Discussion

PG&E's Agricultural Rate Applicability Statement (the PG&E tariff) states:

A customer will be served under this schedule if 70% or more of the energy use is for agricultural end-uses. Agricultural end-uses include growing crops, raising livestock, pumping water for agricultural irrigation, or other uses which involve production for sale, and which do not change the form of the agricultural product. (Emphasis added.)

PG&E does not dispute that at least 70% of the electricity used by Complainants is utilized in hulling and shelling. Therefore, under the plain language of the tariff, whether almond hullers and shellers are entitled to receive electric service at a discounted agricultural rate depends solely on whether the hulling and shelling process changes the form of the agricultural product.

We have previously addressed the applicability of the PG&E tariff to the processing of agricultural products in prior proceedings, most pertinently in D.97-09-043 Producers Dairy, and in D.03-04-059 Air Way Gins.

In Producers Dairy, we found that a dairy, which pasteurized, homogenized, and added vitamins to raw milk and separated the raw milk into different milk products based on the fat content, such as whole milk, skim milk, and cream (standardization), qualified for agricultural rates under PG&E's tariff because these activities do not change the form of the milk. We noted that these processes do not alter the appearance of the milk and prepare the raw milk for human consumption. For example, pasteurization quickly heats the milk in approximately 30 seconds to make it safe for human consumption, homogenization prevents fat globules from floating to the top and thereby increases the shelf life of the milk, and adding vitamins A and D to the pasteurized milk restores the vitamins that naturally exist in raw milk but are destroyed during pasteurization and storage. We stated that standardizing the milk also does not change its form because all of the resulting milk products were originally contained in the raw milk. We also found PG&E's reasoning in denying agricultural rates for milk processing inconsistent because processing raw milk does not change the form of the product more than other agricultural processing activities that receive service at an agricultural rate, such as sorting eggs by size and grade, waxing apples to improve their appearance, and cutting the leafy tops off of carrots.

In addition, we reasoned that although a market might exist for raw, unprocessed milk, the major market for milk is for human consumption, and the Legislature did not intend to force milk producers to find less viable markets for their products in order to benefit from lower agricultural rates for electricity.

In Air Way Gins, we found that cotton ginning qualifies for electric service at an agricultural rate under PG&E's tariffs, because cotton ginning separates two agricultural products, the cottonseed and the cotton fiber, without damage to either one of them. We rejected arguments by PG&E that separating the fiber from the seeds involves a change in the form of the cotton because both the seed and the fiber emerge intact from the process, even if some "tearing" or "disassociation" occurs. We further stated that even if some severing or tearing were to occur, the ginning process seemed less drastic a change to the form of the product than the removal of leaves and cutting tops off of carrots that PG&E treats as eligible for agricultural tariffs. We distinguished cotton ginning from removing the pits from peaches or apricots, a process which clearly changes the form of the fruit, because cotton ginning is essentially a separating and cleaning process that does not involve severing, crushing, or cutting into the cotton fiber or cotton seed.

In Air-Way Gins, we did not decide whether the standard for determining if an agricultural product has undergone a change in form is whether the process for which an agricultural rate is sought "invades the corpus" of the product, as argued by PG&E. However, we stated that in determining whether an agricultural product has undergone a change in form due to processing, the relevant analysis involves a before-and-after comparison of the constituent parts of the agricultural product, such as the cottonseed and the cotton fiber, rather than the before-and-after condition of the raw product as it is harvested from the field.¹⁴ We also reasoned that severing, crushing, or cutting into an agricultural product "are processes that would seem to come within a common-sense definition of a change in form."¹⁵ We also stated that we tend to agree that, "... obvious invasions of the corpus of an agricultural product, such as animal slaughtering and peach pitting, constitute a change in the form of the product."¹⁶

As in Producers Dairy, Air-Way Gins finds that in determining whether a particular activity involves production of an agricultural product for sale or processing of an agricultural product under the PG&E tariff, the Commission must consider the nature of the actual markets for the products, not theoretical markets. We also noted that the intent of the Legislature in enacting § 744¹⁷ was not to expand the class of customers entitled to an agricultural rate to include a broad group of agricultural processors.¹⁸

In this complaint proceeding, we are asked to determine whether the form of the agricultural product is changed by hulling and shelling operations. We note that the almond meat, or almond, is enclosed by a hard shell, which is in turn enclosed in a soft, pulpy outer covering known as the hull. Complainants contend that the shell and hull are extraneous plant material that simply protect and enclose the almond until it is ready to harvest. And the removal of the shell and hull is necessary to reach the agricultural end product-the almond meat or almond. Therefore, complainants believe they are qualified for the agricultural tariff rate as the form of the product-the almond-does not change in the hulling/shelling process.

