Case Title: Office of Pub. Counsel v. Mo. Pub. Serv. Comm'n

Citation: 

Docket Number: SC92964

State: missouri

Court: Missouri Supreme Court

Date: 2013-07-30T00:00:00Z

Document:
SUPREME COURT OF MISSOURI 
en banc 
 
OFFICE OF THE PUBLIC COUNSEL, 
) 
 
 
 
 
 
 
 
) 
 
 
Appellant, 
 
 
 
) 
 
 
 
 
 
 
 
) 
vs. 
 
 
 
 
 
 
) 
No. SC92964 
 
 
 
 
 
 
 
) 
MISSOURI PUBLIC SERVICE 
 
 
) 
COMMISSION and  
 
 
 
) 
ATMOS ENERGY CORPORATION,  
) 
 
 
 
 
 
 
 
) 
 
 
Respondents. 
 
 
) 
 
Appeal from the  
Missouri Public Service Commission 
 
Opinion issued July 30, 2013 
 
 
The Office of Public Counsel (OPC) appeals from an order entered by the 
Missouri Public Service Commission (PSC) rejecting the PSC staff’s proposed actual 
cost adjustment disallowances regarding Atmos Energy Corporation’s transactions with 
its affiliate.  This Court reverses.  
 
When a regulated gas corporation such as Atmos Energy engages in a business 
transaction with an affiliated entity, it is required to abide by the affiliate transaction rules 
set forth in the Missouri Code of State Regulations. 4 CSR 240-40.015-40.016.  Due to 
the inherent risk of self-dealing, the presumption of prudence utilized by the PSC when 
reviewing regulated utility transactions should not be employed if a transaction is 
between a utility and the utility’s affiliate.   
 
Because the PSC reviewed the transaction between Atmos and its affiliate through 
the lens of the presumption of prudence, its order is unlawful and unreasonable.  
Accordingly, the order is reversed and the case remanded to the PSC for further review 
consistent with this opinion.    
I.  
FACTUAL AND PROCEDURAL BACKGROUND 
 
In 2007 and 2008, Atmos Energy Corporation operated as the largest natural-gas-
only distributor in the United States.  As a local distributing company, Atmos does not 
produce its own gas and does not purchase gas directly from producers.  Instead, Atmos 
contracts with independent gas marketing companies to purchase natural gas.  Atmos 
then delivers the purchased gas to customers through its local pipelines.     
Atmos is subject to regulation as a gas corporation and public utility by the 
Missouri Public Service Commission (PSC).  See § 386.020; § 386.250; chapter 393.1  
The PSC is a state agency established to regulate public utilities operating within the 
state.  Pursuant to the statutory provisions in chapter 393, the PSC has jurisdiction over 
the rates and charges that Atmos imposes on its Missouri customers.2 
In addition to the basic amount Atmos charges its customers under its published 
rate, Atmos also is permitted to charge its customers for additional costs it has incurred 
when the price it pays its suppliers for gas increases.  These additional charges are 
recovered through a two-part mechanism known as a purchased gas adjustment/actual 
cost adjustment process (PGA/ACA).  In the PGA portion of this process, a utility such 
                                             
 
1 All Missouri statutory references are to RSMo 2000 unless otherwise indicated. 
2 In 2012, Atmos sold its Missouri assets to Liberty Utilities. 
as Atmos files annual tariffs in which it estimates its costs of obtaining gas over the 
coming year.  The PGA amounts are then included in the customers’ bills over the 
ensuing 12 months.  Because it is difficult to estimate the projected changes in cost 
precisely, the utility then files for an adjustment, or ACA, if its actual cost is different 
than projected in its PGA filing.  This ACA allows the PSC to correct any discrepancies 
between the costs billed and the costs actually incurred.  When an ACA is received, the 
PSC staff audits the utility’s gas purchases made during the ACA period in question.  As 
part of the review, the staff evaluates whether the rates paid by consumers for natural gas 
sold during the period were “just and reasonable.” § 393.130.1.  The PSC then takes the 
staff’s audit into consideration and ultimately determines the proper ACA amount. 3 
Atmos submitted its 2007-2008 ACA filings to the PSC on October 16, 2008.  
PSC staff audited the ACA filing by reviewing and analyzing the billed revenues and 
                                             
