With respect to
Docket 600, however, the DPS Report concluded that:
—During the 14-months that Docket 600 was pending be-
fore the Commission, a representative of the Company had
2NWB has voluntarily assisted all said governmental investiga-
tions and has not been found to have violited any law by any of
said governmental investigations, including the FBI and Ramsey
County Attorney’s investigations, referred to in the order. (NWB
Petition for Reconsideration and Vacation, April 15, 1987, p. 2).
Furthermore, a Federal judge has granted NWB a complete dis-
missal of a private federal civil suit brought in connection with
some of the same allegations. H. J. Inc. v. Northwestern Bell
Telephone Company, 648 F. Supp. 419 (D. C. Minn. 1986); and a
state district judge has granted NWB a complete dismissal of a
similar private state civil suit, H. J., Ine. v. Northwestern Bell
Telephone Company, Minnesota Dist. Ct., Fourth Judicial Dist.,
File No. 86-24166, Judgment Docket, June 22, 1987.
A-9
a number of meetings with Commissioners in restaurants
involving meals paid by the Company. (DPS Report, pp. 59,
64-65, A - 66, 71-72).
—The two Commissioners and the Company representative
who participated in these meals all testified under oath that
at no time did these meetings involve discussions of Docket
600 issues. (DPS Report, pp. 58-59, Depositions of Weir,
Adams and Hanson, A - 65-66).
—During the period Docket 600 was pending there was
no statute or rule in effect in Minnesota which prohibited a
regulated Company from paying for meals consumed at meet-
ings attended by Commissioners. (DPS Report, pp. 59-63, A -
66-70). :
—It is unlikely that Commissioners could be bribed with
free lunches or dinners. (DPS Report, pp. 58, A - 65).
—During the period Docket 600 was pending there was
no statute or rule in effect which prohibited ex parte dis-
cussions between representatives of regulated companies and
Commissioners. (DPS Report, pp. 66, A - 73).
The DPS Report contained no evidence or conclusion that
any particular vote of the Commission in Docket 600 had been
influenced either by the purchase of meals or by any discus-
sions which occurred during the meals. The DPS Report did
not recommend reopening or reconsideration of the 1984 Dock-
et 600 Rate Order.
Upon receipt of this report the MPUC solicited comments
from Northwestern Bell and other interested parties. (A - 89).
Northwestern Bell gave written notice to the Commission
and all parties that Northwestern Bell would object to any
action taken by the Commission, based on the so called “evi-
dence” created by the DPS under the “summary” investiga-
tive procedures utilized in Docket 177, to reopen or reconsider
A-10
the 1984 Docket 600 Rate Order. (NWB’s Comments Regard-
ing the MPUC’s October 3, 1986 Order, dated October 22,
1986, pp. 16-17; A - 98-99).
C. The Petitions for Reconsideration or Dismissal of the
Docket 600 Rate Order.
In July 1986 the Residential Utilities Division of the Office
of Attorney General for the State of Minnesota (“AG-RUD”
or “the Attorney General’) filed a petition with the Commis-
sion requesting the Commission to reopen and reconsider the
1984 Rate Order in Docket 600 alleging that the Company had
engaged in improper ex parte contacts regarding the Com-
mission’s rate case deliberations. (A - 100). The AG-RUD’s
petition was entirely based upon the DPS Report and the
AG-RUD filed no evidence itself in support of its petition. The
AG-RUD admitted in its petition that it had no knowledge
of the specific content of any of the discussions which oc-
curred between the Company representative and the Commis-
sioners which were alleged to be improper. (AG-RUD Peti-
tion, July 9, 1986, p. 5, A - 105).
On August 14, 1986, the Minnesota Public Interest Re-
search Group (“MPIRG”) filed a petition with the Commis-
sion also based upon the DPS Report requesting the Com-
mission to vacate and dismiss the 1984 Rate Order as well
as the Commission’s November 13, 1984 Order in Docket 600
relating to intervenor compensation. MPIRG filed no evidence
in support of its petition. MPIRG also admitted in its petition
that it had no knowledge of the contents of any alleged ex
parte discussions. (MPIRG Petition, August 14, 1986, p. 9).
On October 22, 1986 the DPS filed comments with the Com-
mission altering the DPS’s earlier position and recommend-
ing that the Commission redeliberate the 1984 Rate Order in
Docket 600. (Comments of DPS, October 22, 1986, p. 2).
A-11
Northwestern Bell filed responses to the Petitions of the
AG-RUD and MPIRG and the DPS Comments which, in sum-
marized form, asserted:
D.
—The contacts about which the DPS, AG-RUD and MPIRG
complain were not illegal.
—The contacts about which the DPS, AG-RUD and MPIRG
complain were not prohibited “ex parte” contacts.
—The contacts about which the DPS, AG-RUD and MPIRG
complain did not affect Docket 600.
—Under the circumstances of the “summary nature” of the
proceedings in Docket 177, the MPUC has no legal author-
ity to reopen, reconsider or dismiss the 1984 Rate Order
in Docket 600.
—There are other substantial reasons for not reopening
Docket 600. (NWB’s Reply to Comments of the Other
Parties, November 3, 1986; Response of NWB to Petition
to Reopen and Reconsider filed by the AG-RUD, July 18,
1986; Response of NWB to Petition of MPIRG; NWB’s
Response to the AG’s Reply Brief, September 15, 1986;
Response of NWB to July 8, 1986 Report of the DPS to
the MPUC, August 13, 1986).
The Commission’s Deliberation and Order to Vacate and
Reopen the 1984 Rate Order.
On November 7, 1986 the Commission met in Docket 177
and deliberated the AG-RUD and MPIRG petitions regarding
the 1984 Rate Order in Docket 600. The Commission had not
referred the matter to a contested case hearing and had no
evidence before it except the disputed “evidence” created over
Northwestern Bell’s objection in the DPS summary investi-
gation.
The Commission voted not to reopen any of the dockets
recommended by the DPS in its original report. The Commis-
sion also voted to deny MPIRG’s Petition to dismiss the Com-
A-12
mission’s July 27, 1984 and November 13, 1984 Orders in
Docket 600. The Commission did however vote to approve
the AG-RUD’s Petition to reconsider the 1984 Rate Order
in Docket 600. (A - 107-108).
During the Commission’s November 7, 1986 deliberations
and vote to reopen and reconsider Rate Case Docket 600, no
Commissioner indicated he or she was aware of any evidence,
in the DPS Report or otherwise, that any particular vote in
Docket 600 had in fact been influenced by any contact be-
tween any Commissioner and any representative of North-
western Bell. (MPUC tape #86-166 (partial), tape #86-167,
tape +86-168, tape #86-169, and tape #86-170 (partial) ).
During said deliberations several of the Commissioners com-
mented that they had no knowledge as to what was discussed
at any of the meal meetings which occurred between the Com-
pany’s representative and former Commissioners Adams and
Hanson and had no knowledge that any particular vote was
influenced by the contacts. (MPUC tape #86-166 (partial),
+86-167, tape +#86-168, tape #86-169 and tape +86-170
(partial) ).
Between February 12 - 19, 1987 the Commission met in
Docket 600 and redeliberated on all the issues involved therein.
At no time during the redeliberations and votes did any Com-
missioner state that the rates which had been previously es-
tablished in Docket 600 were unjust or unreasonable. (MPUC
tapes +87-36 through #+87-65). The Commission voted, how-
ever, to change a number of the decisions which had been
made in Docket 600 several years earlier. Those changes,
if put into effect, would result in lowering the Company’s
annual revenue requirement by $11.9 million.*
3 The redeliberations and votes in Docket 600 and the MPUC’s re-
sulting orders of April 3, 1987 and June 4, 1987 in Docket 600 are
the subject of a separate appeal to this court in NWB Tel. Co. v.
MPUC, C9-87-1257.
A-13
On April 2, 1987 the Commission issued its final order in
Docket 177 vacating the July 27, 1984 Rate Order in Docket
600. (A - 109). Northwestern Bell’s Motion for Reconsidera-
tion was denied upon June 4, 1987. (A - 131). Northwestern
Bell obtained a Writ of Certiorari to review said April 2, 1987
order and said June 4, 1987 order in this appeal.
In the event Northwestern Bell is successful in this appeal
in reversing those orders in Docket 177, the 1984 Rate Order
would be reinstated and Northwestern Bell’s appeal in Dock-
et 600, C9-87-1257, would be moot.
STATEMENT OF FACTS
As a “telephone company” within the meaning of Minn.
Stat. § 237.01, Subd. 2 (1984) many of Northwestern Bell’s
intrastate business activities are subject to regulation by the
Minnesota Public Utilities Commission pursuant to various
provisions of Chapter 237 and Chapter 216A of the Minne-
sota Statutes. For example, the Commission has jurisdiction
to determine appropriate changes in the general rates which
the Company charges for its Minnesota intrastate telephone
services. Minn. Stat. § 237.075.
Ratemaking, however, is not the only activity which brings
Northwestern Bell into contact with the MPUC. (Wier Dep.
25-26). As defined by Minn. Stat. § 216A.02 the MPUC en-
gages in some functions which are “legislative” in nature,
some which are “administrative” in nature, and some which
are “quasi-judicial” in nature.
An example of a legislative function would be the promul-
gation of rules having general applicability to all telephone
utilities such as MN Rule 7845.0100, et seq. (A - 138). An ex-
ample of an administrative function would be the issuance of
policy statements, not amounting to formal rulemaking, re-
garding such matters as scheduling or staffing. Also, from
A-14
time to time the Commission meets informally with groups
such as Senior citizens, the handicapped or investment an-
alysts for general background information purposes. (Hanson
Depo. 12). An example of a quasi-judicial function would be
resolving disputed issues resulting from a contested case hav-
ing particular applicability to the conduct of a particular reg-
ulated entity. Some of the issues in a ratemaking case such
as Docket 600 fall into the quasi-judicial category.
In addition, the MPUC engages in other activities which
can have an affect on the telephone industry in general and
Northwestern Bell as one of its members. For example, from
time to time the Company or Commission takes positions on
issues before the state legislature as to changes in the law
or additions to the law applicable to the telephone industry.
(Weir Dep. 16-17). Commissioners and staff members would
sometimes seek information regarding such legislative con-
cerns from Northwestern Bell. (Madison Dep. 54-56).
During any given year there are hundreds if not thousands
of topics of information which are of mutual interest to tele-
phone companies such as Northwestern Bell and the MPUC.
Some relate to particular pending matters but most relate to
general background information. Furthermore, many fall into
the legislative or administrative functions of the Commission
and fewer fall into its quasi-judicial function. (Hanson Dep.
11-14).
In order to facilitate the transfer of information between
Northwestern Bell on the one hand and the state legislature
or the Minnesota Public Utilities Commission on the other,
the Company has utilized its Government Relations/Regula-
tory Department. During 1984 and for eight years prior there-
to Roy Weir was the head of that department. (Weir Dep.
21-23). There was a small group of employees, who had pri-
mary responsibility for issues and concerns related to the
A-15
state legislature who reported to Mr. Weir. There was a larger
group of employees, who were primarily responsible for assist-
ing Mr. Weir in preparing and providing information to the
Commission and its staff and receiving information therefrom
in connection with Regulatory matters. The total staff was
about 32 or 33. (Weir Dep. 23-24). In addition the Company’s
Legal Department would coordinate its activities with the
Regulatory Department in providing information to the Com-
mission of a legal nature. (Weir Depo. 24-25).
1984 was an extremely eventful year in the corporate life
at Northwestern Bell. It was the first year following the
breakup of AT&T on January 1, 1984 it was the first year
Northwestern Bell operated under the ownership of the newly
created U.S. West, Inc. It was the first year that a number
of U.S. West subsidiaries were created and began working
out relationships with Northwestern Bell.
Similarly, state regulatory activities are significantly af-
fected by regulation at the Federal level by the Federal Com-
munication Commission (“FCC”) and by the decisions of
U.S. District Court Judge Harold Greene who presided over
the AT&T breakup. It is important for the Commission to
know how the Company views the effects of Federal regula-
tion on its Minnesota operations.
During 1984 there was a veritable explosion of information
related to the telecommunications industry in general and
Northwestern Bell in particular completely unrelated to Dock-
et 600. Some of it was related to technology, some was related
to business concerns and some to state and regulatory issues.
Most of this information had nothing whatsoever to do with
particular pending quasi-judicial contested case issues such
as Docket 600.
During 1984, however, the Commission did consider and
decided the extent to which Northwestern Bell’s request for
A-16
an increase in rates would be granted in Docket 6€0 which had
been filed in September 1983.
In Docket 600 Northwestern Bell introduced testimony,
exhibits and economic arguments through the normal con-
tested case hearing process pursuant to Minn. Stat. § 237.075
and Minn. Stat. § 14.01, et seq. The Company argued in favor
of aud believed it proved to the Commission that its general
rates should be increased to approximately $107 million a
year (its original application for $109 million was lowered
during the hearing process) and that its authorized rate of
return should be set at approximately 16.5%. The Com-
mission’s decision in Docket 600 was issued July 27, 1984 to
the following effect:
—The Commission voted to slash approximately $50 million
from the amount of the revenue increase NWB requested
resulting in a $57.5 million increase.
—The Commission voted to lower the Company’s requested
authorized rate of return from 16.5% to 14.5%.
—The Commission voted to order Northwestern Bell’s
transfer of its Yellow Pages business to U.S. West Direct
to be null and void.
—The Commission also determined dozens of other issues
many of which were against Northwestern Bell’s posi-
tions. (MPUC Minutes re: Docket 600 Proceedings.)
During 1983, 1984, and 1985 Mr. Weir had a number of
personal contacts with Commission members. As head of the
Company’s Regulatory activities Mr. Weir’s signature ap-
peared on cover letters and correspondence which passed
thousands of pages of documents to the Commission and its
staff on a variety of subjects. (Weir Depo. p. 25-27, also see
MPUC correspondence files.) Some were related to Docket
600, most were not. Mr. Weir also had a number of meetings
A-17
with Commissioners in their offices as well as at other public
locations such as restaurants. (Hanson Depo. 45-46, Adams
Depo. 23-24). Some of these occurred on or near days the
Commission was discussing Docket 600, but the vast majority
did not.
While Docket 600 was technically “pending” from the time
it was filed in September 1983 unti! it was finally concluded
in October 1984, there were only two dozen days out of that
14 month (420 day) period on which any Commission activity
occurred regarding Docket 600. (MPUC Order April 12, 1986,
pp. 6-9, MPUC Minutes, September 1983 - October 1984). On
15 of these 420 days the MPUC’s order selectively links, by
time only, a date on which some Docket 600 activity occurred
within three days (day before, day of, or day after) a meal oc-
curring between Weir and one or more Commissioners. (MPUC
April 2, 1987 Order, pp.6-9). At no time does the MPUC order
find that any specific discussion occurred at any of the meal
meetings regarding Docket 600.
The MPUC order fails to mention that the DPS Report
also produced “evidence” that during the 24 month period
from May 1983 through April 1985, ten of which involved
no Docket 600 activity, there were a total of approximately
125 meal meeting attended by Weir and one or more Com-
missioner. (DPS Report, Exh. 17, Doc. “6,” Exh. 18, Doc. “E”
and Doc. “F,” Exh. 23, Doc. “K”, Adams Depo. Exh. 4 and
Madison Depo. Exh. 3). Again, only 15 of these 125 meal
meetings were within three days (day before, day of, day
after) some MPUC rate case activity. One hundred ten were
not. (See Exhibits and Minutes referred to in this and prior
paragraph).
According to the depositions of Mr. Weir and Commission-
ers Hanson and Adams taken by the Department of Public
A-18
Services, Mr. Weir and both Commissioners had extremely
busy schedules and they found it convenient to combine some
of their discussions with meal time. These meals were paid
for by Weir for which he was reimbursed by the Company.
According to Company expense records Mr. Weir met more
frequently with Commissioners Adams and Hanson but he
also had at least some similar meetings with the other Com-
missioners.
Weir, Hanson and Adams have all testified under oath,
however, that at no time at any of these meetings did they
discuss the issues pending in Docket 600. (MPUC April 2,
1986 Order, p. 9 and DPS Report, p. 64). Furthermore, Han-
son and Adams testified that neither was influenced in any
way by the fact that the meals were provided at Company
expense. (Adams Depo. 93-94, Hanson Depo. 53-57). Finally,
Weir testified that he did not intend to influence the decision
of the Commissioners Hanson and Adams regarding Docket
600 by the conduct of these meetings. (Weir Depo. 224-243,
257-261).
Furthermore, a!] three deponents testified that topics which
were discussed at these meetings were legitimate topics. For
example, both Hanson and Adams testified that they were
former members of the state legislature. They testified that
they first became acquainted with Mr. Weir while he was
acting as a lobbyist on behalf of Northwestern Bell regarding
the state legislature. (Hanson Depo. 10, 39-40; Adams Depo.
8). Thus, they were familiar with the practice of legislators
meeting with lobbyists for lunch. They were also comfortable
in meeting Weir because they had come to know him well.
