BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION, Complainant, vs. PUGET SOUND ENERGY, Respondent. Docket No. UE-981238 PETITION FOR CLARIFICATION/RECONSIDERATION In accordance with WAC 480-09-810, Puget Sound Energy, Inc. ("PSE" or "the Company") hereby petitions the Commission for clarification/reconsideration of its October 28 order in the above docket. Complaint and Order Suspending Tariff Revisions; Order Authorizing Temporary Rates. This docket concerns a tariff filing made by the Company on September 28 proposing to reduce the rate for optional firming service under the Company's Schedule 48 from $0.50 per kVa/month to $0.46 per kVa/month. The Order purports to suspend the tariff revision and set it for investigation, and approve the proposed rate reduction as "temporary rates, subject to refund, pending a final determination in this matter." The Company respectfully requests the Commission to clarify the Order to provide that (1) the proposed rate of $0.46 per kVa/month is the effective rate pending a final determination, and (2) any different rate would be effective as of the prospective date stated in the Commission's final order after its investigation. The Company respectfully submits that if the Order is interpreted to allow a different rate to be approved retroactive to November 1, the Order: Would be contrary to law, as rate changes cannot be implemented retroactively; and •Would establish an unwise public policy that rate reductions will be put into effect immediately, but subject to later revision, which is contrary to long-standing Commission practice and could have unintended effects if applied uniformly to all rate filings. •BACKGROUND The tariff revision at issue in this proceeding concerns PSE's Schedule 48, Optional Large Power Sales Rate, which provides market-based pricing for PSE's industrial and large commercial customers. That rate schedule has been in effect since November 1, 1996, when it was approved by the Commission in Docket No. UE-960696. Adoption of Schedule 48 created a "non-core" class of customers that would bear risks of power unavailability and price variability. One of the services provided under Schedule 48 is "optional firming," which allows customers to receive the equivalent of firm, or "core," service by placing "demands on the company's electric system during periods in the event that non-firm energy is not available for the company to purchase and deliver to the customer." The optional firming service is available at the option of the customer, and selected on an annual basis. Since the effective date of the tariff, the rate for optional firming has been $0.50 per kVa month. The rate was intended to reflect the market cost of capacity at the time, and the rate schedule provides that the rate will be updated from time to time to reflect changes in the market. Specifically, the tariff states: Rate will be adjusted effective in November 1998, and annually thereafter, based upon market prices. Sheet No. 48a, § II, note (b). In accordance with this tariff provision, the Company on September 28, 1998 filed to adjust the rate for optional firming. Included as Attachment 1 is a copy of the Company's September 28 tariff filing. The company's proposed tariff revision would reduce the rate from $.50/kVa month to $.46/kVa month, which the Company estimated reflected the market price for service at the time. The tariff sheet reflected a November 1, 1998 proposed effective date. In its recommendation to the Commission, Staff stated that it was "unable to determine that the rate proposed by PSE for the service accurately reflects the market price, as required by Schedule 48." Staff advised the Commission that it was "unable at this time to determine whether the proposed rate is fair, just, reasonable and sufficient." Staff also took the view that a new rate must be in place in order for the company to be able to provide the service to customers after November 1, 1998. Staff therefore recommended that the rate "be accepted as a temporary rate, subject to refund, pending further investigation and a final determination of a proper rate." Included as Attachment 2 is a copy of Staff's memorandum to the Commission presented at the October 28 open meeting. At that open meeting, the Commission accepted Staff's recommendation. The Order was issued later that day implementing Staff's recommendation. ARGUMENT A. If the Order is Interpreted to Allow a Different Rate to be Approved Retroactive to November 1, the Order Would be Contrary to Law, as Rate Changes Cannot Be Implemented Retroactively. Under the law, utilities are required to file their tariff schedules with the Commission (RCW 80.28.050) and to collect for utility service according to the rates and charges set forth in such tariff schedules on file with the Commission. RCW 80.28.080. When a utility seeks to change a rate or charge, it must file with the Commission the changes it proposes to make to the schedule. RCW 80.28.060. These changes must be submitted thirty days before the date they are proposed to become effective. RCW 80.28.060. In response to this filing, the Commission may either allow (1) the proposed change to take effect on the proposed effective date, or (2) the "[p]roposed changes . . . [to] be suspended by the commission within thirty days or before the effective date of the proposed change, whichever is later." RCW 80.28.060. If the Commission acts to suspend the proposed change, the suspension is for a period "not exceeding ten months from the time the same would otherwise go into effect." RCW 80.04.130. Where the tariff revision proposes to increase a rate or charge, the burden of proof to show that such increase is just and reasonable is upon the utility. RCW 80.04.130(2). The Commission may allow a proposed increase to take effect on a temporary or interim basis, subject to refund, prior to its final determination of permanent rates. State ex rel. Puget Sound Navigation v. Dept. of Transportation, 33 Wn.2d 448, 206 P.2d 456 (1949). If the Order is interpreted to allow a different rate to be approved retroactive to November 1, the Order would be contrary to law in the following respects: Approving a rate reduction as a "temporary rate, subject to refund" violates the Filed Rate Doctrine, as the utility in such circumstances cannot determine what the "proper rate" is. By making a reduced rate "subject to refund," the Commission would be asserting the authority to implement a rate reduction on a retroactive basis, which would constitute unlawful retroactive ratemaking. Any rate other than the $0.46/kVa month proposed by PSE can be implemented only prospectively. Implementing a rate reduction on a temporary basis, subject to refund, is contrary to Commission precedent. The Order places upon PSE the burden of proof to show that "such increases are just and reasonable" (Order, p. 1), when in fact there is no proposed increase. PSE is proposing to reduce the rate from the current $0.50/kVa month to $0.46/kVa month. These points are discussed in turn below. 1. The Utility is Unable to Determine the Proper or Lawful Rate Where a Rate Reduction is Approved as a "Temporary Rate, Subject to Refund." By approving a reduced rate as a "temporary rate, subject to refund," the Commission places PSE in the position of not knowing the proper or lawful rate to charge for the particular service. The previously approved rate--$0.50/kVa month--has been replaced by the lower $0.46/kVa month rate, which itself is temporary and subject to refund. There is thus no rate upon which the Company can rely as the proper or lawful rate to be charged for this service. The Order as it now stands puts virtually all the revenue collected by the Company for this service at risk to be refunded, as there is no benchmark against which to measure the temporary rate. This is in contrast to the typical situation where a rate increase is implemented on a temporary basis, subject to refund, where the utility can rely on the previously approved rates as a floor below which the final rate determination will not fall for the period prior to a Commission order establishing that final rate. The Order should be clarified to provide that the $0.46 rate is the effective rate pending the outcome of the investigation. At issue is compliance with the Filed Rate Doctrine, which provides: If a statute requires that the regulated company file a tariff of rates with the appropriate regulatory agency, no deviations are permitted from those tariffs without a further filing with the agency, and then only prospectively; the tariff rates are the rates that are legally binding on both the company and the ratepayer. . . . . The attempt to recover past costs, or otherwise attempt retroactively to charge something other than the tariff rate that was in effect for the past period, is a violation of the Filed Rate Doctrine. Goodman, The Process of Ratemaking, Public Utilities Reports, Inc. (169-70) (1998). Arizona Grocery Co. v. Atchison, Topeka & Sante Fe Railway Co., 284 U.S. 370 (1931), established the principle that a utility must be able to rely on a previous determination as to a reasonable rate: When . . . the Commission declares a specific rate to be the reasonable and lawful rate for the future it speaks as the legislature, and its pronouncement has the force of a statute. . . . . Congress has delegated to the Commission as its administrative arm its undoubted power to declare, within Constitutional limits, what are lawful rates for the service to be performed by the carriers. The action of the Commission in fixing such rates for the future is subject to the same tests as to its validity as would be an act of congress intended to accomplish the same purpose. . . . . As respects its future conduct the carrier is entitled to rely upon the declaration as to what will be a lawful, that is, a reasonable, rate; and if the order merely sets limits it is entitled to protection if it fixes a rate which falls within them. . . . . . . Where the Commission has upon complaint, and after hearing, declared what is the maximum reasonable rate to be charged by a carrier, it may not at a later time, and upon the same or additional evidence as to the fact situation existing when its previous order was promulgated, by declaring its own finding as to reasonableness erroneous, subject a carrier which conformed thereto to the payment of reparation measured by what the Commission now holds it should have decided in the earlier proceeding to be a reasonable rate. 284 U.S. at 386-90 (emphasis added). This principle has been recognized in Washington. See Puget Sound Navigation Co. v. Department of Pub. Works, 157 Wash. 557, 561-62 (1930), aff'd, 160 Wash. 703 (1931): The controversy has been and still is, only, What is a proper rate? . . . . Under the statute law, all carriers are mandatorily required to charge rates and fares "as specified in its schedule filed and in effect at the time," and are prohibited from charging or collecting other or different rates. [Statute omitted] Without further analysis, we think that the statute law, when read and considered as a whole, leads to the view, and we must now hold, that, when a rate is filed, published and permitted to become effective by the department, it is and remains, until challenged in the manner provided by statute, the lawful rate, and the only lawful rate, to be charged and collected. . . . 