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Spire Missouri, Inc. v. Public Service Commission of State

Court of Appeals of Missouri, Southern District, Second Division

March 15, 2019




          WILLIAM W. FRANCIS, JR., P.J.

         Spire Missouri, Inc., f/k/a Laclede Gas Company ("Spire Missouri"), [3] appeals from two Orders rendered by the Public Service Commission of the State of Missouri ("PSC"). In three points on appeal, Spire Missouri asserts the PSC erred in ordering that $3.6 million in relocation proceeds received from the sale of one of its facilities be used to reduce rates; in denying Spire Missouri approximately half of its rate case operating expenses; and eliminating $28.8 million of its pension asset. Finding no merit to these points, we affirm the Orders of the PSC.

         Factual and Procedural History


         The PSC is the state agency responsible for the regulation of public utilities, including gas corporations, in Missouri. See §§ 386.130 and 386.250.[4] Spire Missouri[5] is an investor-owned gas corporation regulated by the PSC. It has two retail service areas in the state: Spire Missouri East ("Spire East"), [6] formerly known as Laclede Gas Company, serving approximately 630, 000 customers on the Eastern side of the state; and Spire Missouri West (Spire West), formerly known as Missouri Gas Energy, serving approximately 500, 000 customers on the Western side of the state.

         The Office of Public Counsel ("OPC") represents the public in cases before the PSC and on appeal from PSC orders and decisions, including the present case. § 386.710.1(2).

         PSC Proceedings

         Spire Missouri filed tariffs to implement general rate increases for gas service in its Eastern and Western service areas. Along with the proposed tariffs, Spire Missouri also provided written testimony and other documentation in support of the proposed tariffs.

         The test year established for this rate case was the 12-month period ending on December 31, 2016, to be updated for known and measurable changes through June 30, 2017. The updated test year would be further trued up for known and measurable revenue, rate base, and expense items through September 30, 2017.

         The PSC consolidated the Spire East rate case[7] and the Spire West case[8] for hearing purposes, but the cases remained separate as the two service areas do not have the same rates. The parties filed written direct, rebuttal, and sur-rebuttal testimony for the case in chief, and direct and rebuttal true-up testimony.

         The PSC held local public hearings in Spire Missouri's Eastern and Western service areas. An evidentiary hearing was held at the PSC's primary office in Jefferson City.

         PSC's Amended Report and Order

         The PSC issued its Order establishing new rates for the Spire East service area on March 7, 2018. On the same day, the PSC issued its Order establishing new rates for the Spire West service area. Both Orders became effective on March 17, 2018. In those Orders, the PSC made factual findings regarding issues on appeal.

         Ratemaking Treatment of Forest Park Property Transaction

         Spire East owned and operated three large service centers for several decades. One of the service centers was located near Forest Park in the City of St. Louis (the "Forest Park property"). The Forest Park property provided some services, such as gas procurement, gas controls, and diversion, not otherwise provided by other service center locations.

         After the acquisition of the Spire West service area, Spire Missouri undertook certain company restructuring. The major restructuring elements in the St. Louis area were the sale of the Forest Park property, the termination of the lease for the main corporate office at 720 Olive Street, the lease of new offices at 700 and 800 Market Street, and the construction of a new satellite operation facility on Manchester Avenue.

         To obtain additional negotiating leverage for the potential sale of the Forest Park property, Spire East acquired two adjacent parcels of land in January 2013. The cost of the adjacent parcels was $450, 000, plus additional expenses. These properties were included in the sale of the Forest Park property.

         On June 27, 2013, Spire East entered into an agreement to sell the Forest Park property to The Cortex Innovation Community in St. Louis ("Cortex"), an urban redevelopment corporation. As part of the process, Cortex obtained an appraisal of the Forest Park property, which found that the market value of the property, with all of its buildings and structures, was $6.89 million; the appraised market value for the property-with all of the buildings demolished and removed-was $7.44 million.