Both Hanson and Adams testified, however, that they knew
their role as MPUC members was different than that as leg-
islators, and thus avoided some topics of discussion, such as
A-19
contested rate case issues. (Hanson Depo. 22.24, 54: Adams
Depo. 13-15, 25.)
During his deposition Hanson also was asked to explain
why the meetings between Hanson and Adams were more
frequent than other Commissioners. (Hanson Depo. 44). Han-
son testified that since Adams and Hanson were former leg-
islators, and since Weir had first met them in that capacity,
“the three of us shared a common history.” Their joint in-
terest in that history and the politics associated with it formed
the basis of many of their discussions. (Hanson Depo., p. 45).
Hanson also testified that 1984 was the last year of his term
on the Commission. Hanson testified that during 1984 he was
approached regarding a vacant seat on the Minnesota House
of Representatives and sought Weir’s opinion regarding that
subject because he valued Weir’s legislative experience and
political advice (Hanson Depo., p. 48). Hanson also testified
that during 1984 there was general speculation that the senate
seat formally occupied by Hanson might come up for election
on short notice because the plans of the incumbent to seek
another office. Hanson testified that he consulted with Weir
regarding that subject. (Hanson Depo., 49-50). Hanson testi-
fied that he sought Weir’s advice on whether it was worth-
while for him to seek reappointment to the Commission given
the fact that Hanson was a member of the opposite political
party from the Governor who would be making the appoint-
ment. (Hanson Depo., p. 50).
Hanson also testified that during this period one or both of
Weir’s parents died and Weir also was troubled from time to
time regarding the serious illness of his granddaughter. Han-
son testified that, “I have lost my mother and father and our
families being the same age, although the families are not
socializing together, we would talk at length about that.”
A-20
(Hanson Depo., p. 50). Hanson testified that he believed
during the same period he wrote an extensive “position
paper” on the subject of “ameliorated rates.” This in-depth
position paper was on an issue not before the Commission at
the time. Hanson testified he valued Weir’s technical advice
and political advice regarding this subject. (Hanson Depo.,
p. 51).
Hanson was specifically asked under oath whether he be-
lieved his personal relationship with Weir in anyway affected
Hanson’s view of issues pending before the Commission. Han-
son replied as follows:
... 1 realized that the process of making decisions in
regulatory arena is a result of receiving expert testi-
mony, receiving record evidence, and making a determina-
tion strictly on what the Commission has before it ir-
respective of who your friends are and even who your
enemies are.
I would say this is more, I would say some people can’t
understand this and I realize that. But is more a carry-
over from the legislative experience where it is not un-
common at all and I have experienced it myself, where
you are in a position to make very important decisions
quite often against your friends, quite often against the
people, your roommate, quite often against the people
in the political party and everybody in the legislative
process understands very well that your votes have noth-
ing to do with who you know well or how well you know
a person.
They are strictly based on the merits before us. (Hanson
Depo., p. 54).
Weir also gave testimony concerning the legitimate topics
of conversation which occurred during such meetings. Weir
A-21
testified that he made himself available to Commissioners so
that if Commissioners saw problems with the way the Com-
mission was operating they could bring it to his attention.
Weir also testified that he made himself available to Com-
missioners at such meetings to clear up any rumors or hearsay
they might have heard about the Company or to clarify any
stories in the news media. (Weir Depo., p. 55).
Weir was a registered lobbyist under Minn. Stat. § 10A.01
et seq. (Lobbyist Reg. No. 5-0185-0673—DPS Report, Exh.
11). Weir filed quarterly disclosure forms with the Govern-
ment Ethics Practices Board which disclosed the quarterly
amount he spent on entertainment and food and beverages
in connection with legislative or administrative lobbying.
(DPS Report, Exh. 11, Weir Depo. 268).
Both Hanson and Adams testified that they had more dis-
cussions with policy advocates of the Department of Public
Service, one of the other parties in Docket 600, than they did
with Weir and that the nature and extent of their discussions
of regulatory matters with Weir was not substantially differ-
ent from that with the Department of Public Services rep-
resentatives. (Hanson Depo. 157-160; Adams 95-96). No wit-
ness testified that any of the contacts involving Weir and
the Commissioners at which meals were purchased involved
discussions of Docket 600 issues.
ARGUMENT
I. THE COMMISSION ERRED IN FINDING THAT
NORTHWESTERN BELL ENGAGED IN ILLEGAL
CONTACTS WHICH AFFECTED THE COMMISSION’S
1984 RATE CASE DELIBERATIONS AND FINAL
RATE ORDER.
The Commission’s April 2, 1987 order in Docket 177 which
vacated the 1984 Rate Order in Docket 600 purports to be
A-22
based upon certain contacts which occurred between a Com-
pany representative, Mr. Weir, and former Commissioners
Adams and Hanson during the 14-month period between
September 2, 1983 and October 23, 1984 while Docket 600
was pending. (MPUC April 2, 1987 Order, p. 10). The Com-
mission found these contacts to be a serious abuse and viola-
tion of the regulatory process because they were (1) allegedly
illegal ex parte contacts relating to the Docket 600 rate case
proceeding and (2) because Northwestern Bell paid for the
meals involved in these contacts allegedly creating an illegal
conflict of interest for the Commissioners. (MPUC April 2,
1987 Order, p. 12).
It is clear, however, even from the summary nature of the
DPS investigation and report, that none of these contacts
were illegal and none of these contacts had any effect on the
1984 Rate Order. The Commission’s conclusions to the con-
trary are not based upon substantial evidence in the record.
A. There Was No Illegal Conduct Involved in any of
Northwestern Bell’s Contacts With the Commission.
During the period in question, September 1983 through
October 1984, there was no Minnesota statute, rule or regu-
lation in effect which specifically prohibited a representative
of a regulated company from paying for meals consumed by
members of the Public Utilities Commission while matters
involving the regulated company were pending before the
Commission. Similarly, during said period there was no Min-
nesota statute, rule or regulation in effect which specifically
prohibited a regulated company from engaging in ex parte
contacts with members of the Public Utilities Commission.
Furthermore, legislation which was in effect at that time im-
plicitly authorized the contacts which the Commission now
finds to be illegal. Finally, legislation and rules which have
A-23
been passed long after said contacts occurred unquestionably
demonstrate that both the State Legislature and the Com-
mission are aware that the contacts in question did not violate
any prior existing law or regulation.
1. Meals as Conflicts of Interest.
The Minnesota Ethics in Government Act, Minn. Stat. Chap-
ter 10A (1984), among other things, regulates lobbying activ-
ities. It is clear from § 10A.01 of the Act as it existed during
the pendency of Docket 600, that lobbying activities in con-
nection with administrative actions, including utility rate
determinations, were covered by the Act. The Act, however,
did not prohibit the purchase of meals in connection with
such activities but merely required that lobbyists register and
file quarterly disclosure statements in a proscribed format
regarding lobbying disbursements. Furthermore, since the
proscribed lobbying disbursement form (DPS Report, Exh.
11) had specific line items for disclosing “entertainment” and
“food and beverages” for “administrative” lobbying, it is
clear that during the period in question Minnesota law autho-
rized registered lobbyists to purchase meals for public officials
including members of the Public Utilities Commission. Mr.
Weir was a duly registered lobbyist under the Act. (Lobbyist
Registration No. 5-0185-0673—-DPS Report, Exh. 11). As
such Mr. Weir filed quarterly lobbyist disbursement reports
with the Minnesota Government Ethics Practices Board on
proscribed forms provided him by the state on which he dis-
closed the quarterly amounts he spent on food and beverages
in connection with his administrative lobbying activities.
(DPS Report, Exh. 11; Weir Depo. 268).
The Commission’s findings, conclusions and order of April
2, 1987 and order denying reconsideration of June 4, 1987
totally ignore the applicability of Minn. Stat. Chapter 10A
A-24
(1984) to Mr. Weir’s contacts in this matter. Furthermore,
the Commission’s orders totally ignore the finding of the
DPS Report that the purchase of said meals was not a viola-
tion of law as it existed during the pendency of Docket 600.
(DPS Report, pp. 58-62, A-66-70).
Similarly, the Commission’s orders totally ignore the only
Minnesota Statute which specifically discusses conflicts of
interest and members of the Public Utilities Commission.
Minn. Stat. § 216A.035 (a) (1984), as it existed during the
pendency of Docket 600, specifically stated:
No person during his term of membership on the Public
Utilities Commission shall receive any significant portion
of his income directly or indirectly from any public util-
ity.... (Emphasis added).
Since the law at that time specifically stated that a Com-
missioner could receive some portion of his income from a
public utility’ so long as it was not a significant portion of his
income, it is clear that the Commission’s determination that
NWB’s purchase of meals for Commissioners Adams and
Hanson was an illegal conflict of interest is without merit.
It is also important to note that in March 1986, long after
the conduct in this case had occurred, the Minnesota State
Legislature changed the law. Minn. Stat. § 216A.035 was
amended in two relevant respects. First, it now prohibits
members of the Public Utilities Commission from receiving
any income from any public utility. Second, the 1986 amend-
ments specify that the new prohibitions apply to telephone
companies as well as public utilities. Thus, it is clear the state
legislature has recognized that the conflict of interest pro-
4 Minn. Stat. § 216A.035(a) (1984) only applied to gas and electric
public utilities in 1984. In 1986 it was amended to apply to tele-
phone companies as well.
A-25
visions of the prior statute were not applicable to the present
case. For the Commission to attempt to bring Northwestern
Bell’s 1984 conduct under the reach of a 1986 change in the
law, therefore, would be a gross and obvious denial of due
process.
' 2. Meals as Ex Parte Contacts.
In March 1986 the Minnesota State Legislature passed
Minn. Stat. § 216A.037 which for the first time required the
Commission to adopt rules regarding “permissible and im-
permissible ex parte communications.” Prior to the passage
of Minn. Stat. § 216A.037 in 1986 there was no Minnesota
statutory nor regulatory definition of ex parte communica-
tions, let alone a prohibition against such communications in
MPUC proceedings. The Commission has now adopted rules
defining impermissible ex parte contacts. They did not be-
come effective until 1987. (A-137). The legislative activity
of the Minnesota State Legislature and the rulemaking activ-
ity of the Commission in 1986 and 1987, respectively, clearly
underscores the fact that the contacts which occurred be-
tween Mr. Weir and Commissioners Hanson and Adams in
1984 were not then illegal. For the Commission to rely on
ex post facto statutory and regulatory prohibitions to punish
conduct which previously was perfectly legal would be a
clear violation of due process of law. 7
B. The Contacts Were Not “Prohibited” Ex Parte
Contacts.
The Commission’s April 2, 1987 order in Docket 177 wrong-
fully characterizes the meetings between Mr. Weir and Com-
missioners Adams and Hanson as illegal ex parte contacts.
However, even under the current statute (Minn. Stat. § 216A.-
037 (1986)) and the new Commission rules (Minn. Rules
Parts 78545.7000-78545.7600), which were not in effect dur-
A-26
ing 1984, a communication is not an illegal ex parte contact
unless it involves communications regarding a “material is-
sue” in a pending contested case proceeding or disputed
petition. (A-137).
Thus, the mere fact that a party to a proceeding meets and
has discussions with a Commissioner without other parties
being present while a contested matter is pending is not a
“prohibited” ex parte contact in and of itself. There must be
probative evidence on the record that such a meeting also
involved the discussion of a “material issue” in the contested
proceeding to make the ex parte contact impermissible.
While the Commission’s 1987 orders in Docket 177 ignore
this ‘material issue” requirement of prohibited ex parte con-
tacts, prior to the current controversy the Commission’s own
legal counsel did not. On August 1, 1985 the Special Assistant
Attorney General assigned to the Commission issued a legal
memorandum which gave the Commission some “guidelines”
in answering the question, “what is an ex parte contact?”
After providing a formal definition which included such re-
quirements as (a) the communication must be “related to a
specific case or docket,” and (b) the communication must
include, “specific facts relating to a specific utility or tele-
phone” company, the opinion went on to state:
However, not all contacts with parties or persons in-
terested in a case are ex parte contacts. Inquiries that
do not address the merits of the case . .. would not be
considered an ex parte contact.”
(Attorney General’s Office Memorandum, August 1, 1985
referred to in DPS Report Exh. 69; A-141, emphasis added).
The contacts involving Mr. Weir and Commissioners Adams
and Hanson which the Commission’s April 2, 1987 order
found to be illegal were not such contacts. Former Commis-
A-27
sioner Adams testified that at the meetings in question,
“[WJe would discuss anything that was not a contested case
before the Commission.” (Adams Depo., pp. 13-14, emphasis
added). Similarly, Hanson testified that he and Weir did not
discuss “anything that would be even remotely or tangentially
related to the 83-600 case.” (Hanson Depo., p. 80). Further-
more Hanson testified that Weir did not attempt to influence
Hanson’s decision on the 600 case “during any of those meals
or at any other time.” (Hanson Depo., pp. 83-84). Weir also
testified that he did not discuss contested case dockets or
issues with the Commissioners ex parte. (DPS Report, p. 66,
A-73).5
Since none of the petitioning parties to this docket have
produced any evidence which refutes this sworn testimony,
there is no evidence in the record which supports the Commis-
sion’s finding and conclusion that Northwestern Bell engaged
in illegal ex parte contacts during Docket 600. Thus, those
portions of the Commissions orders should be stricken as not
based upon substantial evidence in the record and the 1984
Rate Order should be reinstated.
C. The Commission’s Finding as to the “Public’s Percep-
tion” of the Contacts is not Supported by any Evidence
in the Record.
In addition to the matters discussed in the previous section,
the Commission made a number of other findings regarding
Northwestern Bell’s conduct during Docket 600 which are
not supported by evidence in the record. One of these related
to the “public’s perception” of the contacts in questions.
5 There are many more similar sworn statements from Adams,
Hanson and Weir which establish this point which are set forth
in the Statement of Facts, supra, pages 13-16.
A-28
On page 12 of its order the Commission finds that North-
western Bell’s contacts with the Commission in connection
with Docket 600 “have created an atmosphere of public dis-
trust and lack of confidence in the regulatory process.” On
page 4 of its order the Commission states that the Com-
mission is concerned not with whether the original decision
in a Docket 600 was correct but with “the public’s perception
of the process” used in making that decision. There is, how-
ever, absolutely no evidence in the record as to what the
publie’s perception is of that process or that supports the
Commission’s finding that Northwestern Bell created an
atmosphere of distrust.
During the original Docket 600 proceedings in 1984, a
number of public hearings were held in communities all over
the state which enabled the public to testify as to their view-
point on the merits of Northwestern Bell’s rate increase
application. In addition, during the 1984 Docket 600 eviden-
tiary hearings some of the parties submitted public opinion
survey data regarding some of the original issues contested
in Docket 600. Thus, with respect to those original issues the
Commission, the parties and the Administrative Law Judge
felt it important and necessary to provide some evidence in
the record as to the public’s perception. With respect to the
Commission’s Docket 177 order to vacate and reopen the 1984
Rate Order, however, there was absolutely no public testi-
mony taken regarding the public’s perception of the alleged
contacts or their affect on the Docket 600 ratemaking process,
nor did any of the parties submit any public opinion survey
data regarding said public’s perception.
The Commission, nevertheless, based its cataclysmic de-
cision to throw out a 23, year old rate order, not on evidence
that particular votes or issues were improperly influenced,
vt
A-29
but on the Commission’s unsupported belief that the public
distrusted the process. In fact, in the MPUC’s official minutes
of its motion and vote the Commission admits it was an “as-
sumption” not a “finding.” (A-107). Thus, the Commission’s
“finding” and conclusion in its Docket 177 order regarding
the public’s perception of the processes used in conducting
Docket 600 not only lacks substantial evidence to support it
but it lacks any evidence whatsoever. The Commission’s find-
ings, conclusions and order regarding the public’s perception
of the processes used in Docket 600, therefore, should be
stricken.
D. The Contacts did not Affect the 1984 Rate Case De-
liberations or Order.
As stated earlier Commissioners Adams and Hanson both
gave sworn testimony during the DPS investigation denying
that the contacts involving Weir had any affect whatsoever
on their decision-making in Docket 600. None of the parties
to Docket 177 have offered any evidence that any specific
vote or decision made in Rate Case Docket 600 was affected
by said contacts. In fact, a number of the parties have ad-
mitted in their pleadings in Docket 177 that they are not
aware of what was discussed during the contacts in question
and what effect any such discussions may have had on any
particular issue in the case.
The Commission’s April 2, 1987 order attempts to sub-
stitute disbelief, suspicion and inference for evidence to
refute the uncontradicted sworn testimony of record. As noted
by the FCC in Re WORZ, Inc., 48 PUR 8rd 56 (1963),
however:
“Sworn denials, while not conclusive of the facts, are
not to be brushed aside lightly on the basis of an indefin-
able ‘normal human experience,’ . . . Suspicion, specula-
A-30
tion, and conjecture are not proper substitutes for
evidence, and cannot of themselves form the basis for
conclusions that an applicant engaged in improper con-
duct requiring its disqualification and that two or more
witnesses testified falsely. .. .” (/d., p. 60-61, emphasis
added).