157 Wash. at 561. In stating the general rule, the Washington court explained that the utility must be able to rely upon a previous determination that its existing rate is lawful: [T]he carrier would never know what its lawful earnings were, and could never allocate its earnings to betterments and dividends without the possibility of being embarrassed by delayed orders to make restitution. 157 Wash. at 561. This is precisely the situation which PSE currently faces, as the now effective $0.46/kVa month rate is itself subject to refund. PSE has no way to determine its lawful earnings from this service, as it would appear that virtually all the revenue collected by the Company for this service is at risk to be refunded. This situation could be remedied if the Commission clarified that the $0.46/kVa month rate is the effective rate, with any subsequent rate revision to be implemented only on a prospective basis. It should be noted that in the case of telecommunications companies, the Commission is specifically authorized by statute to approve, prior to investigation, a proposed rate decrease, subject to further adjustment at the conclusion of the investigation. Any different rate approved at the conclusion of the proceeding, however, is effective only prospectively from the date of the Commission's order. The Commission is not permitted to implement a different rate retroactively to the original effective date. RCW 80.04.130, in relevant part, provides: The commission shall not suspend a tariff that makes a decrease in a rate, charge, rental or toll filed by a telecommunications company pending investigation of the fairness, justness, and reasonableness of the decrease when the filing does not contain any offsetting increase to another rate, charge, rental or toll and the filing company agrees to not file for an increase to any rate, charge, rental, or toll to recover the revenue deficit that results from the decrease for a period of one year. . . . The commission may prescribe a different rate to be effective on the prospective date stated in its final order after its investigation, if it concludes based on the record that the originally filed and effective rate is unjust, unfair, or unreasonable. RCW 80.04.130 (emphasis added). There is no similar provision in effect for electric utilities. That such a provision was determined to be necessary to permit subsequent revisions to previously approved rates suggests that in the absence of such a legislative grant of authority, the Commission is powerless to make such revisions in electric rates. State ex rel. Pacific Tel. & Tel. v. Department of Pub. Serv., 19 Wn.2d 200, 215, 142 P.2d 498 (1943) (an agency "must act strictly within its statutory authority"); Vita Foods v. State, 91 Wn. 2d 132, 134, 587 P.2d 535 (1978) (courts should not construe an unambiguous statute; it is not within the court's power to add words to a statute, even if the court believes the legislature intended something else.) Clarifying the Order in the manner suggested by the Company would be consistent with the Commission's lawful authority. 2. Implementing a Rate Reduction on a Retroactive Basis Would Constitute Unlawful Retroactive Ratemaking. Rates are established for the future and it is the generally accepted rule that retroactive rate making is beyond the power of a regulatory commission. Nichols & Welch, Ruling Principles of Utility Rate Regulation 315 (1964). The Commission is authorized to set rates only prospectively, and not retroactively. This authorization derives from (1) the legislative nature of ratemaking, which requires that actions be implemented only prospectively and (2) the express language of the governing statute. In Washington, as in all other state jurisdictions, ratemaking is recognized as a legislative, not a judicial, function. POWER v. WUTC, 104 Wn.2d at 798, 807 (1985). Legislative functions may be exercised only prospectively. Arizona Grocery Co. v. Atchison, Topeka & Santa Fe Ry., 284 U.S. 370, 390 (1932). As Justice Holmes explained in Prentis v. Atlantic Coast Line Co., 211 U.S. 210, 226 (1908): Legislation . . . looks to the future and changes existing conditions by making a new rule, to be applied thereafter to all or some part of those subject to its power. The establishment of a rate is the making of a rule for the future . . . . 