Supreme Court: Southwest Gas must justify costs included in customer rates

When state regulators approve and set utility rates, they review utility spending to decide what expenses should and should not be passed on to customers. In cases where those costs are not fully accounted for, the burden of proving they are prudent rests with the utility, the Nevada Supreme Court ruled Thursday in a case involving Southwest Gas.

In a unanimous decision, the court upheld a Clark County district court ruling and sided with utility regulators and ratepayers, including large customers who often have high utility bills. and high natural gas. The Nevada Resorts Association filed a brief in the case, saying it shouldn’t be up to guests and regulators to prove whether utility costs are prudent.

To do so, the resort association wrote in its brief, “would be unfair, detrimental to Nevada customers, and contrary to well-established Nevada law and pricing policy.”

In 2018, Southwest Gas sued the Public Utilities Commission (PUC) after the regulator failed to allow the utility to recover the costs of certain capital projects and decreased the rate of return the utility is authorized to charge subscribers for infrastructure investments.

The commission, which has a responsibility to protect ratepayers, rejected the claims because it said Southwest Gas had not fully substantiated them. Southwest Gas argued that it was entitled to a presumption of prudence – that regulators should defer to the utility and assume that its costs were reasonable. He also claimed throughout the trial that his due process rights were violated.

The Supreme Court rejected that argument in its decision on Thursday.

“Utilities are granted monopolies to provide their services to the people of Nevada,” Judge Lidia Stiglich wrote in the court notice. “In return, the PUC determines the maximum rate that utilities can charge for their services, subject to judicial review. In this case, we consider that the public services do not benefit from a presumption of prudence with regard to the expenditures that they submit to the PUC.

In a statement Friday, Southwest Gas said, “We appreciate the court’s decision and the clarification of the issues raised as a result of the decision in the company’s 2018 rate case. The company has worked constructively with the Nevada Public Utilities Commission (PUCN) to ensure that it continues to meet their expectations with respect to its regulatory filing,”

After Southwest Gas filed its application for a rate increase in 2018, board regulatory staff determined that the utility had failed to properly substantiate the expenses it was seeking to recover through customer rates. After further investigation, staff discovered what the court described as “questionable expenses” for airfare, twice-weekly massages, a golf course membership and Apple computers.

Southwest Gas agreed that these costs were inappropriate and removed them from its rate increase application. But the “inappropriate expenses” caused commission staff to think about all the costs of the project, which were not broken down to show expenses by line item.

Regulatory staff, who make suggestions to the three-member commission, recommended that half of the project costs be excluded from tariffs. The three-member commission went further, excluding 100% of the costs because Southwest Gas had not fully justified them.

Southwest Gas challenged the ruling in court, arguing that the commission had long applied a presumption that a utility’s expenditures had been made prudently and that the utility had provided supporting evidence and testimony. the costs of his project.

Lawyers for the utility further said the commission applied a lower rate of return than it had requested or granted to similarly situated natural gas utilities. As regulated monopolies that provide needed infrastructure to the public, utilities are entitled to recoup a rate of return on their investments at taxpayers’ expense – but that rate is set and controlled by regulators. Finally, Southwest Gas challenged the board’s decision to cut pension spending.

On all three issues, the Supreme Court denied Southwest Gas’s appeal to review a lower court ruling and the utility regulators’ original decision. In the order, Stiglich wrote that the court “finds[d] that the commission’s decision to deny the utility recovery of certain project expenses and additional pension expenses is supported by substantial evidence on the record.

The Supreme Court is not the only branch of government that has spoken out on this issue in recent months. Last year, the Legislative Assembly, as part of its omnibus energy bill, approved language indicating that utilities generally do not benefit from a presumption of prudence before the commission.

This bill, passed in May under number SB448, stipulated that “the utility has the burden of proving that an expenditure, investment or cost was reasonably and prudently incurred”. Southwest Gas appealed the case to the Supreme Court before the bill was signed into law.

Southwest Gas has come under scrutiny in its spending and management. Investor Carl Icahn, who made an unsolicited bid last year to take over the company, claimed its management had a frayed relationship with its regulator, citing reports from the Las Vegas Review-Journal that documented inappropriate taxpayer spending, similar to those raised in the court case.

“We look forward to working with our regulators and all stakeholders to ensure that Southwest Gas continues to meet customer and regulator expectations to provide affordable, safe, reliable and sustainable energy service,” the company said. company in its press release on Friday.

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