Hobbs Gas Co. v. New Mexico Public Service Com'n

• Decision Date: 22 June 1993
• Docket Number: Nos. 20558,20759,s. 20558
• Citation: 858 P.2d 54,1993 NMSC 32,115 N.M. 678
• Parties: , 147 P.U.R.4th 427, Util. L. Rep. P 26,345 HOBBS GAS COMPANY, Appellant, v. NEW MEXICO PUBLIC SERVICE COMMISSION, Appellee.
• Court: New Mexico Supreme Court

Page 54

858 P.2d 54

115 N.M. 678, 147 P.U.R.4th 427, Util. L.

Rep. P 26,345

HOBBS GAS COMPANY, Appellant, v. NEW MEXICO PUBLIC SERVICE COMMISSION, Appellee.

Nos. 20558, 20759.

Supreme Court of New Mexico.

June 22, 1993.

Rehearing Denied July 28, 1993.

[115 N.M. 679] Simons, Cuddy & Friedman, Daniel H. Friedman, Santa Fe, for appellant.

Lee Huffman, Com'n Counsel, Santa Fe, for appellee.

OPINION

FRANCHINI, Justice.

In these consolidated cases, Hobbs Gas Company (Hobbs) seeks review of two orders of the New Mexico Public Service Commission (Commission) pursuant to NMSA 1978, Sections 62-11-1 to -6 (Repl.Pamp.1984). The April 1, 1992, order in Case No. 2369 denied Hobbs' application for continued use of its purchased gas adjustment clause (PGAC) and required Hobbs to refund its customers close to one million dollars in "overcollections" relating to the period September 1, 1988, to August 31, 1990. The order also disapproved Hobbs' PGAC reconciliation report for the period September 1, 1990, to August 31, 1991. Hobbs was required to file a revised reconciliation report containing computations mandated by the order and to refund approximately $521,389 in "overcollections" later identified by the Commission for that period. Finally, the Commission ordered Hobbs to cease charging its ratepayers for "free gas," to file a rate case by July 1, 1992, and to propose appropriate overcollection refund schedules.

The other case under review, Case No. 2454, concerns Hobbs' noncompliance with the Commission's prior order to cease charging ratepayers through its PGAC for "free gas" and to implement the correct methodology determined by the Commission in the earlier case. The order directs Hobbs to utilize the Commission's methodology in determining its PGAC. Pursuant to Section 62-11-5, we annul and vacate both orders of the Commission.

I.

Hobbs has included a PGAC in its tariffs since 1981. A PGAC allows a company to periodically adjust rates to reflect changes in the unit cost of gas supplies. This protects a natural gas utility from sudden increases in its fuel costs by allowing the utility to pass on the increased fuel costs without having to undergo a rate case. Similarly, ratepayers automatically receive any reductions in fuel costs, without the delay of a rate case. In order to continue use of a PGAC, a utility must file an application for approval by the Commission pursuant to Purchased Gas Adjustment Clauses For Gas Utilities, NMPSC Rule 640 (June 30, 1988). Rule 640 requires a gas utility to apply to the Commission every two years for permission to continue use of the PGAC for the next two-year period. The application process requires the submission of a reconciliation audit, by which under- or overcollections for the preceding period are computed.

Rule 640.16(d) provides that the utility can either include a portion of its gas costs in its basic rates with the remaining portions to be collected through the PGAC (base rate/PGAC), or it can separate gas costs entirely from other costs, including any gas losses, through the PGAC. Hobbs uses the base rate/PGAC methodology. This form of PGAC does not contemplate a dollar-for-dollar pass through of gas costs or savings insofar as line losses and savings from reduction of line losses are concerned. Where a portion of gas costs is included in a utility's base rates, Rule 640 requires the use of a "purchase/sale ratio" in the computation of gas cost and reconciliation factors used to increase or decrease the amount of recovery under the utility's rate schedules. Where a utility has experienced significant line losses, the utility will purchase more gas to meet its customers' requirements without increased sales; accordingly, the ratio of purchases to sales will exceed one. Conversely, should a utility receive unbilled gas from its suppliers, the ratio of purchases to sales will be less than one.

