Opinion ID: 2551972
Heading Depth: 2
Heading Rank: 4

Heading: Issues Related to Take-or-Pay Costs

Text: {26} Prior to the mid-1980's, it was common for long-term gas purchase contracts to include a take-or-pay clause, which requir[es] the purchaser to take, or failing to take, to pay for the minimum annual contract volume of gas which the producer-seller has available for delivery, 8 Howard R. Williams & Charles J. Meyers, Oil and Gas Law 1069-70 (Patrick H. Martin & Bruce M. Kramer eds., 1999). See 4 id. § 724.5. Because of a decrease in the demand for natural gas and a decline in the price of gas during the 1980's, however, local distribution companies (LDC's), such as PNMGS, attempted to avoid the harsh effects of take-or-pay provisions, and in addition to actions by federal and state regulatory agencies, nationwide litigation arose between gas producers and LDC's. See generally General Motors Corp. v. Public Serv. Comm'n, 87 Md.App. 321, 589 A.2d 982, 983-86 (1991). As a result, PNMGS incurred substantial costs, including costs associated with contract renegotiation, penalties for violating take-or-pay clauses, and expenses incurred in the settlement of litigation, including attorney's fees. These costs became known as producer take-or-pay (PTOP) costs. {27} In a prior proceeding, Case No. 2183, the Commission accepted a stipulation that distributed PTOP costs between ratepayers and PNMGS shareholders. According to the stipulation, shareholders would absorb 25% of the PTOP costs at issue in Case No. 2183, and ratepayers would be responsible for the remaining 75%. The stipulation provided that the portion of PTOP costs recoverable from ratepayers would be collected through a rate rider and would be collected from all customer classes on a volumetric basis. A number of issues raised by PNMGS on appeal relate, either directly or indirectly, to PTOP costs.
{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.
{48} PNMGS sought a three-year amortization of $7,062,261 in reservation fees paid under two gas purchase contracts with Amoco Producing Co. and Conoco, Inc. PNMGS entered into these gas purchase contracts as part of its settlement of price dispute litigation with Amoco and Conoco concerning take-or-pay clauses. As stated by PNMGS's witness, Mr. Christopher, a reservation fee represents the cost to the supplier for reserving gas supplies for the purchaser and is separate from, and significantly less costly than, the market value of the commodity. A reservation fee is intended to guarantee an adequate supply of gas for peak demands with lower cost supplies. {49} In seeking rate recovery of the reservation fees, PNMGS introduced a significant amount of expert testimony that the fees were reasonably and prudently incurred. For example, Mr. Christopher testified that, at the time PNMGS reached an agreement with Amoco and Conoco concerning the reservation of gas, there was a long-term projection of rising demand accompanied by rising prices, prompting PNMGS to seek long-term contracts; however, because prices had reached record lows, producers were reticent to enter into long-term contracts, thereby creating a difficult negotiating environment for PNMGS. Additionally, the contract price of the reservation fees, according to Mr. Christopher, was competitive with bids from similarly situated producers having large reserves for the reservation of winter supplies. Mr. Christopher also testified that the reservation contracts with Amoco and Conoco allowed PNMGS to negotiate more favorable agreements with other producers. {50} Staff and the Attorney General opposed recovery of the reservation fees. Staff's expert, Mr. Roybal, and the Attorney General's expert, Mr. Ruback, testified that, although reservation fees are commonly included in gas purchase contracts and it is difficult to determine the reasonableness of reservation fees, PNMGS's reservation fees under the Amoco and Conoco contracts were unreasonable and excessive. Mr. Ruback testified that the price of reserved gas under the Amoco and Conoco contracts greatly exceeded prices in other gas purchase contracts at that time and exceeded prices to which PNMGS had agreed in other contracts. Mr. Ruback concluded that sufficient gas was available [at the time of the agreement with Amoco and Conoco] so that the Company should not have paid such a high premium for a 3-year contract as opposed to a one or two year contract. {51} According to Mr. Roybal and Mr. Ruback, PNMGS agreed to pay excessive reservation fees to Amoco and Conoco because they served as additional consideration in the settlement of the gas purchase contract disputes involving take-or-pay issues. Mr. Ruback testified that these excessive reservation fees are `residual TOP