Discussion

Section 19 of the Agreement states, "Complaints against the utility arising out of this Agreement shall be enforced only under the provisions of Section 1702 of the Public Utilities Code." Section 1702² and Rule 9 of the Rules of Practice and Procedure permit complaints to be filed "setting forth any act or thing done or omitted to be done by any public utility, including any rule or charge heretofore established or fixed by or for any public utility, in violation or claimed to be in violation, of any provision of law or of any order or rule of the Commission. . . ."

In this case, the parties do not dispute that NARCO and PG&E representatives signed an agreement for gas transportation which provided for the assessment of use-or-pay charges based on 75% of the contracted quantities (508,000 and 513,895 Dth for 1991-1992 and 1992-1993, respectively), and that the agreement was based on and consistent with PG&E's Tariff Schedule G-FT. There is also no dispute that, if applicable, the use-or-pay charges are correctly calculated by PG&E.

NARCO argues that it should be excused from liability for use-or-pay charges totaling $296,201.49 associated with its August 5, 1991 Natural Gas Transportation Agreement and the July 22, 1992 amendment thereto for two primary reasons. First, NARCO denies liability for the use-or-pay charges on the grounds that the individual who executed the contract and amendment on NARCO's behalf was not authorized to do so. Second, NARCO argues that it should be excused from liability for the use-or-pay charges because the amounts specified as the minimum annual contract quantities are mistakes. NARCO argues that under the circumstances presented in this case, requiring NARCO to pay use-or-pay charges would be unconscionable. In addition, in its reply brief, NARCO also claims that PG&E's policy of not allowing customers to revise their contracts after the open season allocations are made violates Sections 451 and 489.

Authority to Sign

First, NARCO argues that under California law, its contractual obligation to PG&E under Tariff Schedule G-FT is unenforceable based on the argument that a principal is bound by the unauthorized acts of its agent only to the extent that a third party incurs a liability or parts with value based upon a good faith belief that the agent's acts are authorized. NARCO claims that since PG&E suffered no damage, NARCO is not bound by its agent's unauthorized execution of the contract. NARCO also claims that PG&E should have known that the plant manager did not have authority to sign the contract.

In determining whether Zaro had actual or ostensible authority to execute contracts on behalf of NARCO and whether PG&E knew or should have known if he did not, we consider both NARCO's actions with respect to this contract and PG&E's diligence in determining who had authority to sign.

The contract and the amendment that resulted in NARCO's liability for use-or-pay penalties were both executed by NARCO's Ione plant manager Zaro. NARCO claims that the contract is voidable because Zaro did not have authority to sign the contract.

Both parties acknowledge that NARCO plant managers had signed gas transportation contracts with PG&E for several years, and that both parties had considered those prior contracts to be binding. NARCO admits that it changed its contract authorization policy subsequent to the changes in PG&E's gas program, but presented no evidence to show that it notified PG&E of any change in policy. Despite this lack of notice to PG&E, NARCO claims that PG&E "should have been aware that it was not business as usual" because Hughes became involved in the negotiations along with Access.

NARCO maintains that even though NARCO received and paid PG&E's billings for gas services during the entire contract period, its doing so did not amount to ratification of Zaro's agency because NARCO did not have actual knowledge of the underlying contractual provisions. NARCO states that the payment of PG&E's bills, like NARCO's payment of any other utility bills, was simply a ministerial act by NARCO's accounting personnel.

PG&E contends that since NARCO never indicated on any previous occasion that the plant manager did not have authority to enter into binding agreements and, on the contrary, has treated all such previous agreements as valid and enforceable, there can be no question that with respect to this complaint, the plant manager had ostensible, if not actual, authority to enter in the Agreement. PG&E states that it relied on its experience with past contracts and on statements made by the complainant to determine who had authority to sign on behalf of NARCO. The record includes several contracts that were signed by plant managers. In addition, PG&E's witness Blume testified that she relied on representations made by NARCO representatives Esposito and Elliott regarding who would be responsible for the 1991 transportation contract.

We find NARCO's factual arguments to be implausible. The record demonstrates that prior to September 15, 1992, more than a month after the second contract was executed and after the first use-or-pay charges had been billed, no one at NARCO notified PG&E of any change in policy or took any action whatsoever to inform PG&E that only its corporate purchasing department was authorized to sign contracts. Furthermore, the record shows that NARCO expected the Agreement signed by Zaro to be binding on PG&E and acted consistent with this belief. NARCO requested and received an allocation of gas from the San Juan Basin, then requested and received Canadian gas to fulfill the contract amount. NARCO nominated and received gas monthly and received and paid monthly bills from PG&E.