Furthermore, during the deliberations in this matter a
number of Commissioners admitted they did not know what
Weir may have discussed with Commissioners Adams and
Hanson and did not know that any particular vote was in-
fluenced in anyway by such contacts. (MPUC tape recordings
86-166 through #86-170). In fact, in its April 2, 1987 order
the Commission specifically found that, “. . . it is difficult
to accurately assess the effect NWB’s actions had on partic-
ular votes on particular issues.” (April 2, 1987 Order, p. 10).
It is also apparent from the origina] decision in Docket 600,
however, and the Commission’s later analysis of that decision
that it was not improperly influenced in any way by the
contacts in question. During the 1984 original Docket 600
proceeding, Northwestern Bell had requested and believed it
had proved to be entitled to a rate increase in excess of $107
million. The Commission, however, voted to cut that request
by approximately $50 million. The Company originally re-
quested and believed it proved to be entitled to an authorized
rate of return of 16.5%. The Commission, however, voted to
cut that request to 14.5% (which also was lower than the
then existing actual authorized return of 14.9%).
Two years later on August 21, 1986 the Commission received
a report jointly prepared by the Commission staff and the
DPS staff. (A-146). The Joint Staff Report analyzed the
financial operations of the company for 1985, the first full
year Northwestern Bell operated under the rates set by the
1984 Rate Order, and made the following conclusions:
A-31
—Based on 1985 economic data the Commission in 1984 had
set the Company’s authorized rate of return (14.5%)
too low. It should have been set at 15.25%.
—The rates set by the Commission’s 1984 Rate Order were
also too low to allow the Company to earn either its
authorized rate of return (14.5%) or the rate of return
which should have been required (15.25%).
Thus it is clear that Weir’s contacts with Commissioners
Adams and Hanson in 1984 did not have a pro Company
affect on the 1984 Rate Order. Otherwise, the Joint Staff
Report would have found the Company’s authorized rate of
return and rates to be too high, not too low.
Since there is absolutely no evidence in the record that
any of the alleged improper contacts had any affect on any
decision made in Docket 600, there is no factual basis upon
which the Commission can support its order to vacate and
reopen the 1984 Rate Order due to tainted affect. All Com-
mission decisions must be based upon substantial evidence
in the record. State v. Tri-State Tel. & Tel. Co., 204 Minn. 516,
284 N.W. 294, 300 (1939).
Il. THE COMMISSION HAS NO STATUTORY OR IN-
HERENT AUTHORITY TO REOPEN AND VACATE
A FINAL RATE CASE ORDER WHICH IS OVER
2% YEARS OLD.
A. There is No Statutory Authority.
The Commission’s sole authority for determining rates
regarding Northwestern Bell comes from Minnesota Statutes,
Chapter 237. There is no provision in that Chapter which
authorizes the Commission to reopen and reconsider a tele-
phone rate order once it has become final—let alone one that
has been fina! for over 2%, years.
Minn. Stat. § 237.075, Subd. 5 states that once the Com-
mission has issued an order fixing the rates of a telephone
A-32
company and has served that order on the telephone company
—all of which happened in this case in 1984—“the rates shall
thereafter be observed until changed, as provided by this
Chapter.” (Emphasis added.) Since the State Legislature has
not provided the Commission authority under Chapter 237
to change a final rate order established pursuant to Chapter
237 other than by following the procedures set forth therein,
the Commission does not have express statutory authority
to reopen and vacate the 1984 Rate Order.
The MPUC is a creation of the State Legislature and its
jurisdiction and authority are strictly limited as provided by
statute. As noted by the Minnesota Supreme Court in Great
Northern Railway Co. v. Public Service Commission, 284
Minn. 217, 220, 169 N.W.2d 732, 735 (Minn. 1969):
It is elementary that the Commission, being a creature
of statute, has only those powers given to it by the legis-
lature. Backus-Brooks Co. v. N. P. Ry. Co., (8th Cir.)
21 F.2d 4, 19, where the court said: It is well settled the
powers of a state Commission are special and limited, and
they can exercise only such authority as is legally coa-
ferred by express provisions of law, where such. cs is
by fair implication and intendment incident to and in-
cluded in the authority expressly conferred for the pur-
pose of carrying out and accomplishing the objects for
which the Commission was created, and that any reason-
able doubt of existence of any particular power in the
Commission should be resolved against the exercise of
such power. (Emphasis added).
The Minnesota Supreme Court in recent years has continued
to insist that the Commission live by this doctrine of limited
express authority. Peoples Natural Gas Co. v. Minnesota
Public Utilities Commission, 369 N.W.2d 530, 534 (Minn.
=——— ~<a
A-33
1985) and Senior Citizens Coalition of Northern Minnesota
v. Minnesota Public Utilities Commission, 355 N.W.2d 295,
303-304 (Minn. 1985).
Furthermore, it is clear that the State Legislature knows
how to grant the Commission the authority to reopen final
rate orders if it feels that power is appropriate. In Minn. Stat.
§ 216B.25 (1986), the State Legislature explicitly gave the
Public Utilities Commission authority in rate cases involving
gas and electric utilities to reopen and rescind prior orders
at any time. That statute, however, as well as the rest of
Chapter 216B is specifically inapplicable to telephone rate
determination cases. (Minn. Stat. § 216B.02, Subd. 4). While
there are many provisions of Chapter 216B (the gas and elec-
tric statute) which are similar to Chapter 237 (the telephone
regulatory statute), there is no provision in Chapter 237 re-
motely similar to the power to reopen and amend prior gas
and electric orders as set forth in § 216B.25. Thus it is clear
the legislature has never given, nor intended to give, the
Public Utilities Commission the power to reopen a final tele-
phone rate order such as the 1984 Rate Order.
This is especially clear from action taken by the State
Legislature during its most recent session. During its 1987
session, the legislature had before it a bill, S.F. No. 1193
(A-177). Section 3 of S.F. No. 1193 proposed to amend Chap-
ter 237 by adding a new provision to the telephone statute
which would have given the Commission authority similar
to the authority the Commission has to reopen and amend
prior orders as set forth in the gas and electric statute, §
216B.25. The legislature, however, refused to adopt S.F. 1193
and give the Comniission that authority. This court has re-
lied on similar actions by the State Legislature in other cases
as an indication of a legislative intent not to expand MPUC
A-34
authority by implication. Application of Northwestern Bell
Tel. Co., 367 N.W.2d 655, 661 (Minn. App. 1985).
The Commission’s Docket 177 order to vacate and reopen
the 1984 final rate order was, therefore, a clear abuse of its
statutory authority.
B. The Authority Relied Upon by the Commission Regard-
ing its “Inherent” Authority is not Controlling in this
Case.
The Commission’s April 2, 1987 Order contains a discussion
of its authority to reopen and vacate the 1984 Rate Case
Order. (April 2, 1987 Order, pp. 4-6, A-112). At the outset
Commission, in effect, acknowledges it has no express stat-
utory authority by its complete failure to cite any. Instead,
the Commission begins by citing State on State ex rel. Turn-
bladh v. District Court, 259 Minn. 228, 107 N.W.2d 307 (1960)
and Anchor Cas. Co. v. Bongard’s Coop. Creamery Ass’n.,
253 Minn. 101, 91 N.W.2d 122 (1958). In doing so the Com-
mission acknowledges that these cases are among those
which stand for the proposition that, “. . . courts have
expressed a strong disinclination to reopening orders and
judgments after a reasonable time.” (April 2, 1987 Order,
p. 4). The Commission also acknowledges these two cases as
holdings which prohibit state agencies, such as the MPUC,
from reopening prior orders after agency jurisdiction is lost
by appeal or lapse of time for appeal. Faced with the reality
that the Commission in the present case had lost such juris-
diction due to the passage of time,® the Commission’s order
vainly attempted to distinguish Turnbladh and Anchor Cas.
Co. rather than be bound by them.
6 The time for appeal of the 1984 Rate Order lapsed 30 days after
the final order was issued or from the determination of any
motion for reconsideration. Minn. Stat. § 14.63, § 14.64, § 237.25,
and § 237.26.
— 7
eee
A-35
The Commission’s order asserts that these two cases only
limit the authority of the Commission to correct erroneous
decisions and that in the present case the Commission is not
concerned with correcting an erroneous decision, “but with
the integrity of the decision-making process itself, and the
public’s perception of the process.” (April 2, 1987 Order,
p. 4). This attempt by the Commission to create a meaningful
distinction, however, fails for a number of reasons.
First, neither Turnbladh nor Anchor Cas. Co. make such a
distinction. Thus, they cannot be relied upon as authority.
Second, even if such a distinction were recognized by law
in Minnesota, as indicated earlier there is no evidence on the
record in this docket establishing what the public’s percep-
tion is of the process. Third, the Commission cites no Minne-
sota decision or decision from another jurisdiction which
states that a Minnesota administrative agency has “inherent”
authority to do anything, let alone, to reopen a final admin-
istrative decision which is 234 years old. Nor does the Com-
mission cite any authority allowing it to base such a decision
on “public perception.” Finally, the Commission’s order com-
pletely ignores the only decision of a Minnesota court which
is on point. In Hough Transit Ltd. v. Harig, 373 N.W.2d 327
(Minn. App. 1985) this court held that the decision of a
Minnesota administrative agency (the Department of Eco-
nomic Security) is res judicata with respect to a later attempt
by the same agency to change it. In doing so this court stated
that even if the agency had the power to reverse its earlier
adjudication:
. . . the second decision would be unlawful because not
made within a reasonable time. The second representa-
tive’s decision was made almost two years after the first
representative’s decision. (Jd., p. 332, fn. 1, emphasis
added).
A-36
Since this court has held that the passage of less than two
years would preclude the reopening of a final administrative
order, the Commission in the present case was clearly without
authority to reconsider and vacate its 2%, year old order.
The Commission’s order, however, goes on to cite decisions
from several foreign jurisdictions and one Minnesota decision
in its attempt to formulate its argument that the Commission
has “inherent power” to remedy matter whenever it feels its
regulatory process has been abused. Again, the Commission’s
citation of authority is faulty for a number of reasons. First,
the Commission cites no authority which specifically states
that state administrative agencies, in general, or Minnesota
administrative agencies, in particular, have the “inherent
power” to do anything let alone reopen a final rate case
order which is over 234, years old. Second, the Commission’s
position regarding “inherent” authority is totally inconsistent
with the limited express power doctrine discussed earlier in
this brief. (II. A. pp. 27-30). Third, the Commission only
cites one Minnesota case for this proposition which, simply
put, does not apply.
Halloran v. Blue & White Liberty Cab Co., 258 Minn. 436,
92 N.W.2d 794 (1958), cited by the Commission, did not even
involve an administrative agency, thus, it could not have
involved the inherent power of an administrative agency. It
involved the power of a court to reopen a prior court order.
Halloran held that if one party to a lawsuit conducted in a
state district court can prove that another party obtained a
judgment by committing intentional fraud on the court, that
court may vacate and modify the judgment. In doing so, how-
ever, the Halloran court noted that the moving party was
basing its allegation of fraud on conduct which specifically
involved Canon 30 of the Canons of Professional Ethics of
ij
4
:
on
i
*
ere
A-37
the bar association. The present situation is distinguishable
from Halloran in that (a) there is no allegation that North-
western Bell engaged in conduct which violated a specific
statute, rule or regulation, and (b) Minnesota administrative
agencies do not have the same powers as Minnesota state
district courts.
Rule 60 of the Minnesota Rules of Civil Procedure spe-
cifically empowers Minnesota state district courts to reopen
judgments obtained by fraud under certain circumstances.
There is no similar grant of authority to the MPUC. In fact,
the Minnesota Supreme Court has specifically held that the
granting of rate determining authority to a Minnesota ad-
ministrative agency is not the same as the granting of judicial
powers. State ex rel Halton v. Four Lakes Tel. Co., 141 Minn.
124, 169 N.W. 480 (1918). Thus, Halloran does not support
the Commission’s claim of “inherent” administrative agency
power.
In addition, the Commission’s April 2, 1987 order also relies
on a number of decisions from non Minnesota jurisdictions
which are equally inapplicable here. They all involve enabling
authority and statutory schemes significantly different than
that governing the MPUC.
Universal Oil Products Co. v. Root Refining Co., 328 U.S.
575, 66 S. Ct. 1176, 90 L. Ed. 1447 (1946), cited by the
Commission, involved a party to an appeal before a federal
appellate court who allegedly bribed one of the appellate
justices with over $30,000 and obtained a favorable decision.7
While dicta in the Supreme Court’s opinion states that “a
federal court” has the “inherent power” to “investigate
whether a judgment was obtained by fraud,” the court went
* Facts from decision below, Root Refining Co. v. Universal Oil
Products Co., 169 F.2d 514 (3rd Cir. 1948).
A-38
on to hold merely that the attorneys involved in the case who
acted as amici to the court in the investigation were not en-
titled to obtain attorney’s fees from the losing party. The
Supreme Court did not state anything about the “inherent
power” of a state agency to reopen a prior decision. Further-
more, the Supreme Court specifically stated that even though
a federal court has the inherent power to conduct an investiga-
tion, that if the rights of the party who obtained the prior
judgment are to be adjudicated based upon the investigation
“the usual safeguards of adversary proceedings must be ob-
served.” (Id., 328 U.S. at 580, 66 S. Ct. at 1179). Further-
more, the court went on to state, “. . . obviously, a court can-
not deprive a successful party of his judgment without a
proper hearing.” (Id., 328 U.S. at 580, 66 S. Ct. at 1179).
Thus, Universal Oil does not provide the MPUC with the
authority it seeks in this case, nor does it approve the “sum-
mary” nature of the procedures used by the MPUC to vacate
the prior order in this case.
Hazel-Atlas Co. v. Hartford-Empire Co., 322 U.S. 238
(1944), also relied upon by the Commission, was overruled
in some respects later by the Supreme Court in Standard Oil
Co. v. California, 429 U.S. 17 (1976). Even the original ruling
in Hazel-Atlas, however, did not discuss the authority of a
state agency. In Hazel-Atlas the Supreme Court held that
when a circuit court of appeals makes a finding based on un-
disputed evidence that a party to an appeal had submitted a
forged document to the court and paid a witness $8,000 to
commit perjury in connectiox. with the authenticity of the
document, the court has the authority under its powers of
equity to “devitalize” the prior judgment. Minnesota state
agencies do not have the powers of equity that federal courts
have and Hazel-Atlas does not say that they do.
A-39
WKAT, Inc. v. FCC, 296 F.2d 375 (1961) also did not
involve the inherent power of a state commission. It involved
the power of a U. S. Circuit Court of Appeals under a section
of the Administrative Procedure Act, 5 U.S.C. § 1037 (c), to
issue an order based upon a recommendation from the FCC.
The issue involved in WKAT was who, among competing
licensed applicants, was ertitled to a license to provide broad-
cast services to the public. The moral character of applicants
was one of the issues the FCC was required by law to judge
in making its decision. This is clear from the FCC opinion
which stated:
.. . the misconduct of [the applicants] reflects so ad-
versely upon their character as to demonstrate that they
lack the qualifications to operate the station sought in
this application. .. (296 F.2d at 382).
It is also important to note that the FCC did not make its
findings of misconduct on behalf of the applicants in WKAT
based on a “summary” investigation. It appointed a hearing
officer who conducted extensive hearings, who made findings,
conclusions and an initial decision followed by exceptions be-
ing filed by the parties and a hearing and opinion by the FCC
under the Administrative Procedures Act. The MPUC in the
present case acted under different enabling authority and
utilized summary procedures which ignored the requirements
of the Minnesota Administrative Procedures Act.
Finally, State ex rel. Corbin v. Arizona Corporation Com-
mission, 143 Ariz. 219, 693 P. 2d 363 (1984), cited by the
Commission’s order, is no more controlling than the others.
First, the Corbin case is a decision under Arizona law, not
Minnesota law. The Arizona Corporation Commission is cre-
ated by the Arizona constitution rather than by the Arizona
state legislature. Thus, while the Minnesota Public Utilities
A-40
Commission has been held only to have specific powers dele-
gated to it by the state legislature, the Arizona Corporation
Commission has powers in addition to those granted it by
its state legislature. Second, in Corbin the regulatory com-
mission acted prior to the issuance of a final order during a
proceeding in which it learned that the attorney for an elec-
trical utility and the director of the Commission’s Utilities
Division admitted engaging in a material ex parte contact
with the administrative law judge—they drafted his proposed
decision for him. In the present case the Commission acted
over two years after the rate was final and had no evidence
before it that any decision in question was actually affected
by any ex parte contacts. Third, the Corbin court held that
even under circumstances involved it was not required to
‘dismiss the order or the case. Finally, in Corbin while the
problem came to light prior to the issuance of the final order,
the court noted that the defenses of laches would be applicable
to circumstances involving greater delay. Thus, it is unlikely
that even under Arizona law a rate order that had been final
and operating for more than 234, years would have been re-
opened.