 
3 The PSC adopted the PGA/ACA rate mechanism pursuant to its broad power to regulate 
gas utilities, rather than pursuant to a specific statutory directive.  See chapter 393; 4 CSR 
240-13.010(1)(S) (defining “purchased gas adjustment clause”); 4 CSR 240-40.018(1)(B) 
(explaining use of purchased gas adjustment clauses to control financial gains or losses 
associated with gas price volatility).  This Court has not addressed the authority of the 
PSC to utilize the PGA/ACA mechanism as part of its regulation of gas utilities, although 
one court of appeals decision has done so.  See State ex rel. Midwest Gas Users’ Ass’n v. 
Pub. Serv. Comm’n or State, 976 S.W.2d 470 (Mo. App. 1998) (discussing implied 
authorization for use of PGA/ACA mechanism when certain procedural protections are in 
place). Here, as neither party challenges the use of the PGA/ACA mechanism, this Court 
still does not reach that issue. Cf. State ex rel. Util. Consumers’ Council of Missouri, Inc. 
v. Pub. Serv. Comm’n, 585 S.W.2d 41, 46 (Mo. banc 1979) (disapproving electric utility’s 
use of a fuel adjustment clause, which is similar to a PGA mechanism, because automatic 
adjustment clauses were unlawful under statutory scheme then in place); State ex rel. AG 
Processing v. Pub. Serv. Comm’n, 340 S.W.3d 146, 151 (Mo. App. 2011) (approving 
electric utility’s use of fuel adjustment clause, which permitted automatic adjustment for 
actual fuel costs without a full rate hearing, pursuant to legislature’s 2005 enactment of 
section 386.266). 
 
3
actual gas costs for the period of September 1, 2007, to August 31, 2008, for each of 
Atmos’ eight Missouri service areas.  The staff’s review raised concerns regarding 
Atmos’ transactions with Atmos Energy Marketing LLC (“AEM”).     
AEM is a separate, unregulated but affiliated gas marketing company that is 
wholly owned by Atmos.  Between April 2004 and November 2009, Atmos issued 48 
requests for proposals (RFPs) in six other service areas.  Of these 48 RFPs, AEM 
submitted bids in response to 24 and was the winning bidder in six.    
Two of these six winning bids were for supplying gas to the Hannibal area 
operating system during the 2007-2008 ACA period.  As required when taking bids, 
Atmos issued a RFP and interested suppliers submitted confidential bids proposing 
pricing for supplying gas services to Atmos for the Hannibal area.  For the 2007-2008 
ACA period at issue here, Atmos had two overlapping RFP processes; the first covered 
the period April 1, 2007, to March 31, 2008, and the second covered the period April 1, 
2008, to March 31, 2009.  For each period, Atmos sent RFP letters to 56 gas marketing 
companies.   
During the first period, Atmos received only five bids that Atmos said conformed 
to the RFP requirements.  Its affiliate, AEM, submitted the lowest bid at $14,723,472.  
The lowest conforming bid submitted by a non-affiliated gas marketer was for 
$15,069,726, approximately $346,000 higher than AEM’s bid.  During the second period, 
only three suppliers submitted bids that Atmos said conformed to its RFP.  Its affiliate, 
AEM, submitted a bid of $13,947,511.  This bid was approximately $100,000 lower than 
the next lowest bid of $14,049,424.  Atmos awarded AEM both contracts. 
 