costs.' At some time the Company must have made the decision that reservation fees would likely be passed through 100% to ratepayers via the PGAC, but if classified as TOP costs, at least 25% would be absorbed by the Company. In other words, Staff and the Attorney General took the position that PNMGS attempted to disguise its PTOP costs as reservation fees in order to circumvent the cost sharing methodology contained in the approved stipulation in Case No. 2183. Thus, Staff and the Attorney General argued that these costs should not be included in PNMGS's revenue requirement. {52} The hearing examiner noted that PNMGS offered at one time to settle the dispute with Amoco and Conoco without any provision for reservation fees. Based on this fact and the testimony of Mr. Ruback and Mr. Roybal, the hearing examiner concluded that [t]he evidence presented in this case is clear. PNMGS has not met its burden of proving by a preponderance of evidence that the reservation fees were just, reasonable and prudently incurred.... The reservation fees were an integral part of PNMGS' settlement of PTOP disputes and carried value in the settlement of those disputes. The hearing examiner recommended against allowing rate recovery of the reservation fees in the present proceeding but did not indicate whether PNMGS should be allowed to seek recovery of the fees as PTOP costs in a separate proceeding under the cost sharing methodology of Case No. 2183. {53} The Commission agreed with the hearing examiner that the reservation fees were not reasonably and prudently incurred. Additionally, the Commission clarified the ambiguity concerning any future attempt to recover the reservation fees as PTOP costs. First, although Case No. 2508, in which PNMGS sought alternative recovery of the reservation fees as a cost of gas, was still pending at the time of the Commission's final order in the instant proceeding, the Commission adopted as part of its final order the hearing examiner's recommendation in Case No. 2508 that the reservation fees are not a cost of gas and consequently not recoverable through PNMGS's purchased gas adjustment clause (PGAC), see Hobbs Gas Co., 115 N.M. at 679, 858 P.2d at 55 (discussing the purpose of a PGAC). Thus, the Commission found that the reservation fees could only be recovered in a general rate proceeding, such as the present case, or as PTOP costs through Rate Rider 8. Second, the Commission determined that because the reservation fees were not prudently incurred they cannot be recovered in base rates in this case. Finally, the Commission determined that PNMGS is foreclosed from seeking ... recovery of the reservation fees as PTOP costs in a separate proceeding. The Commission concluded that PNMGS settled its recovery of PTOP costs associated with the litigation between Amoco and Conoco through a stipulation in Case No. 2503/2521 and that the Commission would not alter that stipulation by allowing Rate Rider 8 recovery of reservation fees. {54} On appeal, PNMGS claims that the Commission's determination that its reservation fees were not prudently incurred is not supported by substantial evidence in the record. Alternatively, PNMGS claims that the Commission's decision to foreclose Rate Rider 8 recovery of the reservation fees was arbitrary and capricious. We will address each of these contentions in turn. {55} With respect to the issue of prudence, we believe PNMGS misperceives the applicable standard of review. PNMGS attempts to buttress its argument by discussing the amount of evidence it introduced before the Commission to show that the reservation fees were prudently incurred. However, we do not question whether substantial evidence supports an alternative conclusion; instead, we must determine whether substantial evidence supports the conclusion reached by the Commission. As discussed above, Staff and the Attorney General introduced expert testimony explaining the basis for their position that the reservation fees were excessive and unreasonable. While PNMGS contends that this evidence improperly relies on hindsight review rather than assessing the circumstances known by PNMGS at the time of its agreements with Amoco and Conoco, we must review the whole record in a light most favorable to upholding the decision of the Commission. We do not believe that PNMGS's evidence renders the expert testimony of Mr. Ruback and Mr. Roybal unworthy of belief or otherwise incredible. See Otero County Elec. Coop. v. New Mexico Pub. Serv. Comm'n, 108 N.M. 462, 465-66, 774 P.2d 1050, 1053-54 (1989) (While we review any evidence that supported [the utility's] position, we use that evidence only to test the credibility of evidence supporting the Commission's decision and reject that decision only