The MPUC’s Docket 177 order then goes on to list five
criteria it asserts should be utilized in exercising its alleged
inherent authority for evaluating the need to reopen the 1984
Rate Order. In doing so, the Commission relies on Northern
States Power Co., Docket No. G-0002/GR-85-108, Order Va-
cating December 30, 1985 Order (February 19, 1986, Slip.
Op.) (A-162)* and Professional Air Traffic Controllers Or-
ganizations v. FLRA, 685 F.2d 547 (D.C. Cir. 1982). Neither
decision is applicable here.
8This decision is currently on direct appeal to the Minnesota
Supreme Court.
A-41
NSP involved a motion to reopen a prior order of the Com-
mission brought within a few weeks of the issuance of the
order reopened and within the time limits established by Com-
mission rule for bringing motions for reconsideration. In
the present case, that time limit expired several years ago.
Also, in NSP the utility company itself was one of the parties
who moved for and therefore consented to the reconsideration.
In the present case, Northwestern Bell has never waived its
right to be governed by the Minnesota Supreme Court ap-
proved 1984 Rate Order. Finally, in NSP the Commission
was acting under different enabling legislation which specifi-
cally authorizes the reopening of rate orders in gas and electric
cases at any time. Minn. Stat. § 216B.25. Rate case proceed-
ings involving telephone companies are governed by Minn.
Stat. Chapter 237 which, as was indicated earlier, has no sim-
ilar provision authorizing the reopening of final orders.
In PATCO, supra, the court dealt with a violation of a fed-
eral statute which specifically prohibits ex parte contacts in
federal administrative proceedings. In the present case, there
was no statute, federal or state, which prohibited the contacts
involving Northwestern Bell. Furthermore, in PATCO the
court refused to set aside the agency decision involved de-
spite the fact that the court found illegal ex parte contacts
involving wining and dining had actually occurred in the
case. The court did so because, despite the contacts, it found
the final decision was not affected by the contacts. In the
present case all the participants to the contacts have testified
under oath that the Commission’s decision was not affected
by the contacts. Furthermore, the Commission made no
finding that any specific issue or vote in Docket 600 was af-
fected by any of the contacts.
Even if the five criteria the Commission derived from
NSP/PATCO were applicable to the present case, however,
they were not properly applied by the Commission. In addi-
A-42
tion the Commission, over Northwestern Bell’s objection,
ignored a sixth fundamental criterion.*® The sixth fundamental
criterion should have been formulated as follows:
[6] What specific statute, rule or regulation, if any, was
in effect during the relevant time period which prohib-
ited each alleged conflict of interest or alleged ex parte
communication?
As demonstrated earlier, there were no such applicable
statutes, rules or regulations then in effect.
Furthermore, it is clear that the Commission did not even
abide by the requirements of the five NSP/PATCO criteria
it claimed to have set for itself. For example, the Commission
listed as its second requirement, “Whether the contacts may
have influenced the agency’s ultimate decision.” (April 2,
1987 Order, p. 6; A-114). This is an important criterion be-
cause in the PATCO case, which the Commission relied on in
establishing its criteria, the court decided not to undo a prior
decision despite the fact that it found illegal ex parte contacts
had occurred during the case. The PATCO court also found,
however, there was no proof that the final decision was im-
properly influenced by the statutorily prohibited contacts. If
the Commission is going to rely on PATCO it should also
follow it.
In the present case it is clear, however, the Commission
did not apply the second criterion. On page 10 of its order,
the Commission admits “it was difficult to accurately assess
the effect NWB’s actions had on particular votes on particular
issues.” 1°
9 NWB’s Comments Regarding the MPUC’s October 3, 1986 Order,
dated October 22, 1986, pp. 15-16).
10 Even this statement, which does not find there was an actual
effect overstates the evidence. As indicated earlier there is no
evidence on the record that any vote was affected and several
Commissioners stated so during their November 7, 1986 delibera-
tions.
eee
A-43
Instead of applying the second criterion as stated, the Com-
mission changed it and found not that any votes or issues had
been affected but that an “impression” was created by North-
western Bell’s contacts of “an unduly receptive atmosphere.”
(April 2, 1987, Order, p. 10; A-118). The Commission cited
no authority in support of this substituted criterion. Thus,
the Commission failed to apply that criteria it said it was
going to and the criteria it felt PATCO and NSP required.
Similarly, the Commission ignored its third NSP/PATCO
criterion which it stated to be, “Whether the party making
the improper contacts benefited from the agency’s ultimate
decision.” This is a rather simple requirement to understand.
Did Northwestern Bell, in fact, benefit in the final order
from its alleged improper contacts.
Instead of applying this criterion, as stated, the Commis-
sion, ignored sworn testimony to the contrary, and found that
the contacts in question were “intended” to benefit North-
western Bell in Docket 600. (April 2, 1987 Order, p. 11). The
Commission cited no authority for this substituted criterion.
In addition, the Commission’s finding under this criterion
ignore contrary conclusions reported to it by its own staff.11
For the foregoing reasons it is clear that the Commission’s
order vacating the 1984 Rate Order was issued without statu-
tory authority and the Commission’s attempt to justify its
actions based upon nonexistent inherent authority is meritless.
III. THE MINNESOTA SUPREME COURT’S DECISION
IN HENRY V. MPUC THAT NORTHWESTERN
BELL’S DOCKET 600 RATES ARE JUST AND REA-
SONABLE BARS THE COMMISSION’S ACTION IN
DOCKET 177 UNDER THE DOCTRINE OF RES
JUDICATA.
11 See discussion of Joint Staff Report, Supra, 26-27.
A-44
The practical effect of the Commission’s orders in Docket
177 vacating the 1984 Rate Order when combined with the
Commission’s action in Docket 600 is to illegally lower North-
western Bell’s rates which have been in effect for several
years by $11.9 million a year. (See Commission order of
April 3, 1987 in Docket 600).
As indicated earlier, Northwestern Bell’s current rates
were reviewed by the Minnesota Supreme Court in Henry v.
Minnesota Public Utilities Commission, 392 N.W.2d 209
(Minn. 1986) and found to be just and reasonable and sup-
ported by substantial evidence in the record. (Henry, supra,
pp. 215-216). Both the Commission and Northwestern Bell
were parties of record to the Henry litigation. As such, both
the Commission and Northwestern Bell are bound by the
court’s decision in Henry regarding the issue of whether or
not the final order in Docket 600, the same order which is at
issue in this proceeding, established rates that were just and
reasonable.
Both the United States Supreme Court and Minnesota
courts have held that the principles of res judicata apply to
actions by administrative agencies. U.S. v. Utah Construction
& Mining Co., 384 U.S. 394, 422, 86 S.Ct. 1545, 1560, 16 L. Ed.
2d 642 (1966) and Hough Transit, Ltd. v. Harig, 373 N.W.2d
327, 332 (1985).
In Henry the court stated:
“Based on our careful review of evidence in the record
of this case and the 100-page order of the MPUC, we
conclude that the decision of the MPUC was supported
by evidence in the record and was not arbitrary and
capricious. We therefore hold Northwestern Bell met
its statutory burden of proof under Minn. Stat. § 237.075,
Subd. 4 (1984) as to the rate increase order. (Henry, id.,
p. 216).
A-45
Thus, in Henry the Minnesota Supreme Court has already
ruled, as a matter of law, that the evidence in the record in
Docket 600 establishes that the rates put into effect under
the 1984 Rate Order were just and reasonable regardless of
the procedures utilized in establishing those rates. The Com-
mission, therefore, is bound by that decision and was not en-
titled to change it. If the Commission felt for whatever reason
that Northwestern Bell’s current rates which had previously
been found to be just and reasonable were unjust and unrea-
sonable, the Commission could have commenced a new rate
proceeding to determine that issue and have afforded the
company ail its procedural rights under Minn. Stat. Chapter
237.
The Commission’s deliberations in this matter totally ig-
nored the applicability of the Henry decision until its order
denying reconsideration of June 4, 1987 despite the fact that
Northwestern Bell had repeatedly raised it throughout this
proceeding. (NWB’s Response to the AG-RUD’s Reply Brief,
September 15, 1986, p. 20; and NWB’s Comments Regarding
the MPUC’s October 3, 1986 Order, October 22, 1986, pp.
43-44). The Commission’s only response was to state that the
issue of abuse of the Commission’s process, which the Com-
mission asserted as its legal basis for redeliberating Docket
600, was not before the court in Henry.
This response lacks merit for two reasons. First, it ignores
the fact that in Henry the court held that the evidence of
record supported the rates which were established as being
just and reasonable. This would still be true even if NWB had
attempted to bring additional evidence to the attention of the
Commission regarding Docket 600 by ex parte means. (The
latter circumstance, however, was denied under oath by all
participants). The fact that the evidence of record support
A-46
the rate decision would also be true regardless of the motiva-
tion of the decision makers.
Second, the doctrine of res judicata not only bars issues
which were raised and decided but also those which could have
been raised. In Re: McDonough, 296 N.W.2d 648 (Minn.
1980) ; Youngstown Mines Corp. v. Prout, 266 Minn. 450, 124 .
N.W.2d 328 (1963); and Nelson v. Dorr, 239 Minn. 423, 58
N.W.2d 876 (1953). The Commission knew some of the facts
involved in this matter as early as April 9, 1986 when it issued
its order initiating the investigation. The Commission knew
all of the facts upon which it based its decision as of July 8,
1986 when the Department of Public Services submitted its
report. The Minnesota Supreme Court did not render its
decision in Henry until a month later on August 8, 1986.
Despite the fact that the Commission had this knowledge, it
made no attempt to bring these issues to the attention of the
Minnesota Supreme Court nor to request a stay of the appeal
or remand of the case for the purpose of enabling the parties
to deal with these issues and include them in the Docket 600
appeal.
Furthermore, the policy reasons underlying the doctrine of
res judicata are applicable here. Parties need certainty and a
reasonable end to litigation. Both the Commission and the
Company need to be bound by prior Supreme Court decisions
which declares particular orders of the Commission to be
valid and final. Otherwise the conduct of any regulated busi-
ness would be plagued with uncertainty and chaos.
Furthermore, any dissatisfaction the Commission had with
the practices of parties in this case could have been and have
been corrected by rulemaking. (A-137). Any concern regard-
ing the present reasonableness or unreasonableness of the
Company’s rates can be resolved by the Commission’s com-
—— =
~ - .
AE
:
A-47
mencing a new ratemaking proceeding rather than trashing
one that has been in effect and final for several years.
IV. THE COMMISSION’S ORDER TO VACATE, REOPEN
AND REDELIBERATE A 2%, YEAR OLD FINAL
RATE CASE ORDER VIOLATES THE 10 MONTH
RULE OF MINN. STAT. § 237.075.
Even if the Commission had the autherity and jurisdiction
to vacate a 2%, year old final order, and even if there were a
proper factual basis for doing so based upon proceedings
which did not violate the Company’s due process rights, the
Commission, nevertheless, should not have vacated the 1984
Rate Order and subsequently issued another rate order be-
cause the legal effect of said action is a violation of the 10
month rule of Minn. Stat. § 237.075, Subd. 2.
That statute requires the Commission to issue its final de-
termination in a general rate case “within 10-months after
the initial filing date.” In the present case the initial filing
date was September 29, 1983. The Commission’s final deter-
mination of July 27, 1984 was within the 10 month period.
The Commission’s orders of April 2, 1987 and April 3, 1927
are well beyond it.
The Commission has stayed the ratemaking effects of its
April 2, 1987 order in this matter and its new April 3, 1987
ratemaking order in Docket 600 pending judicial review of
both orders. Once that stay is lifted, however, ualess those
orders have been overturned by this court the plain language
of Minn. Stat. § 237.075, Subd. 2 would apply.
That statute specifically provides that in cases of a 10
month violation the schedule of rates initially filed by the
Company (in this case calling for a $109 million annual in-
crease) “. . . shall be deemed to have been approved by the
Commission . . .” Thus, the legal effect of the Commission’s
A-48
action of not issuing a “final determination” until after April.
2, 1987 on a rate increase petition filed by the Company on
September 23, 1983 would be to increase the Company’s cur-
rent rates by more than $50 million rather than decrease them
by $11.9 million as the Commission intended to do in its
April 3, 1987 order.
Furthermore, the Commission’s own staff and the staff of
the Department of Public Service advised the Commission in
the Joint Staff Report!? that the Commission’s 1984 Rate
Order established an authorized rate of return for the Com-
pany which was too low and established rates which did not
produce sufficient revenue for the Company to earn either
its authorized rate of return or required rate of return during
1985. Thus, while a rate increase resulting from the present
docket would not be what the Commission intended, it would
be no more inequitable than the Commission’s decision to
lower the Company’s rates by $11.9 million annually in 1987
based on a 1983 test year without affording the Company due
process of law.
V. THE PROCEDURES USED BY THE COMMISSION
IN DOCKFT 177 VIOLATED NORTHWESTERN
BELL’S CUNSTITUTIONAL AND STATUTORY
RIGHTS.
Docket 177 was a summary investigation. (MPUC Order
April 9, 1986 and MPUC Order, October 3, 1986). The DPS
Report indicates that Northwestern Bell was officially desig-
nated a party to the investigation. (DPS Report, Ex. 55). Yet,
the DPS Report also indicates Northwestern Bell was denied
the rights of a party by the DPS during the investigation.
For example, while the DPS required Northwestern Bell to
12 See discussion of Joint Staff Report, Supra, pp. 26-27.
A-49
have Northwestern Bell employees respond to interrogatories
and requests for production of documents (DPS Report, Exhs.
49 and 53), the DPS refused to respond to interrogatories and
requests for the production of documents propounded by
Northwestern Bell. (DPS Report, Exh. 65). Northwestern
Bell brought this to the Commission’s attention but obtained
no relief.
In addition, many of the exhibits to the DPS Report are
documents which were not disclosed to Northwestern Bell
during the investigation but only after the DPS Report was
filed. [Exhs. 1-9, 11, 14-15, 30, 32, 87, 47, 51, 52, 55, 56
(Partial), 57-58, 59 (Partial), 63-64, 67, 71-72 and 91]. Since,
many of the exhibits consist of affidavits or DPS memoranda
to the file of interviews or telephone conversations regarding
information provided to the DPS under circumstances which
did not provide Northwestern Bell with notice or an oppor-
tunity to cross-examine or otherwise participate (Exhs. 32,
57-58, 67, 71 and 91) Northwestern Bell was denied funda-
mental due process rights in the manner in which these
“exhibits” were compiled and unilaterally presented to the
Commission.
The Commission, nevertheless, took administrative notice
of the DPS Report, depositions and exhibits and considered
them to be “evidence” of record. (MPUC Order, October 3,
1986, p. 3).
Northwestern Bell, therefore, gave written notice to the
Commission and all parties to Docket 177 that, in addition to
many other reasons, Northwestern Bell would object to any
action taken by the Commission to reopen or reconsider the
1984 Rate Order based on the so called “evidence” created by
the DPS under the “summary” investigative procedures in-
volved in Docket 177. (NWB’s comments, October 22, 1986,
pp. 16-17).
ai a aA i be
A-50
The Commission did not order a contested case under Minn.
Stat. § 237.075 and Minn. Stat. Chapter 14 as it had in pro-
ducing the record which resulted in the 1984 Rate Order in
Docket 600. Since this is a ratemaking proceeding which re-
sulted in a lowering of the Company’s rates based upon dis-
puted issues and evidence, the Commission was required to
do so. State v. Tri-State Tel. & Tel. Co., 284 N.W. 294 (1939)
(“Due process demands that rates be fixed only after a hear-
ing attended by at least the rudiments of fairplay.” IJd., at
300) and Continental Tel. Co. of Minn., Inc., 389 N.W.2d 910
(Minn. 1986). Even under Minn. Stat. § 237.081, which was
relied upon by the Commission in initiating Docket 177 (A-2)
Northwestern Bell is entitled to a formal hearing prior to any
order being issued which changes its rates. Northwestern Bell
never received one.
It is Northwestern Bell’s position that even assuming
arguendo that the Commission has the authority to reopen a
234 year old final rate order, the Commission cannot and
should not do so unless some party has produced evidence in
a proceeding which affords Northwestern Bell its due process
adversarial rights which meets a prima facie threshold en-
abling reopening. In its October 22, 1986 comments to the
Commission, Northwestern Bell took the position that (1)
since no party had come forward in Docket 177 with any
evidence that Mr. Weir’s contacts with Commissioners Adams
and Hanson violated any statute, rule or regulation and (2)
since there was no evidence that Docket 600 issues had ever
been discussed in those meetings and (3) since all the sworn *
evidence of record established that no vote in Docket 600 had
been affected by the contacts, the prima facie threshold had
not been met and no further proceedings were appropriate
or necessary.
A-51
If the Commission or any party disagreed with Northwest-
ern Bell, the Commission should have submitted the matter
to the Office of Administrative Law Judges for contested case
pursuant to Chapter 14. The Commission’s failure to do so
resulted in the Commission issuing an order based on a
record which denied Northwestern Bell statutory and con-
stitutional rights.