We find that complainant's representations, express contractual commitments and prior course of dealing with PG&E demonstrate that until August 1992, Ione plant manager Zaro had ostensible, if not actual, authority to execute contracts for NARCO, that those contracts were considered binding by both PG&E and NARCO and that both parties acted accordingly. Curiously, the same policy that was in effect prior to September 1992 was also apparently in effect again in 1995, when a contract was signed by Mr. Snider, then the Ione plant manager, on behalf of NARCO.

Harm

NARCO contends that even if PG&E did not know that Zaro acted without authority, NARCO cannot be held responsible for Zaro's actions because Civil Code Section 2334 binds a principal to the acts of an agent operating under ostensible, but not actual, authority only to the extent required by the doctrine of estoppel.³

NARCO states that the elements of estoppel are representation by the principal, justifiable reliance thereon by third party, and change of position or injury resulting from the reliance. NARCO argues that because PG&E did not suffer any loss or harm as a result of its reliance on Zaro's ostensible authority, there are no grounds for estoppel in this case and the contract and amendment are voidable because their execution was not authorized. Thus, NARCO maintains, relief is permitted in this case because there is no evidence that granting relief would result in any harm.

We disagree. PG&E and its ratepayers were to be compensated for the use of its interstate pipeline capacity through the fees and charges provided in the Agreement. If we now determine that NARCO should be excused from this fee due to the acts of its agent, ostensible or actual, PG&E and its ratepayers would no longer receive the benefit they agreed to. For the entire two-year period, NARCO held a contractual right to a specified amount of transportation capacity. By virtue of NARCO holding this capacity, other parties did not have access to this capacity except to the extent that NARCO's broker made it available through the secondary market. It is the charge for this transportation capacity for which NARCO is responsible.

NARCO admits that if a non-core customer were permitted, with impunity, to take less than the required minimum amount of gas, such conduct would eventually result in a revenue shortfall for PG&E which would then be entered into PG&E's balancing account for future recovery from all non-core ratepayers. However, NARCO claims that those same revenues would have been recovered from ratepayers anyway had the mistake not been made. While it may be true that PG&E's revenue requirement would not change by virtue of granting NARCO relief, it is not true that a revenue shortfall would exist absent granting such relief. Only by granting NARCO relief from the use-or-pay charges will a revenue shortfall exist. If NARCO had not contracted for the excess capacity, that capacity would have been available to other customers who presumably would have either used it or paid the use-or-pay charges, thereby contributing those same revenues and avoiding a revenue shortfall.

In addition, the record clearly establishes that granting NARCO relief from the use-or-pay charges would be inconsistent with the Commission's policy of protecting ratepayers against precisely this type of situation. In D.90-09-089, we specifically rejected a settlement proposal that would have allowed customers to avoid use-or-pay charges for essentially any circumstance that would reduce demand, and instead adopted a use-or-pay charge to protect the general body of ratepayers from revenue shortfalls that could occur if individual transportation customers' actual gas throughputs were significantly less than their forecasted throughputs. The only permitted exception to the use-or-pay charge was force majeure. The Commission's intention in adopting this charge was to require individual transportation customers to bear the risk associated with demand reductions in transportation services. NARCO's requested relief would inappropriately shift that risk to the detriment of ratepayers.

We conclude that the evidence establishes that granting relief to NARCO would indeed harm PG&E's ratepayers, would be inconsistent with prior Commission orders and PG&E's tariffs, and would set a poor precedent to guide future behavior.

In addition, we agree with PG&E that under the facts of this case, it is not within the discretion of PG&E to disregard its tariff and waive the assessment of the use-or-pay penalty. Tariffs have the force and effect of law.⁴ In its complaint, NARCO notes that it has been purchasing and transporting natural gas over the PG&E system for several years. It has done so under Natural Gas Transportation Service Agreements dated July 10, 1989 and January 26, 1990, both of which contained a minimum contract quantity condition, which is essentially the same as a use-or-pay charge. Based on this experience, NARCO knew or should have known of the tariff requirements under which it operated, including the use-or-pay penalties.

Mistake

NARCO's second argument is that it should be excused from liability for the use-or-pay charges because the contract mistakenly specified minimum annual transportation obligations that were far in excess of NARCO's historical and projected firm gas requirements. NARCO asserts that, where there is a material mistake in a contract, even if the mistake is unilateral and the other party had no knowledge or reason to know of the mistake, the contract is voidable if enforcement would be unconscionable. NARCO emphasizes that if the contract were enforced, NARCO would be forced to pay nearly $300,000 in penalties, while PG&E would suffer no harm. Under these circumstances, NARCO argues, PG&E's receipt of the charges, whether for its direct benefit or the benefit of its ratepayers, would be unconscionable.

