Opinion ID: 2551972
Heading Depth: 3
Heading Rank: 2

Heading: Residential Access Fee

Text: {96} PNMGS collects rates from residential customers through a fixed customer service charge, known as a residential access fee, and a variable commodity charge, which reflects an individual customer's gas usage based on a specified per-therm charge. A residential access fee is intended to cover customer costs that exist regardless of whether the customer uses gas and independent of the amount of usage by any particular customer. See Phillips, supra, at 431 (describing customer costs as including a portion of the distribution system, local connection facilities, metering equipment, meter reading, billing, and accounting). Under the rate structure in existence at the time PNMGS filed for an increase in rates, PNMGS's rates were designed with a $9.00 residential access fee. In petitioning the Commission to increase rates, PNMGS proposed a change in rate structure that would increase the residential access fee by 11%, from the existing charge of $9.00 to $10.00. PNMGS's expert witness, Johnny Ray Johnson, testified that full customer cost of service for monthly service charges would be over $17.00 and that the $1.00 requested increase represents a gradual movement toward full cost of service rates. Aside from this brief testimony, PNMGS introduced no other evidence supporting the increased residential access fee. {97} The Attorney General specifically opposed an increase in the residential access fee. The Attorney General's expert, Mr. Ruback, testified that he believed that PNMGS's rate structure should not include a residential access fee because it is anti-conservation. A fixed portion of a customer's bill eliminates the ability of the customer to control his [or her] bill and a higher charge reduces the commodity rate, thereby encouraging ... [a] wasteful use of energy. See generally Washington Gas Light, 450 A.2d at 1208 (The higher the marginal cost of gas to the consumer (the commodity charge), the greater the incentive to reduce energy waste or to shift to lower cost energy sources.). Mr. Ruback testified that a fixed monthly service charge was also detrimental to competition in the utility industry. As an alternative to eliminating the monthly service charge, Mr. Ruback advocated that the charge should be reduced from $9.00 to $7.25. Mr. Ruback testified that, while PNMGS does have a certain level of customer costs, Commissions have established a longstanding practice of pricing customer charges below the level of customer costs ... [because of] public acceptability, which is a valid rate design [criterion]. In accordance with this longstanding practice, the $10.00 access fee proposed by PNMGS would have been higher than the customer service charge of nineteen utilities in this region of the country. Additionally, Mr. Ruback testified that, if a customer service charge were to be designed to recover full customer costs, those costs should only include the direct costs attributable to billing, collection, meters, and services.... I do not believe that indirect costs such as Administrative and General Expenses and General Plant should be considered direct costs because these indirect costs do not vary directly with the number of customers on the system. See generally Phillips, supra, at 431 (stating that customer costs vary with the number of customers). Mr. Ruback explained that his proposed service charge of $7.25 reflected a full cost of service for all direct customer costs, and he contended that [a]n additional increase of $1.00 [over the existing $9.00 fee] is entirely unjustified on a cost basis. PNMGS introduced no rebuttal testimony in response to the Attorney General's evidence. {98} The hearing examiner recommended retaining the existing residential access fee since a rate decrease is called for in this case. The Commission, despite ordering a decrease in rates significantly larger than the hearing examiner's, ordered an increase in the residential access fee of over 60%, from $9.00 to $14.56. The Commission's only explanation for such a dramatic increase in the residential access fee was the comment of several members of the public in a separate proceeding about negative feelings toward high winter bills in comparison with summer bills caused by a lower fixed service charge and a higher per-therm charge. Although the Commission concedes that these comments are not properly considered as evidence in this case, the Commission took administrative notice of the comments for purposes of redesigning the access fee to collect 80% of overall cost of service. The Attorney General and PNMGS contend on appeal that the Commission's dramatic departure from the existing $9.00 residential access fee is unsupported by substantial evidence. We agree. {99} We acknowledge that the Commission has considerable discretion in the area of rate design. We also assume that the Commission, in exercising its expert judgment and in making public policy decisions necessarily implicated by rate design, may rely in part on public commentary in