Opinion ID: 2551972
Heading Depth: 3
Heading Rank: 1

Heading: Rate Rider 8 Discounts

Text: {28} In Case No. 2340, the Commission addressed the proper interpretation and implementation of the stipulation concerning PTOP costs adopted in Case No. 2183. The Commission established a tariff mechanism, labeled Rate Rider 8, that would allow PNMGS to recover the ratepayers' 75% portion of PTOP costs incurred by PNMGS. In accordance with the stipulation in Case No. 2183, the Commission applied the Rate Rider 8 take-or-pay surcharge to all customer classes. {29} PNMGS has both transportation customers, who buy from PNMGS the service of transporting through PNMGS's gas pipelines natural gas purchased by the transportation customer from a different supplier, see NMSA 1978, § 62-6-4.1 (1993, repealed effective July 1, 2003) (providing for the contract carriage of natural gas), and sales customers, who buy natural gas directly from PNMGS. See generally NMSA 1978, § 62-8-4 (1941, repealed effective July 1, 2003) ([E]very utility shall have the right to make reasonable classifications of its users). PNMGS's transportation customers tend to be industrial or large commercial natural gas users, compared to the mainly residential and small commercial customers comprising the class of sales customers. {30} Under the Rate Rider 8 tariff, PNMGS recovers the ratepayer portion of PTOP costs from both sales customers and on-system transportation customers, meaning those transportation customers within PNMGS's service area. Because the gas transportation market is highly competitive, however, the Commission, in Case No. 2340, adopted the hearing examiner's recommendation that PNMGS be allowed to discount the Rate Rider 8 surcharge for transportation customers in order to provide an incentive to continue purchasing transportation service from PNMGS. The Commission determined that the granting of prudent Rate Rider 8 discounts would be more beneficial to PNMGS and ratepayers generally in terms of revenue and increased load than the loss of transportation customers to competitors of PNMGS. Additionally, the loss of a transportation customer and that customer's contribution to Rate Rider 8 would result in an increase of other customers' contribution to Rate Rider 8 in order to fully satisfy ratepayers' 75% contribution to recovery of take-or-pay costs. The decision to allow PNMGS to discount Rate Rider 8 surcharges for on-system transportation customers was consistent with the Commission's existing policy to allow cost-of-service discounts in negotiating on-system and off-system transportation rates provided that the discounted rate is above the variable cost of service. {31} In Case No. 2340, the Commission noted that it is uncontested that [PNMGS] should be allowed to recover the discounts; it is the manner of recovery that is at issue. The Commission determined that requested recovery of Rate Rider 8 discounts should be reviewed in general rate proceedings, such as the present case, and that the Commission will treat the discounts in the same manner as discounts for transportation rates. {32} Relying on the Commission's approval in Case No. 2340, PNMGS began granting Rate Rider 8 discounts to transportation customers in July 1992. In the present proceeding, PNMGS sought to recover actual Rate Rider 8 discounts granted from July 1992 through the end of the test period in the amount of $5,374,665. [2] PNMGS contended that the Commission should review Rate Rider 8 discounts under a general prudence standard and that all of the discounts were reasonable. {33} The hearing examiner accepted the positions of Staff and the Attorney General that Rate Rider 8 discounts should be evaluated under a cost/benefit test instead of PNMGS's proposed test of prudence. However, the hearing examiner modified the cost/benefit test on the basis of rebuttal testimony from PNMGS. Whereas Staff had determined the net benefit of Rate Rider 8 discounts to PNMGS by calculating PNMGS's total revenues from discounted transportation customers, including both on-system and off-system transportation customers, the hearing examiner accepted PNMGS's position that a net benefit should be determined by assessing revenues associated only with Rate Rider 8, meaning revenues from discounted on-system transportation customers but not revenues from off-system transportation customers. Using this analysis, the hearing examiner concluded that PNMGS should be allowed to recover $3,644,636. {34} The Commission agreed with the hearing examiner that PNMGS's proposed recovery of Rate Rider 8 discounts should be evaluated under a cost/benefit test. However, the Commission rejected the hearing examiner's modified cost/benefit test, and applying Staff's cost/benefit model, the Commission determined that PNMGS had a negative net economic benefit of $109,032 from Rate Rider 8 discounts. Instead of allowing recovery for this amount, the Commission then determined that we are confident that this shortfall in fact was more than made up by PNMGS in the form of discount on-system and off-system revenues received between August 1990 and April 1992. Therefore, the Commission denied any recovery for Rate Rider 8 discounts. {35} On appeal, PNMGS claims that the Commission's use of a cost/benefit test for Rate Rider 8 discounts constitutes the retroactive application of a change in Commission practice without sufficient justification and prior notice. PNMGS also claims that the cost/benefit test applied by the Commission is arbitrary and capricious. {36} We