Since the ultimate result of the proceedings in Docket 177
was to vacate an order which entitled Northwestern Bell to
$56.5 million annually and later replaced with an order in
Docket 600 which, if not reversed, would result in a $11.9
million reduction to Northwestern Bell, the Commission has
confiscated Northwestern Bell’s property in violation of its
state and federal constitutional rights to due process and in
violation of its statutory rights. Bluefield Waterworks & Im-
provement Co. v. P.S.C. of W. Vir., 262 U.S. 679, 48 S. Ct.
675 (1923) and State v. Tri-State Tel. & Tel. Co., 284 N.W.
294 (Minn. 1939).
CONCLUSION
For the foregoing reasons Northwestern Bell requests that
this court reverse and vacate the Commission’s orders in
Docket 177 of April 2, 1987 and June 4, 1987 and reinstate the
Commission’s 1984 Rate Order.
Dated :
Respectfully submitted,
NORTHWESTERN BELL
TELEPHONE COMPANY
A-52
APPENDIX 2
C9-87-1297
STATE OF MINNESOTA
COURT OF APPEALS
NORTHWESTERN BELL TELEPHONE
COMPANY,
Relator,
vs.
MINNESOTA PUBLIC UTILITIES COMMISSION,
Respondent.
BRIEF OF NORTHWESTERN BELL |
TELEPHONE COMPANY
TABLE OF CONTENTS
Page
i oe eae ek eeeoes 1
Te oak epee ad havea enees 4
on. ee eh irre ih 5
A. Facts Related To Capital Structure........ 5
B. Facts Related To Directory Adjustment ... 10
C. Facts Related To Tax Flow Through... 13
D. Facts Related To Free Services.......... 14
E. Facts Related To Other Errors....... he 18 }
1. Denial of Oral Argument.............. 18 ,
2. Failure to Deal with Issues Raised in the
Petition for Reconsideration ...... 18
Basing Prospective Rates on Out-of-Date
yy ae 19
|
A-53
BY.) Se ec ee Poe ee ee eee
A. The MPUC Erred In Using A Hypothetical
Capital Structure To Set Northwestern Bell’s
Been Eat ee I ee as
) A
The MPUC’s Capital Structure Determina-
tion is Barred by the Supreme Court’s
Decision in the Henry Case............
The MPUC’s Capital Structure Decision
is Contrary to Established Law .........
The MPUC’s Capital Structure Determina-
tion Is Arbitrary and Capricious........
The MPUC’s Capital Structure Determina-
tion Is Not Supported By Substantial Evi-
dence Viewing the Record Whole...__....
B. The MPUC’s Decision To Impute Hypothetical
Directory Revenues Is Contrary To Law, Un-
supported By Substantial Evidence And Arbi-
wary Ame Gapeeme ......... 2. is,
FR
The MPUC’s Decision to Impute Revenues
Is Barred By This Court’s Decision in the
ee I reo eee
The MPUC’s Decision To Impute Direc-
tory Revenues Is Contrary To Other Ap-
plicable Principles of Substantive Law _.
The MPUC’s Decision To Impute Hypo-
thetical Directov;, Revenues to the Com-
pany is Not Supported By Substantial Evi-
dence and is Arbitrary and Capricious .
C. The MPUC’s Decision To Require The Com-
pany To Reduce Rates Prospectively Due To
A Non-Existent Tax Surplus Is Contrary To
21
31
31
33
35
A-54
Law, Unsupported By Substantial Evidence
And Is Arbitrary And Capricious ..........
The MPUC’s Decision To Require The Com-
pany To Give Services Away Free Of Charge
Is Contrary To Law, Unsupported By Sub-
stantial Evidence And Is Arbitrary And
Casttaea. ... as Ar eee
1.
The Requirement That the Company’s
Must Give Away Services Violates Minn.
Bint. 3 Des ss oi kee ee
The MPUC’s Decision Is Not Supported
By Adequate Findings ...........i26:.:
The MPUC’s Decision Is Not Supported
By Any Evidence and Is Arbitrary and
Comme 6. i See ee
The MPUC’s Decision Confiscates the
Company's TROMNRE so) Blin ek oe
The MPUC Lacks Jurisdiction to Require
the Company to Give Away Service .....
The Order After Redeliberation And The
Order Denying Reconsideration Are Affected
By Substantial Legal And Procedural! Errors.
}
Denial of the Company of the Opportunity
to Present Oral Argument to a Majority
of the Commissivners Who Rendered These
Decisions Violates Due Process and the
Administrative Procedures Act.........
The MPUC’s Failure to Deal With Sub-
stantive Issues Raised on Reconsideration
i RS +. Saw ee See
Page
39
39
40
41
42
43
44
44
46
A-55
Page
8. The MPUC Erred In Attempting to Set
Prospective Rates Based on Out-of-Date
rt Souk a cm ao v's ew 48
I ts vaya cea dadbavcccves 49
TABLE OF AUTHORITIES
Minnesota Statutes:
Ne oy esas ice ced ae ese ate 45
ES pet seste aalaceate 45, 46
er ee ewes 46
I i, vc cave weve scaneten 42, 43
Den = meme, OGnG. 4 ..............4.. 22, 25, 28
ner © merre, gue. © ...............2.2.. 37, 43
Minn. Stat. § 237.075, subd.6 ................... 37, 43
Sr re 43
re 39, 40, 43
ES re 44
Minn. Stat. §§ 237.69-.72 ....... Sh A Me eke ae 44
Internal Revenue Code:
a a spn ca ce dee ba eee 37
Treasury Regulations:
Section 1.167(a)-11(b)6 SO Art OBL Feo 37, 38
Section 1.167(1)-1(h) (2) Fee Go A ee earn ear a 38
Minnesota Supreme Court Decisions:
Hauser v. Mealey,
263 N.W.2d 803 (Minn. 1978) .................. 33
Henry v. Minnesota Public Utilities Commission,
b 392 N.W.2d 209 (Minn. 1986) ..... 1, 2, 18, 21, 22, 35, 47
Hibbing Taconite Co. v. Public Service
Commission, 302 N.W.2d 5 (Minn. 1980) ........ 35, 46
Holden v. Farwell, Ozmun, Kirk & Co.,
34 N.W.2d 920 (Minn. 1948) ............ 32
A-56
Janssen v. Neal,
ee Rg ) rae ae eee vas
Lange v. Nelson-Ryan Flight Service, Inc.,
116 N.W.2d 266 (Minn. 1962) ............... 23, 24, 33
Matter of Haugen,
yy PR Rh | 45
Minnesota Power & Light Co. v. Minnesota
Public Utilities Commission, 342 N.W.2d 324
i Is ek Casi Oe ers told are Wk oa 23, 33
Northwestern Bell Telephone Company v. State,
253 N.W.2d 815 (Minn. 1977) ............... ..86, 48
Northwestern Bell v. State,
216 N.W.2d 841 (Minn. 1974) ......._... . 18, 24, 25, 33
Reserve Mining Co. v. Herbst,
256 N.W.2d 808 (Minn. 1977) ........ ee
Shimp v. Sederstrom,
233 N.W.2d 292 (Minn. 1975) ............. So) Oe
Tankar Gas, Inc. v. Lumbermen’s Mutual inant
Co., 9 N.W.2d 754 (Minn. 1943) ......... <- 33
Minnesota Court of Appeals Decisions:
Application of Northwestern Bell Telephone
Company, 374 N.W.2d 758 (Minn. App. 1985),
aff’d in part, reversed in part, 386 N.W.2d 723
Ce cr het eee Gatianieete an ast; 1
Application of Northwestern Bell Seteplestia
Company, 371 N.W.2d 563 (Minn. App. 1985),
review denied, September 29, 1986 1, 21, 32
Application of Northwestern Bell Telephone
Company, 367 N.W.2d 655
(Minn. App. 1985) | | 1, 12, 19, 31, 32, 34, 37
Central Telephone Co. v. Minnesota Public Utilities
Commission, 356 N.W.2d 696
(Minn. App. 1984) 10, 18, 25, 26, 27, 28, 47
| A-57
In the Matter of Determining the Natural
Ordinary High Water Level of Lake Pulaski,
384 N.W.2d 510 (Minn. App. 1986) ............. 45
In Re Estate of Boysen,
: 851 N.W.2d 398 (Minn. App. 1984) ............. 33
People’s Natural Gas Co. v. Minnesota Public
Utilities Commission, 342 N.W.2d 348
: Ca es ee iia sk. 24, 25, 27
Petition of Northern States Power Company,
402 N.W.2d 135 (Minn. App. 1987) . .18, 23, 25, 26, 29, 47
Roseberg v. Steen,
363 N.W.2d 102 (Minn. App. 1985) ............. 33
State by Johnson v. Sports & Health Club,
392 N.W.2d 329 (Minn. App. 1986) ............. 23
Yellowbird, Inc. v. MSP Express, Inc.,
377 N.W.2d 490 (Minn. App. 1985) ....... 40, 45, 46, 48
Decisions from Other Jurisdictions:
Coastal Oil & Gas Corp. v. F. E. R. C.,
782 F.2d 1249 (5th Circuit 1986) ............... 35
Southern Union Gas Co. v. F. E. R. C.,
725 F.2d 99 (10th Circuit 1984) ................ 35
United States v. Western Electric Company, Inc.,
569 F.Supp. 990 (D.D.C. 1982) ........... eh ee
South Central Bell v. Louisiana Public Service
Commission, 373 So.2d 478 (La. 1979) ........... 10
I. PROCEDURAL HISTORY
This case (“Docket 600’) originated with a Petition for a
general rate increase filed in September, 1983, by North-
western Bell Telephone Company (““NWB’’). After contested
case proceedings, the Minnesota Public Utilities Commission
(“MPUC’”’) issued its initial decision on July 27, 1984 (‘1984
Rate Order’’). (A-6-106). The MPUC issued its Order After
ee eT
A-58
Reconsideration and Rehearing on September 26, 1984.
(A-107-119). On October 17, 1984 (A-120-127), the MPUC
approved the implementation of new rates designed to in-
crease NWB’s authorized revenues by $57,511,000 annually.
The new rates have been in effect since October 19, 1984.
A variety of appeals were taken from the MPUC’s 1984
orders. This Court reversed two aspects of the MPUC’s de-
cisions (see Application of Northwestern Bell Tel. Co., 367
N.W.2d 655 (Minn. App. 1985)), and the Minnesota Supreme
Court affirmed these orders in all other respects in Henry v.
Minnesota Public Utilities Commission, 392 N.W.2d 209
(Minn. 1986),! holding:
“Based on our careful review of the evidence in the rec-
ord of this case and the 100-page order of the MPUC we
conclude the decision of the MPUC was supported by
evidence in the record and was not arbitrary and capri-
cious. We therefore hold Northwestern Bell met its
statutory burden of proof under Minn. Stat. Section
237.075, subd. 4 (1984) as to the rate increase ordered.”
(392 N.W.2d at 216).
In April, 1986, the MPUC initiated a proceeding (Docket
No. U-999/CI-86-177, (“Docket 177”)) to investigate contacts
between a Company representative and certain former Com-
missioners. The Department of Public Service (“DPS”) con-
ducted an investigation and submitted a Report to the MPUC
on July 8, 1986. Thereafter, several parties to Docket 600
1 Additional appeals include Application of Northwestern Bell Tei
Co., S71 N.W.2d 563 (Minn. App. 1985), review denied, Sept. 2
1986 (relating to a January 10, 1985 order dealing with directory
accounting matters), and Application of Northwestern Bell Tel
Co., 374 N.W.2d 758 (Minn. App. 1985), aff'd in part and reversed
in part, 386 N.W.2d 723 (1986) (relating to intervenor compensa
tion in telephone rate proceedings)
A-59
moved the MPUC to reopen, reconsider or vacate the previous
decisions in Docket 600. The Company opposed these requests.
The MPUC deliberated on these and other matters in No-
vember, 1986, and February, 1987. On April 2, 1987, it issued
its order in Docket 177, vacating its 1984 Rate Order. The next
day, the MPUC issued the Order After Redeliberation
(“OAR”) in Docket 600 based on the factual record, briefs
and arguments presented in 1984. (A-130-269).
In the OAR, the MPUC reduced the previously authorized
rate increase from $57,511,000 to $45,603,000 annually. (See
A-267). The major revenue requirement changes made by the
MPUC were: (1) to impute a hypothetical capital structure
and hypothetical interest expense to NWB for purposes of
calculating NWB’s authorized rate of return and test year
income tax expense (Compare A-78-79, with A-196-197, 226-
231); (2) to impute $2.527 million of hypothetical directory
revenues to NWB (A-71-74); and (3) to require NWB to con-
tinue to flow through in prospective rates a deferred income
tax surplus that had already been flowed through in rates
charged since 1982 (A-164-165).
The MPUC also altered the previously-approved metro-
politan rate structure. (Compare A-103-104, para. b & c, with
A-138, para. c) and, sua sponte, ordered NWB to provide
certain services free to handicapped customers. (Compare
A-104, para. m & n, with A-268, para. m & n).
NWB filed timely Petitions for Reconsideration of the
OAR in Docket 600 and the April 2, 1987 order in Docket 177.
By orders dated June 4, 1987, the MPUC denied both peti-
tions. (See A-?70-274 regarding Docket 600.)? The MPUC
~WR has sepal ste ly ippealed the MPUC's orde rs of April 2
and June 4, 1987, in Docket 177 to this Court in Northwest
Bei! Tel. C Vv esota Public Utilities Ce on, CY-87-
1296
A-60
denied reconsideration of the Docket 600 Petition without dis-
cussing any of NWB’s substantive issues. However, it clarified
and expanded its direction to NWB to provide free services
to the handicapped. (Order Denying Reconsideration
(“ODR”) A-272-273).
NWB filed compliance tariffs as directed by the MPUC’s
orders, as well as tariffs and supporting documentation that
more appropriately calculate the revenue impact, and the re-
sulting rates for other services, of the MPUC’s decision to
require NWB to give away service. On July 21, 1987, the
MPUC approved the compliance tariffs and rejected NWB’s
alternative tariffs and revenue calculations. (A-280-286).
On June 30, 1987, the MPUC stayed any requirements that
NWB implement new rates pending the outcome of NWB’s
appeals. (A-275-279).*
II. ISSUES ON APPEAL
NWB separately appealed the MPUC’s orders in Docket
177. Issues related to the propriety of the MPUC’s decision
to vacate the 1984 Rate Order will be addressed in that appeal
and will not be addressed here.* If the Court determines that
The combined result of the Tier and handicapped services rate
design decisions is that NWB’s approximately 99,000 customers
in Tiers 3 and 4 of the Metropolitan area will experience rate
increases if the approved compliance tariffs are implemented,
even though the MPUC reduced NWB’s rate increase by ap-
proximately $12 million. By its ODR dated June 4, 1987, the
MPUC specifically rejected a Suburban Rate Authority request
that the MPUC reconsider the Tier decision. (A-274). llowever,
a second petition for further reconsideration of the Tier issue
was recently filed by the Suburban Rate Authority and that
petition is presently pending before the Commission.
4 Those issues include whether the MPUC had authority and juris
diction to vacate the 1984 Rate Order in the manner in which it
did, whether the procedures the MPUC followed were lawful,
what is the appropriate legal impact of the MPUC’s order vacat-
ing the 1984 Rate Order on NWB’s current rates, and whether
there was a factual record that supported the MPUC’s vacation
action.
A-61
the MPUC improperly vacated the 1984 Rate Order and re-
instates the 1984 Rate Order, this appeal will be moot. How-
ever, if the Court affirms the vacation of the 1984 Rate Order,
it will be necessary to consider the merits of the following is-
sues raised in this appeal:
(1) Is the MPUC’s decision to impute a hypothetical
capital structure and cost of debt to NWB contrary to
law, unsupported by substantial evidence and arbitrary
and capricious?
(2) Is the MPUC’s decision to impute hypothetical
directory revenue to NWB contrary to law, unsupported
by substantial evidence, and arbitrary and capricious?
(3) Is the MPUC’s decision to require NWB to re-
duce rates prospectively due to a non-existent tax surplus
contrary to law, unsupported by substantial evidence and
arbitrary and capricious?
(4) Is the MPUC’s decision to require NWB to pro-
vide services free of charge to certain customers contrary
OL wk BIN hey
20 ome) i
to constitutional principles and law, unsupported by evi-
dence in the record and arbitrary and capricious?
(5) Were the procedures the MP'JC utilized with
regard to arriving at its decision contrary to NWB’s con-
stitutional right to due process of law, contrary to other
legal standards and contrary to the provisions of Admin-
istrative Procedures Act?
Ill. STATEMENT OF FACTS
A. FACTS RELATED TO CAPITAL STRUCTURE.
In its OAR, the MPUC used a hypothetical capital structure
to set NWB’s rates, holding NWB had failed to establish the
reasonableness of its actual capital structure. (A-227-230).
