In re Petition of PNM Gas Services

• Decision Date: 17 April 2000
• Docket Number: No. 24148.,24148.
• Citation: 129 N.M. 1,1 P.3d 383,2000 NMSC 12
• Parties: In the Matter of THE PETITION OF PNM GAS SERVICES, A Division of Public Service Company of New Mexico, for A Revision to Its Rates, Rules, Forms and Charges Pursuant to Advice Notice Nos. 592, 593, and 594 PNM GAS SERVICES, a division of Public Service Company of New Mexico, Appellant, v. NEW MEXICO PUBLIC UTILITY COMMISSION, Appellee, v. NEW MEXICO ATTORNEY GENERAL, Cross-Appellant, and INCORPORATED COUNTY OF LOS ALAMOS, Intervenors.
• Court: New Mexico Supreme Court

1 P.3d 383

129 N.M. 1

2000 NMSC 12

In the Matter of THE PETITION OF PNM GAS SERVICES, A Division of Public Service Company of New Mexico, for A Revision to Its Rates, Rules, Forms and Charges Pursuant to Advice Notice Nos. 592, 593, and 594

PNM GAS SERVICES, a division of Public Service Company of New Mexico, Appellant, v. NEW MEXICO PUBLIC UTILITY COMMISSION, Appellee, v. NEW MEXICO ATTORNEY GENERAL, Cross-Appellant, and INCORPORATED COUNTY OF LOS ALAMOS, Intervenors.

No. 24148.

Supreme Court of New Mexico.

April 17, 2000.

Keleher & McLeod, P.A., Robert H. Clark, Clyde F. Worthen, Thomas C. Bird, Albuquerque, Bill R. Garcia, Public Service Company of New Mexico, Albuquerque, for Appellant.

New Mexico Public Utility Commission, Anastasia S. Stevens, Commission Counsel, Santa Fe, for Appellee.

Patricia A. Madrid, Attorney General, Jeff Taylor, Assistant Attorney General, Santa Fe, for Cross-Appellant.

Virtue, Najjar & Bartell, P.C., Daniel A. Najjar, Santa Fe, for Intervenors.

OPINION

SERNA, Justice.

{1} PNM Gas Services (PNMGS), a division of Public Service Company of New Mexico (PNM), petitioned the New Mexico Public Utility Commission (Commission) for a rate increase in the amount of approximately $13.3 million. Following a full hearing before a hearing examiner concerning PNMGS's gas rates in Case No. 2662, the hearing examiner determined that PNMGS's then-existing rates were not fair, just, and reasonable and recommended that PNMGS's rates be decreased by $547,184. In a final order, the Commission denied PNMGS's requested rate increase, and the Commission ordered a reduction in PNMGS's gas rates by approximately $6.9 million. PNMGS appeals from the Commission's final order and requests that this Court vacate and annul the order.

{2} PNMGS raises numerous issues on appeal which, according to PNMGS, indicate that the Commission acted unlawfully or unreasonably: (1) the Commission denied recovery of $5.9 million in costs incurred in retiring high cost debt; (2) the Commission denied recovery of $11.4 million in rate discounts granted to transportation customers under a newly established cost/benefit test; (3) the Commission denied recovery of over $7 million in fees paid to reserve gas under two gas purchase agreements; (4) the Commission denied recovery of $457,000 in expenses incurred in the settlement of litigation between PNMGS and Mewbourne Oil Company; (5) the Commission denied all recovery of rate case expenses; (6) the Commission accepted a thirty-year weather normalization instead of PNMGS's proposed ten-year weather normalization; and (7) the Commission accepted the Commission Staff's proposed rate of return over PNMGS's proposed rate of return. PNMGS asserts two additional issues with which the Attorney General, in a cross-appeal, joins: (1) the Commission rejected PNMGS's and the Attorney General's request to change the rate design in the recovery of reliability costs through a mechanism labeled Rate Rider 12; and (2) the Commission increased the residential access charge by $5.56, even though PNMGS requested an increase of only $1.00.

{3} We believe that evidence in the record supports the Commission's decision to apply a cost/benefit test in disallowing Rate Rider 8 discounts, to adopt the proposed thirty-year weather normalization, to accept Staff's proposed rate of return, and to decline to change the rate design through the Rate Rider 12 mechanism; however, we hold that the Commission's conclusions concerning re-acquired debt and the residential access charge, as well as the Commission's decision to deny PNMGS the opportunity to recover reservation fees in a separate proceeding and to deny in their entirety the Mewbourne settlement expenses and rate case expenses, are not supported by substantial evidence in the record. As a result, we vacate and annul the Commission's final order.

I. Standard of Review

{4} Under the Public Utility Act, this Court "shall vacate and annul the order complained of if it is made to appear to the satisfaction of the [C]ourt that the order is unreasonable or unlawful." NMSA 1978, § 62-11-5 (1982, repealed effective July 1, 2003).

The scope of review of Commission decisions is limited to the question of whether the Commission acted fraudulently, arbitrarily or capriciously, whether the decision is supported by substantial evidence, and, generally, whether the actions of the Commission are within the scope of its authority. Substantial evidence means such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.

Attorney Gen. v. New Mexico Pub. Serv. Comm'n, 101 N.M. 549, 553, 685 P.2d 957, 961 (1984) (citation omitted). Because of the multiple roles inherently served by agencies such as the Commission in administrative proceedings, see Duke City Lumber Co. v. New Mexico Envtl. Improvement Bd., 101 N.M. 291, 294, 681 P.2d 717, 720 (1984),

this Court reviews the whole record, including both the evidence in favor of and the evidence contrary to the Commission's decision, in order to determine whether the decision is supported by substantial evidence. See id. at 293, 681 P.2d at 719. PNMGS, and the Attorney General with respect to the cross-appeal, must bear the burden of demonstrating that the Commission's order is unreasonable or unlawful, NMSA 1978, § 62-11-4 (1965), and "this Court must view the evidence in the light most favorable to the decision made by the Commission." Attorney Gen.,

101 N.M. at 553,

685 P.2d at 961.

II. General Principles Implicated in a Rate Case

{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, s 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...