first address PNMGS's contention that the Commission unreasonably departed from prior practice. As discussed above, in determining whether the Commission has engaged in improper retroactive adjudicatory rulemaking, we assess the five factors articulated in Hobbs Gas Co., 115 N.M. at 682, 858 P.2d at 58. PNMGS claims that the Commission established a prudence test for Rate Rider 8 discounts in Case No. 2340 and that it relied on this test to its substantial detriment. PNMGS thus contends that under Hobbs Gas Co. the Commission's action was improper. We agree with the Commission, however, that this issue presents a matter of first impression for the Commission, that its treatment of Rate Rider 8 discounts is consistent with, and a logical extension of, prior Commission practice, and that any reliance on PNMGS's part on a prudence test was not reasonable under the circumstances. {37} In Case No. 2340, the Commission clearly granted PNMGS authority to discount the Rate Rider 8 surcharge for on-system transportation customers; however, the Commission did not establish a prudence standard for the recovery of these discounts. Instead, the Commission determined that Rate Rider 8 discounts would be treated like other transportation discounts, such as cost-of-service discounts. The Commission had previously addressed transportation discounts in Phase I of Case No. 2068. {38} With respect to potential recovery of cost-of-service transportation discounts, the Commission determined in Case No. 2068 that PNMGS would not be foreclosed from seeking recovery but, as a general matter, the utility would bear the burden of absorbing the discounted difference between a negotiated rate and a fully allocated cost-of-service rate. The Commission rejected PNMGS's contention that placing the risk of lost revenues from cost-of-service discounts on the utility would discourage the negotiation of rates, because the potential loss of revenues from a loss of customers to competitors provides a major incentive to negotiate transportation rates. Nonetheless, the Commission determined that the allocation of costs from cost-of-service discounts involves a variety of factors and equities that should be considered, and the Commission left open the possibility of granting recovery for cost-of-service discounts under certain limited scenarios. {39} Based on the Commission's decision in Case No. 2068, Staff's expert, Mr. Roybal, testified that recovery of Rate Rider 8 discounts should similarly be determined based on all factors and equities associated with PNMGS's discounting procedure. Mr. Roybal testified that embedded in [the Case No. 2068 transportation discount] framework is the consideration of the costs and benefits associated with the discount activities of a gas utility. Mr. Roybal further testified that this proceeding presented the Commission with the first request for recovery of any form of transportation discounts, and the Commission therefore had not had the opportunity to refine its remarks concerning transportation discount recovery in Case No. 2068. Staff proposed a cost/benefit test for recovery of Rate Rider 8 discounts in order to further the principles articulated in Case No. 2068 concerning transportation discounts generally. {40} As related by Mr. Roybal's testimony, the proper standard for evaluating recovery of Rate Rider 8 discounts was a matter of first impression before the Commission. The Commission has a duty to ensure that [n]o public utility shall, as to rates or services, make or grant any unreasonable preference or advantage to any corporation or person within any classification. NMSA 1978, § 62-8-6 (1993, repealed effective July 1, 2003). The stipulation in Case No. 2183 provided that ratepayers' portion of PTOP costs would be recovered from all customer classes. Mr. Roybal testified that recovery for PNMGS's actual Rate Rider 8 discounts results in an extreme inequity to the detriment of sales customers and full-tariff transportation customers. Mr. Roybal additionally testified that recovery of discounts through base rates would shift the allocation of PTOP costs contrary to the stipulation in Case No. 2183 and that doing so would improperly place the entire risk of PNMGS discount activities ... upon sales customers and full-tariff transportation customers. The Attorney General's expert, Mr. Ruback testified that PNMGS's methodology, by holding non-discounted ratepayers responsible for 100% of Rate Rider 8 discounts, has the effect of absolving the Company from any discount responsibility. According to Mr. Ruback, [s]ales customers should be spared additional [PTOP] costs. An expert witness for intervenor United States Executive Agencies (USEA), Jatinder Kumar, testified that PNMGS' proposal imposes most of the risks associated with discounts on full rate customers while PNMGS retains the benefits of discounts ... [and] provide[s] PNMGS with economic incentives to maximize profits at the expense of full rate customers. {41} On the basis of the record in this case and the Commission's prior decisions, we believe that the Commission acted reasonably in adopting a cost/benefit test to determine whether the Rate Rider 8 discounts provided a benefit to ratepayers or, instead, only served to place an undue burden on sales customers and non-discounted transportation customers. [3] Under these circumstances, we believe the Commission's adoption of a cost/benefit test was a reasonable response to fill a void in an unsettled area of law. Hobbs Gas Co., 115 N.M. at 