Application of Black Hills Power , 2016 S.D. 92 ( 2016 )

#27751-a-LSW
2016 S.D. 92
IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
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In the Matter of the Application of
Black Hills Power, Inc. for authority
to increase its electric rates.
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APPEAL FROM THE CIRCUIT COURT OF
THE SIXTH JUDICIAL CIRCUIT
HUGHES COUNTY, SOUTH DAKOTA
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THE HONORABLE MARK W. BARNETT
Judge
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MARK A. MORENO of
Moreno, Lee & Bachand, PC
Pierre, South Dakota
ANDREW P MORATZKA of
Stoel Rives, LLP
Minneapolis, Minnesota
and
CHAD T. MARRIOTT of
Stoel Rives, LLP
Portland, Oregon Attorneys for appellants GCC
Dacotah, Inc., Pete Lien & Sons,
Inc., Rushmore Forest Products,
Inc., Spearfish Forest Products,
Inc., Rapid City Regional
Hospital, Inc. & Wharf
Resources, Inc., together the
Black Hills Industrial
Intervenors
****
CONSIDERED ON BRIEFS
ON AUGUST 29, 2016
OPINION FILED 12/14/16
LEE A. MAGNUSON
NICOLE O. TUPMAN
Lindquist & Vennum LLP
Sioux Falls, South Dakota
and
TODD BRINK
AMY KOENIG of
Black Hills Power Corporation
Rapid City, South Dakota Attorneys for appellee Black
Hills Power.
KAREN E. CREMER
Special Assistant Attorney General
South Dakota Public Utilities Commission
Pierre, South Dakota Attorneys for appellee South
Dakota Public Utilities
Commission.
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WILBUR, Justice
[¶1.] In March 2014, Black Hills Power, Inc., (BHP) filed an application for
authority to increase electric rates with the South Dakota Public Utility
Commission. In June 2014, Black Hills Industrial Intervenors (BHII) 1 filed a
motion to intervene, and the Commission granted the motion. The parties then
agreed to a settlement stipulation regarding the increase in December 2014, but
BHP sought to amend the stipulation in February 2015. BHII resisted the
amendment, but the Commission granted the amended settlement stipulation and
approved the rate increase. BHII appeals.
Background
[¶2.] Black Hills Power is a public utility in South Dakota, providing electric
service to approximately 65,500 customers in the western portion of the state. As a
South Dakota public utility, BHP must provide service to all customers in a given
area in return for a state-granted monopoly.
[¶3.] All utilities must petition the Commission before raising their rates.
BHP applied for a rate increase in March 2014. As required by SDCL chapter 43-
34A, BHP submitted a cost analysis with its petition. The cost analysis included
the “test year” required by ARSD 20:10:13:43. The test year is used by the
Commission in its analysis of whether the utility’s costs merit a rate increase. The
utility must apply for the rate increase within six months of the end of the test year.
1. BHII consists of appellants GCC Dacotah, Inc., Pete Lien & Sons, Inc.,
Rushmore Forest Products, Inc., Spearfish Forest Products, Inc., Rapid City
Regional Hospital, Inc., and Wharf Resources (U.S.A.), Inc.
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BHP’s test year ran from September 30, 2012, to September 30, 2013. If granted,
the rate increase for a typical customer would be approximately $10.91 per month.
[¶4.] In June 2014, BHII filed a motion to intervene in BHP’s rate-increase
application, which the Commission granted. The Commission, BHP, and BHII
exchanged discovery and began negotiations to settle and stipulate to the rate
increase. BHP filed a joint motion for approval of the settlement stipulation in
December 2014, and the Commission held a hearing on the matter in January 2015.
One of the issues the parties debated at the hearing was BHP’s pension expenses.
In its cost analysis, BHP averaged its pension expenses over the five-year period
from 2010 to 2014, while BHII argued that the actual costs from 2014 should be
used. BHII would later argue that a five-year period from 2011 to 2015 would be
most appropriate.
[¶5.] Before the Commission voted on the matter, BHP filed an amended
settlement stipulation. This amendment removed a previous cost allocation of
$286,000 to one of BHP’s affiliates and replaced that amount with $413,000 for
expenses related to a power plant. The Commission considered the amended
stipulation and voted to approve the settlement.
[¶6.] BHII appealed the approval of the amended settlement stipulation to
the circuit court, which affirmed the Commission’s decision. BHII now appeals to
this Court, arguing three issues:
1. Whether the Commission misinterpreted
ARSD 20:10:13:44 by allowing BHP to make adjustments
to its cost calculation after its initial application.
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2. Whether the Commission erred by allowing BHP to
exclude the year 2015 from its five-year normalization of
pension expenses.
3. Whether the Commission erred when it concluded that
BHP met its burden of proof regarding the inclusion of its
incentive-compensation plan in the cost analysis.
Decision
[¶7.] 1. Whether the Commission misinterpreted ARSD 20:10:13:44 by
allowing BHP to make adjustments to its cost calculation after
its initial application.