On the other hand, PG&E contends that the agricultural product is not the almond meat, but instead it is the unhulled almond which consists of three constituent parts-the hull, the shell, and the almond (almond meat)-all of which are agricultural products. And since the hullers/shellers change the form of the agricultural product by removing the hull and by severing and removing the shell, they change the form of the unhulled almond and are therefore not qualified for the agricultural tariff rate. PG&E adds that there exists a substantial market for the hulls and shells as well.

Based on our review of the record, we agree with the complainants that PG&E's agricultural tariffs should apply to almond hulling/shelling. We are unconvinced by PG&E's argument that the unhulled almond is the agricultural product. We find that the almond, or almond meat, is the agricultural product and that hulling and/or shelling does not change the form of the almond. While the appearance of the unhulled almond changes dramatically from a fuzzy hull, surrounding the hard shell that completely encloses the almond meat, the form of the almond kernel itself does not change. Almond hulling and shelling does not alter in any way the almond itself, nor does it change the appearance of the almond itself.

In Air-Way Gins we found the relevant analysis involves a before-and-after comparison of the constituent parts of the agricultural product, such as the cottonseed and the cotton fiber. The constituent part of the agricultural product-the almond-remains the same after hulling and shelling. Thus, the complainants are entitled to an agricultural rate because the principal agricultural product, e.g., the almond meat, is not cut into, severed, crushed, or changed as a result of hulling and/or shelling.

We accept Complainants' arguments that almond hulling and shelling are analogous to other activities that qualify for an agricultural rate under PG&E's tariff, such as cutting the leafy tops off of carrots, removing the stems from raisins, or removing the outer leaves from cabbage and lettuce. Each of these processes more closely resembles removing the in-hull almond from the almond tree, because they separate the agricultural product from the plant on which it is grown.

We agree with the Complainants' argument that hulls and shells are merely agricultural residues, rather than agricultural products. Although we recognize that it could be argued that the development of markets for hulls and shells as cattle feed and cattle bedding means that hulls and shells can be considered as agricultural products in their own right, almond orchards are planted for almonds, not shells and hulls. We further note that the promotion and development of a market for shells and hulls mitigates the environmental problem that disposal of the hulls and shells otherwise would create. Plus, air pollution requirements prohibit the burning of hulls and shells (RT 17:21-27), and almond growers will use caution in putting hulls and shells into the ground to avoid making the soil too acidic (RT 17:4-19).

Even though there is a viable market for the almond hulls and shells, we found in Producers Dairy that "we do not believe that the intent of the legislature was to force milk producers to find less viable markets in order to benefit from AG rates." The record shows that the primary market is for unshelled almonds, while a much smaller, but viable market exists for in-shell almonds, especially almonds to be sold to India and China. There is no market for in-hull almonds. Almond growers should not have to leave their product in-shell in order to benefit from lower AG rates.

The role of agricultural tariffs is to provide discounted rates for customers engaged in agricultural activities, and eligibility for an agricultural rate must be based on the nature of the particular activity involved and the language of the tariff. Having found an economically viable use for hulls and shells, should not automatically preclude almond growers, hullers and shellers from receiving a discounted agricultural electric rate.

We note, further, that the language of the PG&E tariff does not give clear guidance as to when utility customers involved in producing or processing an agricultural product (except for customers directly growing crops or livestock or pumping water for irrigation) qualify to receive electric service at an agricultural rate. The key phrase which determines eligibility for an agricultural rate for these processes, "which do not change the form of the product," is subject to conflicting interpretations by customers, PG&E, and the Commission. As noted in Air-Way Gins, the tariff has led to almost metaphysical arguments about whether a particular agricultural process should qualify for an agricultural rate and has necessitated several Commission decisions to adjudicate disputes between PG&E and its customers.¹⁹