Capital structure impacts the rate-setting process, because the
cost of each type of capital (i.e., debt and equity) is weighted
A-62
by its percentage of the total capital to determine NWB’s
overall rate of return.® (See, Id., p. 103).
The record reflected the equity ratios of 17 telephone com-
panies, including NWB:
Company
Cincinnati Bell
Rochester Telephone
AT&T
Bell South
Bell Atlantic
Northwestern Bell actual
Ameritech
US West—used in 1984 Rate Order
Southwestern Bell
Southern New England Tel.
NYNEX
Pacific Telesis
United Telephone
Centel
GTE
Continental
Mid-Continent
Equity Ratio
61.7%
58.1%
57.4%
56.9 %
56.7 %
56.4%
56.2 %
55.9%
55.4%
54.5 %
54.9%
53.5 %
44.7%
43.5 %
40.7 %
38.8 %
33.5 %
5 For example, if a company’s capital structure were 60% common
equity, at a cost of 15%, and 40% debt, at a cost of 10%, its over-
all cost of capital (its overall rate of return) would be 13%
(60% x 15% + 40% x 10% = 13%). Capital structure also in-
directly impacts allowable income tax expense, because interest
paid on dept is a deductible expense for income tax purposes.
Thus, hypothetically increasing the percentage of debt in a com-
pany’s capital structure will not only reduce the overa!] rate of
return (because debt is generally less expensive than common
equity), it will also reduce allowed income tax expense by (hypo-
thetically) increasing the interest deduction.
A-63
(Exh. 157, Sched. 2; Exh. 188, Sched. 11R, 13R; Exh. 150,
Sched. 18.) The MPUC adopted a hypothetical equity ratio of
50.1%.
Four witnesses addressed the capital structure issue. Wil-
liam L. Bauhard, NWB’s Assistant Treasurer, testified that
NWB’s service obligations require it to be able to raise large
amounts of capital. That ability is enhanced by a AAA bond
rating, which is affected by NWB’s capital structure. (Exh.
15, pp. 5-6). Mr. Bauhard therefore recommended the MPUC
use NWB’s actual capital structure (56.4% equity, 43.6%
debt) to set rates. (/d., pp. 18-19). In rebuttal, Mr. Bauhard
presented the capital structures of the seven regional Bell
holding companies created at divestiture. Their equity ratios
ranged from 53.5% to 56.9%, averaging 55.6%. (Exh. 188,
pp. 26-27; Exh. 189, Scheds. 10R, 11R).°
Eugene W. Meyer, Vice President and Director of Kidder,
Peabody & Co., explained that, to have ready access to the
capital markets on reasonable terms, it would be essential for
NWB to maintain a capital structure consistent with a AAA
or AA bond rating. (Exh. 4, p. 11). Such a bond rating en-
sures access to a wider range of investors, thus enhancing
NWB’s ability to raise capital (/d., p. 5). A lower bond rating
would not produce a lower incremental cost of capital; how-
ever, if NWB’s bond rating were lowered, raising it would
be costly. (/d., pp. 4-6; Exh. 5, App. C; Vol. 1, p. 146, lines
1-4).
Dr. Matityahu Marcus, testifying on behalf of the OAG,
recommended the use of a capital structure consisting of 55%
equity and 45% debt. (Exh. 149, p. 38). Later, the OAG
6The testimony expressiv states the debt ratios of these com-
panies. Their equity ratios can be determined by subtracting tie
debt ratio from 100%.
A-64
urged the use of US WEST’s actual capital structure con-
taining 55.94% equity and 44.06% debt.’ (Initial Brief of
OAG, Vol. I, pp. 23-24).
Dr. Luther Thompson, on behalf of the DPS, recommended
a structure of 50% equity, 43.6% debt and 6.4% imputed
debt. (Exh. 196, p. 4). Asserting the MPUC must “balance”
shareholders’ needs against ratepayers’ concerns, he argued
the MPUC should not defer to NWB’s actual capital structure
“for regulatory purposes.” (Exh. 156, pp. 4-5, 7).
Dr. Thompson based his recommendation on some—but not
all—of the groups of companies analyzed by some of the rate
of return witnesses. He calculated the average equity ratio
of four telephone companies analyzed by Dr. Eilon Amit, the
five telephone companies analyzed by Mr. Robert Morris,®
the 25 electric companies analyzed by Mr. Bauhard, and four
telephone companies and four electric companies analyzed by
Dr. Litzenberger. Dr. Thompson selected these groups because
their average bond ratings and average “betas” were similar
to NWB’s.® He also considered the capital structure used by
the MPUC in NWB’s 1982 rate case, containing 50.1% equity.
7 That, in fact, was the consolidated capital structure of US WEST’s
three operating telephone companies (Mountain Beil, North-
western Bell and Pacific Northwest Bell). The structure thus did
not reflect US WEST’s other subsidiaries. (Exh. 189, Sched. 10).
*The Morris “group” contained the same four companies as the
Amit group (Cincinnati Bell, Mid-Continent Telephone, Ro-
chester Telephone and Southern New England Telephone) plus
AT&T. (Exh. 157, Sched. 2, pp. 1-2). In fact, Mr. Morris analyzed
the four “Amit” companies as a group, and AT&T separately.
(Exh. 9, p. 7; Exh. 10, Sched. 2).
®“Beta” is a measure of the movement of the rate of return of
a given stock, relative to the stock market as a whole. If that
movement is relatively less than the market, the stock is per-
ceived to be less risky than the market as a who/le, and vice
versa. (Exh. 7, p. 21).
a ere ee
ee ae
2 PERO He
ALE AD, La BM te EE TDD CG ti a ee
a a ae ee ae Se
A-65
(Id., pp. 10-11).'° He did not consider the Bell regional hold-
ing companies which were analyzed by Dr. Marcus (Exh. 149,
p. 3), by Dr. Litzenberger in his supplemental testimony’?
(Exh. 217, p. 1), and by Dr. Amit in a secondary analysis.
(Exh. 191, p. 36).
In its 1984 Rate Order, the MPUC rejected Dr. Thompson’s
recommendation :
“The DPS analysis merely demonstrated that NWB’s
capital structure was not equal to the composite groups
its witness, Dr. Thompson, had chosen for comparison
purposes. Dr. Thompson never demonstrated that NWB’s
capital structure was imprudent or unreasonable. The
Commission is not convinced by the DPS’s argument and
has rejected similar arguments in NWB, P-421/GR-82-
203 at 32, and NWB, P-421/GR-80-911 at 45.” (A-78).'?
The MPUC, however, also rejected NWB’s proposal to use
its capital structure to set rates:
“The Commission agrees that since divestiture, the same
Bell System consolidated capital structure that the Com-
pany advocated using in its last rate case .. ., no longer
exists and therefore it would be impossible to use that
capital structure. However, although the actual entity
has disappeared, the principle of using the parent com-
pany’s consolidated capital structure, which has been the
10In that case, decided before divestiture, the MPUC used the Bell
System consolidated capital structure. (Northwestern Bell Tele-
phone Co., Docket No. P-421/GR-82-203, pp. 30-32 (April 20, 1983)
(“203 Order”)).
11 Dr. Litzenberger withdrew his original analysis in favor of the
analysis in his supplemental testimony. (Exh. 217, pp. 1, 16).
12 In its 203 Order, the MPUC had stated:
“The DPS analysis merely demonstrated that the Bell System
equity ratio was not equal to the industry average, not that it
was unreasonable or imprudent.” (203 Order, p. 32).
A-66
Commission’s consistent practice in the last two NWB
rate cases .. ., did not disappear with Bell System con-
solidated capital structure. The Commission finds it rea-
sonable and appropriate, therefore, to use the consolidated
capital structure of US WEST... to determine the over-
all rate of return in this proceeding.” (/d.)
In the OAR the MPUC did an abrupt about-face. On the
basis of two precedents—its own Central Telephone rate
order (which had been reversed by this Court)'* and a Lou-
isiana Supreme Court decision'*—the MPUC rejected the
principle that it could impose a hypothetical capital structure
only on a showing that NWB’s actual structure was unrea-
sonable. (A-227-229). Rather, NWB had the burden of prov-
ing the reasonableness of its actual capital structure, which,
the MPUC held, it failed to do. (A-229-230). Relying on Dr.
Thompson, the MPUC adopted a hypothetical capital struc-
ture containing 50.1% equity to set NWB’s rates. (/d., p. 101).
B. FACTS RELATED TO DIRECTORY ADJUSTMENT.
In 1988, NWB decided to have its directories published by
US West Direct, an affiliate. To facilitate this transition,
NWB transferred certain assets (charged against retained
earnings of the shareholders) to Landmark Publishing (Di-
rect’s parent company) and entered into a series of contracts
with Direct. (A-54, 197). The MPUC was notified of the
transfer in December, 1983, and it directed that the issues
related to the transfer be considered in Docket 600.
In its initial presentation NWB did not adjust its test
year financials to reflect the change in operations; from the
13 Central Telephone Company, Docket No. P-405/GR-83-300 (March
30, 1984), reversed, Central Telephone Co. v. Minnesota PUC, 356
N.W.2d 696 (Minn. App. 1984).
14 South Central Bell v. Louisiana P.S.C., 373 So.2d 478 (La. 1979).
tae Bet
DONG BIER BBS eset
A-67
ratepayers’ perspective, rates would be set as though NWB
had remained in the publishing business. (A-54, 198). This
approach insulated ratepayers from any claimed detrimental
effects of the transfer.'®
Based on incomplete data available in February of 1984,
NWB’s financial expert testified that the change in opera-
tions, if considered by the MPUC, would likely be beneficial
to the ratepayers. The best information, then available to
NWB (based on FCC/MPUC prescribed accounting proce-
dures), indicated that the change in operations could reduce
revenue requirements by about $827,000 annually. He also
testified that this estimate—largely because of inadequacies
in accounting data—was not sufficiently reliable for use in a
rate analysis. (NWB Exh. 279, p. 26, lines 3-18).
Other parties objected to the transfer, urging the MPUC
to set it aside and order NWB to resume directory publica-
tion. They also attempted to show that the ratepayers would
be worse off after the transfer. For example, the OAG esti-
mated NWB would lose about $9.6 million in 1985 revenue,
while the DPS estimated the revenue loss in that year (if
the transfer were recognized) would be $3,183,000.1* But, as
long as NWB’s financial presentation was on a business-as-
usual basis, none of these alleged losses would be reflected in
15 The only change reflected in the financial data was a change in
capital structure that had the impact of reducing NWB’s recom-
mended rate of return by 4 basis points. Thus, the reflection of
this effect was beneficial, not detrimental to the ratepayers.
16 These estimates were succinctly critiqued in NWB’s Reply Brief
to the Hearing Examiner, dated May 4, 1984, at pages 172-178,
copies of which are included in the Appendix at pages A-304-311,
and in NWB’s Supplemental Statement of Facts in its Reply
Brief, at pages 2-7, in Application of Northwestern Bell Tel. Co.,
367 N.W.2d 655 (Minn. App. 1985), copies of which are included
in the Appendix at pages A-312-318.
A-68
rates until after the next general rate proceeding, and then
only if the MPUC found it appropriate to do so.
In its 1984 Rate Order, the MPUC ordered NWB to resume
publishing directories. NWB appealed and this Court re-
versed; it held prior MPUC approval of the transfer was not
required, but noted:
“The Commission’s hands aren’t completely tied. If it
decides the contract was not in the best interests of the
ratepayer and that the fees paid by West Direct to North-
western were unreasonable, it can make an adjustment
to Northwestern’s rate request.” (367 N.W.2d at 661,
emphasis added).
The Court of Appeals also hela:
“The Commission’s order voiding the agreement trans-
ferring Northwestern’s directory operations is reversed.
Accordingly, this case is remanded to the Commission to
enter findings consistent with this opinion and the Com-
mission is ordered to reinstate the contract between
Northwestern and West Direct. The Commission can
make a review of the transfer and its future impact on
Northwestern’s rates on a more complete record in the
next rate case. If appropriate, an adjustment can be
made at that time.” (867 N.W.2d at 663, emphasis added).
On redeliberation in 1987, the MPUC accepted the 1984
Hearing Examiner’s recommendation that pre-tax income be
increased by $2,526,666 “to allow for the impact of the re-
moval of directory operations during the time the rates
would be in effect.” The MPUC’s stated rationale was that
the “benefits [of the transfer] appear to lay heavily on the
side of US West’s shareholders without a corresponding bene-
fit falling to Minnesota ratepayers.” (A-203).
A-69
C. FACTS RELATED TO TAX FLOW THROUGH.
In the 1983 203 Order, the MPUC adjusted test year finan-
cials to amortize, over a three year period, an identified de-
ferred tax reserve surplus resulting from a reduction in the
federal tax rate from 48% to 46%. (A-29). Thus, commenc-
ing in July, 1982, NWB’s rates were reduced to flow the
alleged excess reserve back to the ratepayers. (A-30).
As part of the 1984 Rate Order, the MPUC decided to con-
tinue to flow the remaining excess deferred taxes through to
ratepayers via reduced rates over the three year period:
“The Commission finds that the reduction in the federal
income tax rate from 48% to 46% was an extraordinary
event that effectively created a surplus in the Company’s
accumulated deferred federal income tax account. The
Commission concludes that the surplus tax reserve should
continue to be amortized over a three year period as
ordered in NWB, P-421/GR-82-203 to insure that a
greater proportion of the amortization will be received
by ratepayers who actually paid income taxes at the
prior 48% tax rates.” (A-30, emphasis added). P
The new October 1984 rates continued to reflect the flow
through.'!7
Thus, since July, 1982, NWB’s rates have been reduced for
the express purpose of returning a specific tax surplus to the
ratepayers. The MPUC’s scheme was predicated upon spe-
cific adjustments to revenue requirements designed and in-
tended to eliminate the surplus over three years. By late
1985 the entire surplus had been returned to ratepayers in
the form of reduced rates.
17 The flow through had also been reflected in the interim rates
established by the MPUC in November of 1983 in this proceeding
because, pursuant to Minn. Stat. § 237.075, subd. 3, interim rates
had to be based on the substantive decisions made by the MPUC
in the 203 Order.
A-70
Nonetheless, in the OAR the MPUC ordered NWB to imple-
ment new rates (effective May 14, 1987), reflecting the con-
tinued flow through of the surplus that had been fully amor-
tized nearly two years earlier. (See A-164-165). The MPUC
also denied reconsideration without discussion of this issue.'®
(A-271).
D. FACTS RELATED TO FREE SERVICE.
NWB provides a variety of central office based optional
services that simplify, expedite and enhance customers’ ability
to use the telephone. Two such services are Touch Tone and
Speed Call 8.'°
In the 1984 Rate Order, the MPUC concluded that Touch
Tone is an adjunct to local service and increased the rates
for that service in relationship to the local rate increase.
(A-99). With regard to Speed Call 8, the MPUC generally
agreed to the price increase proposed by NWB, but added:
“The Commission is aware that the speed-calling feature
may facilitate use of the telephone system by persons
with certain physical or mental impairments. In order
to facilitate the use of the telephone system by these
persons, the Commission will set the rate for the speed-
calling 8 feature at $1 for customers who indicate to
the Company that the service is used by a physically or
mentally impaired person.” (A-100).
18 NWB argued this issue for the first time in its Petition for Re-
consideration because the surplus had not been fully extinguished
at the time of the 1984 Rate Order and because the MPUC did not
allow the filing of new briefs or arguments prior to the issuance
of the OAR.
19Touch Tone enables a customer to dial a number by pushing
number buttons on the telephone, rather than using a rotary dial.
Speed Call 8 service enables a customer to dial up to eight
numbers by dialing preprogrammed two-digit codes, rather than
the complete telephone number, for each of the eight prepro-
grammed numbers.
4
¥
4
A
dh at a
sh ey tres a Cr adhe V IO tt OME Uren inlbabth tea a! cli
wr A
A-71
In the OAR the MPUC expanded the 1984 Rate Order as it
affected these services. The MPUC determined that Touch
Tone “may facilitate the use of the telephone system by
persons with certain physical or mental impairments”
(A-258) and ordered NWB to provide the service “to qualified
physically or mentally impaired persons without charge.”
(Id.) The MPUC determined that Speed Call 8 service should
also be provided free to those persons, instead of at the $1
rate established in the 1984 Rate Order. (A-259).
NWB requested reconsideration of both decisions, noting:
(1) the scope of the order was unclear (i.e., whether “‘with-
out charge” applied to both recurring and non-recurring
charges and to residential and business services) ; (2) the rev-
enue effect of these decisions (based on company estimates)
could be millions of dollars; (3) the lost revenues would have
to be recovered from other customers; and (4) there was no
evidence at all to support the MPUC’s actions. The MPUC
denied reconsideration, but clarified the OAR. First, the
MPUC decided that both recurring and nonrecurring charges
are to be foregone, but that the decision applies only to
residentiai services. Eligible customers were defined as
those having a household member certified by a qualified
authority?® to have a disability requiring the use of Speed
Call 8 or Touch-Tone service. (A-272). Finally, the MPUC
directed NWB to determine the amount of recurring and non-
recurring revenue obtained from the provision of these ser-
vices to eligible customers during 1983. That amount was
to be recovered in other rates. (A-273-274). In other words,
20 A “qualified authority” includes doctors, nurses, ophthalmolo-
gists, optometrists, therapists, professional staff of hcspitals, insti-
tutions and public welfare agencies, and professional librarians
or any person whose competence is acceptable to the Librarian
of Congress. (A-272).
