State ex rel. Public Counsel v. Missouri Public Service

• Decision Date: 23 June 2009
• Docket Number: No. WD 70219.,WD 70219.
• Citation: 289 S.W.3d 240
• Parties: STATE of Missouri, ex rel. PUBLIC COUNSEL, Respondent, Atmos Energy Corporation, Appellant, v. MISSOURI PUBLIC SERVICE COMMISSION, Respondent.
• Court: Missouri Court of Appeals

289 S.W.3d 240

STATE of Missouri, ex rel. PUBLIC COUNSEL, Respondent Atmos Energy Corporation, Appellant, v. MISSOURI PUBLIC SERVICE COMMISSION, Respondent.

No. WD 70219.

Missouri Court of Appeals, Western District.

June 23, 2009.

Larry W. Dority, for Appellant.

Jennifer L. Heintz, for Respondent Missouri Public Service Commission.

Marc D. Poston, for Respondent Office of Public Counsel.

Before Division One: JAMES E. WELSH, P.J., VICTOR C. HOWARD, Judge and ALOK AHUJA, Judge.

VICTOR C. HOWARD, Judge.

Atmos Energy Corporation ("Atmos") filed a request with the Missouri Public Service Commission ("the Commission") to increase its rates in order to recover approximately $3.4 million in additional annual revenue and also sought to implement a weather normalization adjustment ("WNA") mechanism. Atmos later abandoned both requests and adopted a proposal of the Commission's Staff that would allow Atmos to recover its non-gas costs through a straight fixed variable ("SFV") rate design. After holding evidentiary hearings, the Commission issued its order approving the SFV rate design. The Cole County Circuit Court reversed the Commission's order, finding it to be unlawful and unreasonable. The Commission's order is reversed and remanded in part and affirmed in part.

Factual and Procedural Background

Atmos is a public utility and gas corporation operating as a local distribution company that provides retail natural gas service to approximately 60,000 residential and business customers in Missouri. In April 2006, Atmos filed a request with the Commission to increase its rates and thereby increase its annual revenues by approximately $3.4 million. Atmos also initially sought to implement a WNA mechanism, which would mitigate the impact of weather variability on Atmos's revenue stream. Atmos later abandoned both its request for a revenue increase and its WNA proposal in favor of the SFV rate design recommended by the Commission's Staff. Atmos and Staff both agree that the SFV rate design should replace the traditional rate design that Atmos currently uses for its residential customers. The Missouri Office of the Public Counsel ("OPC") opposes the adoption of the SFV rate design and challenges the other various proposals that Atmos and Staff have agreed upon.

Although a customer's bill includes charges for gas costs and non-gas costs, only the non-gas charge is relevant to the SFV rate design issue. The non-gas charge recovers the costs that Atmos incurs in distributing gas to its customers. Under the traditional rate design that Atmos currently employs, non-gas charges include two components. Under the first component, Atmos charges a flat monthly rate to recover its fixed costs that are caused by all customers regardless of the amount of gas they use. Atmos's fixed costs of service include the costs to provide meters, service lines, and regulators. The second component is a volumetric charge, which is based on the amount of gas used by the customer and allows Atmos to recover costs that vary with customer demand. The SFV rate design approved by the Commission will eliminate the volumetric charge and allow Atmos to recover all of its non-gas costs in a single fixed monthly charge.¹

In addition to the implementation of the SFV rate design, the Commission's order included findings on several other issues. Among these issues was Staff's proposal to create a new general service class by splitting the current Small General Service ("SGS") class into an SGS class and a Medium General Service ("MGS") class. Staff proposed that the SGS class would include non-residential customers using 2,000 or fewer Ccf annually, and the MGS class would include non-residential customers using between 2,000 and 75,000 Ccf annually. Pursuant to the proposal, the SGS class would be charged using the SFV rate design, and the MGS class would remain under the traditional rate design utilizing both a fixed charge and a usage-based charge. Based on evidence indicating that customers using 2,000 or fewer Ccf per year are served by the same size and type of equipment as residential customers, the Commission approved the proposal.

