Office of the Pub. Counsel v. Mo. Pub. Serv. Comm'n, No. SC 92964.

CourtUnited States State Supreme Court of Missouri
Writing for the CourtLAURA DENVIR STITH
Citation409 S.W.3d 371
PartiesOFFICE OF the PUBLIC COUNSEL, Appellant, v. MISSOURI PUBLIC SERVICE COMMISSION and Atmos Energy Corporation, Respondents.
Decision Date10 September 2013
Docket NumberNo. SC 92964.

409 S.W.3d 371

OFFICE OF the PUBLIC COUNSEL, Appellant,
v.
MISSOURI PUBLIC SERVICE COMMISSION and Atmos Energy Corporation, Respondents.

No. SC 92964.

Supreme Court of Missouri,
En Banc.

July 30, 2013.
Rehearing Denied Sept. 10, 2013.

Opinion Modified on Court's Own Motion Sept. 10, 2013.


[409 S.W.3d 372]


Marc Poston, Deputy Counsel, Jefferson City, for The Office of Public Counsel.

Jennifer Leigh Heintz, The Commission, Jefferson City, for The Public Service Commission.


James M. Fischer, Larry W. Dority, Fischer & Dority PC, Jefferson City, Douglas C. Walther, Deputy General Counsel of Atmos Energy Corporation, Dallas, for Atmos Energy Corporation.

LAURA DENVIR STITH, Judge.

The Office of Public Counsel (OPC) appeals from an order entered by the Missouri Public Service Commission (PSC) rejecting the PSC staff's proposed actual cost adjustment disallowances regarding Atmos Energy Corporation's transactions with its affiliate. This Court reverses.

When a regulated gas corporation such as Atmos Energy engages in a business transaction with an affiliated entity, it is required to abide by the affiliate transaction rules set forth in the Missouri Code of State Regulations. 4 CSR 240–40.015–40.016. Due to the inherent risk of self-dealing, the presumption of prudence utilized by the PSC when reviewing regulated utility transactions should not be employed if a transaction is between a utility and the utility's affiliate.

Because the PSC reviewed the transaction between Atmos and its affiliate through the lens of the presumption of prudence, its order is unlawful and unreasonable. Accordingly, the order is reversed and the case remanded to the PSC for further review consistent with this opinion.

I. FACTUAL AND PROCEDURAL BACKGROUND

In 2007 and 2008, Atmos Energy Corporation operated as the largest natural-gas-only distributor in the United States. As a local distributing company, Atmos does not produce its own gas and does not purchase gas directly from producers. Instead, Atmos contracts with independent gas marketing companies to purchase natural gas. Atmos then delivers the purchased gas to customers through its local pipelines.

[409 S.W.3d 373]

Atmos is subject to regulation as a gas corporation and public utility by the Missouri Public Service Commission (PSC). See § 386.020; § 386.250; chapter 393.1 The PSC is a state agency established to regulate public utilities operating within the state. Pursuant to the statutory provisions in chapter 393, the PSC has jurisdiction over the rates and charges that Atmos imposes on its Missouri customers.2

In addition to the basic amount Atmos charges its customers under its published rate, Atmos also is permitted to charge its customers for additional costs it has incurred when the price it pays its suppliers for gas increases. These additional charges are recovered through a two-part mechanism known as a purchased gas adjustment/actual cost adjustment process (PGA/ACA). In the PGA portion of this process, a utility such as Atmos files annual tariffs in which it estimates its costs of obtaining gas over the coming year. The PGA amounts are then included in the customers' bills over the ensuing 12 months. Because it is difficult to estimate the projected changes in cost precisely, the utility then files for an adjustment, or ACA, if its actual cost is different than projected in its PGA filing. This ACA allows the PSC to correct any discrepancies between the costs billed and the costs actually incurred. When an ACA is received, the PSC staff audits the utility's gas purchases made during the ACA period in question. As part of the review, the staff evaluates whether the rates paid by consumers for natural gas sold during the period were “just and reasonable.” § 393.130.1. The PSC then takes the staff's audit into consideration and ultimately determines the proper ACA amount.3

Atmos submitted its 2007–2008 ACA filings to the PSC on October 16, 2008. PSC staff audited the ACA filing by reviewing and analyzing the billed revenues and actual gas costs for the period of September 1, 2007, to August 31, 2008, for each of Atmos' eight Missouri service areas. The staff's review raised concerns regarding Atmos' transactions with Atmos Energy Marketing LLC (“AEM”).

AEM is a separate, unregulated but affiliated gas marketing company that is wholly owned by Atmos. Between April 2004 and November 2009, Atmos issued 48 requests for proposals (RFPs) in six other service areas. Of these 48 RFPs, AEM

[409 S.W.3d 374]

submitted bids in response to 24 and was the winning bidder in six.

Two of these six winning bids were for supplying gas to the Hannibal area operating system during the 2007–2008 ACA period. As required when taking bids, Atmos issued a RFP and interested suppliers submitted confidential bids proposing pricing for supplying gas services to Atmos for the Hannibal area. For the 2007–2008 ACA period at issue here, Atmos had two overlapping RFP processes; the first covered the period April 1, 2007, to March 31, 2008, and the second covered the period April 1, 2008, to March 31, 2009. For each period, Atmos sent RFP letters to 56 gas marketing companies.

