TENNESSEE CONSUMER ADVOCATE,    )
                               )
     Plaintiff/Appellant,      )        TN Regulatory Authority
                               )        Trial No. 95-01134
                               )
VS.                            )
                               )
TENNESSEE REGULATORY AUTHORITY)         Appeal No.
AND UNITED CITIES GAS COMPANY, )        01A01-9606-BC-00286
                               )
     Defendant/Appellee.       )


                    IN THE COURT OF APPEALS OF TENNESSEE
                                                            FILED
                         MIDDLE SECTION AT NASHVILLE          March 5, 1997

                                                        Cecil W. Crowson
                     APPEAL FROM THE DAVIDSON COUNTY Appellate Court Clerk
                   TENNESSEE PUBLIC SERVICE COMMISSION,
                         AT NASHVILLE, TENNESSEE




Charles W. Burson
Attorney General & Reporter

L. Vincent Williams
Consumer Advocate Division
404 James Robertson Parkway
Nashville, TN 37243-0500
ATTORNEY FOR PLAINTIFF/APPELLANT


H. Edward Phillips, III
Tennessee Regulatory Authority
460 James Robertson Parkway
Nashville, TN 37243
ATTORNEY FOR DEFENDANT/APPELLEE


                          REVERSED AND REMANDED



                                   HENRY F. TODD
                                   PRESIDING JUDGE, MIDDLE SECTION


CONCUR:

BEN H. CANTRELL, JUDGE,
WILLIAM C. KOCH, JR., JUDGE
TENNESSEE CONSUMER ADVOCATE,   )
                               )
     Plaintiff/Appellant,      )                     TN Regulatory Authority
                               )                     Trial No. 95-01134
                               )
VS.                            )
                               )
TENNESSEE REGULATORY AUTHORITY)                      Appeal No.
AND UNITED CITIES GAS COMPANY, )                     01A01-9606-BC-00286
                               )
     Defendant/Appellee.       )



                                      O P I N I O N



       The petitioner, Tennessee Consumer Advocate, has petitioned this Court for review of

administrative decisions of the Tennessee Public Services Commission pursuant to T.R.A.P.

Rule 12. By order entered by this Court on October 3, 1996, the review is limited to an order

entered by the Commission on May 3, 1996. However, the circumstances stated hereafter require

reference to an order previously entered by the Tennessee Public Service Commission on May

12, 1995.



                                          The Parties.

       Prior to June 30, 1996, the Public Service Commission controlled the charges of public

utilities in Tennessee. On June 30, 1996, the Public Service Commission was discontinued by

enactment of the Legislature which created the Tennessee Regulatory Commission which has

been substituted for the Public Service Commission in proceedings before this Court.



       By T.C.A. § 65-4-118, the Consumer Advocate Division of the Office of Attorney

General and Reporter may with the approval of the Attorney General and Reporter appear before

any administrative body in the interests of Tennessee consumers of public utility services.



       United Cities Gas Company is a public utility which purchases and distributes natural gas


                                               -2-
through its pipelines to patrons in parts of Tennessee.



                                The Administrative Proceedings.

       On January 20, 1995, United filed with the Public Utilities Commission (hereafter

P.S.C.), an application for approval of a scheme of variable rates based upon the wholesale price

of gas purchased from suppliers.



       P.S.C. granted leave to the Consumer Advocate to intervene.



       On May 12, 1995, the P.S.C. entered an order approving the proposed scheme on

condition that an independent consultant be engaged to review the “mechanism” and report to the

commission annually.



       On October 31, 1995, United Gas submitted to the Commission for approval, a contract

with Consulting & Systems Integration, providing that the work was to be performed by a Mr.

Frank Creamer. Subsequently, United Gas requested that Anderson Consulting be substituted for

Consulting Systems because Mr. Creamer had severed his connection with Consulting Systems

and affiliated with Anderson.



       The May 3, 1996, order of the Commission, which is the subject of this appeal, approved

the contract with Anderson Consulting and thereby satisfied all of the conditions for activation of

the rate plan conditionally approved in the May 12, 1995 order.