We find that the record does not support NARCO's claim. The decision to request a particular amount of gas was NARCO's alone. NARCO alone had sufficient knowledge of its future operations to designate the appropriate amount of gas. Therefore it was incumbent upon NARCO to ensure that the contracts it executed met, but did not exceed its needs. In relation to NARCO's request, PG&E had a corresponding obligation to ensure that a customer's request for gas was consistent with that customer's past usage.

In this case, the record shows that NARCO elected to submit a request for access to San Juan Basin gas in an amount equal to its total Ione fuel requirements, which were determined to be 508,000 Dth per year, with the intent of maximizing its allocation of San Juan Basin gas. NARCO admits that the 508,000 Dth ACQ was inconsistent with the Ione plant's needs, but states that its expectation was that if it didn't receive the entire amount of its request from the San Juan Basin, the contract would be revised downward to reflect an amount identical to its allocation of San Juan Basin gas. NARCO's witness Hughes stated that Access advised him that the Agreement with PG&E could be revised, and also stated that the advice was confirmed by PG&E. However, NARCO did not provide evidence of that confirmation, nor did NARCO provide evidence of any attempt to change the contract quantity prior to September 1992.

In contrast, PG&E witnesses Blume, Aube, and Cooper each testified that they informed NARCO on several occasions that it could not change contract quantities after the original contract was signed. Moreover, although NARCO's witness Hughes claims that NARCO was following Access' recommended strategy in designating the maximum contract amount and intending to reduce that amount after the open season allocation, such a reduction is not spelled out in Access' strategy as presented in Exhibit 3, Tab 3.

The record shows that PG&E fulfilled its obligation to ensure that NARCO's request for gas was consistent with past usage for both contract year 1991-1992 and contract year 1992-1993. NARCO's requested ACQ of 508,000 Dth, with a use-or-pay charge for usage less than 75% of the ACQ, 381,000 Dth, was indeed consistent with NARCO's past usage, particularly its usage of 490,000 Dth in 1989 and 340,000 Dth in 1990. Blume presented uncontroverted testimony that during the first contract year she raised the use-or-pay issue with Zaro many times, and brought a copy of a detailed bill which described the underutilization when she met with Zaro.

For the second contract year, Blume testified that she informed Zaro that although exact figures had yet to be calculated because the contract year had not officially ended, it was clear that NARCO would be subject to a use-or-pay charge for failure to use 75% of its ACQ. Despite this information, Zaro requested to increase the ACQ to 513,000 Dth for the 1992-1993 contract period. Blume stated that she met with Zaro to confirm the increase and that Zaro informed her both that he was taking orders from corporate headquarters in Cleveland and that the increase was correct.

We agree with PG&E that this is not a case of clerical error or unintentional designation of the 508,000 Dth ACQ. Instead, NARCO intentionally designated the contract amount, eventually regretted that designation, and now seeks to be excused from the consequences.

NARCO admits that a facsimile dated June 5, 1991 sent by Zaro to PG&E confirmed the San Juan Basin allocation and provided for deliveries of gas from Canada to cover the remainder of the contract amount, but claims that this was also a mistake. NARCO's witness Hughes explained that he reviewed the forms provided by Zaro prior to the June 5, 1991 memo but mistakenly thought that he was reviewing a cleaned-up version of the April 15, 1991 contract. NARCO further claims that the mistake was compounded when Zaro signed the August 5, 1991 revised contract without Hughes having been notified of either the San Juan Basin allocation or the revised contract terms.

NARCO also admits that despite its failure to use 75% of the ACQ during the 1991-1992 contract year, Zaro submitted a request to increase the ACQ for the Ione plant to 513,000 Dth for the 1992-1993 contract year, but claims that this also was a mistake. NARCO states that the fact that this was a mistake is demonstrated by NARCO's continuation of its prior fuel use practices. NARCO states that it made no effort to meet the minimum usage requirement of the contract because it was not aware of its obligations.

NARCO's witness Hughes admitted that prior to September 1992 he did not notify PG&E that the amounts specified in the Agreement were mistakes. The record shows that NARCO's Purchasing Manager admitted that he was not aware of the August 5, 1991 contract or the July 22, 1992 amendment until August 1992, despite available evidence to the contrary in the form of monthly PG&E billings and Access' balancing activity. The testimony also shows that Hughes never checked with Access or PG&E to determine what the San Juan Basin allocation was. Hughes admitted that he did not monitor the Ione plant's usage of natural gas in 1991-1992 or 1992-1993 and instead delegated that responsibility to Access. Hughes admitted that Access was responsible for trading imbalances, but claimed that he never saw specific trade information from Access during the term of this contract. Hughes further admitted that he did nothing to monitor Zaro's activities or to make sure that he was on the right track.