A-72
NWB was required to assume that providing services free
would not increase the number of eligible customers who
would subscribe.
NWB is aware of no evidence to support the MPUC’s de-
cision to require NWB to provide these services free, or the
MPUC’s method of calculating the revenue NWB will lose or
the increased costs that NWB will incur as a result of pro-
viding these services free.
NWB’s compliance filing included two sets of customer
estimates and revenue calculations and rates: one based on
the MPUC-ordered methodology, and the other on a method-
ology NWB believed would more closely track reality if
NWB provides free service to substantial numbers of cus
tomers. The MPUC’s order of July 21, 1987 (A-281-282),
shows the following comparisons:
MPUC Method Company Method?
Touch Tone customers
that will subscribe 38,489 232,889
Touch Tone recurring
revenues foregone $531,148 $3,353,748
Speed Call 8 customers
that will subscribe 330 123,889
Speed Call 8 recurring
revenues foregone 11,880 $4,429,080
Total non-recurring
revenue foregone for
both services 37,326 $1,429,080
-1 These numbe! 1) nts NWR ing
the MPUC refused to consider. However, the total numb
Speed Call 8 customer nd total non-recurring revenues as
: in the MPT th raer f ne ti Lis ' ? S hart) liffer
what from the data filed by NWB
A-73
The MPUC refused to consider NWB’s estimates of lost
revenue. It approved the compliance rates NWB filed based
on the MPUC’s method for estimating lost revenue. (A-283-
284). Thus, if more current customers demand free services,
NWB will lose the current revenues from those customers.
If additional customers demand free services, NWB will not
recover any of the non-recurring or recurring costs it will
thereby incur.
Dozens of vendors (including Target, Sears, Wards,
K-Mart, Radio Shack, Best-Buy, Penney’s, Spiegel and AT&T
and many others) sell or lease telephone equipment providing
both touch tone and speed calling features in direct competi-
tion with the services NWB has been ordered to give away.
E. FACTS RELATED TO OTHER ERRORS.
1. Denial of Oral Argument.
When the MPUC issued the 1984 Rate Order the Commis-
sioners were Leo G. Adams, Harry Seymour Crump, Roger L.
Hanson, Terry Hoffman, and Cynthia A. Kitlinski. (See A-6,
107, 120). By the time the MPUC redeliberated and issued
the OAR and ODR, Commissioners Adams, Hanson and Hoff-
man had been replaced by new Commissioners, Barbara Beer-
halter, Robert J. O’Keefe and Darrel L. Peterson. (See A-130,
270.) Despite its requests, NWB was afforded no opportunity
to present oral argument on the merits of its 1983 Petition
to the majority of the Commissioners who issued the OAR
(See A-284-285), or to present oral argument to any of the
Commissioners on its Petition for Reconsideration of the
OAR. (See A-286-288.)
2. Failure to Deal With Issues Raised In the Petition for
Keconsideration.
A-74
After the issuance of the OAR, NWB filed an extensive
Petition for Reconsideration pointing out many of the errors
the MPUC made in the OAR, including: (1) the Supreme
Court's decision in the Henry case, supra, barred the MPUC’s
action (See NWB’s Petition, pp. 2-3, 26-27, 39-41); (2) this
Court had reversed the Central decision, which the MPUC
had relied upon as authority to adopt a hypothetical capital
structure, and that this Court had reaffirmed the validity of
Northwestern Bell v. State, 216 N.W.2d 841 (Minn. 1974),
in Petition of Northern States Power Co., 402 N.W.2d 135
(Minn. App. 1987) (See NWB’s Petition, pp. 5-7); (3) the
entire tax surplus had aiready been flowed back to rate-
payers and the OAR subjected NWB to grave tax risks (See
NWB’s Petition, pp. 27-31); (4) the imputation of directory
revenues is contrary to a prior Minnesota Supreme Court
decision and this Court’s decision in Application of North-
western Bell Tel. Co., 367 N.W.2d 655 (Minn. App. 1985)
(See NWB’s Petition, pp. 31-34); and (5) no evidence sup-
ported the MPUC’s actions with regard to Touch Tone and
Sreed Call 8 services and those actions were arbitrary and
capricious. (See NWB’s Petition, pp. 37-39).
The MPUC’s OAR did not discuss any of these matters.
Neither did the ODR; rather, the ODR simply states:
“The Cemmission finds that the parties have raised no
new arsrurmments or evidence in Petitions for Reconsider-
ation thal nave not already been thorough!» considered
by the Commission.” (A-271).
3. Failure to Make Requisite Findings and Basing Pro-
spective Rates on Out-of-Date Financial Data.
.
A-75
As noted earlier, the MPUC issued its OAR and the ODR
based on a record created in 1984. One of the express pur-
poses of those orders was to reduce NWB’s rates commencing
May 14, 1987. (A-266). When the MPUC issued those orders,
it had no evidence before it to establish that the record com-
piled in 1984 was adequate to set prospective rates.
In fact, prior MPUC decision established the contrary. In
June, 1986, the Federal Executive Agencies (based on matters
unrelated to the MPUC’s decision to redeliberate this case)
asked the MPUC to investigate the reasonableness of NWB’s
current rates. (A-287). In that proceeding, Docket P-421/
CI-86-354, the MPUC ordered the DPS and the MPUC staff
to investigate the reasonableness of NWB’s rates. (A-288-
289). In mid-1986 the MPUC received a Joint Report showing
that in 1985 NWB (based on the rates set by the MPUC in
the 1984 Rate Order) had been unable to earn either its
authorized return or the substantially higher market-required
return. (A-292). Therefore, in an order dated October 24,
1986, the MPUC determined:
“It is in the public interest to determine reasonable rates
based upon a full, fair record. To make this determina-
tion, the Commission will need to know NWB’s 1986
costs and revenues, and these are not yet known. The
Commission concludes that it must base its decision on
complete 1986 data.” (A-294, emphasis added).
The MPUC also observed that a variety of substantial pend-
ing matters would have a “significant financial impact on
NWB’s earnings after 1986. (A-294). Accordingly, the MPUC
ordered NWB to submit a detailed financial filing on April
1, 1987. (A-295-297). NWB submitted that filing, and a
A-76
scant two days later, on April 3, 1987, the MPUC issued its
OAR—based on 1983 data—cutting “current rates” by more
than $12 million annually. Thereafter, on May 27, 1987, the
MPUC further decided that it:
“TC]annot resolve all questions regarding the reason-
ableness of NWB’s current rates to its satisfaction and
that sufficient grounds exist to warrant a contested case
hearing to determine whether NWB’s current rates are
just and reasonable or would result in excessive and
unreasonable earnings for the Company.” (A-299).
Thus, in October, 1986, the MPUC squarely recognized that
NWB’s rates set in 1984 had been inadequate in 1985 and that
careful examination of 1986 data was necessary in order
to set prospective rates. Yet, in the OAR issued six months
later, the MPUC used 1983 data to set prospective rates
without affording NWB the benefit of any hearing at all.
Two months after that, it decided it could not determine the
reasonableness of the rates set by the OAR without contested
hearings.
IV. ARGUMENT
A. THE MPUC ERRED IN USING A HYPOTHETICAL
CAPITAL STRUCTURE TO SET NORTHWESTERN
BELL’S RATES IN THE OAR.
In the OAR, the MPUC used a hypothetical capital struc-
ture, consisting of 50.1% equity, 43.6% debt and 6.3% im-
puted debt, to redetermine NWB’s revenue requirement. That
is contrary to the Supreme Court’s decision in Henry, supra,
contrary to law, arbitrary and capricious, and not supported
by substantial evidence, considering the record as a whole.
The MPUC should have used US WEST’s actua! capital struc-
ture (55.9% equity, 44.1% debt), as it did in its 1984 Rate
A-77
Order? or NWB’s capital structure (56.4% equity, 43.6%
debt), as NWB recommended.??
1. The MPUC’s Capital Structure Determination is Barred
by the Supreme Court’s Decision in the Henry case.
In the OAR, the MPUC stated:
“TT jhe Commission concludes that NWB has presented
no convincing evidence as to the reasonableness of its
capital structure for ratemaking purposes and has thus
failed to sustain its burden of proof... .” (A-230).
The MPUC is wrong as a matter of law.
In the 1984 Rate Order, the MPUC considered the capital
structure issue and determined to use US WEST’s capital
structure, based on its application of “the unreasonable or
imprudent” standard and its view that the evidence presented
by the DPS was insufficient to establish unreasonableness.
(A-78). That Order was appealed ultimately to the Supreme
Court, which disposed of a challenge to the sufficiency of the
evidence as follows:
“We will review the MPUC’s determination of a just and
reasonable rate in this case according to the substantial
evidence standard for rate of return determinations and
the arbitrary and capricious standard for rate design
determinations. (citation omitted) Based on our careful
review of the evidence in the record of this case and the
22 The MPUC adjusted US WEST’s capital structure to remove the
effects of NWB’s transfer of directory operations to US WEST
Direct, which it had attempted to void. (1984 Rate Order, p. 75).
This Court later overturned that attempt. (Re Northwestern
Bell Telephone Company, 371 N.W.2d 563 (Minn. App. 1985)).
Thus that adjustment is no longer appropriate.
23 This error affected not only the calculation of the overall rate of
return, but also the calculation of interest for purposes of ascer-
taining test-year tax expense and the calculation of cash working
capital. These aspects of the OAR must also be corrected.
A-78
100-page order of the MPUC, we conclude the decision
of the MPUC was supported by evidence in the record
and was not arbitrary and capricious. We therefore hold
Northwestern Bell met its statutory burden of proof
under Minn. Stat. Sec. 237.075, subd. 4 (1984) as to the
rate increase ordered.” (Henry v. Public Utilities Com-
mission, 392 N.W.2d 209, 216 (1986), emphasis supplied).
In assessing the rate of return evidence, the Supreme Court
had to consider capital structure. As this Court has stated:
“Capital structure is one component used in determining
overail rate of return by weighing the cost of capital
by its percentage in the company’s capita] structure—
.... ” (Petition of Northern States Power Co., 402
N.W.2d 135, 140 (Minn App. 1987)).
The issue of capital structure was fully litigated before
the MPUC in 1984 and reviewed by the Supreme Court, which
held, as a matter of law, that NWB met its burden of proof.
That determination became the law of the case, and the MPUC
cannot now reverse it. Janssen v. Neal, 256 N.W.2d 292 (Minn.
1977) ; State by Johnson v. Sports & Health Club, 392 N.W.2d
329 (Minn. App. 1986). Nor can this Court change the result
on this appeal:
“There exists a well-established rule that issues consid-
ered and adjudicated on a first appeal become the law of
the case and will not be reexamined or readjudicated on a
second appeal of the same case.” Lange v. Nelson-Ryan
Flight Service, Inc., 263 Minn. 152, 155, 116 N.W.2d 266,
269 (1962).
This rule applies to matters adjudicated before the MPUC
and reviewed by the appellate courts. See Minnesota Power
& Light Co. v. Minn. P.U.C., 342 N.W.2d 324 (Minn. 1983).
Moreover, once the MPUC’s 1984 Rate Order, which utilized
the “arbitrary or imprudent” standard, was affirmed by the
Pe eee eee ee, ee ee ee ee et ee ee
A-79
Supreme Court on this issue, the MPUC was powerless to use
a different standard in its redeliberation:
“Since our prior decision the membership of the court
has changed. If we were to assume that the arguments
of the defendant presently advanced on the issues pre-
viously determined might now be persuasive to a majority
of the court, we nevertheless are not at liberty under this
rule to engage in a reexamination, much less to so declare.
This attitude is consistent with the rule of the law of the
case and is founded upon a policy which requires that
issues once fully litigated be set at rest.” Lange v. Nelson-
Ryan Flight Service, Inc., supra, 263 Minn. at 155, 116
N.W.2d at 269.
Regardless of the merits of the standard used in the OAR,
the MPUC erred by using it in the face of a contrary Supreme
Court decision on the prior appeal.
2. The MPUC’s Capital Structure Decision is Contrary to
Established Law.
The seminal case concerning the regulatory treatment of
capital structure issues in Minnesota is Northwestern Bell v.
State, 299 Minn. 1, 216 N.W.2d 841 (1974). There the Su-
preme Court stated:
“We have difficulty accepting the concept that in a
rate case of this kind the state may collaterally attack
the judgment of the company in maintaining its embed-
ded debt at a low figure. We agree with the position of
the company that this is a discretionary matter of man-
agement...” (Id. at 14-15, 216 N.W.2d at 850; emphasis
supplied).
Though this passage plainly states a general rule, the MPUC
dismissed it as merely reflecting the state of the record, which
did not contain “competing capital structure proposals.” (A-
228-229).
A-80
This Court has considered—and reaffirmed—the appli-
cation of Northwestern Bell to capital structure issues three
times.** Peoples Natural Gas Co. v. Minnesota P.U.C., 342
N.W.2d 348 (Minn. App. 1983), involved an unincorporated
division of InterNorth. Since it had no capital structure of its
own, Peoples proposed the use of InterNorth’s capital struc-
ture; the MPUC used a hypothetical structure containing less
equity. This Court held the MPUC did not have to find
Peoples’ structure unreasonable before it could use a hypo-
thetical capital structure because:
“Northwestern Bell applies to utilities that have an ob-
jective capital structure of their own.” (Jd. at 352).
With no objective capital structure, Peoples’ proposal was
hypothetical and thus entitled to no deference.
In Central Telephone Co. v. Minnesota P.U.C., 356 N.W.2d
696 (Minn. App. 1984), the MPUC used the capital structure
of Centel, Central’s parent, rather than Central’s own struc-
ture. (Jd. at 698). The MPUC held Northwestern Bell no
longer applied because of the intervening passage of Minn.
Stat. § 237.075, subd. 4, and that Central had to prove the
reasonableness of its capital structure. (Jd. at 702). This
Court rejected the notion that this statute had implicitly
overruled Northwestern Bell, noting that its Peoples Natural
Gas opinion had expressly stated the continued vitality of
that decision. Thus, the MPUC’s decision was based on an
error of law. (/d.)?5
24 The most telling fact about the OAR is its disregard of these three
decisions, which received no mention.
25 Here, the MPUC made essentially the same argument, stating:
“a substantive or legal presumption in favor of a company-
proposed capital structure . . . would be inconsistent with...
Sec. 237.075, subd. 4. . .” (A-228).
A-81
Finally, in Petition of Northern States Power Co., 402
N.W.2d 135 (Minn. App. 1987), the MPUC imposed a hypo-
thetical capital structure, stating:
““NSP has not come forward with sufficient evidence
to justify the reasonableness of its capital structure for
ratemaking purposes.’ ” (Jd. at 140).
With a citation to Northwestern Bell, this Court reversed
the MPUC, holding it should have utilized NSP’s actual struc-
ture, “especially since the record shows it to be within the
normal range for comparable utilities.” (Jd.)
There can be no question of the continued vitality of North-
western Bell, or of its applicability to NWB, which has its
own capital structure. Nor can there be a serious question as
to the meaning of the case, though the MPUC asserts other-
wise:
“The Commission does not believe that the Supreme Court
in [Northwestern Bell] v. State established as a matter
of law that the Commission must first determine that
the company-proposed capital structure is unreasonable
before it evaluates or selects an alternative proposal.
In that decision the Court conducted its review on the
basis of the record before it. That record did not contain
competing capital structure proposals.” (A-228).
The short answer is that both Central Telephone, supra,
and Northern States Power, supra, contained “competing cap-
ital structure proposals,” yet, in each case, this Court reversed
the MPUC’s attempt to require the utility to prove the reason-
ableness of its actual capital structure. Indeed, Central Tel-
ephone is virtually indistinguishable from this case—except
that the “hypothetical” capital structure there was the par-
ent’s actual structure; here, the MPUC used a wholly fictitious
structure.
A-82
In Central Telephone, this Court noted the MPUC’s “strict
adherence to Northwestern Bell in recent cases,” in which
the MPUC had used the unreasonable or imprudent standard.
(356 N.W.2d at 702). In other words, that standard is the
standard of Northwestern Bell, just as the Company has
claimed all along.
3. The MPUC’s Capital Structure Determination Is Arbi-
trary and Capricious.
