Opinion ID: 2551972
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Heading Rank: 2

Heading: General Principles Implicated in a Rate Case

Text: {5} In the context of a general rate case, the Legislature has delegated exclusive authority to the Commission to set the rates charged by PNMGS. See NMSA 1978, § 62-6-4(A) (1996, repealed effective July 1, 2003). The Commission is vested with considerable discretion in determining the justness and reasonableness of utility rates. Attorney Gen., 101 N.M. at 553, 685 P.2d at 961; accord NMSA 1978, § 62-8-7 (1991, prior to 1998 amendment, repealed effective July 1, 2003). {6} Generally, the Commission establishes a utility's rates based on the utility's revenue requirement, which is determined through an assessment of a number of different factors. The traditional elements of the rate-making process and the establishment of the total revenue requirement are (1) determination of the costs of the operation, (2) determination of the rate base which is the value of the property minus accrued depreciation, and (3) determination of the rate of return. Hobbs Gas Co. v. New Mexico Pub. Serv. Comm'n, 94 N.M. 731, 733, 616 P.2d 1116, 1118 (1980). The ratemaking process is prospective in nature in that [p]ast deficits may not be made up by excessive charges in the future nor may past profits be reduced by disallowances to future operating expense. Mountain States Tel. & Tel. Co. v. New Mexico State Corp. Comm'n, 90 N.M. 325, 341, 563 P.2d 588, 604 (1977) (quoted authority omitted); accord Behles v. New Mexico Pub. Serv. Comm'n (In re Application of Timberon Water Co.), 114 N.M. 154, 161, 836 P.2d 73, 80 (1992). The setting of rates thus requires a certain amount of prediction by the Commission concerning a utility's future revenue requirement. Although there is no way of learning precisely what it will cost to render any particular service, Mountain States, 90 N.M. at 338, 563 P.2d at 601, the Commission attempts to predict with reasonable accuracy a utility's future operating costs by utilizing a test-year method. Under the historical test-year method employed by the Commission in this case, the Commission evaluates a utility's operating costs for a specified preceding twelve-month period and uses the utility's past experience as a guide to the utility's future revenue requirement. See Charles F. Phillips, Jr., The Regulation of Public Utilities 188 (2d ed.1988). {7} Because of the level of complexity involved in setting rates and the number of variables at issue in every rate proceeding, the Commission is not bound to the use of any single formula or combination of formulae in determining rates. The ratemaking function involves the making of pragmatic adjustments. It is the result reached, not the method employed, which is controlling. Mountain States, 90 N.M. at 338, 563 P.2d at 601, quoted in Hobbs Gas Co., 94 N.M. at 734, 616 P.2d at 1119; accord State ex rel. Sandel v. New Mexico Pub. Util. Comm'n, 1999-NMSC-019, ¶ 15, 127 N.M. 272, 980 P.2d 55. Within this flexible framework, the Commission must balance the interest of consumers and the interest of investors ... to the end that reasonable and proper services shall be available at fair, just and reasonable rates, and to the end that capital and investment may be encouraged and attracted so as to provide for the construction, development and extension, without unnecessary duplication and economic waste, of proper plants and facilities for the rendition of service to the general public and to industry. NMSA 1978, § 62-3-1(B) (1967, repealed effective July 1, 2003). {8} Ultimately, the Commission must ensure that rates are neither unreasonably high so as to unjustly burden ratepayers with excessive rates nor unreasonably low so as to constitute a taking of property without just compensation or a violation of due process by preventing the utility from earning a reasonable rate of return on its investment. See NMSA 1978, § 62-8-1 (1953, repealed effective July 1, 2003) (Every rate made, demanded or received by any public utility shall be just and reasonable.); see also General Tel. Co. v. Corporation Comm'n (In re Application of General Tel. Co.), 98 N.M. 749, 753, 652 P.2d 1200, 1204 (1982) ([T]he failure of [a utility commission] to provide rates that will give the company a reasonable rate of return constitutes a violation of due process and a taking of property without just compensation.). A reasonable rate of return is one that provides a fair opportunity for the utility to receive just compensation for its investments, Mountain States, 90 N.M. at 334, 563 P.2d at 597, and that fulfills the statutory goal in Section 62-3-1(B) of enabling the utility to attract new capital to maintain, improve, and expand its services in response to consumer demand. Phillips, supra, at 170. There is a significant zone of reasonableness ... between utility confiscation and ratepayer extortion. Behles, 114 N.M. at 161, 836 P.2d at 80. {9} Although [t]he Commission is vested with considerable discretion in determining whether a rate to be received and charged is just and reasonable, Hobbs Gas Co., 94 N.M. at 733, 616 P.2d at 1118, and the Commission must have the ability... to adapt to changes in circumstances in the rate-making determination from one year to the next, id. at 736, 616 P.2d at 1121, the Commission is not free to disregard its own rules and prior ratemaking decisions or to change its position without good cause and prior notice to the affected parties. Hobbs Gas Co. v. New Mexico Pub. Serv. Comm'n, 115 N.M. 678, 681, 858 P.2d 54, 57 (1993). In this context, we apply a five-factor balancing test, articulated in Retail, Wholesale & Department Store Union v. NLRB, 466 F.2d 380, 390 (D.C.Cir.1972), to determine whether an agency's change from a prior position may be applied retroactively: (1) whether the particular case is one of first impression, (2) whether the new rule represents an abrupt departure from well established practice or merely attempts to fill a void in an unsettled area of law, (3) the extent to which the party against whom the new rule is applied relied on the former rule, (4) the degree of the burden which a retroactive order imposes on a party, and (5) the statutory interest in applying a new rule despite the reliance of a party on the old standard. Retail, Wholesale, 466 F.2d at 390, quoted in Hobbs Gas Co., 115 N.M. at 682, 858 P.2d at 58. {10} If we determine under the applicable standard of review that the Commission's order in a rate proceeding is unlawful or unreasonable, we have no power to modify the action or order appealed from; instead, we must vacate and annul the order en toto. NMSA 1978, § 62-11-5 (1982, repealed effective July 1, 2003). However, we are not precluded from declaring or determining that parts of a Commission order are unlawful and/or unreasonable (which requires vacating and annulling en toto) but at the same time declaring other parts of the order to be reasonable and lawful. Hobbs Gas Co., 115 N.M. at 680, 858 P.2d at 56. With these general principles in mind, we turn to the specific issues presented by PNMGS on appeal.