682, 858 P.2d at 58. {42} The Commission clearly articulated in Case No. 2340 that recovery of Rate Rider 8 discounts was not guaranteed. Because the Commission indicated that Rate Rider 8 discounts would be treated like other transportation discounts and because PNMGS was aware of the Commission's ruling regarding transportation discounts in Case No. 2068, we believe that PNMGS's reliance on the Commission's application of a prudence test to Rate Rider 8 discounts was unreasonable. PNMGS should have known that the Commission would scrutinize Rate Rider 8 discounts to ensure that there would be no unreasonable discrimination in rates between on-system transportation customers and sales customers through an improper shifting of responsibility for PTOP costs. Thus, we conclude that the Commission's use of a cost/benefit test to evaluate Rate Rider 8 discounts did not constitute improper retroactive adjudicative rulemaking. {43} PNMGS's other contention regarding the Commission's decision to disallow Rate Rider 8 discounts focuses on the form of the cost/benefit test applied by the Commission. PNMGS claims that the Commission acted arbitrarily and capriciously by including off-system discounted transportation revenue as a benefit under the test. We disagree. The purpose of the cost/benefit test was to ensure that recovery of Rate Rider 8 discounts would not unduly burden non-discounted ratepayers and that the risk of discounting the Rate Rider 8 surcharge be equitably distributed between shareholders and ratepayers. {44} In Case No. 2340, the Commission determined that Rate Rider 8 discounts should be evaluated in a general rate case in order to fully examine transportation discounts and determine the amount attributable to Rate Rider 8 and those attributable to cost of service components. Thus, consistent with the different treatment of cost-of-service discounts in Case No. 2068, the Commission clearly intended to separate the evaluation of requested recovery of Rate Rider 8 discounts from cost-of-service discounts. As the hearing examiner in the present proceeding noted, however, Under PNMGS' wrongful position of guaranteed Rate Rider 8 discount recovery, those discounts would carry no risks for PNMGS. Based on this position, PNMGS determined that it was in its best interest to arbitrarily discount Rate Rider 8 costs in their entirety before discounting costs of service rates. Therefore, the Commission cannot determine whether a discount should have been attributed to cost-of-service ... or to Rate Rider 8 costs in this proceeding as contemplated by the Commission in ... Case No. 2340. {45} Mr. Roybal explained the reason for including off-system transportation discounts in the benefit aspect of his analysis: Because rates to sales customers and full-tariff transportation customers are designed to recover total fixed costs of PNMGS, it is Staff's position that the risks of PNMGS' discounting activities are placed on sales customers and full-tariff transportation customers. The benefits associated with all discount activities, including discount off-system transportation agreements, are factors to be considered and included in the analysis to determine the overall costs and benefits associated with PNMGS' discount activities. We believe Mr. Roybal's testimony indicates a concern about PNMGS's failure to differentiate cost-of-service discounts from Rate Rider 8 discounts. {46} With PNMGS's treatment of Rate Rider 8 discounts in relation to cost-of-service discounts in mind, the Commission's decision to include total discounted revenues is understandable. Mr. Ruback summarized the basis of the Commission's decision regarding cost-of-service discounts in Case No. 2068 as follows: If the Company cannot recover these costs from transportation customers, because of such customers' competitive alternatives, they should not be reallocated to captive customers. This is a business risk which investors voluntarily undertake and have been compensated for. We believe the Commission was properly cautious that PNMGS may have been attempting to structure discounts in order to circumvent the recovery criteria established for cost-of-service discounts in Case No. 2068, thereby overstating Rate Rider 8 discounts and resulting in unnecessary and unreasonable shifting of PTOP costs to sales customers. Because cost-of-service discounts are available to off-system transportation customers, we cannot conclude that it was arbitrary and capricious for the Commission to include total discounted transportation revenue in its cost/benefit test in order to ensure that recovery of transportation discounts would not unreasonably shift the risk of discounting to ratepayers. {47} This same rationale, however, does not apply to the Commission's decision to deny recovery of its calculation of a negative net economic benefit of $109,032 based on transportation revenues earned prior to Case No. 2340. Because PNMGS did not begin granting Rate Rider 8 discounts until after Case No. 2340 and did not request rate recovery for cost-of-service discounts negotiated prior to that time, we believe that these transportation revenues are wholly unrelated to PNMGS's request to recover Rate Rider 8 discounts. Thus, although the Commission's cost/benefit test is supported by the record, we conclude that the decision to deny recovery of PNMGS's negative net economic benefit from Rate Rider 8 discounts of $109,032 on this basis was arbitrary and capricious and is not supported by substantial evidence in the record.