4
Staff raised an issue about how the RFP set out certain supply requirements and 
whether AEM’s bid actually conformed to the RFP requirements.  It is uncontested that 
the RFP mandated that all gas supply be “firm and warranted.”  But the RFP process also 
allowed bidders to use either a primary natural gas receipt point or a secondary receipt 
point.  Primary firm delivery is the highest priority gas supply and costs more because 
timely delivery is assured.  Secondary in-path delivery is just below primary firm 
delivery.  The secondary delivery method, though, is still “firm” though less convenient.  
Both forms of delivery are preferred over “interruptible” supply, because the timing of 
supplying interruptible gas may be interrupted if the supplier has an inadequate quantity 
of gas to meet all commitments at a specific time.  Staff contended it was not clear that 
AEM’s bid was for firm rather than interruptible gas because the transaction confirmation 
document that normally specifies “firm” delivery was left blank.  Staff also contended the 
distinction between primary and secondary receipt points was not made clear in the RFP 
bidding, which could have allowed AEM an advantage if it had insider knowledge that 
Atmos was willing to accept a secondary receipt point bid.  Staff contends this gave AEM 
a benefit in the transactions because of its affiliation with Atmos. 
The transactions between a utility such as Atmos and its affiliate are governed by 
the PSC’s affiliate transaction rules.  The rules establish standards for a regulated gas 
utility’s dealings with its affiliated companies.  When acquiring natural gas from an 
affiliate, a regulated local distribution company can compensate its affiliate only at the 
lesser of the gas’ fair market price or the fully distributed cost to the regulated gas 
 
5
company were it to acquire the gas for itself.  4 CSR 240-40.016(3)(A).4  This provision 
is known as the asymmetrical pricing standard.  State ex rel. Atmos Energy Corp. v. Pub. 
Serv. Comm'n of State, 103 S.W.3d 753, 762 (Mo. banc 2003).  
 
Following its audit of the 2007-2008 ACA period, the PSC staff report indicated 
that Atmos had failed to comply with the affiliate transaction rules because it failed to 
properly document the fair market value and fully distributed cost of its transactions with 
AEM.  Staff proposed a disallowance of $308,733 for the Hannibal area, an amount equal 
to the profit AEM earned on that transaction.  
In its filed response to the staff’s recommendation, Atmos disagreed with the 
proposed disallowance and requested a hearing.  The PSC conducted an evidentiary 
hearing on March 23 and 24, 2011, and issued a report and order on November 9, 2011.   
 
In considering whether Atmos complied with the affiliate transaction rules, the 
PSC applied a presumption that Atmos’ gas purchases were prudent and put the burden 
on staff to prove that the purchases from AEM were not prudent.  The PSC determined 
that staff had failed to rebut this presumption, that the fair market price was established 
by Atmos’ bidding process, and that this fair market price was less than the fully 
                                             
 
4 4 CSR 240-40.015 is the general affiliate transaction rule, while 4 CSR 240-40.016 
specifically regulates transactions between regulated gas corporations and affiliated gas 
marketing companies.  Both 240-40.015 and 240-40.016 provide: 
(A) A regulated gas corporation shall not provide a financial advantage to an affiliated 
entity.  For the purposes of this rule, a regulated gas corporation shall be deemed to 
provide a financial advantage to an affiliated entity if –  
1. It compensates an affiliated entity for goods or services above the lesser of –  
A. The fair market price; or 
B. The fully distributed cost to the regulated gas corporation to provide the 
goods or services for itself … 
 
6
distributed cost for Atmos to acquire the gas itself.  Based on this presumption, the PSC 
found compliance with the affiliate transaction rules and rejected staff’s proposed 
disallowances regarding Atmos’ transactions with AEM. 
OPC filed an application for rehearing, which the PSC denied.5  OPC appealed 
and the court of appeals affirmed.  This Court granted transfer pursuant to art. V, sec. 10 
of the Missouri Constitution after opinion by the court of appeals. 
II.  
STANDARD OF REVIEW 
“Pursuant to section 386.510, the appellate standard of review of a [PSC] order is 
two-pronged: ‘first, the reviewing court must determine whether the [PSC]'s order is 
lawful; and second, the court must determine whether the order is reasonable.’”  State ex 
rel. AG Processing, Inc. v. Pub. Serv. Comm’n of State, 120 S.W.3d 732, 734 (Mo. banc 
2003).  The PSC’s order has a presumption of validity, and the burden of proof is on the 
appellant to prove that the order is unlawful or unreasonable.  State ex rel. Sprint 
Missouri, Inc. v. Pub. Serv. Comm’n of State, 165 S.W.3d 160, 164 (Mo. banc 2005).  The 
lawfulness of an order is determined “by whether statutory authority for its issuance 
exists, and all legal issues are reviewed de novo.” AG Processing, 120 S.W.3d at 734.  
“The decision of the [PSC] is reasonable where the order is supported by substantial, 
competent evidence on the whole record; the decision is not arbitrary or capricious or 
where the [PSC] has not abused its discretion.”  State ex rel. Praxair, Inc. v. Missouri 
Pub. Serv. Comm’n, 344 S.W.3d 178, 184 (Mo. banc 2011). 
                                             
 
5 OPC acts as consumers’ advocate and represents the public in utility cases before the 
PSC.  The powers of the OPC are set forth in section 386.710. 
 
