Colorado Office of Consumer Counsel v. Public Service Co.

877 P.2d 867

• Court: Supreme Court of Colorado
• Decided: August 15, 1994
• Docket: 93SA181
• Status: Published

Opinions

Justice YOLLACK

delivered the Opinion of the Court.

This case is an appeal by the Public Service Company of Colorado (Public Service)¹ from an Order of the Denver District Court.² The district court determined that the Public Utilities Commission (PUC or Commission) engaged in unlawful retroactive ratemaking by awarding a bonus to Public Service after Public Service successfully pursued litigation against a natural gas supplier to recover excessive charges for natural gas. The district court also held that the granting of the bonus to Public Service was unjust and unreasonable. We affirm the decision of the district court.

I.

This case dates back to the early 1970s. In the 1970s and 1980s, Public Service purchased most of its natural gas supplies from Colorado Interstate Gas Company (CIG). Public Service and its affiliates were, in turn, CIG’s largest customer group. In the early 1970s, the United States was experiencing a shortage of natural gas in the interstate market. In 1973, CIG, believing its natural gas resources were insufficient for current and anticipated future demands, applied to the Federal Power Commission for approval of a customer-funded gas exploration program. Following extensive negotiations involving the Federal Power Commission, Public Service, the PUC, and other CIG customers, the parties entered into a “Gas Search Agreement” which was approved by the Federal Power Commission. Under the agreement, CIG would transfer its producing leases to a newly formed subsidiary, CIG Exploration, Inc., which would sell the former company-owned production to CIG at prevailing rates, rather than the lower cost of service rates that CIG was entitled to receive under existing regulations. CIG would pass these higher rates through to its customers. Over five years, the program was designed to create a fund for gas exploration in excess of $50 million.

In 1978, the PUC expressed concern that Public Service had no incentive to obtain the lowest prices possible for its gas supplies. The PUC issued Decision No. C78-414, which struck a balance between the needs of the consumers and the needs of Public Service to shift the risk of escalating fuel costs to the ratepayers by allowing Public Service to continue to use gas cost adjustments, but by requiring Public Service to take “vigorous” legal steps to ensure that gas costs were kept to a minimum.

Congress passed the Natural Gas Policy Act in 1978.³ The Act established certain maximum lawful prices for different categories of gas. Consistent with congressional intent to encourage exploration for new gas supplies, these prices were often higher than the area rates in effect at the time CIG’s Gas Search Agreement was entered into. After passage of the Act, CIG began paying its affiliate, CIG Exploration, Inc., the highest applicable “maximum lawful” price for gas discovered under the agreement, and passing those higher costs through to its customers.

As a result of various legal actions taken by Public Service against CIG between 1982 and 1988, and subsequent stipulations reached later, it was determined that CIG had overcharged Public Service by $64.6 million, an amount that CIG agreed to pay to Public Service.⁴ On November 9, 1990, Public Service filed an application with the PUC requesting authorization to use the CIG funds to reduce gas and electric rates, and also requesting permission to retain approximately $5 million as a bonus payment for its efforts in obtaining the payments from CIG.⁵

The Colorado Office of Consumer Counsel (OCC) filed a protest to the application on November 16, 1990. The OCC requested that the proposed adjustments to the gas and electric rates be set for hearing and objected to the bonus award proposed by Public Service. On November 22, 1991, the PUC awarded Public Service a bonus of $3.27 million. The OCC subsequently filed a Petition for a Writ of Certiorari in the Denver District Court, requesting that the $3.27 million payment be set aside on the ground that it violated the prohibition against retroactive ratemaking. On May 19, 1993, the Denver District Court reversed the PUC’s decision awarding the $3.27 million bonus to Public Service. The court ruled that allowing Public Service to keep a portion of the refund as a bonus constituted unlawful retroactive rate-making. The court further found that the decision of the PUC awarding the bonus was unjust and unreasonable.

II.