         Cortex purchased the Forest Park property, including the buildings, other improvements, and the additional parcels of land for $8.3 million. Cortex paid an additional $5.3 million for employee and equipment expenses. The sale closed in May 2014.

         Spire East's profit from the $8.3 million sale price of the Forest Park property (previously included in rate base) after subtracting the $1.8 million net book value of the buildings and $700, 000 for the land, was $5.8 million. Of that amount, Spire East used $1.95 million for the purchase of furniture and fixtures at the new offices located at 700 and 800 Market Street, recording these purchases at a "zero" net book value.

         Spire East reported its moving and relocation expenses, but the expenses were not tracked by specific move. With the exception of a lease expense for one temporary location at a cost of $200, 000, it was unclear which expenses were used for moving Forest Park employees and equipment, and which were used for moving employees and equipment from Olive Street to the Market Street location.

         Spire East did not seek PSC authorization prior to the sale of the Forest Park property.[9] At the time of the sale, the Forest Park property was necessary and useful to the provision of utility service. PSC Staff ("the Staff") argued that the gain from the sale of the Forest Park property should be shared with ratepayers because Spire East sold utility property needed for the provision of public service, which had to be replaced with a new facility at a higher cost.

         Staff proposed that $3.6 million (the $5.7 million relocation proceeds, less documented moving expenses and the $1.95 million in capital expenditures for furniture and fixtures) be used to offset the cost of the more expensive Manchester facility. The PSC found that: (1) Staff's proposal was just and reasonable; (2) ratepayers should not continue to pay for property replaced with a more expensive property; and (3) the sale of the Forest Park property was not purely a land transaction, but was necessary for the provision of Spire Missouri's utility service. At the time of the Forest Park property sale, the buildings on the land were in the Spire East's rate base and had an undepreciated net book value of $1.8 million. The PSC found that when the buildings were sold, any return on building costs should have been removed from rates at the time of the sale. The PSC did not authorize the sale, and there was no adjustment to rates made at the time of the sale.

         Spire East's recording of the sale transaction reduced the building asset account by $3.3 million. However, the PSC found that the reduction of the depreciation reserve by the same amount did not allow for the recognition of the $1.8 million loss on the retirement of the Forest Park buildings, and misrepresented the effect of the sale on the utility's depreciation reserve.

         The PSC ordered Spire East to account for the sale of the Forest Park transaction in accordance with the FERC's USoA[10] by increasing its accumulated depreciation reserve by the $1.8 million loss on the retirement of the Forest Park buildings; that neither a return of the $1.8 million undepreciated value of the Forest Park buildings, nor any return on the $1.8 million would be included in rates going forward; and that the remainder of the $5.8 million gain belonged to the shareholders.

         The PSC found that Spire East partially replaced the Forest Park property with the Manchester facility; that while the Manchester facility might be less expensive to operate than the Forest Park facility, it was a more expensive capital asset than the Forest Park property; that the rates established in this case included this more expensive capital asset; and that it was appropriate for the PSC to order a portion of the $5.7 million in relocation costs be used to offset the higher costs of this partial replacement facility.

         The PSC also found that while the actual expenses incurred to relocate Forest Park employees could not be determined from the evidence presented, the $200, 000 lease expense and the $1.95 million capital contributions should be deducted from the $5.7 million total before the remainder was used to offset the construction cost of the new Manchester facility.

         The PSC ordered Spire East to create a regulatory liability to record the rate base offset of the relocation expense, amortized over five years, effective on the date of the rates set in this case.

         Rate Case Expense

         Rate case expense is the sum of the costs a utility incurs in preparing, filing, and litigating a rate case.

         Spire Missouri's witness on rate case expense testified that the company enters into a rate case with an estimate of its rate case expenses, but that Spire Missouri had no firm ceiling or other mechanism in place to limit those expenses.

