S.E. 2d
THE STATE OF SOUTH CAROLINA
In The Supreme Court
Heater of Seabrook Inc., Appellant,
v.
The Public Service
Commission of South
Carolina, Respondent.
Appeal From Richland County
J. Ernest Kinard, Jr., Judge
Opinion No. 24821
Heard June 3, 1998 - Filed July 21. 1998
REVERSED AND REMANDED
Darra W. Cothran, of Woodward, Cothran &
Herndon, of Columbia, for appellant.
F. David Butler, of the Public Service Commission
of South Carolina, of Columbia, for respondent
Public Service Commission of South Carolina.
Elliott F. Elam, Jr., of the South Carolina
Department of Consumer Affairs, of Columbia, for
respondent Consumer Advocate.
Stephen P. Groves, Michael A. Molony, and
Stephen L. Brown, of Young, Clement, Rivers &
Tisdale, L.L.P., of Charleston, for respondent Town
of Seabrook Island.
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HEATER OF SEABROOK v. PSC
WALLER, A.J.: On appeal is an order denying Appellant Heater
of Seabrook's application for a rate increase. We reverse the Public Service
Commission's order and remand for further findings.
FACTS/PROCEDURAL POSTURE
On January 13, 1994 Heater of Seabrook ("Utility"), a water and sewer
utility, applied to Respondent Public Service Commission ("PSC") for a rate
increase. Utility sought a rate increase of 10.40% for water and 34.02% for
sewer, for a combined overall rate increase of 20.67%. The South Carolina
Consumer Advocate and the Town of Seabrook Island were granted leave to
intervene. After a public hearing, the PSC issued Order Number 94-644,
dated July 11, 1994, denying Utility's request. The denial was affirmed by
the circuit court. Utility appealed.
We reversed, citing two errors in the PSC's order: (1) the comparison
of Utility's current test year expenses with those from random prior calendar
years in deciding whether Utility's expenses had increased enough to justify
a rate increase; and (2) the treatment of availability fees as operating
revenues. We instructed the PSC on remand (1) to compare Utility's current
test year expenses only with the test year expenses from Utility's previous
rate case; and (2) to treat availability fees as contributions in aid of
construction rather than revenues. Heater of Seabrook, Inc. v. PSC, 324 S.C.
56, 478 S.E.2d 826 (1996) ("Heater I").
On remand, the PSC re-analyzed Utility's application in light of Heater
I. On February 21, 1997 it issued Order Number 97-114 again denying
Utility's request for a rate increase. The PSC supplemented its findings in
Order Number 97-251, dated March 27, 1997, denying Utility's petition for
rehearing. The circuit court affirmed. Utility again appeals.
ISSUES
I. Did the PSC employ the appropriate rate setting method?
II. Was the rate set by the PSC supported by the evidence?
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HEATER OF SEABROOK v. PSC
DISCUSSION
I. Rate Setting Method
Utility argues error in the PSC's decision to employ the "operating
margin" method1 in setting the appropriate rate of return. Instead, it argues
the PSC should have used the "rate of return on rate base" method.2
The PSC employed the operating margin method in its initial 1994
order. In Heater I, we addressed the PSC's choice, while not explicitly ruling
on it, "simply to provide the Commission with some meaningful guidance."
324 S.C. at 64, 478 S.E.2d at 830. We first noted there was no statutory
requirement that the PSC use any particular rate setting method3, and
therefore it had "wide latitude" to determine an appropriate method. We
continued:
This does not mean, however, that a particular methodology
may not be more appropriate than another under a specific set
of circumstances. In fact, the use of a methodology related to the
actual circumstances faced by a utility company may almost
guarantee the setting of a just and reasonable rate. Therefore,
although we will continue to look at whether there is substantial
evidence supporting the rate of return set by Commission and
will not analyze in isolation whether the decision to use a
1Determined by dividing the net operating income for return by the
total operating revenues of the utility.
2Determined by dividing the net income for return by the rate base.
A utility's "rate base" is defined as the amount of investment on which a
regulated public utility is entitled to an opportunity to earn a fair and
reasonable return; and represents the total investment in, or the fair value
of, the used and useful property which it necessarily devotes to rendering the
regulated services. Hamm v. PSC, 309 S.C. 282, 285, 422 S.E.2d 110, 112
(1992).
3 See Nucor Steel v. PSC 312 S.C. 79, 85, 439 S.E.2d 270, 273 (1994)
("The statutory mandate set forth in S.C. Code Ann. 58-5-240(H) only
requires the PSC to determine a fair rate-of-return and document fully the
evidence which justifies that rate-of-return. Nothing in the plain language
of the statute requires the PSC to adopt any one particular price-setting
methodology.").
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HEAT'ER OF SEABROOK v. PSC
particular methodology is so supported, we caution Commission
to employ a methodology tailored to the facts and
circumstances of the case before it.
