## Facts

- Missouri Gas Energy (MGE), a natural-gas distribution utility, operated as an operating division of Southern Union Company and had no separate capital structure or direct investors.
- In November 2003, MGE filed tariff sheets seeking a general rate increase of about $44.8 million and proposed a more equity-heavy hypothetical capital structure with a 12% return on equity (ROE).
- Southern Union had a highly leveraged financing profile; MGE argued this increased risk affected its ability to attract capital and justified higher returns.
- A prior stipulation concerning Southern Union’s acquisition of an interstate pipeline subsidiary provided that the pipeline’s debt would be non-recourse as to MGE and insulated from MGE’s customers.
- The Public Service Commission (PSC) established a test year ending June 30, 2003, allowed specified updates through December 31, 2003, and conducted a limited true-up through April 30, 2004.
- After hearings, the PSC (3–2) issued a Report and Order granting a $22.5 million revenue increase, adopting a 29.99% equity / 70.01% debt ratemaking capital structure, and allowing a 10.5% ROE.
- The circuit court reversed, finding the 10.5% ROE unsupported by competent and substantial evidence and concluding the resulting rates were unlawful and confiscatory, in part based on its view of expert credibility and a national-average ROE benchmark.
- The PSC appealed; the appellate court consolidated the appeals and reviewed the PSC’s order.

## Issues

1. Whether the PSC’s adoption of a 10.5% ROE with a 29.99% equity capital structure produced an unreasonable or unconstitutionally confiscatory rate of return.
2. Whether the PSC lawfully exercised discretion in selecting a ratemaking capital structure that differed from Southern Union’s actual leverage and in rejecting MGE’s proposed hypothetical structure.
3. Whether the circuit court exceeded the permissible scope of review by reassessing witness credibility and reweighing conflicting expert testimony rather than deferring to the PSC where substantial evidence supported the order.

## Decision

- The appellate court reversed the circuit court’s judgment and affirmed the PSC’s Report and Order.
- The court held the PSC’s 10.5% ROE and selected capital structure were supported by competent and substantial evidence and were not unlawful, unreasonable, arbitrary, or capricious.
- The court rejected the claim that the PSC’s determinations were confiscatory, concluding the rate order provided a reasonable opportunity to earn a fair return.
- The court held the circuit court improperly substituted its judgment for the PSC’s by revisiting expert credibility and emphasizing comparative benchmarks.

## Legal Principles

- Judicial review of PSC ratemaking is deferential: an order is upheld if supported by competent and substantial evidence on the whole record and not unlawful, unreasonable, arbitrary, or capricious.
- Reviewing courts evaluate the PSC’s order rather than re-deciding the case; they may not reweigh evidence or reassess credibility where the commission’s findings fall within the evidentiary record.
- A rate is confiscatory only if it deprives the utility of a fair return; the Constitution requires a reasonable opportunity to earn a fair return, not any guaranteed earnings level.
- When expert opinions conflict, a commission’s selection of an ROE within the evidentiary range is generally sustainable if the commission explains its choice.
- A commission may use a regulatory (including hypothetical or adjusted) capital structure in ratemaking, particularly for a utility division lacking a standalone capital structure, to avoid shifting parent-company financing consequences to ratepayers.

## Conclusion

The court upheld the PSC’s ratemaking judgment, concluding that the 10.5% ROE and selected capital structure were supported by substantial evidence, did not result in confiscation, and could not be overturned based on a circuit court’s reweighing of expert testimony or reliance on comparative averages.


State ex rel. Missouri Gas Energy, a Division of Southern Union Co. v. Public Service Commission, 186 S.W.3d 376 (Mo. Ct. App. W.D. 2005)