ORDER NO. 97-408

ENTERED OCT 17 1997

This is an electronic copy.

BEFORE THE PUBLIC UTILITY COMMISSION

OF OREGON

UE 101/DR 20

DISPOSITION: DECLARATORY RULING ISSUED

On August 14, 1997, PacifiCorp filed a Petition for a Declaratory Ruling. The questions presented are set out below. On August 25, 1997, the Public Utility Commission of Oregon granted the request for a declaratory ruling.

In a ruling issued August 29, 1997, the Administrative Law Judge included DR 20 in UE 101, the docket relating to Portland General Electric’s Customer Choice Pilot Program. The ruling also set out a briefing schedule for the declaratory ruling proceeding. PacifiCorp filed a brief and other parties filed responsive briefs.

This order sets out the questions presented in PacifiCorp’s declaratory ruling request, the assumed facts set out in that request, and the Commission’s conclusions on the questions presented. We have considered the arguments of all parties in reaching these conclusions.

Assumed Facts

PacifiCorp has asked the Commission to base its ruling on the following assumed facts:

1. As defined by ORS 756.005, PacifiCorp is a public utility in the State of Oregon.

2. "Direct Access Pilot Program" means an experimental program under which Oregon retail customers may choose their supplier of electric energy services, while continuing to receive distribution services from their incumbent utility.

3. Competition among electric energy service suppliers exists in Direct Access Pilot Programs.

4. Irrespective of whether public utilities file tariffs setting prices for their sales in a Direct Access Pilot Program, through exercise of the Commission’s general regulatory power over public utilities in Oregon, the Commission has jurisdiction to review the sales made by public utilities in Direct Access Pilot Programs for ratemaking purposes and to set conditions upon the participation of public utilities in Direct Access Pilot Programs that will ensure fair competition.

5. The requirement that a public utility file tariffs setting prices for its sales made in a Direct Access Pilot Program would effectively foreclose public utility participation in the program because the regulatory requirement of tariffed prices is inconsistent with the demands for responsiveness and price flexibility in a competitive marketplace. Similarly, the applicability of the utility price discrimination laws could prohibit public utility participation in a Direct Access Pilot Program because the public utility might be required to charge the same price to all customers that are similarly situated regardless of competitive considerations.

Questions Presented and Positions of the Parties

PacifiCorp has asked the Commission to answer the following questions based upon the assumed facts:

1. Is PacifiCorp required to file and follow tariffs under ORS 757.205 and 757.225 covering its sales or potential sales in a Direct Access Pilot Program?

PacifiCorp asks that the Commission answer this question in the negative.

2. If PacifiCorp is required to file and follow tariffs covering its participation in a Direct Access Pilot Program, may this requirement be satisfied by a tariff that lists the general terms and conditions of PacifiCorp’s participation in the Direct Access Pilot Program, but does not contain pricing information for individual sales?

PacifiCorp asks that the Commission answer this question in the affirmative.

3. Are the utility price discrimination laws set forth at ORS 757.310 to 757.330 applicable to PacifiCorp’s sales in a Direct Access Pilot Program?

PacifiCorp asks that the Commission answer this question in the negative.

Position of Other Parties

PGE argues that the tariff requirements are mandatory and cannot be waived by the Commission without express legislative direction. It disagrees with PacifiCorp’s attempt to narrow the definition of "service." Moreover, PGE argues that permitting PacifiCorp to operate without tariffs could lead to cross-subsidization. PacifiCorp will use its regulated generating assets to provide retail service in the pilot program. PacifiCorp could, therefore, base its prices in the direct access pilot program on its marginal costs of providing service to customers of that program, rather than its embedded costs, thereby enabling it to charge less than its competitors. CUB agrees with PGE on this issue.

The Citizens’ Utility Board argues that only narrow exemptions from regulatory requirements be granted, if any, and that they be explicitly limited to the direct access pilot program.