Since 1985, Hobbs has received a portion of its purchased gas from suppliers without being charged for it, possibly from meter malfunctions, meter-reading errors, or other causes. In its application in Case No. 2369, as in its two preceding PGAC continuation filings, Hobbs used the same methodology for computing the portion of its costs of gas recovered through base rates and for computing its reconciliation factor. The purchase/sale ratio reported in computing the reconciliation factor and the purchase/sale ratio utilized in computing the portion of the gas recovered through base rates were determined using the amount of gas it had purchased in the numerator of the ratio and the amount of gas sold to its customers in the denominator. This was apparent from the fact that the purchase/sale ratio shown in these calculations was less than one.¹ In Case No. 2081, the Commission granted Hobbs the continued use of its PGAC for the periods ending August 31, 1985, and August 31, 1987. In Case No. 2246, the Commission granted Hobbs the continued use of its PGAC for the periods ending August 31, 1988, and August 31, 1989. In Case No. 2369 (one of the cases on review here) the Hearing Officer ruled that Section 640.21, when read in its entirety, requires that delivered units (which includes the unmetered, cost-free gas) be used in the numerator of the purchase/sale ratio. Even though Hobbs' use of purchased units in the numerator of the purchase/sale ratio had been tacitly approved in the two prior PGAC continuation cases, the Commission adopted the Hearing Officer's recommendation that the purchase/sale ratio be recalculated using the newly recognized "proper" methodology, thus holding Hobbs responsible for a refund of the difference in the sums as recalculated.

II.

Judicial review of a Commission's order is limited to a determination of whether the Commission acted fraudulently, arbitrarily, or capriciously, and whether the Commission's order is supported by substantial evidence. Llano, Inc. v. Southern Union Gas Co., 75 N.M. 7, 11-12, 399 P.2d 646, 651 (1964). The burden is on Hobbs to show that the order of the Commission is unreasonable or unlawful. Section 62-11-4; Behles v. New Mexico Pub. Serv. Comm'n (In re Timberon Water Co.), 114 N.M. 154, 156, 836 P.2d 73, 75 (1992). This Court has no power to modify the order appealed from, but "shall either affirm or annul and vacate the same." Section 62-11-5. We are required to "vacate and annul the order complained of if it is made to appear to the satisfaction of the court that the order is unreasonable or unlawful." Id. If we vacate the order, we must "vacate and set aside en toto." Transcontinental Bus Sys., Inc. v. State Corp. Comm'n, 56 N.M. 158, 167, 241 P.2d 829, 835 (1952). We are "powerless to change, modify or amend an order by holding part of it lawful and reasonable and another part or parts unlawful or unreasonable." Id. The limitations on our power to amend or modify Commission orders are soundly grounded in the separation of powers. Amending or modifying Commission orders would be substituting our judgment for that of the Commission, and we thus would be acting legislatively and not judicially. Id. at 169, 241 P.2d at 836. 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. Following remand to the Commission, the Commission may properly enter an order embodying those provisions in the earlier, vacated order that have been declared reasonable and lawful. See Public Serv. Co. v. New Mexico Pub. Serv. Comm'n, 92 N.M. 721, 723, 594 P.2d 1177, 1179 (1979) (remanding case to Commission for entry of new order based on substantial evidence).

Hobbs contends that requiring PGAC refunds for the period September 1, 1988, to May 1, 1992, is unreasonable and unlawful. We partially agree. "Although a Commission should be able to change its procedure, it should not arbitrarily or capriciously do so without good reasons." Southern Union Gas Co. v. New Mexico Pub. Serv. Comm'n, 84 N.M. 330, 333, 503 P.2d 310, 313 (1972). Thus, regulatory treatment which "radically departs from past practice without proper notice" will not be sustained. General Tel. Co. v. Corporation Comm'n, 98 N.M. 749, 755-56, 652 P.2d 1200, 1206-07 (1982).

In General Telephone, the Commission utilized a novel and different method of calculating General Telephone's working capital in a rate case. General Telephone had calculated its working capital on the basis of a method approved and utilized by the Commission in prior rate cases. The Commission asserted that it was not bound by any particular method in determining rates. We disagreed, stating:

The [Commission] is bound by, and limited to, its existing rules and regulations, proper application of the law, compliance with the constitutional mandate, and by previously established methods of ratemaking, absent a change in circumstances peculiar to the company and the pending case, making it necessary that there be a departure from established method.

General Telephone, 98 N.M. at 755, 652 P.2d at 1206.

Applying this standard to the Commission's change of position, we noted that "[t]he record does not reflect prior notice to [General Telephone] of any 'changed circumstances' affecting the method of calculating cash working capital since prior orders of the [Commission] approved the method utilized by [General Telephone]." Id. Prior notice is required before any prospective change in policy can be made. To allow a radical departure from past practice, such as a new method of calculating the PGAC, to have retroactive effect without putting the utility on notice that such a change was contemplated would be inconsistent with our opinion in General Telephone.

In Hobbs Gas Co. v. New Mexico Public Service Commission, 94 N.M. 731, 735-36, 616 P.2d 1116, 1120-21 (1980), this Court held that application of the...