Here, the use of the operating margin, methodology
seems unusual, to say the least. Typically, that methodology
is appropriate where a utility's rate base has been substantially
reduced by customer donations, tap fees, contributions in aid of
construction, and book value in excess of investment. As the
testimony in this proceeding indicates, it is less appropriate for
utilities that have large rate bases and need to earn a rate of
return sufficient to obtain the necessary equity and debt capital
that a larger utility needs for sound operation. We caution
Commission to consider the circumstances of the case before
it when choosing a price-setting methodology.
Id. (emphasis supplied).
On remand in Order Number 97-114, the PSC again found the
operating margin method was appropriate, "as we have employed it with
other water and sewer companies similarly situated." Supplemental Order
Number 97-251 further elaborated, stating Utility was "similarly situated to
Carolina Water Service in size, for example, and we have used the operating
margin methodology properly in the past in that company's rate cases." The
PSC also stated, "[D]istinguishing factors must be pointed out before the
Commission may properly depart from its past methodology in similar
circumstances. No such factors were pointed out here. Thus, this
Commission stuck to precedent." (emphasis supplied).
Utility argues the PSC's order did not follow the court's instructions in
Heater I because its decision was not tailored to the factual circumstances of
its case. We agree. In two separate places, we instructed the PSC to
consider the facts and circumstances of the case before it in making its
decision. We also strongly suggested the PSC should consider the size of
Utility's rate base in choosing the appropriate method.
Despite our instructions in Heater I, the PSC based its decision of the
appropriate rate setting method on two things: comparison with other
utilities and prior practice. Nowhere in the orders was there a reference to
any characteristic of Utility making the operating margin method
appropriate. We have previously addressed the impropriety of relying on
precedent as the basis for factual determinations. See, e.g., Hamm, 309 S.C.
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HEATER OF SEABROOK v. PSC
at 289, 422 S.E.2d at 114 ("The declaration of an existing practice may not
be substituted for an evaluation of the evidence. A previously adopted policy
may not furnish the sole basis for the Commission's action.").
Moreover, even without the specific instructions from Heater I, the
order is too vague to allow for more than cursory appellate review. For
example, the order refers to Carolina Water Service, another water and sewer
utility, as the comparison standard. However, there is no evidence
whatsoever in the record giving any information about Carolina Water
Service. Under these circumstances, it would be impossible for an appellate
court to afford meaningful review to any comparison findings regarding this
utility. The same reasoning applies to the PSC's generic reference to "other
similarly situated" utilities.
The findings of fact of an administrative body must be
sufficiently detailed to enable the reviewing court to determine
whether the findings are supported by the evidence and whether
the law has been properly applied to those findings. Implicit
findings of fact are not sufficient. Where material facts are in
dispute, the administrative body must make specific, express
findings of fact.
Able Communications, Inc. v. PSC, 290 S.C. 409, 411, 351 S.C. 151, 152
(1986). See also S.C. Code Ann. 1-23-350 (1986) ("A final decision shall
include findings of fact and conclusions of law, separately stated. Findings
of fact, if set forth in statutory language, shall be accompanied by a concise
and explicit statement of the underlying facts supporting the findings.");
Hamm v. PSC, 302 S.C. 132, 394 S.E.2d 311 (1990).
We have repeatedly emphasized the need for specificity in
administrative orders. The need is particularly great when complex issues
are involved, such as those generally found in utility rate setting cases.
Administrative agencies are afforded wide latitude in making decisions, as
shown in the deferential standard of appellate review.4 However, the writing
4Judicial review of PSC orders is controlled by S.C. Code Ann. 1-23-
380(A)(6) (Supp. 1997). From this statute comes the well-settled "substantial
evidence" rule:
The findings of the Commission are presumptively correct and
have the force and effect of law. Therefore, the burden of proof
is on the party challenging an order of the Commission to show
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HEATER OF SEABROOK v. PSC
of orders without sufficient detail or analysis, coupled with this standard of
review, can make their decisions as a practical matter unassailable on appeal.
We find the PSC's order regarding the choice of rate method does not
comply with the specificity requirements for administrative orders as set forth
above.
II. Evidentiary Support for Rate Set by PSC
Utility next argues error in the PSC's finding an operating margin of
8.6% was reasonable, and in the resulting denial of the rate increase. We do
not reach the merits of Utility's argument because we find the PSC's order
insufficient for reasons similar to those discussed in Issue I.
In Order Number 97-114, the PSC stated it had moved some $66,480
(representing the availability fees collected) from revenue to contributions in
aid of construction, in accordance with the Court's order in Heater I. It then
granted Utility $66,480 in additional annual revenue to replace the
availability fee amount, approving a water rate increase of approximately
8.5% to earn this additional revenue. On the issue of the appropriate
operating margin, it stated it had re-examined the evidence in light of Heater
I and had determined that only "minimal increases in expenses" had been
incurred which were not significant enough to justify a rate increase.5
that it is unsupported by substantial evidence and that the
decision is clearly erroneous in view of the substantial evidence
on the whole record. The Public Service, Commission is
recognized as the "expert" designated by the legislature to make
policy determinations regarding utility rates; thus, the role of a
court reviewing such decisions is very limited.