if the evidence in support of that decision was rendered incredible.). Thus, we conclude that the Commission's determination that the reservation fees were imprudent is supported by substantial evidence in the record. {56} Nonetheless, we agree with PNMGS that the Commission acted arbitrarily and capriciously by denying PNMGS the opportunity to recover the reservation fees as PTOP costs in a separate proceeding. In order to explain our decision on this issue, it is necessary to more closely scrutinize the stipulation reached in Case No. 2503/2521. In that proceeding, PNMGS did not initially request recovery for the reservation fees in its petition to recover the PTOP costs associated with its litigation with Amoco and Conoco. Although PNMGS attempted to inject the issue of reservation fees in Case No. 2503/2521 in its rebuttal testimony, it voluntarily withdrew this issue following objections by other parties that it exceeded the scope of rebuttal. Thus, at the time the parties agreed to the stipulation, the issue of reservation fees was not an outstanding issue in Case No. 2503/2521. {57} The stipulation in Case No. 2503/2521 explicitly provided: A final order issued by the Commission approving this Stipulation shall not constitute a bar to any future litigation of issues raised in the pleadings and testimony or any issues which could have been raised or any other matters which have not been addressed specifically by this Stipulation. The stipulation contained no explicit provision dealing with reservation fees. It is clear from the terms of the stipulation that it resolved the recoverable amount of PTOP costs initially requested by PNMGS in that case and, as the hearing examiner noted, did not resolve the issue of reservation fees. Thus, no party to the stipulation could have reasonably believed that the stipulation would bar future litigation of the reservation fee issue. {58} Based on our review of the stipulation in Case No. 2503/2521, we conclude that the Commission's concern about altering the stipulation in that case by permitting PNMGS to seek Rate Rider 8 recovery of the reservation fees is unfounded. The Commission has a statutory duty to balance the interests of investors and ratepayers in a neutral manner. See § 62-3-1(B). Based on Staff's and the Attorney General's position that the reservation fees were disguised PTOP costs, based on the Commission's application of its previously established cost-sharing methodology to the other PTOP costs associated with PNMGS's litigation with Amoco and Conoco, and based on the Commission's determination that recovery of the reservation fees was limited to either a general rate proceeding or Rate Rider 8, we conclude that the Commission's decision in this proceeding to deny rate recovery and to preclude PNMGS from the opportunity of seeking future recovery of reservation fees as PTOP costs was arbitrary and capricious.
{59} PNMGS had two gas purchase contracts with Mewbourne, a gas well operator, that were labeled GP 11560 and GP16368. Both of these contracts contained take-or-pay clauses. PNMGS introduced expert testimony that both of these contracts were reasonable and prudent. {60} In 1993, Mewbourne filed two claims against PNMGS for breach of contract, alleging that PNMGS failed to take or pay for certain quantities of gas. Mewbourne claimed take-or-pay deficiencies, with prejudgment interest, in excess of $2 million between the two claims. PNMGS filed two counterclaims against Mewbourne relating to refunds for alleged overpayment of gas and to a natural gas compression agreement. After performing a risk analysis of Mewbourne's claims, in conjunction with a consulting firm, and estimating litigation expenses if the case were to go to trial, PNMGS engaged in extended negotiations and eventually agreed to settle the claim with Mewbourne in June of 1995. Pursuant to the settlement, PNMGS agreed to pay Mewbourne $457,000 as full and complete settlement of Mewbourne's take-or-pay claims, and Mewbourne agreed to pay PNMGS $197,000 as full and complete settlement of PNMGS's counterclaims. {61} In this proceeding, PNMGS sought to recover PTOP costs associated with its settlement of litigation with Mewbourne. Specifically, PNMGS sought rate recovery of the settlement amount of $457,000 and litigation expenses of $204,957.43. PNMGS proposed to credit its settlement proceeds of $197,000 to its PGAC. In addition to its expert testimony concerning the prudence of the gas purchase contracts with Mewbourne, PNMGS introduced the testimony of two witnesses that the requested litigation expenses associated with Mewbourne's claims were necessary and reasonable. {62} Based on a Commission rule requiring utilities to immediately credit a PGAC with refunds