During the first period, Atmos received only five bids that Atmos said conformed to the RFP requirements. Its affiliate, AEM, submitted the lowest bid at $14,723,472. The lowest conforming bid submitted by a non-affiliated gas marketer was for $15,069,726, approximately $346,000 higher than AEM's bid. During the second period, only three suppliers submitted bids that Atmos said conformed to its RFP. Its affiliate, AEM, submitted a bid of $13,947,511. This bid was approximately $100,000 lower than the next lowest bid of $14,049,424. Atmos awarded AEM both contracts.

Staff raised an issue about how the RFP set out certain supply requirements and whether AEM's bid actually conformed to the RFP requirements. It is uncontested that the RFP mandated that all gas supply be “firm and warranted.” But the RFP process also allowed bidders to use either a primary natural gas receipt point or a secondary receipt point. Primary firm delivery is the highest priority gas supply and costs more because timely delivery is assured. Secondary in-path delivery is just below primary firm delivery. The secondary delivery method, though, is still “firm” though less convenient. Both forms of delivery are preferred over “interruptible” supply, because the timing of supplying interruptible gas may be interrupted if the supplier has an inadequate quantity of gas to meet all commitments at a specific time. Staff contended it was not clear that AEM's bid was for firm rather than interruptible gas because the transaction confirmation document that normally specifies “firm” delivery was left blank. Staff also contended the distinction between primary and secondary receipt points was not made clear in the RFP bidding, which could have allowed AEM an advantage if it had insider knowledge that Atmos was willing to accept a secondary receipt point bid. Staff contends this gave AEM a benefit in the transactions because of its affiliation with Atmos.

The transactions between a utility such as Atmos and its affiliate are governed by the PSC's affiliate transaction rules. The rules establish standards for a regulated gas utility's dealings with its affiliated companies. When acquiring natural gas from an affiliate, a regulated local distribution company can compensate its affiliate only at the lesser of the gas' fair market price or the fully distributed cost to the regulated gas company were it to acquire the gas for itself. 4 CSR 240–40.016(3)(A). 4 This provision is known as

[409 S.W.3d 375]

the asymmetrical pricing standard. State ex rel. Atmos Energy Corp. v. Pub. Serv. Comm'n of State, 103 S.W.3d 753, 762 (Mo. banc 2003).

Following its audit of the 2007–2008 ACA period, the PSC staff report indicated that Atmos had failed to comply with the affiliate transaction rules because it failed to properly document the fair market value and fully distributed cost of its transactions with AEM. Staff proposed a disallowance of $308,733 for the Hannibal area, an amount equal to the profit AEM earned on that transaction.

In its filed response to the staff's recommendation, Atmos disagreed with the proposed disallowance and requested a hearing. The PSC conducted an evidentiary hearing on March 23 and 24, 2011, and issued a report and order on November 9, 2011.

In considering whether Atmos complied with the affiliate transaction rules, the PSC applied a presumption that Atmos' gas purchases were prudent and put the burden on staff to prove that the purchases from AEM were not prudent. The PSC determined that staff had failed to rebut this presumption, that the fair market price was established by Atmos' bidding process, and that this fair market price was less than the fully distributed cost for Atmos to acquire the gas itself. Based on this presumption, the PSC found compliance with the affiliate transaction rules and rejected staff's proposed disallowances regarding Atmos' transactions with AEM.

OPC filed an application for rehearing, which the PSC denied.5 OPC appealed and the court of appeals affirmed. This Court granted transfer pursuant to art. V, sec. 10 of the Missouri Constitution after opinion by the court of appeals.

II. STANDARD OF REVIEW

“Pursuant to section 386.510, the appellate standard of review of a [PSC] order is two-pronged: ‘first, the reviewing court must determine whether the [PSC]'s order is lawful; and second, the court must determine whether the order is reasonable.’ ” State ex rel. AG Processing, Inc. v. Pub. Serv. Comm'n of State, 120 S.W.3d 732, 734 (Mo. banc 2003). The PSC's order has a presumption of validity, and the burden of proof is on the appellant to prove that the order is unlawful or unreasonable. State ex rel. Sprint Missouri, Inc. v. Pub. Serv. Comm'n of State, 165 S.W.3d 160, 164 (Mo. banc 2005). The lawfulness of an order is determined “by...

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1 practice notes
  • Earth Island Inst. v. Union Elec. Co., No. SC 93944
    • United States
    • United States State Supreme Court of Missouri
    • February 10, 2015
    ...is lawful; and second, the court must determine whether the order is reasonable.” Office of Pub. Counsel v. Missouri Pub. Serv. Comm'n, 409 S.W.3d 371, 375 (Mo. banc 2013) (quoting State ex rel. AG Processing, Inc. v. Pub. Serv. Comm'n , 120 S.W.3d 732, 734 (Mo. banc 2003) ). The appellant ......
1 cases
  • Earth Island Inst. v. Union Elec. Co., No. SC 93944
    • United States
    • United States State Supreme Court of Missouri
    • February 10, 2015
    ...is lawful; and second, the court must determine whether the order is reasonable.” Office of Pub. Counsel v. Missouri Pub. Serv. Comm'n, 409 S.W.3d 371, 375 (Mo. banc 2013) (quoting State ex rel. AG Processing, Inc. v. Pub. Serv. Comm'n , 120 S.W.3d 732, 734 (Mo. banc 2003) ). The appellant ......

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