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

Heading: Reservation Fees

Text: {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.