7
III.  
ANALYSIS 
 
The OPC argues that the PSC’s order is unlawful and unreasonable in that it 
violates 4 CSR 240-40.016 and is not based on competent and substantial evidence.  The 
order is unlawful, the OPC contends, because the PSC did not adhere to the asymmetrical 
pricing standard rules, which require documentation showing that Atmos charged 
customers the lesser of the fair market price or the fully distributed cost for the gas supply 
acquired from Atmos’ affiliate, AEM.  The OPC claims the order is unreasonable 
because it believes the PSC’s conclusion that Atmos acquired gas supply from AEM at 
the lesser of the fully distributed cost or fair market price is not supported by competent 
and substantial evidence.  This error was contributed to by the PSC’s misreliance on the 
presumption of prudence in reviewing the bid of an affiliate, which OPC says is 
improper.  
A. 
Presumption of Prudence 
The burden is on the gas corporation to prove that the gas costs it proposes to pass 
along to customers are just and reasonable.  § 393.150.2; see also  Matter of Kansas 
Power and Light Co., 30 Mo. P.S.C. (N.S.) 76 (1989) (The gas corporation “has the 
burden of showing its proposed rates are just and reasonable … [and] of showing the 
reasonableness of costs associated with its rates for gas.) 
While the burden of proof rests on the gas corporation, the PSC’s practice has 
been to apply a “presumption of prudence” in determining whether a utility properly 
incurred its expenditures.  The presumption of prudence is not a creature of statute or 
regulation.  It first was recognized by the PSC in Matter of Union Electric, 27 Mo. P.S.C. 
 
8
(N.S.) 183 (1985) and has been applied by it since that point.  
Under the presumption of prudence, a utility’s costs “are presumed to be prudently 
incurred. ... However, the presumption does not survive a showing of inefficiency or 
improvidence” that creates “serious doubt as to the prudence of an expenditure.”  Id. at 
193, quoting Anaheim, Riverside, Etc. v. Fed. Energy Reg. Com’n, 669 F.2d 799, 809 
(D.C. Cir. 1981).  If such a showing is made, the presumption drops out and the applicant 
has the burden of dispelling these doubts and proving the questioned expenditure to have 
been prudent.  Id.  
The Missouri court of appeals has applied the presumption of prudence in 
numerous cases involving non-affiliated companies.  See, e.g., State ex rel. Assoc. 
Natural Gas Co. v. Public Serv. Comm’n, 954 S.W.2d 520 (Mo. App. 1997).  It also has 
applied it in one case involving affiliated companies, simply stating without any analysis 
that, “Although UE purchased the CTGs from its affiliates, the commission properly 
presumed that UE was prudent in its purchase of the CTGs.”  State ex rel. Pub. Counsel 
v. Pub. Serv. Comm’n, 274 S.W.3d 569, 582 (Mo. App. 2009).   
This Court has not addressed directly whether the presumption of prudence is 
valid in either affiliate or non-affiliate cases, although it did note its existence, without 
addressing its legitimacy, in dicta in a non-affiliate case, State ex rel. Riverside Pipeline 
Co., L.P. v. Pub. Serv. Comm’n of State, 215 S.W.3d 76, 85 (Mo. banc 2007).  Riverside 
upheld a stipulation between the PSC and certain energy companies that precluded 
prudence review by the PSC. 
 