With respect to Question 1, CUB argues that there in no justification for suspending the tariff requirements. On Question 2, CUB claims that allowing tariffs with no pricing information may make the tracking of revenues difficult and may thus impede the discovery of cross-subsidization. As to Question 3, CUB notes that creation of a rate class for which only some customers qualify may be permissible, but only if there are rational reasons for the disparate treatment. Such a rationale may exist to test a direct access pilot program. That type of program is limited in time, so the disparate treatment between those in the pilot area and those outside will end. Moreover, all customers in the pilot may return to the regulated rate so the issue of discrimination is avoided for the term of the pilot.

Pope and Talbot expresses concern that any exemptions from the regulatory requirements not extend to any pilot program that PacifiCorp might undertake. It asks that if PacifiCorp is allowed to file and follow tariffs that list general terms and conditions, limitations be imposed so that abuses such as cherry picking of the best customers not occur.

Analysis and Disposition

Question 1: Is PacifiCorp required to file and follow tariffs under ORS 757.205 and 757.225 covering its sales or potential sales in a Direct Access Pilot Program?

ORS 757.205(1) provides:

Every public utility shall file with the commission, within a time to be fixed by the commission, schedules which shall be open to public inspection, showing all rates, tolls, and charges which it has established and which are in force at the time for any service performed by it within the state, or for any service in connection therewith or performed by any public utility controlled or operated by it.

ORS 757.225 provides:

No public utility shall charge, demand, collect or receive a greater or less compensation for any service performed by it within the state, or for any service in connection therewith, than is specified in printed rate schedules as may at the time be in force, or demand, collect or receive any rate not specified in such schedule. The rates named therein are the lawful rates until they are changed as provided in ORS 757.210 to 757.220.

PacifiCorp argues that these statutes, which bind it when it functions as a regulated provider of bundled electric services, should not apply when it provides competitive services in a Direct Access Pilot Program and does not rely upon its monopoly distribution system or monopoly status to provide the services. It argues that a public utility participating in such a program will be providing the unbundled commodity portion of the energy needs of customers located within another public utility’s allocated service territory. It would therefore not be operating as a public utility but rather as a competitive provider. PacifiCorp argues that if the Commission’s general powers are broad enough to adopt a pilot program on an experimental basis, those powers must necessarily be broad enough to set the terms and conditions of public utility participation in such programs. Thus, PacifiCorp argues, the Commission has the power to exempt a public utility from the requirement of filing tariffs when the utility functions competitively and provides unbundled energy services in a pilot program.

PacifiCorp argues, moreover, that the term "service" in ORS 757.205 should be interpreted as applying only to the provision of bundled monopoly services and not to the provision of competitive energy services in a pilot program. PacifiCorp notes that the statutes which use the term "service," ORS 757.205, 757.225, and 756.010(8), do not indicate whether the term applies to the provision of unbundled competitive energy services or is limited to the provision of bundled, monopoly services. Thus, PacifiCorp argues, the Commission should look at the context of the statutes involved as a guide to interpretation. Since these statutes are part of the statutory scheme establishing economic regulation for utilities functioning as monopoly service providers, the term "service" should be viewed as covering only regulated, bundled energy services and not the sale of competitive unbundled energy service in the pilot program.

PacifiCorp also argues that policy considerations should be taken into account by the Commission in making its decision on these issues. It argues that tariff requirements that would be applicable to some but not all potential service providers would be counterproductive to the development of the competitive market and to the usefulness of a pilot program as a means of a gathering data on the transition to competition.

Disposition

The Commission answers this question: Yes.

PacifiCorp is, by its own admission, a "public utility" under ORS 757.005 The company has also stated that if it participates in direct access programs, it will do so as a vertically integrated utility, rather than through an affiliate. In other words, if PacifiCorp takes part, it will be acting as a "public utility."

As a public utility, PacifiCorp is required by ORS 757.205(1) to file tariffs for service it offers. The term "service" means more than the bundled rates the company now provides. Under ORS 756.010(8):

"Service" is used in its broadest and most inclusive sense and includes equipment and facilities related to providing the service or product served.

There is also case law to support the Commission’s position. In Northwest Climate Conditioning Association v. Lobdell, 79 Or App 560 (1986), the Oregon Court of Appeals held that this agency must require tariffs of regulated utilities even for services that are subject to direct competition.