Public Service argues that the district court erred in concluding that the $3.27 million bonus payment constituted retroactive ratemaking because the funds it recovered from CIG represented the “settlement” of a lawsuit, not a rate change, and because its effect is prospective, not retrospective. Even if the payment can be properly described as retroactive ratemaking, Public Service argues in the alternative that the bonus should be classified under one of the several exceptions to the doctrine that prohibits retroactive ratemaking. The Office of Consumer Counsel argues that the bonus constitutes retroactive ratemaking and that no exception applies to this case.

A.

The fixing of utility rates is a legislative function that the General Assembly has delegated to the Public Utilities Commission. § 40-3-102, 17 C.R.S. (1993); Public Utils. Comm’n v. District Court, 186 Colo. 278, 527 P.2d 233 (1974); Mountain States Tel. & Tel. Co. v. Public Utils. Comm’n, 176 Colo. 457, 491 P.2d 582 (1971); City and County of Denver v. People ex rel. Public Utils. Comm’n, 129 Colo. 41, 266 P.2d 1105 (1954). Ratemaking is thus subject to the prohibition against retrospective legislation found in article II, section 11, of the Colorado Constitution. Mountain States Tel. & Tel. v. Public Utils. Comm’n, 180 Colo. 74, 502 P.2d 945 (1972). This provision of the constitution prohibits legislation that “ ‘takes away or impairs vested rights acquired under existing laws, or creates a new obligation, imposes a new duty, or attaches a new disability, in respect to transactions or considerations already passed.’ ” Moore v. Chalmers-Galloway Live Stock Co., 90 Colo. 548, 554, 10 P.2d 950, 952 (1932) (quoting Denver, South Park & Pacific Ry. Co. v. Woodward, 4 Colo. 162, 167 (1878)). In the context of utility regulation, a charge by a utility is retrospective and constitutionally prohibited if it is connected to the past performance of the utility. Peoples Natural Gas v. Public Utils. Comm’n, 197 Colo. 152, 590 P.2d 960 (1979).

B.

We conclude that the $3.27 million bonus awarded to Public Service constituted unlawful retroactive ratemaking. By not returning all of the CIG refund money to Public Service’s customers and allowing Public Service to keep as a bonus a portion of the amounts unlawfully charged by CIG, the PUC is, in effect, retroactively raising the rates paid by the ratepayers during the 1982-1988 period by $3.27 million. The relevant tariff in effect during the 1982-1988 period authorized Public Service to collect only fuel costs from ratepayers. The tariff provided, in part,

DETERMINATION OF GAS COST ADJUSTMENT AMOUNTS

The Gas Cost Adjustment or Purchased Gas Adjustment amounts will be determined by:

1. Calculating the increased or decreased cost of gas purchased from Company’s pipeline suppliers based on the volumes of natural gas purchased.

By returning to ratepayers $3.27 million less than all the overcharges collected from them, the PUC, in effect, imposed an additional charge on ratepayers for utility services provided between 1982 and 1988. Ratepayers paid for utility services in accordance with the tariff, but had a portion of their money diverted to Public Service’s bonus. At no time between 1982 and 1988 did the tariff in effect permit Public Service to collect an incentive payment from ratepayers, or did the PUC authorize any bonus in addition to the amounts collected for utility service.

There is no question that most of the refund money must be returned to consumers in order not to violate the constitutional prohibition against retroactive ratemaking. It is therefore logically inconsistent to assert that, although most of the refund money must be returned to avoid retroactive rate-making, Public Service should be allowed to keep some of it as a bonus, and that the bonus does not entail retroactive ratemak-ing.⁶

C.

Public Service asserts in the alternative that, even if its retention of the bonus constitutes retroactive ratemaking, it should be permitted to keep the bonus under one of the exceptions that we have announced to the constitutional prohibition on retroactive rate-making. We do not find that any of the exceptions are applicable to this case.