The MPUC’s capital structure determination is also con-
trary to its own precedents. In NWB’s 1982 general rate pro-
ceeding, the MPUC stated:
“In Northwestern Bell Telephone Co. v. State ... the
Minnesota Supreme Court indicated that the Commission
may not readily substitute its judgment for that of
company management on the issue of appropriate capital
structure. While this decision does not give utility man-
agement absolute discretion, the Commission believes
that the capital structure must be found unreasonable
or imprudent before the Commission chooses a different
structure.” (203 Order, at 32; See also, United Telephone
Co., Docket No. P-480/GR-82-200 (April 27, 1983)).?°
While the MPUC can overrule its own precedents, it must
provide sufficient reasons for doing so. (Central Telephone
Co. v. Minnesota P.U.C., supra, 356 N.W.2d at 702; Peoples
Natural Gas Co. v. Minnesota P.U.C., supra, 342 N.W.2d at
352-53).
Here, the MPUC made no effort to justify its departure
from its own precedents. Instead, it simply denied the con-
flict, stating that:
26In the 1984 Rate Order in this proceeding, the MPUC dismissed
the DPS’s recommendation, stating: “Dr. Thompson never demon-
strated that NWB’s capital structure was imprudent or unreason-
able.” (A-27).
SLL
A-83
“in so far [sic] as they may be interpreted to suggest
that there must be a finding of unreasonableness of a
company’s proposed structure before an alternative is
entertained, [these decisions] are clarified by this Order.”
(A-229).
But the 203 Order flatly stated:
“the Commission believes that the capital structure must
be found unreasonable or imprudent before the Commis-
sion chooses a different structure.” (203 Order, p. 32).
That these words require “clarification” is dubious, at best;
that they can be interpreted as the MPUC now suggests—the
opposite of their plain meaning—is nonsense. The words
simply will not bear the meaning the MPUC now wishes them
to carry, and no reasonable person could so find.
To support its conclusion in the OAR that NWB had the
burden of proving the reasonableness of its capital structure,
the MPUC cites and relies on Minn. Stat. § 237.075, subd. 4.
(A-227). But this Court has expressly rejected the notion
that this statute overruled Northwestern Bell and requires
the utility to prove the reasonableness of its capital structure.
(Central Telephone Co. v. Minnesota P.U.C., supra, 356 N.W.
2d at 702).?7
The MPUC must “give reasons for departing from its
prior norms and decisions.” (/d.) Implicit in that is the re-
quirement that the reasons form a legitimate basis for the
decision, which plainly is not the case here. The MPUC’s
decision is arbitrary and capricious and must be reversed.
(Id.)
27 The OAR also cites Rule 301 of the Minnesota Rules of Evidence
as support for the four-step procedure the MPUC purported to
follow here. (A-228). However, the MPUC denied any intent to
effect substantive changes by means of this procedure (/d.). and
Rule 301 has nothing to say about who has the burden of proof
on a given issue in a rate case.
A-84
4. The MPUC’s Capital Structure Determination Is Not
Supported By Substantial Evidence Viewing the Record
Whole.
No matter who had the burden to prove what, the record
establishes the reasonableness of NWB’s actual capital struc-
ture. The seven regional Bell holding companies created at
divestiture provide the vast bulk of exchange telephone ser-
vice in this country, serving some 80% of all telephone sub-
scribers. (See United States v. Western Elec. Co., Inc., 569
F. Supp. 990, 993 n. 8 (D.D.C. 1982)). The record indicates
that these companies’ equity ratios range from 53.5% to
56.9%, averaging about 55.6%. (Exh. 189, Scheds. 10R, 11R;
Ex. 188, pp. 26-27). NWB’s equity ratio of 56.4% and US
WEST’s equity ratio of 55.9% are thus “within the normal
range for comparable utilities” and should not have been
rejected by the MPUC. Petition of Northern States Power
Co., supra, 402 N.W.2d at 140.
Unwilling or unable to contradict or explain away this evi-
dence, the MPUC just ignored it. The OAR makes no men-
tion of the equity ratios of the regional Bell holding com-
panies, even though they were put into the record expressly
for the purpose of demonstrating the reasonableness of
NWPB’s actual capital structure. (Ex. 188, pp. 26-27).
This is particularly outrageous, in that the MPUC, citing
Dr. Thompson’s testimony, surveyed some of the comparable
groups used by some of the rate of return witnesses in their
cost of equity analysis, to determine its hypothetical capital
structure. (A-230-231). These groups did not include the
regional Bell companies, even though they were the subject
of Dr. Marcus’s and Dr. Litzenberger’s rate of return anal-
yses (Ex. 149, p. 3; Ex. 217, p. 1) and of Dr. Amit’s second-
ary analysis. (Ex. 191, p. 36). Instead, the MPUC looked at
the capital structures of the four telephone companies ana-
A-85
lyzed by Dr. Amit, the same four companies, plus AT&T,
analyzed by Mr. Morris, four telephone companies and four
electric companies initially analyzed by Dr. Litzenberger (who
later discarded that analysis in favor of a subsequent analysis
of the regional companies), and 25 electric companies analyzed
by Mr. Bauhard. The MPUC’s “analysis” of these groups con-
sisted of calculating their mean (average) equity ratios and
averaging the averages. (Ex. 157, Sched. 2).
Two of the five groups were from another industry: forty
percent of the analysis did not even involve telephone com-
panies. One of the three groups of telephone companies
(Centel, Continental Telephone, Mid-Continent Telephone,
and United Telephone) came from a rate of return study
withdrawn by its sponsor. The other two groups each con-
sisted of four companies (Cincinnati Bell, Mid-Continent
Telephone, Rochester Telephone, and Southern New England
Telephone) plus, in one case, AT&T. Thus, Mid-Continent
Telephone—a tiny fraction the size of NWB—was counted
three times, while the regional Bell companies—80% of the
industry—were ignored. Rational decisions are not made this
way.
The three telephone-company groups relied on by the
MPUC have a total of eight companies, with equity ratios
ranging from 33.54% to 61.69%. (Exh. 158). One can con-
clude from these data only that telephone companies have
vastly different capital structures, which is essentially what
the MPUC concluded in the 1984 Rate Order and in the 203
Order, when presented with similar data (A-78; 203 Order,
pp. 31-32).?8
28 Assuming electric companies have any relevance to the capital
structure determination (as opposed to return on equity), they
show similar disparities. The 29 electric utilities in the Bauhard
and Litzenberger groups have equity ratios ranging from 36.34%
to 51.45%. (Ex. 157, Sched. 2, pp. 3-4).
0
A-86
For all these reasons, the MPUC erred in using a hypo-
thetical capital structure in this proceeding. Its OAR should,
therefore, be reversed with a mandate to reinstate its original
determination utilizing the capital structure of US WEST
or to utilize NWB’s capital structure.*°
B. THE MPUC’S DECISION TO IMPUTE HYPOTHET-
ICAL DIRECTORY REVENUES IS CONTRARY TO
LAW, UNSUPPORTED BY SUBSTANTIAL EVI-
DENCE AND ARBITRARY AND CAPRICIOUS.
1. The MPUC’s Decision to Impute Revenues Is Barred
By This Court’s Decision in the Prior Appeal.
Issues related to the directory transfer and the appropriate
regulatory response were before this Court in Application of
Northwestern Bell Tel. Co., 367 N.W.2d 655 (Minn. App.
1985). This Court was there informed that NWB’s financial
data had been so presented as to insulate ratepayers from
any adverse impact of the directory decision and that, be-
cause of deficiencies in the available accounting data, there
were differences of opinion regarding the ultimate impact
on ratepayers. (See A-313-318). In light of this controversy,
this Court reversed the MPUC’s decision to order NWB to
resume publishing directories. In light of the fact that rate-
payers had been protected, and the existing controversy about
the ultimate effect of the transfer, this Court held:
“Accordingly, this case is remanded to the Commission
to enter findings consistent with this opinion and the
29 If the Court agrees that the Henry decision established the law
of the case on this issue, the MPUC should be directed to use US
WEST’s capital structure, as it did in the 1984 Rate Order. If,
however, the MPUC was free to reconsider this issue in the OAR,
it should have used NWB’s capital structure, and the Court's
mandate should so direct it now. As noted earlier, these structures
closely approximate each other.
A-87
Commission is ordered to reinstate the contract between
Northwestern and West Direct. The Commission can
make a review of the transfer and its future impact on
Northwestern’s rates on a more complete record in the
next rate case. If appropriate, an adjustment can be
made at that time.” (367 N.W.2d at 663, emphasis added).
In a subsequent, related decision, this Court upheld an
MPUC order imposing substantial new, detailed accounting
requirements on the Company with regard to directory mat-
ters so that more reliable and complete information would be
available in the next case. (See Application of Northwestern
Bell Telephone, 371 N.W.2d 563 (Minn. App. 1985)).
The MPUC ignored this Court’s direction. It did not enter
findings consistent with the Court’s opinion. Nor has it abided
by the Court’s admonition that adjustments, if appropriate,
should be made after an evaluation, based on a more complete
record, in the next rate proceeding. Instead, based on the
same record—with no new evidence—the MPUC made rate
adjustments. The law is clear that the MPUC cannot act
contrary to the reviewing Court’s mandate. In Holden v.
Farwell, Ozmun, Kirk & Co., 34 N.W.2d 920 (1948), the
Supreme Court held, that on remand, not only the express
findings and conclusions in the Supreme Court’s decision had
to be followed, but also any findings inherent and implicit
in that decision. See, also, In Re Estate of Boysen, 351 N.W.2d
at 398, 400-401 (Minn. App. 1984); Tankar Gas, Inc. v.
Lumbermen’s Mut. Casualty Co., 9 N.W.2d 754, 758 (1943).
Here the MPUC acted flatly contrary to this Court’s mandate.
The MPUC’s action is also contrary to the law of the case
as established by this Court. See Lange v. Nelson-Ryan Flight
Service, Inc., supra; see also, Minnesota Power & Light Co. v.
Minn. P.U.C., 342 N.W.2d 324 (Minn. 1983). It is also barred
A-88
by the doctrine of res judicata. Roseberg v. Steen, 363 N.W.2d
102, 105 (Minn. App. 1985); Hauser v. Mealey, 263 N.W.2d
803, 806 (Minn. 1978); Shimp v. Sederstrom, 233 N.W.2d
292, 294 (Minn. 1975).
The MPUC could not, consistent with the Court’s prior de-
cisions, make major adjustments to NWB’s revenue require-
ments.
2. The MPUC’s Decision To Impute Directory Revenues
Is Contrary To Other Applicable Principles of Sub-
stantive Law.
Under Minnesota law, the MPUC can make affiliated inter-
est adjustments only in limited circumstances. In Northwest-
ern Bell Telephone Company v. State, 216 N.W. 841, 854
(Minn. 1974), the Supreme Court held:
“[I]t seems to us unreasonable to arbitrarily penalize
the company for doing business with an affiliate where
there is no evidence that subscribers would benefit by
the company’s securing supplies elsewhere. That is not
to say that if prices charged both by the affiliate and by
its competitors are exorbitant and improperly reflect
leverage obtained by monopolistic practices, the commis-
sion would not be warranted in disallowing what is
excessive.”
As noted by this Court in Application of Northwestern Bell
Tel. Co., 367 N.W.2d at 661, the MPUC’s authority is limited
to “disregard[ing] unwarrented payments to affiliates when
calculating the ‘just and . °° onable’ rates.” 367 N.W.2d at
661, emphasis added.
The MPUC ignored these standards. It did not analyze
the directory contracts or find them to be substantively in-
appropriate in the fashion required by the Supreme Court.
It made no meaningful attempt to adjust the Company’s rate
A-89
case financials to reflect the impact of the contracts. All the
MPUC has done is express a vague concern about the relative
benefits of the contracts and impose a heavy penalty upon
the Company because the MPUC dislikes the transfer.
This is obvious because NWB’s rate case financials were
presented on a business-as-usual basis—i.e., as though the
transfer had never taken piace—and the ratepayers were
fully insulated from any alleged detrimental financial effects
of the transfer. The MPUC’s OAR captures all of the benefits
of the business-as-usual approach and, by imputing addi-
tional hypothetical revenues to NWB—“to allow for the im-
pact of the removal of directory operations”—, the MPUC
has placed the ratepayers in a better position than they would
have been if the transfer had never taken place. Thus, under
the OAR, NWB is placed in the anomalous position of suffer-
ing a $2.5 million penalty*°—and the ratepayers get a $2.5
million windfall—merely because NWB made a lawful bus-
iness decision with which the MPUC disagrees.
3. The MPUC’s Decision To Impute Hypothetical Directory
Revenues to the Company is Not Supported By Substan-
tial Evidence and is Arbitrary and Capricious.
Major adjustments to NWB’s test year financials must be
supported by substantial evidence. See, e.g., Henry v. Minne-
sota Public Utilities Commission, 392 N.W.2d 209, 216 (Minn.
1986); Hibbing Taconite Co. v. Public Service Commission,
302 N.W.2d 5, 9 (Minn. 1980). The major adjustment to di-
rectory revenues adopted by the MPUC is without such sup-
port.
As discussed earlier, NWB’s business-as-usual approach
fully protected ratepayers. Beyond that, however, the adjust-
30The MPUC has no jurisdiction to impose penalties. See Coastal
Oil & Gas Corp. v. FERC, 782 F.2d 1249 (5th Cir. 1986); Southern
Union Gas Co. v. FERC, 725 F.2d 99 (10th Cir. 1954).
A-90
ment adopted by the MPUC was faulty in several major re-
spects. The adjustment was not sponsored by any witness to
the proceeding; it was merely a refinement of a calculation
constructed by the DPS for the first time in its Brief to the
ALJ.
Moreover, the adjustment completely ignored the fact that
—pursuant to FCC and MPUC prescribed accounting systems
—many directly related expenses (i.e., expenses associated
with pensions, profit sharing, payroll taxes and general over-
head) are not separately identifiable and were not taken into
account in the adjustment. (See Exh. 359). Thus, the expenses
considered in constructing the adjustment are hopelessly er-
roneous.
Similarly, the adjustment is predicated upon continuation
of historical growth in directory revenues. The evidence was
to the contrary, demonstrating that past revenue growth was
attributable almost entirely to price increases, not volume
growth. (Tr. Vol. 45, p. 71). At the end of 1983, directory
advertising prices in Minnesota were among the highest in
the nation and widespread price cutting and increased com-
petition in the industry was anticipated. (Exh. 317, p. 4; Tr.
Vol. 45, p. 71, p. 92). in short, there was no basis to assume
that growth in directory revenue was sufficiently certain to
form the basis for a major adjustment. See Northwestern
Bell Tel. Co. v. State, 253 N.W.2d 815, 822 (Minn. 1977).
C. THE MPUC’S DECISION TO REQUIRE THE COM-
PANY TO REDUCE RATES PROSPECTIVELY
DUE TO A NON-EXISTENT TAX SURPLUS IS
CONTRARY TO LAW, UNSUPPORTED BY SUB-
STANTIAL EVIDENCE AND IS ARBITRARY AND
CAPRICIOUS.
The OAR requires NWB to reduce rates to reflect a spe-
cific deferred tax surplus that no longer exists. Pursuant to
A-91
prior MPUC’s orders, rates have been reduced on a continuous
basis since 1982, so that the entire surplus has been ex-
tinguished. Yet the OAR and the MPUC’s subsequent orders
require NWB to reduce rates prospectively, as though rate-
payers are entitled to future rate discounts based on the non-
existent surplus.
This MPUC’s decision is contrary to law and confiscatory
because it results in an arbitrary reduction in NWB’s cost of
service and the establishment of rates insufficient to earn the
MPUC authorized rate of return. This is contrary to Minn.
Stat. § 237.075, subdivisions 5 and 6 and NWB’s constitutional
right to avoid confiscation of its property.
The decision is also contrary to the decision of this Court
in Application of Northwestern Bell Tel. Co., 367 N.W.2d
655 (Minn. App. 1985). One of the issues there was whether
the MPUC could require NWB to amortize and return to
ratepayers unamortized investment tax credits that NWB no
longer owned. This Court held the MPUC erred by reducing
NWB’s cost of service to reflect non-existent credits. (367
N.W.2d at 661-663). The MPUC attempted essentially the
same thing here. It wants to give the ratepayers continuing
credit—on a prospective basis—for a surplus that no longer
exists.
The situation here is analogous to the investment tax credit
issue in the Court’s prior decision in another respect. There,
this Court determined that the MPUC’s decision to reflect
non-existent tax credits in the Company’s cost of service
would violate the Internal Revenue Code. Precisely the same
situation exists here.
The Internal Revenue Code requires the “normalization
method of accounting” be followed in order to qualify for
accelerated depreciation for tax purposes. (Section 167(1)
i ab ae
A-92
(3)(G)). Corresponding IRS regulations provide that the
taxpayer loses its tax deferral if it fails to normalize. (Trea-
sury Regulation 1.167(a)-11(b)6.) In addition, Treasury Reg-
ulation § 1.167(1)-1(h) (2) states:
“The taxpayer must credit the amount of deferred Fed-
eral income tax determined under subparagraph (1) (i)
of this paragraph for any taxable year to a reserve for
deferred taxes, a depreciation reserve, or other reserve
account. The taxpayer need not establish a separate re-
serve account for such amount but the amount of deferred
tax determined under subparagraph (1)(i) of this para-
graph and must be accounted for in such a manner so as
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