The issues relating to Atmos's revenue requirement were presented to the Commission in three subparts: (1) the appropriate level of expense; (2) the appropriate rate of return and return on equity; and (3) the appropriate level of revenue excess or deficiency. Although Staff had initially concluded that Atmos was earning an excess of $1.2 million, instead of pursuing a revenue reduction, Staff chose to advocate a change in Atmos's rate design. Therefore, Staff recommended that Atmos's revenues stay the same. In abandoning its original request for a rate increase and in adopting Staff's SFV rate design, Atmos agreed that revenues should remain the same. The Commission noted in its order that while OPC recommended that Atmos's rates be decreased based upon Staff's initial finding of excess earnings, OPC did not file any direct testimony regarding Atmos's revenue requirement and did not file a complaint against the reasonableness of Atmos's current rates. Thus, the Commission found that the appropriate level of revenue excess or deficiency was zero and that the issues of the appropriate level of expense, rate of return, and return on equity were rendered moot.

Staff next proposed to combine Atmos's seven Missouri districts into three new districts. Pursuant to the proposal, the Kirksville, Palmyra, and Hannibal/Canton/Bowling Green districts would be combined to form the Northeast district, the Neelyville and Southeast Missouri districts would be combined to form the Southeast district, and the Greeley and Butler districts would be combined to form the West Central district. Staff advocated consolidation for the purpose of simplifying administration and eliminating customer confusion regarding charges, and reasoned that the consolidation was appropriate because Atmos's cost of service did not differ substantially throughout Missouri. OPC opposed consolidation of the districts, arguing that Atmos had not performed a district specific cost study to substantiate its claim that costs do not differ among districts. The Commission found that it was just and reasonable to consolidate the districts because the evidence supported Atmos's claim that its cost to serve similarly situated customers in neighboring districts was about the same and because it was unnecessary for Atmos to determine its costs to serve each of the original seven districts.

In their next proposal, Atmos and Staff advocated entering a negative amortization of $591,000 into Atmos's depreciation reserve account. Atmos's witness, Donald Roff, performed a depreciation study and concluded that Atmos's depreciation rates were generally too high. Mr. Roff recommended new depreciation rates and determined that, based on the difference between the current rates and his recommended rates, a negative amortization of $591,000 should be entered. Staff witness Guy Gilbert testified that Atmos had not kept accurate records, leaving him unable to perform a detailed depreciation analysis. Therefore, he recommended that the current depreciation rates remain in place. Mr. Gilbert testified that although the lack of data made it impossible for him to perform a depreciation analysis and verify the accuracy of the $591,000 figure, he did not disagree with Atmos's proposal to enter a negative amortization of that amount. Mr. Gilbert characterized the negative amortization of $591,000 as a surrogate to adjusting the depreciation rates until Atmos provided enough data to enable Staff to determine the appropriate depreciation rates. As to the effect of Atmos and Staff's proposal, Mr. Gilbert testified that it would result in an immediate benefit for customers by lowering their rates.

OPC objected to Atmos and Staff's proposal on two grounds. First, OPC argued that the accuracy of the $591,000 figure could not be verified by Staff because Atmos had provided insufficient data for Staff to perform a detailed depreciation analysis. Second, OPC claimed that while the negative amortization may provide an immediate benefit to current ratepayers, future ratepayers will have to pay back and pay a return on the $591,000. The Commission found that Atmos and Staff's proposal to enter a negative amortization of $591,000 should be implemented because it would offset an over-accrual to the depreciation reserve and would provide an immediate benefit to customers by lowering Atmos's depreciation expense. In addressing the second argument made by OPC, the Commission found that the benefits of negative amortization outweighed any potential harm that may result.

Staff's final proposal involved the charges applicable to customers who disconnect from Atmos's service for a period of time during the year. Testimony from a Staff witness showed that approximately ten percent of Atmos's customers disconnect for a month or more each year and that this was usually done during the warmer months when gas is unnecessary. These periods of disconnection caused Atmos to be unable to recover its fixed costs from the customers who disconnected their service. Staff therefore created a proposal with the intent to dissuade customers from disconnecting during the warmer months of the year. Under Staff's proposal, customers who disconnected and then chose to reconnect at the same address would pay a traditional reconnection charge of $24.00 and would also pay for all missed delivery charges that occurred while the customer was disconnected. Staff stated that its proposal to recover missed delivery charges would apply to any customer who disconnected and then reconnected at the same address during a twelve-month period, regardless of the reason for disconnecting. Although Atmos had its own proposal regarding seasonal reconnection charges, it also supported Staff's proposal. OPC challenged the proposal, arguing that...