211 U.S. at 226. Further, the Commission has no statutory authority to engage in retroactive ratemaking. An administrative agency must be strictly limited in its operations to those powers granted by the Legislature. Cole v. WUTC, 79 Wn.2d 302, 306 (1971). The governing statute in Washington is RCW 80.28.020, which provides that the Commission: shall determine the just, reasonable, or sufficient rates . . . to be thereafter observed and in force, and shall fix the same by order. RCW 80.28.020 (emphasis added). Other courts have held that statutes authorizing utility commissions to fix rates to be followed "thereafter" allow a public utility commission to set rates prospectively only. In Public Utilities Commission of Ohio v. United Fuel Gas Co., 317 U.S. 456 (1942), the U.S. Supreme Court interpreted a statute similar to Washington's which describes rates "to be thereafter" charged. The Court stated the following with respect to the operation of the statute: The statute in terms thus gives the commission power to prescribe such rates prospectively only. If, after notice and hearing, the commission finds rates to be unlawful, it can then fix the just and reasonable rates "to be thereafter" charged. The establishment of new rates must be preceded by a finding that the old rates are unjust and unreasonable, and the new rates are prospective as of the date they are fixed. There is no basis in the statute for concluding that the commission's orders can be retroactive to the date when the commission's inquiry into the rates was begun; on the contrary, the explicit language of the statute precludes such construction. 317 U.S. at 464 (emphasis added). See also Pacific Tel. & Tel. Co. v. Public Utils. Comm'n, 401 P.2d 353, 362 (Cal. 1965) ("[T]his language is plain and unambiguous. The Legislature has instructed the commission that after a hearing it is to make its order fixing rates to be in force thereafter") (emphasis in original). In this proceeding, if the Commission determines at the conclusion of its investigation that a rate different from $0.46/kVa month or $0.50/kVa month is reasonable, it may approve such a rate, but only on a prospective basis to be thereafter charged. It would be contrary to law to implement any rate change retroactively to an earlier date. 3. The Tariff Cannot By Its Terms Provide for Implementation in a Manner Contrary to Law. As noted above, the tariff contemplates that the rate for optional firming service will be revised from time to time to reflect market rate. Specifically, the tariff states: Rate will be adjusted effective in November 1998, and annually thereafter, based upon market prices. Sheet No. 48a, § II, note (b). In its recommendation to the Commission, Staff interpreted this provision of the tariff as using an "interim" rate for this service, with annual rate changes "designed to reflect the market prices for firming service as they change from time to time." According to the Staff memo, "Staff believes that a new rate must be in place in order for the Company to be able to provide the service to customers after November 1, 1991 [sic]." The Order, in turn, states that the tariff requires that "a new rate be in effect on November 1, 1998." (Memo, p. 1) Nothing in the Order approving Schedule 48, however, indicates that the rate approved for Optional Firming Service was an "interim rate." Nor does anything in the tariff state that the existing rate will expire on a date certain. Rather, the specific provisions in the tariff regarding rate changes for Optional Firming Service simply identify the schedule under which such rate filings are to be made. By making its filing on September 28, 1998 in accordance with RCW 80.28.060 for a price change proposed to become effective on November 1, the Company has complied with RCW 80.28.060 and with the provisions of the tariff regarding price revisions. There is nothing in the language of the tariff which suggests that some nonstandard form of ratemaking is to apply to these annual rate changes. Where deferred accounting is in place, for example, the Commission may set rates which are subject to true-up at a later date. In such situations, the Commission has the ability to set rates on an interim basis, subject to adjustment at a later date. These situations are limited, however, and in the case of deferred accounting, must be authorized by an accounting order issued by the Commission. In the case of Puget Sound Power & Light's Periodic Rate Adjustment Mechanism, or PRAM, for example, the Commission implemented a rate increase on a temporary basis subject to refund. Docket Nos. UE-920433, UE-920499 and UE-921262, Fifteenth Supplemental Order on Reconsideration, p. 23. The final rate decision was implemented through the PRAM rate revisions, Nineteenth Supplemental Order. There is no deferred accounting approved for rate revisions under Schedule 48, nor is there any rate mechanism in place that would permit rates to be set on an interim basis, subject to later true-up. Any proposed rate changes for this service must conform to the same legal requirements as apply with respect to other rate changes, including the proscription against retroactive ratemaking and compliance with the Filed Rate Doctrine. 4. Implementing a Rate Reduction on a Temporary Basis, Subject to Refund, Is Contrary to Commission Precedent. In a number of decisions, the Commission (or its predecessor) has approved temporary rate increases (subject to refund) to provide interim rate relief pending the outcome of the investigation of permanent rates. State ex rel. Puget Sound Navigation v. Dept. of Transportation, 33 Wn.2d 448, 206 P.2d 456 (1949) establishes the authority of the Commission to allow a rate increase request to become effective on a temporary basis, subject to refund in the event the rates finally determined are less than the temporary rates. In that case, the carrier filed for a 30% rate increase, and the carrier sought permission, which was granted, to place those increased rates into effect on a temporary basis, pending the Department of Transportation's final action on the rate filing. The Department imposed the condition that refunds would be required if the increased temporary rates were determined to be unreasonably high. The carrier "accepted the conditional allowance of its tariffs and acted thereon by collecting the temporary rates." 