       On appeal, the Consumer Advocate presents ten issues for review. Only those which

relate to the May 3, 1996, order will be considered.



       The appellant’s fourth, fifth, sixth and seventh issues are:


                                               -3-
       IV.     The commission’s action violated statutory provisions,
       was asked upon unlawful procedure, was arbitrary and
       capricious, or was clear error when it took judicial notice of a
       report prepared by a consultant of UCG.

       V.      The Consumer Advocate was denied an opportunity to
       be heard as to the propriety of taking judicial notice of the
       report.

       VI.     The Consumer Advocate division was not notified of
       the material noticed and afforded an opportunity to contest and
       rebut the facts or material so noticed.

       VII. A decision of the Tennessee Public Service Commission
       is void or voidable when agency members receive aid from staff
       assistants, and such persons received ex parte communications
       of a type that the administrative judge hearing officer or agency
       members would be prohibited from receiving, and which furnish,
       augment, diminish or modify the evidence in the record in
       violation of Tenn. Code Ann. § 4-5-304(b).


At a hearing before the Commission on February 3, 1996, the following occurred:

       Mr. Irion: We have the independent consultant here. Does the
       Commission on wish to hear from him?

       Chairman: I think what we have agreed to is just summarize his
       testimony.

       Mr. Williams: He has not made any testimony, and --

       Mr. Irion: He has only filed a report, and he is not technically
       our witness or --

       Mr. Williams: I think he is their witness. They chose him and
       paid for him. We did not have any choice. The Consumer
       Advocate was not given any choice in the matter who was
       going to be the witness.

       Chairman: The Commission can take judicial notice of that, that
       record. That’s our record.

       Com. Hewlett: This is our consultant.

       Mr. Hal Novak: That’s correct, sir. The Commission staff chose
       this consultant.

       Chairman: We can take judicial notice of that and it can referred
       to in your argument here.

       Mr. Williams: I would say that the Commission staff approved
       the consultant after the company selected the consultant.


                                       -4-
              Mr. Novak: That’s not true, sir.

              Chairman: Well, now wait a minute now, fellows. We can take
              judicial notice, and will take judicial notice of all our records
              and reports like that to the Commission and you can refer to
              that in your argument.

              Mr. Williams: What I would also like to do, Commissioner,
              maybe we need to have a longer period of time. I would like
              to know what the staff’s position -- it was indicated that the
              staff had a position that the rule operated effectively, that the
              Commissioners had obviously heard and were considering. I
              would like disclosure under the statute of the staff’s position
              on why they think that it operates correctly.

              Com. Hewlett: Well, that would be in my way of thinking not
              impossible to get into the record, but very difficult it is most
              appropriate, as I understand the law, for us to discuss with
              our technical staff. That’s the reason that the Consumer
              Advocate Division was created because of the ex parte
              concerns of when our staff were parties to the case and when
              they are not. Our staff, as I understand it, it not a party to
              this case, and they are a resource for us for analyzing anything
              that is before this Commission. In this case this situation. So, I
              think you are trying to make a party to the case somebody that
              is not.

              Mr. Williams: No, sir, what we are trying to do is get all the
              salient information on the record. The statute explicitly, the
              UAPA explicitly requires that the Commission disclose
              when it has any of the position papers that are presented by
              the staff, and the Public Records Act does not prevent the
              disclosure of those items either.

              Chairman: We will rule on that at the beginning of the meeting
              at 1:30.

              Mr. Williams: Okay.

              Chairman: Well, we will evaluate that with our legal counsel,
              and rule on it before issuing an order or in the order in this
              manner.



       The record of proceedings clearly indicates that the Commission considered a report of an

expert despite the objections of the Consumer Advocate and his efforts to impeach the report by

cross-examination of the expert. T.C.A. § 65-2-109(1) and (2), authorize the consideration of a

broad spectrum of evidence. However, no authority is cited to empower the Commission to

deny a protesting party access to all evidence considered by the Commission and opportunity to

                                                 -5-
impeach it by cross-examination of the origin of such evidence.