from gas suppliers, the Commission adopted the hearing examiner's recommendation that the proceeds received by PNMGS from the Mewbourne settlement immediately be credited to the PGAC. The Commission also allowed rate recovery of a portion of PNMGS's litigation expenses, $61,737.94, incurred in association with PNMGS's successful settlement of its counterclaims against Mewbourne. The Commission then determined that PNMGS imprudently extended the take-or-pay clause in gas purchase contract GP 11560 with Mewbourne in 1985 for an additional five years. The Commission further determined that PNMGS was imprudent in not relieving itself of the take-or-pay obligation in its management of GP 16368. As a result, the Commission determined that shareholders, rather than ratepayers, should bear the burden of PNMGS's failure to relieve itself of take-or-pay obligations with Mewbourne. Because the Commission determined that the take-or-pay clauses were imprudent, it also denied the remaining litigation expenses of $143,219.49. On appeal, PNMGS claims that the Commission's determination that its PTOP costs were imprudently incurred is unsupported by substantial evidence. [4] {63} We separately evaluate the Commission's determination of imprudence for each contract with Mewbourne. The Commission has previously defined prudence in this context as the standard of care expected of a reasonable person acting under the circumstances faced by a utility's management at the time of the decision at issue. The Commission considers only those facts known or knowable by a utility at the time of the decision, and it eschews any form of hindsight review. {64} Staff's expert, Estevan Lopez, testified that it was imprudent for PNMGS to extend GP 11560 with Mewbourne in 1985. According to Mr. Lopez, PNMGS' decision to extend GP 11560 needlessly exposed it to unwarranted risk of future added costs with little, if any, benefit expected in return for that exposure. PNMGS attempted to counter this evidence. However, we do not believe that PNMGS's rebuttal renders Mr. Lopez's contrary opinion incredible. See Attorney Gen., 101 N.M. at 553, 685 P.2d at 961 (Although conflicting testimony was presented to the Commission, evidence of two conflicting opinions in the record does not mean that the decision arrived at is unsupported by substantial evidence.); see also Las Cruces Prof'l Fire Fighters & Int'l Ass'n of Fire Fighters, Local 2362 v. City of Las Cruces, 1997-NMCA-044, ¶ 12, 123 N.M. 329, 940 P.2d 177. Thus, we conclude that the Commission's determination that PNMGS was imprudent in extending the take-or-pay clause in GP 11560 is supported by substantial evidence. {65} We reach a different conclusion, however, with respect to the Commission's determination of imprudence for the take-or-pay clause in GP 16368. Unlike GP 11560, Staff did not oppose recovery for PTOP costs associated with GP 16368. Staff's witness, Mr. Lopez, did not oppose such recovery on the basis that PNMGS's predecessor, Southern Union Gas Co., executed the contract with Mewbourne and the contract was assigned to PNMGS upon its acquisition of Southern Union. According to Mr. Lopez, PNMGS did not make the decision to extend this particular contract and its shareholders should not be expected to bear the cost which resulted from that decision. {66} The Commission apparently accepted the proposition that because PNMGS was not involved in signing the contract it could not be held responsible for the existence of the take-or-pay clause. Additionally, the Commission concluded, on the basis of the protracted and complex history of PNMGS's acquisition of Southern Union, that it was not imprudent for PNMGS to accept GP 16368 as a part of the acquisition. Nonetheless, the Commission concluded that PNMGS had the opportunity after the acquisition to renegotiate the contract or manage its purchases or both. This conclusion is without support in the record. In fact, the only testimony concerning the prudence of GP 16368 came from Mr. McFearin, who testified that Southern Union acted prudently in entering into the contract with Mewbourne. There was no testimony that PNMGS had an opportunity to renegotiate GP 16368 with Mewbourne or what costs PNMGS would have reasonably incurred in the process of such a renegotiation. Thus, the Commission's determination of imprudence concerning PNMGS's failure to manage properly its contract with Mewbourne is based solely on conjecture. As a result, we conclude that the Commission's decision to disallow PNMGS's PTOP costs associated with GP 16368 is unsupported by substantial evidence. For the same reason, the Commission improperly denied the portion of PNMGS's requested litigation expenses related to its settlement of GP 16368. [5]