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Public Advocate v. Public Utilities Comm.
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MAINE SUPREME JUDICIAL COURT				Reporter of Decisions
Decision:		1998 ME 218
Docket:		PUC-97-455
Argued:		January 6, 1998
Decided :		September 28, 1998

Panel:		WATHEN, C.J., and  CLIFFORD, RUDMAN, LIPEZ{*} and SAUFLEY, JJ. and
			ROBERTS, A.R.J.{**}
Majority:	WATHEN, C.J., and  CLIFFORD and RUDMAN, JJ.
Dissent:	SAUFLEY, J. and ROBERTS, A.R.J.

PUBLIC ADVOCATE

v.

PUBLIC UTILITIES COMMISSION et al.

CLIFFORD, J.

	[¶1] The Public Advocate appeals an order entered by the Public
Utilities Commission, and the denial of a motion to reconsider that order,
allowing New England Telephone and Telegraph Company (NET){1} to
recover, through a surcharge in rates, costs related to an expansion of basic
service calling areas mandated by the Commission.  The Public Advocate
contends that the Commission's order allowing the surcharges is beyond the
Commission's statutory authority and constitutes impermissible retroactive
ratemaking.  We disagree that the surcharge is retroactive ratemaking and
conclude that the order implementing the Commission's mandate was a
legitimate deferral of collection of unusual costs to a time when those costs
were known, pursuant to 35-A M.R.S.A. § 502(1) (1988).  Accordingly, we
affirm.
	[¶2]  At issue in this appeal is M.P.U.C. Reg. 65-407, Chapter 204, 
the Basic Service Calling Area (BSCA) rule.  In 1994 the Commission
implemented the BSCA rule to expand basic service calling areas (within
which calls are local and not subject to a long distance toll charge) of the
telephone companies.
	[¶3]  The BSCA rule was certain to affect telephone company
revenues.  The nature of that effect, however, was difficult to predict. 
Rather than attempt to determine that effect in advance and authorize rate
changes, surcharges or refunds, before the effective date of the changes in
the basic service calling areas, (rate changes that were almost certain not to
accurately reflect the true cost), the Commission adopted a deferred
accounting mechanism so that the cost of the BSCA rule could be accurately
determined before changes in the rates necessary to cover the cost of those
changes were approved.  Chapter 204 required each local exchange carrier
(LEC){2} to establish a "tracking account" to record the revenue effects of the
BSCA plan for the first twelve months after the plans are implemented.  The
rule then required the LEC to file a report with the Commission:

If the tracking account has a positive balance, the LEC must file
a proposal to return the excess to customers and to lower
prospective rates with its report.  If the tracking account has a
negative balance, the LEC may file proposed rates for
Commission review and approval to recover the shortfall that
occurred during the 12-month deferral period and the period
following the 12-month deferral period but prior to the
effective date of the newly proposed rates, and to adjust
prospective rates to avoid a similar revenue shortfall in the
future.  

Chapter 204(VII)(A)(3).  Chapter 204 further stipulated that any proposed
rate increase based on the BSCA rule would be "revenue neutral," i.e., the
utility is prohibited from taking in more revenue than the documented cost
of the expanded service required by the rule.  The rate of return of the
utility would not be affected.
	[¶4]  NET added new exchanges pursuant to the BSCA rule in March
of 1995, several months prior to the conclusion of a NET rate case.  That
rate case, however, did not consider the revenue effect of the BSCA rule. 
NET filed its tracking report on December 6, 1996.  The tracking report
reflected that the implementation of the additional basic service calling
areas resulted in one time implementation costs of $501,655 and a revenue
shortfall of about $3 million per year.  NET filed to recover the shortfalls
incurred as a result of compliance with Chapter 204, as authorized by the
rule.  The Commission approved the recovery in an order dated April 15,
1997 for: (1) one-time implementation costs of $501,655; (2) the revenue
shortfall of $6 million that occurred over the two years between
implementation of additional calling areas and the date of the order (March
1, 1995 to April 15, 1997); and (3) an ongoing projected annual revenue
shortfall of $2,987,484.  After the Commission denied a motion by the
Advocate to modify the order allowing the surcharges,{3} the Public Advocate
brought this appeal pursuant to 35-A M.R.S.A. § 1320, challenging, as
prohibited retroactive ratemaking, the approval of NET's request for
recovery of $6 million in past revenue shortfall and $501,655 in one-time
implementation costs.  The Public Advocate does not challenge the portion
of the order allowing recovery, through an increase in basic telephone rates,
of the ongoing projected $3,000,000 shortfall in revenue caused by the
BSCA implementation, that order having no retroactive aspects.
	[¶5]  Our review of the actions of the Commission is limited.  "We
defer to the Commission's choice of ratemaking methodologies or
techniques."  Public Advocate v. Public Utils. Comm'n, 655 A.2d 1251, 1253
(Me. 1995) (citing  New England Tel. & Tel. Co. v. Public Utils. Comm'n, 448
A.2d 272, 279 (Me. 1982)).  We review questions of law de novo, but "[o]n
questions involving the interpretation and application of technical statutes
or regulations, we give deference to the administrative agency unless the
statutes or regulations plainly compel a contrary result."  National Indus.
Constructors, Inc. v. Superintendent of Ins., 655 A.2d 342, 345 (Me. 1995);
see also Agro v. Public Utils. Comm'n, 611 A.2d 566, 569 (Me. 1992) ("a
court will defer to an administrative agency's construction of a statute
administered by it").