[¶8.] This issue involves the interpretation of the language of an
administrative rule. “Administrative regulations are subject to the same rules of
construction as are statutes.” Citibank, N.A. v. S.D. Dep’t of Revenue, 2015 S.D. 67,
¶ 12, 868 N.W.2d 381, 387 (quoting Westmed Rehab, Inc. v. Dep’t of Soc. Servs.,
2004 S.D. 104, ¶ 8, 687 N.W.2d 516, 518). We review the agency’s interpretation de
novo. See Nelson v. S.D. State Bd. of Dentistry, 464 N.W.2d 621, 624 (S.D. 1991). 2
2. The parties spend a significant amount of argument in the briefs debating
the correct standard of review, focusing on whether the agency’s
interpretation of its own long-standing rule is entitled to deference. An
agency is normally entitled to a “reasonable range of informed discretion”
when the language of the rule is “technical in nature or ambiguous, or when
the agency interpretation is one of long standing.” Nelson, 464 N.W.2d at
623. In promulgating this rule, the Court in Nelson cited the decisions of
other state courts. Id. These cases collectively provide that, where the
language of the rule is unambiguous, deference need not be given. Iowa
Fed'n of Labor v. Iowa Dep't of Job Serv., 427 N.W.2d 443, 449 (Iowa 1988)
(evaluating the reasonableness of an agency’s interpretation according to
statutory rules of construction); In re Se. Minn. Cit. Action Coun., 359 N.W.2d
60, 63 (Minn. Ct. App. 1984) (“However, we need not defer when the language
employed or the standard delineated is clear and capable of understanding.”);
In re Stone Creek Channel Improvements, 424 N.W.2d 894, 900 (N.D. 1988)
(“No deference is called for when the regulating language is clear.”). As the
language is not ambiguous, deference to the Commission’s interpretation is
unnecessary.
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[¶9.] “When regulatory language is clear, certain and unambiguous, [the
Court’s] function is confined to declaring its meaning as clearly expressed.”
Citibank, 2015 S.D. 67, ¶ 12, 868 N.W.2d at 387 (quoting Westmed Rehab, 2004 S.D.
104, ¶ 8, 687 N.W.2d at 518). “[I]t is fundamental ‘that the words of a [rule] must
be read in their context and with a view to their place in the overall [regulatory]
scheme.’” In re Certification of a Question of Law from U.S. Dist. Court, Dist. of
S.D., S. Div., 2014 S.D. 57, ¶ 8, 851 N.W.2d 924, 927 (quoting In re Expungement of
Oliver, 2012 S.D. 9, ¶ 9, 810 N.W.2d 350, 352).
[¶10.] The parties argue about the meaning of ARSD 20:10:13:44, which
reads in full:
The statement of the cost of service shall contain an analysis of
system costs as reflected on the filing utility’s books for a test
period consisting of 12 months of actual experience ending no
earlier than 6 months before the date of filing of the data
required by §§ 20:10:13:40 and 20:10:13:43 unless good cause for
extension is shown. The analysis shall include the return, taxes,
depreciation, and operating expenses and an allocation of such
costs to the services rendered. The information submitted with
the statement shall show the data itemized in this section for
the test period, as reflected on the books of the filing public
utility. Proposed adjustments to book costs shall be shown
separately and shall be fully supported, including schedules
showing their derivation, where appropriate. However, no
adjustments shall be permitted unless they are based on
changes in facilities, operations, or costs which are known with
reasonable certainty and measurable with reasonable accuracy
at the time of the filing and which will become effective within
24 months of the last month of the test period used for this
section and unless expected changes in revenue are also shown
for the same period.
The phrase “at the time of filing” in the last sentence of the rule is the point of
disagreement between the parties. BHII argues that the “filing” in the phrase
refers to the filing of the initial petition. Under this interpretation, “adjustments”
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would refer to adjustments in the test-year data and would not be permitted after
the filing of the initial application. BHP and the Commission assert that the word
“filing” refers to the filing of the adjustment itself, thus permitting adjustments to
the cost analysis after the initial application.
[¶11.] The plain meaning of the rule indicates that the Commission’s
interpretation is correct. The latter half of the rule reads:
Proposed adjustments to book costs shall be shown separately
and shall be fully supported, including schedules showing their
derivation, where appropriate. However, no adjustments shall
be permitted unless they are based on changes in facilities,
operations, or costs which are known with reasonable certainty
and measurable with reasonable accuracy at the time of the
filing and which will become effective within 24 months of the
last month of the test period used for this section and unless
expected changes in revenue are also shown for the same period.
ARSD 20:10:13:44 (emphasis added). The emphasized language shows that
the noun “adjustments” precedes “filing” in the same sentence. Additionally,
the phrase “proposed adjustments” begins the sentence prior. The only
reference to the filing of the initial application occurs in the first sentence of
the rule. Interpreting the rule as referring to the filing of the initial
application requires adding “of the initial application” after “filing” in the last
sentence. Such an interpretation is prohibited. City of Sioux Falls v. Ewoldt,
1997 S.D. 106, ¶ 13, 568 N.W.2d 764, 767 (“[The Court] may not, under the
guise of judicial construction, add modifying words to the statute or change
its terms.” (quoting State v. Franz, 526 N.W.2d 718, 720 (S.D. 1995))). As the
phrase “at the time of the filing” refers to the filing of the individual
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adjustment and not to the filing of the application itself, the Commission
correctly allowed BHP to file the adjustments to its cost analysis. 3
[¶12.] 2. Whether the Commission erred by allowing BHP to
exclude the year 2015 from its five-year normalization of
pension expenses.