Question 2: If PacifiCorp is required to file and follow tariffs covering its participation in a Direct Access Pilot Program, may this requirement be satisfied by a tariff that lists the general terms and conditions of PacifiCorp’s participation in the Direct Access Pilot Program, but does not contain pricing information for individual sales?

PacifiCorp asks that the Commission answer this question in the affirmative. In other words, if the Commission determines that PacifiCorp must file a tariff for its sales in a pilot program, PacifiCorp asks that the Commission permit PacifiCorp to file a tariff that describes the general terms and conditions of its participation but does not contain detailed pricing information for sales or for potential sales. Its cites Northwest Natural Gas Company v. Oregon Steel Mills, Order No. 91-736 and Northwest Climate Conditioning Association v. Lobdell, 79 Or App 560, 567, 720 P2d 1281 (1986) and cases from other jurisdictions for the proposition that the Commission has the discretion to fashion a tariff to permit PacifiCorp to compete effectively.

Disposition

The Commission answers this question: Yes.

Tariffs typically set out specific prices for specific services. The Commission is aware, however, that such an approach will not work well in the open market that it expects to exist in a direct access pilot program. Sellers in an open market must be free to adjust prices to compete with others who provide the same goods or services. PacifiCorp, as a participant in an open market, should be free to do likewise, but it should not be permitted to engage in anti-competitive conduct, such as selling at predatory prices.

The Commission believes that the best approach is to require PacifiCorp to file tariffs that establish ground rules under which the company must operate. PacifiCorp states that its interest in direct access pilot programs is limited to serving industrial customers. Those industrial customers will be able to buy electricity from PacifiCorp or any other energy provider. If PacifiCorp seeks to provide service to any of these industries, then the company will be offering energy to customers that have a service alternative. In that respect, the offers PacifiCorp will make will be much like special contract offers it and other utilities now make. That being the case, it makes sense that if PacifiCorp makes an offer, it follow the standard the Legislative Assembly has adopted for special contracts.

When the Commission is asked to approve a special contract, ORS 757.230 requires it to consider a number of factors. Two of those are relevant to offers PacifiCorp may make in a direct access pilot program. They are:

Whether the rate generates revenues at least sufficient to cover relevant short and long run costs of the utility during the term of the rates;

Whether the rate generates revenues sufficient to insure that just and reasonable rates are established for remaining customers of the utility.

The Commission believes these considerations should be requirements in PacifiCorp’s tariff. PacifiCorp can work with Staff and other interested parties to develop such a tariff.

Question 3: Are the utility price discrimination laws set forth at ORS 757.310 to 757.330 applicable to PacifiCorp’s sales in a Direct Access Pilot Program?

ORS 757.310 provides:

(1) Except as provided in ORS 757.315, no public utility, or any agent or officer thereof shall, directly or indirectly, by any device, charge, demand, collect or receive from any person a greater or less compensation for any service rendered by it than:

(a) That prescribed in the public schedules or tariffs then in force or established; or

(b) It charges, demands, collects or receives from any other person for a like and contemporaneous service under substantially similar circumstances. A difference in rates or charges based upon a difference in classification pursuant to ORS 757.230 shall not constitute a violation of this paragraph. A difference in rates or charges for a service provided pursuant to ORS 757.516 shall not constitute a violation of this paragraph.

(2) Any public utility violating this section is guilty of unjust discrimination.

PacifiCorp asks that the Commission answer this question in the negative. It reiterates the same arguments made above with respect to the question of the applicability of tariff laws: that the Commission’s general authority to regulate the terms and conditions of the pilot program and a reasonable construction of the term "service" give the Commission the authority to declare price discrimination laws inapplicable in this limited context.

PacifiCorp also reiterates its policy arguments in support of its position. It argues that the dangers of utility price discrimination do not exist in a competitive market and that price discrimination is in fact a positive force in a competitive market. It cites Commission orders which support this proposition. It concludes that price discrimination laws would be inimical to the success of the Pilot Program.

Disposition

The Commission answers this question: No. ORS 757.310 through 757.330 do not apply to sales made in a direct access pilot program.