The OPC agrees that a presumption of prudence is appropriately applied in arms-
 
9
length transactions, and this Court concurs.  When dealing at arms-length, there is a 
diminished probability of collusion and the pressures of a competitive market create an 
assumption of legitimacy.  
OPC argues, however, that a presumption that a transaction was agreed to 
prudently should not apply to affiliate transactions because of the greater risk of self-
dealing when contracting with an affiliate.  This Court again agrees.  As noted in the 
report of a Congressional staff investigation of the particularly egregious affiliate 
dealings between Enron and its pipeline subsidies in the wake of Enron’s collapse: 
[W]henever a company conducts transactions among its own affiliates there 
are inherent issues about the fairness and motivations of such transactions. 
… One concern is that where one affiliate in a transaction has captive 
customers, a one-sided deal between affiliates can saddle those customers 
with additional financial burdens.  Another concern is that one affiliate will 
treat another with favoritism at the expense of other companies or in ways 
detrimental to the market as a whole. 
 
Staff of Senate Comm. on Gov’t Affairs, 107th Cong., Committee Staff Investigation of 
the Federal Energy Regulatory Commission’s Oversight of Enron 26, n.75 (Nov. 12, 
2002); see also Judy Sheldrew, Shutting the Barn Door Before the Horse Is Stolen: How 
and Why State Public Utility Commissions Should Regulate Transactions Between A 
Public Utility and Its Affiliates, 4 NEV. L.J. 164, 195 (2003).   
This greater risk inherent in affiliate transactions arises because agreements 
between a public utility and its affiliates are not “made at arm’s length or on an open 
market.  They are between corporations, one of which is controlled by the other. As such 
they are subject to suspicion and therefore present dangerous potentialities.”  Pac. Tel. & 
Tel. Co. v. Pub. Utils. Comm’n, 215 P.2d 441, 449 (Cal. 1950) (Carter, J., dissenting). 
 
10
Indeed, as the PSC acknowledged in State ex rel. Atmos Energy Corp. v. Pub. 
Serv. Comm’n of State, 103 S.W.3d 753, 763-64 (Mo. banc 2003), the affiliate transaction 
rules were adopted in response to the very kinds of concerns now raised by OPC.  In that 
case, the concern was with a profit-producing scheme among certain public utilities 
termed “cross-subsidization,” through which some utilities would abandon their 
traditional monopoly structure and expand into non-regulated areas.  “This expansion 
[gave] utilities the opportunity and incentive to shift their non-regulated costs to their 
regulated operations with the effect of unnecessarily increasing the rates charged to the 
utilities’ customers.”  Id. at 764.  See also United States v. Western Elec. Co., 592           
F. Supp. 846, 853 (D.D.C.1984) (“As long as a [utility] is engaged in both monopoly and 
competitive activities, it will have the incentive as well as the ability to ‘milk’ the rate-of-
return regulated monopoly affiliate to subsidize its competitive ventures”). 
 
Here, the concern is with an ability to offer a lower bid than one’s competitors 
because of access to inside information about costs and terms and because of an ability to 
shift fixed costs to the regulated utility, thereby allowing the affiliate to bid lower due to 
lower overhead costs.  While this Court does not suggest that there was such conduct 
here, the risk of this conduct and the incentive to undertake it inherently exists in affiliate 
transactions.  
For these reasons, the rationale for permitting a presumption of prudence in arms-
length transactions simply has no application to affiliate transactions.  The PSC enacted 
the affiliate transaction rules in 2000 with the precise purpose of thwarting unnecessary 
rate hikes due to cross-subsidization.  State ex rel. Atmos, 103 S.W.3d at 764.  Those rules 
 