The record shows that the quantities were intentionally designated initially by Elliott and confirmed with PG&E's representative, and the contract executed by Zaro. Having held capacity to use as it chose, NARCO cannot later claim that it is not responsible for the charges associated with holding that capacity. NARCO must have been aware that it was consistently bringing more gas into the system than it was using for the Ione plant, because that information was provided on invoices received from PG&E and because its broker Access was performing balancing services on its behalf.

Despite NARCO's claim that it intended to change the contract amount to reflect only the allocation of San Juan Basin gas, it provided no evidence to establish that it attempted at any point prior to September 15, 1992 to change the contract quantities other than to increase them for the second contract year. We agree with PG&E that NARCO failed to exercise reasonable care in managing this Agreement. We also agree with PG&E that NARCO's failure to monitor activities of its plant manager, failure to monitor the actions of its agent, and failure to make any timely claim that its designations of 508,000 and 513,000 Dth were inaccurate, do not warrant relief from NARCO's contractual obligations based on the theory of mistake.

Unconscionability

Finally, NARCO claims that where there is a material mistake in a contract, the contract is voidable if enforcement would be unconscionable, even if the mistake is unilateral and the other party had no knowledge or reason to know of the mistake. NARCO further claims that enforcement of this contract would be unconscionable because PG&E would suffer no harm if NARCO were excused from it. Even if we were to accept NARCO's claim that the contract was the result of a mistake, which we do not, we would not agree that enforcement of the contract is unconscionable.

The Commission has previously stated that in California the standard for determining unconscionability is the presence of a contractual inequality that is so strong as to shock the conscience and confound the judgement of any person of common sense.⁵ Further, the doctrine of unconscionability has both a procedural element and a substantive element, and both must be present before a contract will be deemed unenforceable.⁶ The procedural element focuses on inequality of bargaining power (oppression) and hidden terms (surprise). The substantive element refers to an overly harsh allocation of risks or costs that is not justified by the circumstances.⁷

In this case, although PG&E would appear to have had superior bargaining power in negotiating the contract, the contract term in dispute was the annual contract quantity, and it was in fact determined solely by NARCO and its agent Access. NARCO's witness Hughes acknowledged that it signed a transportation contract with volumes equal to the total fuel requirement of its Ione plant, 508,000 Dth annually, following a strategy recommended by Access, to maximize its allocation of gas out of the San Juan Basin.

PG&E's witness Blume testified that she did not advise NARCO that the contract quantity could be modified once the San Juan Basin allocation was known. Blume also testified that she advised NARCO not to overstate its actual gas needs.

In seeking to enforce the use-or-pay provision, PG&E is relying on its Tariff Schedule G-FT, with which NARCO was or should have been familiar, since use-or-pay provisions have been present in past gas supply and transportation contracts. Therefore, there was no element of surprise in the contract. Similarly, while NARCO may view the use-or-pay provision as overly harsh, the Commission in D.90-09-089 specifically considered the provision and determined that it represented a fair allocation of risk.

Since oppression, surprise, and overly harsh terms have not been shown, the use-or-pay provision of the contract is not invalid on the basis of unconscionability.

Based on the evidence provided in this case, we find that NARCO's agent had ostensible, if not actual authority to sign contracts on behalf of NARCO and that PG&E properly relied upon that authority. We also find PG&E's ratepayers would indeed incur a liability if NARCO were excused from responsibility for these charges. We deny the complaint.

Public Utilities Code Sections 451 and 489

In its Reply Brief, NARCO claims that PG&E's policy of not allowing customers to change the contract after the open season allocations are determined violates Section 451, which requires, "All rules made by a public utility affecting or pertaining to its charges or service to the public shall be just and reasonable," and Section 489, which requires that all rules, contracts, privileges, and facilities which in any manner relate to rates, tolls, rentals, classifications, or service be shown in filed tariffs.

NARCO has not shown that PG&E's open season policies violate Section 451 or 489. PG&E's stated open season rules appear consistent with the goals set out by the Commission in D.90-09-089 of allocating the risk of demand fluctuations to specific non-core customers and not to the general body of ratepayers. PG&E provided testimony supporting its claim that it informed each customer of the policy and urged customers not to overstate their requirements because they would not be able to revise their contracts. PG&E's letter of May 8, 1991 further supports its position. NARCO presented no evidence or testimony demonstrating that the details of PG&E's open season program should be considered "rules, contracts, or privileges" such that they should be shown in filed tariffs.