33 Wn.2d at 483. When the final rate decision granted only a 10% increase, the carrier was required to refund the amounts collected in excess of the permanent rate level. Subsequently, the Commission has granted petitions for interim rate relief under similar circumstances, allowing a requested rate increase to take effect on a temporary basis, subject to refund in the event the final rate levels approved are lower than the interim rates. This has been done in situations where necessary to preserve the financial integrity and the ability of the utility to continue its operations. In ruling on such requests for temporary rate relief, the Commission has applied six criteria initially announced in Cause No. U-72-30, Pacific Northwest Bell (1972). There do not appear to be any situations where the Commission has implemented a proposed rate reduction on a temporary basis, subject to refund. Similarly, where the Commission has determined that rate reductions are necessary after the conclusion of hearings and investigation, such rate decreases have been made effective as of the date of the final Commission order. The Commission did not purport to have the authority to implement a rate reduction as of the date of the complaint and suspension order. In Washington Natural Gas Company, Docket No. UG-920840 (1993), the utility requested a general rate increase of $41.4 million. At the conclusion of the hearing and investigation, the Commission determined that a rate reduction was required, and directed the utility to file tariffs to implement such a rate reduction, to take effect on a prospective basis only. Fourth Supplemental Order, p. 49. Similarly, U S WEST Communications in February 1995 filed for a $204 million rate increase, and instead was ordered to reduce its rates by $91.5 million at the conclusion of the proceeding. That rate reduction was directed to be implemented prospectively only, not back to the date of the utility's original filing or the issuance of the complaint and suspension order. WUTC v. U S WEST Communications, Inc., Docket No. UT-950200, Fifteenth Supplemental Order (April 11, 1996). It is unprecedented for the Commission to require that a rate reduction be implemented retroactively to the date of the utility's original filing or the issuance of the complaint and suspension order. 5. The Order Erroneously Places on PSE the Burden of Proof to Show that "Such Increases are Just and Reasonable" (Order, p. 1), When in Fact There is No Proposed Increase. The Order states that: In accordance with RCW 80.04.130, the burden of proof to show that such increases are just and reasonable shall be upon the respondent [PSE]. Order, p. 1. The referenced statute, RCW 80.04.130, provides in relevant part that: (2) At any hearing involving any change in any schedule, classification, rule or regulation the effect of which is to increase any rate, charge, rental or toll theretofore charged, the burden of proof to show that such increase is just and reasonable shall be upon the public service company. RCW 80.04.130 (emphasis added). By its September 28 tariff filing, PSE is not proposing to increase any rate or charge, but rather to decrease the existing rate from $0.50/kVa month to $0.46/kVa month. The Order should be corrected to reflect that RCW 80.04.130 does not, by its terms, assign to PSE the burden of justifying its proposed rate. B. Even if Otherwise Lawful, the Order Establishes an Unwise Public Policy That Rate Changes Will Be Put Into Effect Immediately, Subject to Later Revision. The statute governing tariff changes, RCW 80.28.060, requires that any proposed change in any rate or charge be filed by the utility with the Commission thirty days prior to its proposed effective date. Under the statute, the Commission has two courses of action with respect to a proposed rate change: it can either (1) allow the proposed change to go into effect as of the date stated in the utility's proposed tariff, or (2) suspend the effective date of the proposed rate change (for up to ten months under RCW 80.04.130) to permit hearings and an investigation and, in the meantime, the existing rates continue in effect. The Order potentially departs from decades of Commission precedent which precludes rate changes from becoming effective prior to the conclusion of hearings and investigation. Under the Commission's previous practice, proposed rates are suspended and existing rates remain in effect until issuance of a final Commission order. The Commission has allowed a rate increase to take effect immediately only in those rare situations where it can be justified as emergency, interim rate relief, applying the six criteria enunciated in Pacific Northwest Bell, Cause No. U-72-30. CONCLUSION Puget Sound Energy, Inc. respectfully requests the Commission to clarify/reconsider its October 28 Order in the above proceeding. The Order should be clarified to provide that (1) the proposed rate of $0.46 per kVa/month is the effective rate pending a final determination, and (2) any different rate would be effective as of the prospective date stated in the Commission's final order after its investigation. DATED this 9th day of November, 1998. PUGET SOUND ENERGY, INC. By: James M. Van Nostrand Andree Gagnon PERKINS COIE LLP Of Attorneys for Puget Sound Energy, Inc. [BA983070.038]