11
require that a utility must show that it paid the lesser of the fair market rate or the fully 
distributed cost to the regulated gas corporation and require that records be kept 
supporting these calculations.  4 CSR 240-40.016(4)(B) (“[T]he regulated gas corporation 
shall document both the fair market price of such … goods and services and the fully 
distributed cost to the regulated gas corporation to produce the … goods or services for 
itself.”) 
The affiliate rules’ stated purpose is to “prevent regulated utilities from 
subsidizing their non-regulated operations … and provide the public the assurance that 
their rates are not adversely impacted by the utilities’ nonregulated activities.”  240-
40.015.  A presumption that costs of transactions between affiliates were prudent is 
inconsistent with these rules. 
For these reasons, the majority of other courts to address the issue have concluded 
that a presumption of prudence should not be applied to affiliate transactions.  In US W. 
Commc’ns, Inc. v. Pub. Serv. Comm’n of Utah, 901 P.2d 270 (Utah 1995), the Supreme 
Court of Utah held that the Utah Public Service Commission correctly placed the burden 
on a telephone provider of proving that the services rendered by its affiliate were not 
duplicative.  In support of its decision, the court remarked; “While the pressures of a 
competitive market might allow us to assume, in the absence of a showing to the 
contrary, that nonaffiliate expenses are reasonable, the same cannot be said of affiliate 
expenses not incurred in an arm's length transaction.”  Id. at 274. 
The Supreme Court of Idaho reached a similar conclusion in Boise Water Corp. v. 
Idaho Pub. Utilities Comm’n, 555 P.2d 163 (1976).  The court refused to make an 
 
12
exception to the rule placing upon the utility the burden of proving reasonableness of its 
operating expenses paid to an affiliate, stating; “The reason for this distinction between 
affiliate and non-affiliate expenditures appears to be that the probability of unwarranted 
expenditures corresponds to the probability of collusion.”  Id. at 169.  See also, Turpen v. 
Oklahoma Corp. Comm’n, 769 P.2d 1309, 1320-21 (Okla. 1988) (“It is generally held 
that, while the regulatory agency bears the burden of proving that expenses incurred in 
transactions with nonaffiliates are unreasonable, the utility bears the burden of proving 
that expenses incurred in transactions with affiliates are reasonable); Michigan Gas 
Utilities v. Michigan Pub. Serv. Comm’n, 206234, 1999 WL 33454925 (Mich. App. Feb. 
9, 1999) (“the utility has the burden of demonstrating that its transactions with its affiliate 
are reasonable”).  This Court concurs.  A presumption of prudence is inconsistent with 
the rationale for the affiliate transaction rules and with the PSC’s obligation to prevent 
regulated utilities from subsidizing their non-regulated operations. 
The PSC counters that it always has recognized a presumption of prudence and 
that this Court cannot read the affiliate transaction rules to negate that presumption in the 
case of affiliated transactions because the affiliate transaction rules themselves state that 
they did not “modify existing legal standards regarding which party has the burden of 
proof in commission proceedings.”  4 CSR 240-40.015(6)(C) & 240-40.016(7)(C). This 
argument is based on a misunderstanding of the concept of burden of proof. 
Missouri law sets out the burden of proof in PSC proceedings.  As noted earlier, 
those statutes provide that a gas corporation has the burden to prove that the gas costs it 
proposes to pass along to customers are just and reasonable.  § 393.150.2.  The PSC has 
 
13
no authority to adopt rules changing the burden of proof set out in the relevant statutes, 
and it was proper for the affiliate transaction rules to note that they did not attempt to do 
so.  See Kanakuk-Kanakomo Kamps, Inc. v. Dir. of Revenue, 8 S.W.3d 94, 98 (Mo. banc 
1999) (A regulation that is beyond the scope of the statute is a nullity). 
A change in the presumption of prudence does not change the burden of proof set 
out in the PSC governing statutes.  The presumption of prudence does not address the 
burden of proof at all.  It sets out an evidentiary presumption created by the PSC.  That 
standard provides that the utility’s expenditures are presumed to be prudent until 
adequate contrary evidence is produced, at which point the presumption disappears from 
the case.  See Deck v. Teasley, 322 S.W.3d 536, 539 (Mo. banc 2010) (discussing general 
law of presumptions).  This presumption affects who has the burden of proceeding, but it 
does not change the burden of proof, which by statute must remain on the utility.6                    
§ 393.150.2.   
Further, the presumption of prudence is not even a creature of statute or of PSC 
regulations or rules.  It was created by PSC case law.  It cannot be applied inconsistently 
with the PSC’s governing statutes and rules.  As discussed above, the application of a 
presumption of prudence to a transaction with an affiliated company is inconsistent with 
the PSC’s statutory and regulatory obligations to review affiliate transactions.  
Accordingly, the presumption of prudence is inapplicable to affiliate transactions. 
                                             
 
6 Although the above analysis is dispositive, it bears noting that the PSC has not 
identified any rule, regulation or decision in which it affirmatively determined prior to the 
adoption of the affiliate transaction rules that the presumption of prudence was applicable 
to affiliate transactions.  For this reason also, AEM’s argument is not well taken.  
 