The law allows discrimination between customer classes, but not within customer classes. Under ORS 757.230, the Commission "may authorize classifications or schedules of rates applicable to individual customers or groups of customers." That statute allows the agency to require different groups of customers to pay different charges. For years the Commission has used its authority under the statute to develop different rates for industrial customers, for commercial customers, and for residential customers. More recently, it has used the authority given under ORS 757.230 for special contracts tailored for the needs of individual industrial customers.

By contrast, ORS 757.310 through 757.330 deal with discrimination within a customer class. ORS 757.310 is particularly relevant. It prevents a public utility from charging different people different amounts "for a like and contemporaneous service under substantially similar circumstances." In other words, ORS 757.310 prohibits discrimination within a customer class.

ORS 757.230 and 757.310, when read together, make clear that the Commission may authorize discrimination, except when the discrimination is within a customer class.

It is important to note that there is language in ORS 757.310 that shows how ORS 757.310 through 757.330 fit together with ORS 757.230. ORS 757.310 states,

"A difference in rates or charges based upon a difference in classification pursuant to ORS 757.230 shall not constitute a violation . . ." of the law.

In simple English, the above language tells the Commission that if it is acting consistent with ORS 757.230 in creating customer classes, then it is not acting against the prohibitions of ORS 757.310 through 757.330. The question, then, is how far the agency can go under ORS 757.230 in developing customer classes for a direct access pilot program.

Of course, the Commission has never had occasion to apply ORS 757.230 in a direct access pilot program. Nevertheless, the language of the statue gives the agency guidance as to what it may do.

ORS 757.230 allows the Commission to consider a number of factors in establishing customer classes. The agency’s authority is broad, for the last of the factors mentioned is "any other reasonable consideration." The Commission believes the language means that it can use any economic justification—so long as it is a reasonable one—in the creation of customer classes. As mentioned above, the authority given the agency by ORS 757.230 is broad enough to allow it to permit rates tailored to the need of individual customers—again, so long as there is a reasonable economic justification for doing so.

The Commission believes that there is reasonable economic justification for establishing individual customer classes in the open market that will exist in a direct access pilot program. In open markets, each customer acts in his, her, or its own best interests. Two people purchasing the same automobile from the same dealer may pay different prices. The same is true of two people buying comparable houses from the same contractor. Having anything other than individual customer classes is simply antithetical to the idea of an open market.

Some may have a problem with the idea that two customers receiving the same service are paying different rates. In an open market, however, each of those customers will have service alternatives. If customer A finds that it is paying more than customer B for the same service, customer A can demand the same rate customer B is paying. If the energy service provider for customer A fails to meet A’s demand, A is free to switch to another provider.

The Commission is aware that this direct access pilot program could result in discrimination that is not in the public interest. One of the purposes of this pilot program is to learn whether such a problem will arise. If it does, then the agency is free to use its authority to create customer classes in post-pilot programs to the extent necessary to eliminate discrimination that is not in the public interest.

As a practical matter, the Commission believes that the energy service providers participating in the UE 101 pilot will not have the resources to deal with residential and small commercial customers on an individual basis, even though, in theory, the agency is allowing those customers to fend for themselves. If the Commission’s belief is correct, energy service providers should have difficulty discriminating among those customers. On the other hand, large commercial and industrial customers will be the ones receiving rates tailored to meet their needs. One customer may want firm power, another may want interruptible, a third may want a 50-50 blend of firm and interruptible, and a fourth may want a different blend of firm and interruptible. Other customers may want to combine buying electricity with a purchase of natural gas or other energy services. Even customers who may want the same service may contract for that service at different times, when the market prices of those services are different. The possibilities are endless. The only practical solution is to allow each of these customers to act in its own best interests. And that is a solution that ORS 757.230 allows the Commission to adopt.

ORDER

IT IS ORDERED that, based on the assumed facts presented herein, the Commission issues the declaratory rulings set out above.

Made, entered, and effective ________________________.

A party may request rehearing or reconsideration of this order pursuant to ORS 756.561. A request for rehearing or reconsideration must be filed with the Commission within 60 days of the date of service of this order. The request must comply with the requirements in OAR 860-014-0095. A copy of any such request must also be served on each party to the proceeding as provided by OAR 860-013-0070(2). A party may appeal this order to a court pursuant to ORS 756.580.