Public Service first cites Peoples Natural Gas v. Public Utilities Commission, 197 Colo. 152, 590 P.2d 960 (1979), which it claims allowed the utility company to charge its customers a surcharge for past services. In that case, the utility filed new rate tariffs with the PUC to pass through increased wholesale fuel costs to its customers. The proposed rates were contested, and the utility was not allowed to collect the rates during the challenge. However, the utility also filed a request for a surcharge to cover losses it would suffer between the time of filing and the time of the PUC’s decision. The PUC later approved the new rate and allowed the utility to recover through a surcharge the uncollected costs incurred during the period the rates were contested. We rejected the challenge to the surcharge as retroactive ratemaking because the rates had been filed prior to the dispute’s arising and therefore the utility was not attempting to recover costs incurred prior to the filing of the new tariff. Unlike Peoples Natural Gas, in this case, Public Service never filed with the PUC a rate increase representing the bonus it now seeks to retain, nor did it, prior to the litigation, request the funds contingent on the successful outcome of the lawsuit or on the PUC’s later approval.

Public Service next cites Colorado Energy Advocacy Office v. Public Service Co., 704 P.2d 298 (Colo.1985), as another exception to retroactive ratemaking. There, the tariff in place allowed the utility to recover the previous month’s gas costs by rates that would be charged in the next month. In that case, however, the contract was in place specifying particular rates before the issue of retroactive ratemaking arose. Where a utility has a pre-existing tariff authorizing it to make rate adjustments for prior periods, such adjustments do not violate the retroactive ratemaking provision. See City of Piqua, Ohio v. Federal Energy Regulatory Comm’n, 610 F.2d 950 (D.C.Cir.1979); Hall v. Federal Energy Regulatory Comm’n, 691 F.2d 1184 (5th Cir.1982), cert. denied sub nom. Arkla, Inc. v. Hall, 464 U.S. 822, 104 S.Ct. 88, 78 L.Ed.2d 96 (1983).

Public Service also urges us to apply the reasoning from cases which permitted a utility to recover the costs of repairs after natural disasters through future rate increases. See, e.g., Narragansett Elec. Co. v. Burke, 415 A.2d 177 (R.I.1980); Mississippi ex rel. Pittman v. Mississippi Public Serv. Comm’n, 520 So.2d 1355 (Miss.1988). In these natural disaster cases, the utility was granted an exemption from the prohibition against retroactive ratemaking either because it faced financial insolvency or because essential services would not be able to be restored to the affected areas without the exemption. These circumstances are not present here, nor has Public Service made any showing of an economic need to retain the bonus.

None of these exceptions to the doctrine of retroactive ratemaking is applicable to this case. Accordingly, we find that the bonus approved by the Public Utilities Commission constituted retroactive ratemaking, in contravention of article II, section 11, of the Colorado Constitution.

III.

The district court also found that the decision of the PUC to award the $3.27 million bonus to Public Service was unjust and unreasonable. Public Service argues on appeal that the decision of the Commission was reasonable and was justified because Public Service undertook “extraordinary efforts” to recover the refund from CIG.

The legislature has directed that all charges made by a public utility shall be just and reasonable. § 40-3-101(1), 17 C.R.S. (1993). The primary purpose of the Public Utilities Commission is to ensure that the rates charged are not excessive or unjustly discriminatory. Cottrell v. City & County of Denver, 636 P.2d 703 (Colo.1981). The PUC protects the right of consumers to pay a rate that accurately reflects the cost of service rendered,⁷ and has a general responsibility to protect the public interest regarding utility rates. City of Montrose v. Public Utils. Comm’n, 629 P.2d 619 (Colo.1981).