         When Spire Missouri filed its rate cases, it budgeted rate case expense of $994, 447, with $596, 668 budgeted in Spire East's rate case, and $397, 779 budgeted in Spire West's rate case. Spire Missouri's anticipated annual expense to be recovered from these rate cases over the proposed amortization period[11] was $198, 889 for Spire East, and $132, 593 for Spire West.

         By the time of hearing, Spire Missouri's estimated rate case expense had increased to $1.3 million, and thereafter exceeded even that estimate.

         Staff recommended that the proposed rate case expenses be recovered via a sharing mechanism between the ratepayers and the shareholders based on the ratio of Spire East and Spire West's PSC-authorized revenue requirement increase to their requested revenue increase, net of Staff's adjustments.

         Staff recommended that the allowed rate case expense be split between Spire East and Spire West, 53.5 percent and 46.5 percent respectively, based on each division's requested revenue requirement increase; that rate case expense be normalized[12] over four years, the approximate time between rate cases for both Spire East and Spire West; and one disallowance[13] for the procurement of a Cash Working Capital study, with the cost of that study to be borne entirely by the shareholders as it was not a prudent expense.

         The OPC recommended a disallowance for the expenses related to Spire Missouri witness Thomas J. Flaherty because of the high hourly rate charged by this expert.

         Spire Missouri admitted that it purposefully takes more "aggressive" positions and builds "a little bit of cushion" into its requests. Spire Missouri's rate case witness testified that the company never expected to receive the full amount that it requested.

         The PSC found that Spire Missouri pursued issues and incurred rate case expense that largely benefited only shareholders. Notably, Spire Missouri employed an outside witness to support its recommended return on equity of 10.35 percent, the highest of any large utility in Missouri. The PSC observed that: (1) Spire Missouri's witness testified that the goal of the utility is to be awarded its requested return of equity; (2) Spire Missouri pursued unique shareholder-focused ratemaking tools intended to insulate shareholders from risk, including three new tracking mechanisms and a revenue stabilization mechanism; and (3) Spire Missouri sought utility expenses that were highly discretionary and did not benefit customers, such as incentive compensation tied to earnings per share, a retention mechanism, a one-time adder to return on equity for claimed benefits of acquisitions in Alabama and Mississippi, and performance metrics.

         The PSC found that Spire Missouri controlled approximately half of the issues that went to hearing. It also found that the shareholders who controlled 50 percent of the rate case issues should share 50 percent of the rate case expense. The PSC made an exception for the cost of the depreciation study and the cost of the customer notices that were required by rule or by order, and directed that these be allocated entirely to the ratepayers. The remainder of rate case expense would be allocated 50 percent to ratepayers and 50 percent to shareholders.

         Before these rates cases were filed, the OPC had filed overearnings complaints against Spire East and Spire West. The complaints were stayed pending the filing of these rate cases. Spire Missouri argued that sharing rate case expense is inappropriate because it was required to file these rate cases in relation to the overearnings complaints, and by the Infrastructure System Replacement Surcharge ("ISRS") statute.

         The PSC found that while Spire Missouri was required to participate in the overearnings complaints, it was within the utility's discretion to file the rate cases. The PSC also found that the ISRS statute did not require Spire Missouri to file these rate cases; rather, the statute merely required Spire Missouri to file a rate case if it wanted to continue to collect an ISRS surcharge. Spire Missouri elected to continue collecting an ISRS surcharge, and filed these rate cases to that end.

         Staff and the OPC each argued that certain rate case expenses incurred by Spire Missouri should be excluded from rates and borne explicitly by shareholders because the expenses were not prudent. The PSC rejected these proposals and declined to find that any specific item of rate expense was imprudent. Instead, the PSC found that a rate-case-sharing mechanism would act as sufficient incentive for the utility to manage its costs.

         The PSC ordered that: (1) Spire Missouri recover the full cost of the depreciation study over five years; (2) the cost of the customer notices be normalized over four years; (3) 50 percent of the remainder of Spire Missouri's rate case expense was to be recovered in rates; and (4) the recoverable rate case expense would be recovered over four years (the rough equivalent of the length of time between the utility's rate cases).