14
B. 
PSC Order Inappropriately Relied on Presumption of Prudence 
The PSC used the presumption of prudence to shift the burden from Atmos, which 
should have been required to show that it complied with the affiliate transaction rules, 
and instead placed the burden on staff to show that Atmos did not do so.  
The effect of the PSC’s reliance on the presumption of prudence is particularly 
obvious in regard to the PSC’s discussion of what would have been the fully distributed 
cost had Atmos obtained the gas itself rather than going through third parties.  As noted 
earlier, the affiliate transaction rules mandate that a utility shall not provide a financial 
advantage to an affiliated entity.  The utility provides a financial advantage if it 
“compensates an affiliated entity for … goods or services above the lesser of … [t]he fair 
market price … or [t]he fully distributed cost to the [utility] to provide the … goods or 
services for itself.”  4 CSR 240-40.016(3)(A). 
In all transactions that involve the purchase or receipt of goods or services from an 
affiliated entity, the utility must document the fair market value and the fully distributed 
cost, 4 CSR 240-40.016(4)(B),7 and this documentation must be kept in books and 
records with “sufficient detail to permit verification with this rule.”  4 CSR 240-
                                             
 
egulation states in relevant part: 
In transactions that involve either the purchase or receipt of information, 
assets, goods or services by a regulated gas corporation from an affiliated 
entity, the regulated gas corporation shall document both the fair market 
price of such information, assets
7 The r
, goods and services and the fully 
he regulated gas corporation to produce the information, 
0-40.016(4)(B). 
distributed cost to t
assets, goods or services for itself.  
4 CSR 24
 
15
40.016(5)(C)1.8  The rules specifically define what figures must be included in the 
calculation of the fully distributed cost: 
                                             
Fully distributed cost (FDC) means a methodology that examines all costs 
of an enterprise in relation to all the goods and services that are produced.  
FDC requires recognition of all costs incurred directly or indirectly used to 
produce a good or service.  Costs are assigned either through a direct or 
allocated approach.  Costs that cannot be directly assigned or indirectly 
allocated (e.g., general or administrative) must also be included in the FDC 
calculation through a general allocation. 
 
4 CSR 240-40.016(1)(F). 
Due to its reliance on the presumption of prudence, the PSC did not consider 
whether Atmos kept the required books and records and whether Atmos showed that its 
fully distributed costs were higher than the fair market value of the services received 
from its’ affiliate.  Neither did it require Atmos or AEM to produce most of these records 
to staff or OPC. 9  Staff did not have evidence as to how AEM prepared its bid or as to 
the sharing of costs between Atmos and AEM because it had not been able to obtain this 
 
8 The evidentiary requirement requires a regulated gas company maintain the following 
records: 
1. Records identifying the basis used (e.g., fair market price, fully 
distributed cost, etc.) to record affiliate transactions; and 
2. Books of accounts and supporting records in sufficient detail to permit 
verification of compliance with this rule.   
4 CSR 240-40.016(5)(C).  
9  This also led the PSC to not resolve the issue whether Atmos adequately complied with 
the PSC’s order compelling production of certain information in its books and records 
and whether the order went beyond what was required by the affiliate transaction rules.  
In light of the presumption of prudence, the PSC found that this discovery was not 
necessary. Because it is appropriate for the PSC to determine the parties’ disagreement on 
the meaning, effect and compliance with the motion to compel in the first instance in 
light of this Court’s ruling on the inappropriateness of using the presumption of prudence 
in affiliate transactions, this Court does not resolve this issue here but leaves it for the 
PSC to resolve on remand. 
 