Section 40-6-111, 17 C.R.S. (1993), gives the PUC the power to review rates that may be unreasonable or improper. § 40-6-lll(l)(a), 17 C.R.S. (1993). This section applies to cases that challenge existing or proposed rates. Peoples Natural Gas v. Public Utils. Comm’n, 197 Colo. 152, 590 P.2d 960 (1979). In deciding whether a rate is just and reasonable, the PUC is directed by the statute to consider

current, future, or past test periods or any reasonable combination thereof and any other factors which may affect the sufficiency or insufficiency of such rates ... during the period the same may be in effect and may consider any factors which influence an adequate supply of energy and any factors which encourage energy conservation.

§ 40-6-lll(2)(a), 17 C.R.S. (1993).

The district court’s review of the Commission’s decision is governed by section 40-6-115(3), 17 C.R.S. (1993), which states:

[T]he district court shall decide all relevant questions of law and interpret all relevant constitutional and statutory provisions. The review shall not extend further than to determine whether the commission has regularly pursued its authority, including a determination of whether the decision under review violates any right of the petitioner under the constitution of the United States or of the state of Colorado, and whether the decision of the commission is just and reasonable and whether its conclusions are in accordance with the evidence.

The exercise of the Commission’s discretion and judgment should not be disturbed absent an abuse of discretion. City of Montrose v. Public Utils. Comm’n, 629 P.2d 619 (Colo.1981). This court, along with other courts, has failed to fashion a cogent definition of abuse of discretion. One case that attempted a definition stated:

“We are sure that in many instances, in the years gone by, the rulings of presiding judges, in matters wherein they are given the right to exercise their discretion, were not interfered with because of the old unfortunate statement to the effect that it must be shown that there was an ‘abuse of discretion.’ Recently it has been shown time after time that the term ‘abuse of discretion’ does not mean any reflection upon the presiding judge, and it is a strict legal term, to indicate that the appellate court is simply of the opinion that there was commission of an error of law in the circumstances.”

Medina v. District Court, 177 Colo. 185, 186, 493 P.2d 367, 368 (1972) (quoting Eager v. Derowitsch, 68 Wyo. 251, 232 P.2d 713 (1951)). Our usual pattern in abuse of discretion cases is to review individual instances of potential error and decide in each ease whether an abuse has occurred. It is somewhat like Justice Stewart and pornography: we know it when we see it.⁸

We agree with the district court that the PUC’s decision to award a $3.27 million bonus to Public Service was unreasonable, unjust, and an abuse of discretion.

Public Service, through the rates it has collected from its customers, has recovered all of the costs it incurred in pursuing the CIG refund, including its attorney’s fees. Even though Public Service has been “made whole,” it still asserts it is entitled to a bonus because the efforts it undertook were “extraordinary.” Public Service cites as examples of such efforts the fact that the litigation with CIG lasted for six years, that the ease resulted in huge monetary benefits to consumers, and that some of the issues concerning the Gas Search Agreement were unique. No other examples of extraordinary efforts were offered by Public Service. We are unconvinced that the efforts undertaken by Public Service were so “extraordinary” that they would warrant a $3.27 million bonus payment.

The amount of the bonus payment rightly belongs to the customers of Public Service. The facts of this case are similar to those in Citizens Utilities Co. v. City of La Junta, 121 Colo. 261, 215 P.2d 332 (1950). There, we held that a fund, which contained monies representing overcharges of utility customers, was held in trust for the customers, and the utility company had no title or ownership interest in it. The utility serves merely “as a conduit through which the refunded moneys should flow from the wholesalers to the consumers.” Public Serv. Co. v. City and County of Denver, 153 Colo. 396, 400, 387 P.2d 33, 35 (1963). It would be unjust and unreasonable to withhold $3.27 million from those to whom it rightfully belongs.

Furthermore, the position of the PUC in this case directly contradicts its earlier decision, In the Matter of the Investigation of Moon Lake Electric Association, Inc., for Failure to Distribute Refund, Case No. 6308, Decision No. C83-1268 (1983). In that case, the utility received a refund from its wholesale gas supplier because the supplier had charged excessive prices. The utility considered keeping the refund and applying it to capital improvements. Ruling that the refund was not the property of the utility, but merely was held “in trust” for its customers, the PUC held that the utility had no right or interest in the money and could not retain it for capital improvements.