its task of evaluating the evidence in the record and formulating a proper rate structure. Nevertheless, the Commission cannot rely on its own expert judgment, regardless of the source of that judgment, as a substitute for evidence in the record. In this case, the Commission purported to be acting in response to customer dissatisfaction with a low residential access fee. However, the only evidence in the record concerning customer response to service charges came from Mr. Ruback, who testified that utility commissions typically set customer charges below customer costs because a service charge is widely misunderstood and often resented by customers. Cf. Washington Gas Light, 450 A.2d at 1201. Without substantial evidence in the record, we reject customer dissatisfaction as a basis for the Commission's action. {100} PNMGS proposed an increase in the residential access fee in order to move in the direction of a service charge reflecting full customer costs. Although PNMGS bore the burden to prove the reasonableness of its entire rate structure, Otero County Elec. Coop., 108 N.M. at 465, 774 P.2d at 1053, PNMGS introduced no evidence that a rate design that recovers a service charge reflecting full customer costs is just and reasonable. Specifically, there is no evidence in the record to refute Mr. Ruback's testimony that a higher residential access fee has a negative impact on both conservation and competition, both of which are relevant rate design factors, or to refute the evidence that establishes that the Commission's $14.56 access fee greatly exceeds the customer service charge for nineteen utilities in the region. See Mountain States, 90 N.M. at 339, 563 P.2d at 602 (listing factors appropriately considered in rate design, such as cost of service, existence of competition, and comparison with other rates in other geographic areas); see also Washington Gas Light, 450 A.2d at 1203 (discussing conservation); Central Hudson Gas & Elec. Corp. v. Public Serv. Comm'n, 447 U.S. 557, 571, 100 S.Ct. 2343, 65 L.Ed.2d 341 (1980) (same); Phillips, supra, at 410-11 (same). We have previously discouraged the use of cost of service as a sole criterion in designing rates, Mountain States, 90 N.M. at 339, 563 P.2d at 602, and we reject the Commission's attempt to do so in this case without a basis in the record. {101} In any event, even assuming that the Commission had relied on Mr. Johnson's testimony concerning full cost of service recovery and Mr. Ruback's testimony that [t]here is no rate design [criterion] or regulatory requirement that the customer charge recover a specific level of [customer] costs, there is no indication from the Commission's order that the Commission relied on a full customer cost model. The Commission's order states that the Commission decided in this case to design rates which collect eighty percent of the cost of service allocated to the residential classes through an `access fee' that will be charged to every residential consumer monthly, regardless of consumption. It is clear from the Commission's calculations that the Commission's reference to cost of service referred to overall cost of service, including both customer costs and commodity costs. [10] Even if the Commission had accepted Mr. Johnson's proposed full cost of service for all customer costs over Mr. Ruback's proposed full cost of service for only direct customer costs, no witness in this case testified that it would be appropriate to establish a rate design for a customer service charge based on a utility's overall cost of service. Without a basis in the record, we reject the Commission's attempt to design a customer service charge based on overall cost of service instead of customer cost of service. {102} Finally, we note that the generally accepted rate-making principles for the development of a sound rate design include continuity and stability. United States v. Public Utils. Comm'n, 635 A.2d 1135, 1143 (R.I.1993); accord Phillips, supra, at 410. The Commission has previously adhered to the principle of gradualism in establishing rate structures for public utilities in this State, and the Commission stated in its final order that the guiding principle of rate design is to set rates which will move the relative rate of return of each end-use class closer to unity, or full cost of service contribution, in a gradual manner that avoids rate shock. (Emphasis added.) Indeed, PNMGS's proposal of a $1.00 increase was intended to represent a gradual movement toward a full customer cost of service access fee. There is no testimony in the record concerning the effect that an unusually high access fee would have on consumers. Thus, by increasing the residential access fee by over 60%, we believe the Commission improperly overlooked the potential that a dramatic shift in rates for residential consumers would cause rate shock, and the Commission thereby violated the fundamental rate-design principle of stability in rates. We therefore conclude that the Commission's residential access fee of $14.56 is not supported by substantial evidence in the record.