[¶13.] In its cost analysis, BHP included a normalization of its pension
expenses from 2010 to 2014. Had it included the five-year period from 2011 to 2015,
the normalization would have been higher. BHII argues that if the Commission
allowed BHP to make adjustments to its cost analysis with new data that would
require the new rate to be higher, BHP should be mandated to include other
adjustments that would decrease the rate. Nothing in the language of
ARSD 20:10:13:44 indicates that adjustments are mandatory rather than
permissive. The clause concerning adjustments begins: “Proposed adjustments to
book costs shall be shown separately and shall be fully supported, including
schedules showing their derivation, where appropriate.” ARSD 20:10:13:44
(emphasis added). The emphasized language indicates that any adjustment is to be
proposed by the utility. The rule does not state that the utility must propose all
possible adjustments to its cost analysis. Without any language indicating all
possible adjustments are mandatory, BHII’s argument is unpersuasive.
[¶14.] BHII alternatively argues that the Commission’s decision to allow
BHP to submit its pension expenses from 2010 to 2014 rather than including 2015
is arbitrary and capricious. SDCL 1-26-36 states that “[t]he court may reverse or
3. BHII’s additional arguments that the Commission should have rejected three
of BHP’s cost adjustments and one line-item adjustment rest on its incorrect
interpretation of ARSD 20:10:13:44 or are otherwise without merit.
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modify the [Commission’s] decision if substantial rights of the appellant have been
prejudiced because the administrative findings, inferences, conclusions, or decisions
are: . . . (6) [a]rbitrary or capricious[.]” A decision is arbitrary or capricious when it
is not governed by any fixed rules but when it is based on “personal, selfish, or
fraudulent motives, or on false information, and is characterized by a lack of
relevant and competent evidence to support the action taken.” In re Jarman,
2015 S.D. 8, ¶ 19, 860 N.W.2d 1, 9 (quoting Huth v. Beresford Sch. Dist. #61-2,
2013 S.D. 39, ¶ 14, 832 N.W.2d 62, 65).
[¶15.] The Commission took a great deal of evidence regarding pension
expenses. This evidence indicated strong fluctuation from year to year. There is no
indication that the Commission’s acceptance of the 2010–2014 pension
normalization was in any way based on “personal, selfish, or fraudulent motives” or
that the information was in any way false. Id. The Commission’s consideration of
the 2010–2014 normalized expenses while not including 2015 was not arbitrary and
capricious.
[¶16.] 3. Whether the Commission erred when it concluded that
BHP met its burden of proof regarding the inclusion of its
incentive-compensation plan in the cost analysis.
[¶17.] BHII argues that a de novo standard should be applied because
“determining whether the uncontroverted facts or the facts as established satisfy
the legal standard of proof . . . is a mixed question of law and fact, reviewable de
novo.” Erdahl v. Groff, 1998 S.D. 28, ¶ 30, 576 N.W.2d 15, 21. We agree. In
essence, BHII challenges the sufficiency of the evidence, i.e., whether there is
enough evidence to support as reasonable and necessary the amount cited by BHP
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for its incentive-compensation plan. BHP had the burden to prove that the costs of
the incentive-compensation plan were “prudent, efficient, and economical and are
reasonable and necessary[.]” SDCL § 49-34A-8.4. “[T]he burden of proof for
administrative hearings is preponderance of the evidence.” Irvine v. City of Sioux
Falls, 2006 S.D. 20, ¶ 10, 711 N.W.2d 607, 610.
[¶18.] The evidence provided was sufficient for BHP to meet its burden of
proof, and the Commission did not err in finding that a portion of BHP’s incentive-
compensation plan is a cost that it can pass on to customers. BHP’s compensation
plan is not based solely on corporate financial success. A significant amount of the
plan concerns employee safety and other nonfinancial goals, such as retaining key
employees. The Commission found these portions of the incentive-compensation
plan to be in the customers’ interest, whereas it excluded BHP’s incentive-
compensation plan that related to financial corporate success. The Commission also
heard live testimony that the incentive-compensation plan was both reasonable and
necessary. The facts support the Commission’s conclusion that these expenses were
necessary to provide service to BHP’s customers. The evidence was sufficient to
support the Commission’s decision.
Conclusion
[¶19.] The Commission properly interpreted ARSD 20:10:13:44 when it ruled
that BHP could submit adjustments to the settlement stipulation after the filing of
the initial application. The Commission also did not act arbitrarily or capriciously
in its consideration of the pension expenses, and the evidence was sufficient to
support its inclusion of portions of BHP’s incentive-compensation plan.
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[¶20.] Affirmed.
[¶21.] GILBERTSON, Chief Justice, and ZINTER, SEVERSON, and KERN,
Justices, concur.
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