         Ratemaking Treatment of Prepaid Pension Assets

         Spire East has a collective bargaining agreement with its union employees that offers those employees a lump-sum payment at retirement. Spire East made pension contributions in excess of those required by federal statutory minimums to avoid benefit restrictions under the Pension Protection Act and to avoid variable premiums by the Pension Benefit Guaranty Corporation ("PBGC").[14]

         The pension asset is a regulatory asset that represents an amount owed by ratepayers for Spire East's and Spire West's contributions to the company pension funds that have not been recovered in rates. A pension liability is the opposite of a pension asset in that a liability is created when the company has recovered more from ratepayers than it has paid into the pension funds with regard to the authorized regulatory payments.

         Staff, the OPC, and Spire West agreed that Spire West had a pension liability of $28.4 million.

         Staff and Spire East disagreed as to the amount ratepayers paid in pension expense between 1990 and 1994 for both FAS[15] 87 and FAS 88, and from 1994 to 1996 for the FAS 88 account.

         Spire East argued that: (1) between the time it adopted FAS 87 in 1987 and its rate case in 1994, its pension asset accumulated $19.8 million; (2) its pension asset accumulated $9 million under FAS 88 between its 1994 rate case and its 1996 rate case; and (3) its prepaid pension asset was $28.8 million higher than Staff's position.

         The PSC adopted the 1994 stipulation and agreement in GR-94-220 as a resolution of all issues and permitted Spire East to book its pension and Other Post-Employment Benefit ("OPEB") expenses to FAS 87 and FAS 106[16] accounts, respectively. The report and order in GR-94-220 authorized the deferral of OPEB expenses, Supplemental Executive Retirement Plan ("SERP"), and directors' pension plans described in paragraphs 8 and 9 of the stipulation and agreement in that case. The stipulation and agreement in GR-94-220 stated that the parties agreed as to Spire East's adoption of FAS 87 for all qualified pension plans and that PSC approval of the stipulation and agreement would constitute all necessary authorization for Spire East to use FAS 87 and FAS 106 for ratemaking purposes.

         Prior to September 1, 1996 (when rates from GR-96-193 became effective) accumulated pension assets in FAS 88 were not included in Spire East's cost of service.

         Paragraph 7 of the PSC-approved stipulation and agreement from Spire East's 2013 rate case, GR-2013-0171, stated that Spire East was to be allowed rate recovery for contributions it would make to avoid benefit restrictions specified by the Pension Protection Act of 2006 (PPA). Spire East contributed funds sufficient to avoid the restrictions outlined in the PPA. The stipulation and agreement in GR-2013-0171 also stated that Spire East could include pension asset contributions in excess of ERISA minimums because they were made to avoid variable premiums from the PBGC.

         The PSC found that the parties were using a cash contribution method, and not FAS 87 or FAS 88 accrual accounting prior to the effective date of GR-94-220 (September 1, 1994); for ratemaking purposes, the recording of the difference between the utility's pension fund contributions and the amount collected in rates began September 1, 1994; the report and order in GR-94-220 resolved relevant issues, and authorized Spire East to book its pension and OPEB expenses to FAS 87 and 106 accounts. The PSC found that the sworn testimony of Staff and Spire Missouri's witnesses knowledgeable of the issues during the time in question to be more persuasive than the conclusions drawn by Spire East and its witnesses more than 20 years later.

         The PSC determined that Spire West's pension liability was $28.4 million. It further determined that the appropriate amount of Spire East's prepaid pension asset was $131.4 million, and ordered an eight-year amortization for this prepaid pension asset.

         Post-Order Proceedings

         Spire Missouri filed tariffs to implement the new rates for Spire East and Spire West authorized by the Orders. Spire Missouri also filed timely applications for rehearing of the Orders. The PSC denied the applications for rehearing. This appeal followed.

         Standard ...

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