When CIG overcharged for the gas it supplied from 1982 to 1988, Public Service passed the overcharges through to its customers. The injured parties, then, are the consumers who were wrongfully overcharged, not Public Service. The purpose of the refund is to make whole those who suffered the loss as a result of the unlawfully high rates. We cannot countenance the distribution of funds to those who suffered no loss, at the expense of the consumers who did.

Finally, with reference to section 40-6-lll(2)(a), which lists the factors to be considered by the PUC in determining whether a rate is just and reasonable,⁹ we find that the PUC improperly decided that Public Service should receive the bonus as a reward for its litigation against CIG and to “motivate future results.” These purposes are not among the factors listed in the statute, although, arguably, they may “affect the sufficiency or insufficiency” of the rates.¹⁰

Because the $3.27 million bonus awarded to Public Service rightfully belongs to the customers of Public Service, and was not part of the tariff in place at the time, and was improperly awarded by the Commission, we find that the decision of the PUC to award the bonus was unjust and unreasonable, and that the PUC abused its discretion.

IV.

We affirm the decision of the district court and hold that the bonus awarded to Public Service by the Public Utilities Commission was an exercise in unconstitutional retroactive ratemaking, and that the Commission abused its discretion in awarding the bonus.

LOHR, J., dissents, and ROVIRA, C.J., and MULLARKEY, J., join in the dissent.

1 . The Public Utilities Commission does not join in this appeal.

2 . We have jurisdiction to consider this appeal pursuant to § 40-6-115(5), 17 C.R.S. (1993).

3 . 15 U.S.C. §§ 3301-3432 (1989).

4 .CIG was ordered to pay the sum in four installments. By paying the last three installments early, CIG avoided certain interest charges, and ultimately paid only $56.9 million. CIG made payments from September 1990 to September 1991.

5 . This amount represented a pure bonus for Public Service; it had already been reimbursed for all of its attorney’s fees and other costs associated with recovering the CIG refund.

6 . The decision of the PUC is also inconsistent with its earlier decision, In the Matter of the Investigation of Moon Lake Electric Association, Inc., for Failure to Distribute Refund, Case No. 6308, Decision No. C83-1268 (1983) (noting in a factually similar case that "[t]o allow a utility to retain refunds and apply them to past losses sets the stage for retroactive ratemaking”).

7 . Public Serv. Co. v. Public Utils. Comm’n, 644 P.2d 933 (Colo.1982).

8 . See Jacobellis v. Ohio, 378 U.S. 184, 197, 84 S.Ct. 1676, 1683, 12 L.Ed.2d 793 (1964) (Stewart, J., concurring).

9 . The factors are "current, future, or past test periods or any reasonable combination thereof and any other factors which may affect the sufficiency or insufficiency of such rates ... during the period the same may be in effect and ... any factors which influence an adequate supply of energy and any factors which encourage energy conservation.” § 40-6-111 (2)(a), 17 C.R.S. (1993).

10 . We recognize that the Public Utilities Commission has an incentive program in place with Public Service to encourage energy conservation by consumers. This "Demand Side Management” program, begun in the early 1990s, is incorporated into the tariff and rate structure, and rewards Public Service if it meets certain pre-established criteria related to the reduction of its customers' energy consumption. The program allows Public Service to recover some of the money it loses, as energy consumption decreases and it sells less service. The Demand Side Management program was approved by the Public Utilities Commission after extensive hearings (see, e.g., Commission Decision and Order (1) Adopting Portions of a Settlement Agreement To Be the Basis for Cost Recovery for DSM Programs that Stem from the DSM Collaborative Process, and (2) Giving Directions Concerning Further Treatment of Certain Issues, 139 Pub.Util.Rep. 4th 398 (1993)), but its legality has never been addressed by a court of law.