THE RATEMAKING PROCESS.

	[¶6]  The purpose of Maine's public utilities regulatory system "is to
assure safe, reasonable and adequate service at rates which are just and
reasonable to customers and public utilities."  35-A M.R.S.A. § 101 (1988). 
In the usual proceedings for approval of schedules for prospective rate
increases pursuant to 35-A M.R.S.A. §§ 301-312 (1988 & Supp. 1997), the
Commission has the power to approve rates which are "just and reasonable,"
and "[e]very unjust or unreasonable charge for public utility service is
prohibited and declared unlawful."  35-A M.R.S.A. § 301(3), (4) (1988 &
Supp. 1997).  The statute is explicit that "[i]n determining just and
reasonable rates," the commission:

A.  Shall provide such revenues to the utility as may be required
to perform its public service and to attract necessary capital on
just and reasonable terms;  and . . . 
B.  Shall, to a level within the Commission's discretion, consider
whether the utility is operating as efficiently as possible and is
utilizing sound management practices . . . ."

35-A M.R.S.A. § 301(4) (1988 & Supp. 1997).  The just and reasonable rate
is determined by the Commission "after consideration of the utility's
appropriate rate of return, 'designed to provide sufficient revenue to cover
the Company's total cost of service.  Such costs include both the operating
expenses of the utility and an adequate return on the investment in property
and equipment serving the public.'"  Maine Pub. Advocate v. Public Utils.
Comm'n, 476 A.2d 178, 179 (Me. 1984) (quoting Central Me. Power Co. v.
Pub. Utils. Comm'n, 455 A.2d 34, 38 (Me. 1983); see also Camden &
Rockland Water Co. v. Maine Pub. Utils. Comm'n, 432 A.2d 1284, 1286 (Me.
1981).

PROHIBITIONS ON RETROACTIVE RATEMAKING 

	[¶7]  The Public Advocate contends that prior case law clearly
establishes that the Commission lacks authority to adjust rates pursuant to
the tracking mechanism.  He relies on four of our prior cases:  New England
Tel. & Tel. Co. v. Public Utils. Comm'n, 354 A.2d 753 (Me. 1976)
(hereinafter NET I); New England Tel. & Tel. Co. v. Public Utils. Comm'n,
362 A.2d 741 (Me. 1976) (NET II); First Hartford Corp. v. Central Me. Power
Co., 425 A.2d 174 (Me. 1981); Maine Pub. Advocate v. Public Utils. Comm'n,
476 A.2d 178 (Me. 1984).  The prohibition on retroactive ratemaking is not
unique to Maine.  It has been summarized as follows:

The rule prohibits a public utility commission from setting
future rates to allow a utility to recoup past losses or to refund to
consumers excess utility profits.  Restated, the rule prohibits a
utility commission from making a retrospective inquiry to
determine whether a prior rate was reasonable and imposing a
surcharge when rates were too low or a refund when rates were
too high.

State v. Public Util. Comm'n of Texas, 883 S.W.2d 190, 199 (Tex. 1994)
(citation omitted).  
	[¶8]  Our cases are consistent with the rule articulated by the Texas
court in that they make clear that the Commission has no authority to
approve changes in rates that compensate a utility after the fact for errors in
rates previously determined to be just and reasonable.  See NET II, 362 A.2d
at 758; see also First Hartford Corp., 425 A.2d at 181.  Once rates have been
set, the Commission may not adjust those rates retrospectively to make up
for subsequently discovered mistakes in those rates.  See NET II at 758; see
also First Hartford Corp., 425 A.2d at 181.  The Public Advocate argues that
the language in those cases makes clear that the action of the Commission in
adjusting the rates to implement the BSCA rule is impermissible retroactive
ratemaking and beyond its power.
	[¶9]  In NET I we upheld the Commission's denial of NET's request,
pending the outcome of a rate case, for a temporary rate increase for the
period between the temporary request and the Commission's final approval
of the increase in the underlying rate case.  We held that this "regulatory
lag" to the detriment of the utility could only be dealt with prospectively. 
NET I, 354 A.2d at 764.  We concluded that the statutes did not give the
Commission the authority to establish "temporary" rates as a means of
providing an after the fact remedy for an entirely past situation no longer
continuing at the time the Commission establishes the "temporary rates."
Id.  The BSCA tracking provision rule, however, is not an after the fact
remedy.  It reflects a decision by the Commission made before the costs of
implementing the BSCA rule are incurred, and before they are known, to
defer those costs to a time when the actual costs become known.  Moreover,
Chapter 204's tracking provision operates independently from ratemaking. 
NET's loss of revenue results from a mandate imposed by the Commission
subsequent to the setting of rates.