Patton v. PSC, 280 S.C. 288, 290-91, 312 S.E.2d 257, 259 (1984) (internal
citations omitted). See also Palmetto Alliance, Inc. v. PSC, 282 S.C. 430, 432,
319 S.E.2d 695, 696 (1984) (Substantial evidence is something less than the
weight of the evidence and the possibility of drawing two inconsistent
conclusions from the evidence does not prevent an administrative agency's
finding from being supported by substantial evidence).
5During the pendency of this appeal, the PSC had allowed Utility to put
its requested increased rates into effect under bond. Thus, the PSC ordered
Utility to refund $308,739, representing the difference between the increased
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HEATER OF SEABROOK v. PSC
The order gave no further reasons or findings of fact upon which the
determination was based. When Utility petitioned for rehearing, the PSC
dismissed Utility's argument that Order Number 97-114 did not make specific
findings of fact:
We discern no error. In remanding the case back to the
Commission, the South Carolina Supreme Court expressed the
opinion that the $66,640 in availability fees should not have been
treated as operating revenue, because of a lack of substantial
evidence. In Order No. 97-114, we specifically granted the
Company $66,480 in additional annual rate revenue to replace
the availability fees that we formerly counted as regulated
revenue. We also noted that this was our only change from
Order No. 92-1028, wherein we fully explained our reasoning on
arriving at the 8.60% operating margin. For this reason, we
believe that all appropriate findings of fact are contained in
Order No. 97-114, as that Order fully addressed the Supreme
Court's concerns. Findings of fact supporting the operating
margin reached were fully explained in the prior Order, and
other than the matters discussed above, were fully laid out
therein.
State law requires the PSC's "determination of a fair rate of return
must be documented fully in its findings of fact and based exclusively on
reliable, probative, and substantial evidence on the whole record." S.C. Code
Ann. 58-5-240 (Supp. 1997). See also S.C. Code Ann. 1-23-350 (1986)
(requiring findings of fact, if set forth in statutory language, to be
accompanied by a "concise and explicit statement of the underlying facts
supporting the findings"); Hamm v. PSC, 302 S.C. 132,-394 S.E.2d 311 (1990);
Able Communications, Inc. v. PSC, 290 S.C. 409, 351 S.C. 151 (1986).
Neither of the 1997 orders make any findings of fact other than to find the
increase in expenses "minimal." Again, this type of conclusory statement,
with no supporting factual documentation, makes meaningful appellate review
impossible.6 Moreover, we are troubled by the PSC's reference to Order
Number 92-1028 as containing its reasoning for arriving at the appropriate
operating margin. This order contained the PSC's findings from Utility's
rate and the rate the PSC ultimately allowed.
6For example, it is unknown whether the PSC meant that it found the
increase in expenses minimal on their face, or in the context of how such
increase ultimately factored into a resulting operating margin calculation.
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HEATER OF SEABROOK v. PSC
prior rate case, where a rate increase was granted on December 12, 1992.
We find it inappropriate to refer to this order, which was based on evidence,
and a prior test year, completely different from Utility's financial condition
at the time of the current application.7 Finally, the only other source for the
missing findings of fact was an order we had already reversed on the basis
of improper findings and comparisons.
For these reasons, we find the PSC's order did not comply with
applicable requirements, particularly those set forth in section 58-5-240, and
therefore cannot stand.
CONCLUSION
We find Order Number 97-114, as supplemented by Order Number 97-
251, insufficient for the reasons described above. We therefore remand for
further proceedings consistent with this opinion. Regarding the choice of rate
setting method, the PSC is ordered to comply with our directive as set out
in Heater I and as again emphasized in this opinion. Regarding the setting
of an appropriate rate of return, the PSC shall be mindful of the legislative
mandates of sections 1-23-350 and 58-5-240 in writing its order.8
REVERSED AND REMANDED.
FINNEY, C.J, TOAL, MOORE and BURNETT, JJ., concur.
7Thinking the PSC may have mistakenly referred to Order Number 92-
1028 when it meant Order Number 94-644 (the original order from the
current application which was reviewed in Heater I), we specifically
questioned the PSC on this point at oral arguments The PSC affirmed it was
referring to the 1992 order.
8In light of our disposition of Issues I and II, we decline to address
Utility's due process argument. However, due to confusion in the PSC's
interpretation of Heater I, we emphasize that our decision in no way reflects
on the PSC's duty to consider this issue on remand should it arise.
Furthermore, we reverse the PSC's finding this issue is moot because the
utility has been sold to the Town of Seabrook. Clearly, determination of the
issue, should it arise, would affect Utility's duty to pay the refund ordered
by the PSC, see supra note 5.
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