       The issue of consideration of documents and/or communications is not an issue of

“judicial notice” or “administrative notice,” but an issue of admissibility of evidence and

procedural fairness in respect to notice of the matter to be considered and opportunity to cross-

examine, or impeach the source or contradict the evidence to be considered.



       It is elementary that administrative agencies are permitted to consider evidence which, in

a court of law, would be excluded under the liberal practice of administrative agencies. Almost

any matter relevant to the pending issue may be considered, provided interested parties are given

adequate notice of the matter to be considered and full opportunity to interrogate, cross-examine

and impeach the source of information and to contradict the information.



       No error is found in the consideration of informal forms of communication. However,

error is found in the failure to give timely notice of the communication with opportunity to

question, cross-examine and impeach the source and contradict the information.



       As illustrated by the above quotation from the record, the Commission was unfamiliar

with basic rules of fairness in an administrative hearing.

               Tenn. Code Ann. § 4-5-312(b)
               Procedure of hearing. To the extent necessary for full
               disclosure of all relevant facts and issues, the administrative
               judge or hearing officer shall afford to all parties the
               opportunity to respond, present evidence and argument,
               conduct cross-examination, and submit rebuttal
               evidence, as restricted by a limited grant of intervention or
               by the pre-hearing order. (Emphasis added.)

               Tenn. Code Ann. § 4-5-313(6)
               Parties must be notified before or during the hearing, or
               before the issuance of any initial or final order that is based
               in whole or in part on facts or material noticed, of the
               specific facts or material noticed and the source thereof,



                                                -6-
               including any staff memoranda and data, and be afforded an
               opportunity to contest and rebut the facts or material so
               noticed.

               Tenn. Code Ann. § 4-5-304(a)(b)
               Ex parte communications.
               (a) Unless required for the disposition of ex parte matters
               specifically authorized by statute, an administrative judge,
               hearing officer or agency member serving in a contested
               case proceeding may not communicate, directly or indirectly,
               regarding any issue in the proceeding, while the proceeding
               is pending, with any person without notice and
               opportunity for all parties to participate in the communi-
               cation.
               (b) Notwithstanding subsection (a), an administrative judge,
               hearing officer or agency member may communicate with
               agency members regarding a matter pending before the
               agency or may receive aid from staff assistants, members of
               the staff of the attorney general and reporter, or a licensed
               attorney, if such persons do not receive ex parte communi-
               cations of a type that the administrative judge, hearing
               officer or agency members would be prohibited from
               receiving, and do not furnish, augment, diminish or
               modify the evidence in the record. (Emphasis added.)



       This Court concludes that the Commission commited a violation of basic principles of

fairness in failing to afford the Consumer Advocate reasonable access to the materials to be

considered and reasonable opportunity to cross-examinate or otherwise impeach the origin of

such materials..



       For the foregoing reasons, the order entered by the Public Service Commission on May 3,

1996, is reversed, vacated, and the cause is remanded to the Tennessee Regulatory Authority for

such further proceedings and actions as it may deem appropriate including a reconsideration of

the subject of the May 3, 1996, order of the Public Service Commission.



       Should the Regulatory Authority reach a conclusion different from that expressed in the

May 3, 1996, order of the Commission, the way may be opened for a further consideration of the

subject matter of the May 26, 1995, order, in which event the authority will be free to examine

the merits of the order and the proposal dealt with therein.

                                               -7-
       Of particular interest and concern are the propriety of omitting certain income from

considering “fair return,” of “rewarding” utility for keeping its expenses at the minimum, and of

utilizing the services of an expert employed by the utility. These issues have not been discussed

in this opinion because of the limitation of the scope of the appeal granted by this Court.



       Costs of this appeal are assessed against the Tennessee Regulatory Authority.



                            REVERSED AND REMANDED.



                                      _____________________________________
                                      HENRY F. TODD
                                      PRESIDING JUDGE, MIDDLE SECTION


CONCUR:


_____________________________________
BEN H. CANTRELL, JUDGE


_____________________________________
WILLIAM C. KOCH, JR., JUDGE




                                               -8-