16
information.  This led the PSC to reject staff’s proposed disallowance of $308,733 in 
profits because, it found, staff did not offer “any serious argument to suggest that Atmos 
could provide gas-marketing services for itself cheaper if it did not use the services of gas 
market
 on Atmos to keep records that 
would 
 
ing companies.”   
Of course, it was not up to staff to prove a negative.  Whether staff thought the 
cost would have been cheaper if Atmos had not used the affiliate was the not the relevant 
question; the affiliate transaction rules put the burden
allow it to show it would not have been cheaper. 
The PSC notes that staff did not specifically contest what Atmos’ costs of 
providing its own gas marketing services would have been.  OPC, however, did contest 
this issue.  In its initial brief before the PSC, OPC specifically challenged the prudence of 
purchasing gas at a marked-up price from an affiliate rather than by Atmos acquiring the 
gas itself at a similar or lesser cost, stating, “Atmos’ decision to purchase gas through its 
marketing affiliate AEM, rather than by making the gas purchases itself (and avoiding the
AEM profit mark-up) is reason alone to render Atmos’ purchasing decisions imprudent.” 
 
OPC argues that the PSC erred in simply presuming that, because there was a bid 
process, the lowest price bid must have been the lowest fair market value of the gas.  It 
argues that the number of bidders was so low that the bid process was inadequate to 
identify the fair market value of the gas.  OPC also specifically questions whether Atmos 
required AEM to bid for the same service as the other companies to whom Atmos sent an 
RFP in light of staff’s evidence that the agreement between Atmos and AEM left blank 
whether the gas was to be “firm” or “interruptible gas,” whereas other gas-supply 
 
17
agreements between Atmos and non-affiliates specifically identified that firm gas was 
required.  This was an important distinction because, as noted earlier, firm gas 
transportation, for which delivery is guaranteed, is generally more expensive than 
interruptible transportation, for which delivery can be delayed if the pipeline’s capacity is 
comple
d by AEM most certainly would not have reflected the 
ermine the fair market 
value o
o that the PSC can resolve these issues in the first instance based on the proper 
tely in use.   
OPC suggests that if Atmos requested proposals for firm gas transportation with 
the understanding that it would be sufficient if AEM bid the cost of interruptible gas 
transportation, it would have allowed AEM to undercut the other gas marketers’ bids.  If 
this were what happened, the bi
“fair market price” of firm gas.  
 
Similarly, OPC questioned whether the bidding process adequately established the 
fair market price due to the low number of conforming bids submitted by non-affiliated 
gas marketers. In the first RFP, only four non-affiliated gas marketers submitted 
conforming bids; in the second RFP, only two did so (and only if one presumes that they 
all bid on firm rather than interruptible gas). The record does not show whether the PSC 
would have considered this a sufficient response to enable it to det
f the gas had it not relied on the presumption of prudence.   
As with the question of fully distributed costs, due to its reliance on the 
presumption of prudence, the PSC did not develop a sufficient record on these or related 
issues to permit this Court to determine whether Atmos complied with the affiliate 
transaction rules and whether the PSC order is reasonable and lawful.  This Court 
remands s
 
18
 
19
IV. 
in a transaction 
with an
ion of the fully distributed cost.  The PSC’s order is 
reversed, and the case remanded. 
 
 
 
 
 
 
_________________________________  
 
 
 
 
 
     LAURA DENVIR STITH, JUDGE 
ll concur 
 
 
standard. 
CONCLUSION 
The PSC erred in relying upon the presumption of prudence in rejecting staff and 
OPC’s proposed disallowance for Atmos’ Hannibal service area gas costs.  The affiliate 
transaction rules were enacted in an effort to prevent regulated utilities from subsidizing 
their non-regulated activities.  To presume that a regulated utility’s costs 
 affiliate were incurred prudently is inconsistent with these rules.  
The PSC relied heavily on the presumption of prudence in rejecting staff’s 
proposed disallowance.  This error resulted in an order that is unlawful and unreasonable.  
On remand, the PSC again must consider whether Atmos compensated AEM above the 
lesser of the fair market price or the fully distributed cost to Atmos to provide the gas for 
itself.  To satisfy the affiliate transaction rules’ requirements, Atmos must provide 
sufficient asymmetrical pricing documentation as to fair market value, including the 
bidding process, and the calculat
 
  
 
 
 
 
A