Discussion
Based on our review of the record, we agree with complainants that PG&E's agricultural tariffs as currently written should apply to cotton ginning. Despite PG&E's characterization of the ginning process as a "disassociation" or "tearing away" of cotton fibers from cottonseed, it seems clear -- when rhetoric is put aside -- that what happens during ginning is a separation of these two products, without damage being done to either of them. Ginning does not require that the cotton fiber or cottonseed be severed, crushed or cut into, all of which are processes that would seem to come within a common-sense definition of a "change of form". Moreover, PG&E does not appear to dispute that in California, there is no market for unginned cotton.
We are forced to acknowledge, however, that we have not reached our conclusion easily, or because PG&E failed to present any good arguments for ruling the other way. As is made clear by Jolivette's review of the history of PG&E's agricultural tariffs, the change-of-form language was adopted in 1988 to address the agricultural working group's perception that inequities had resulted from the "on the farm/off the farm" distinction in the previous tariff eligibility statements. Even though the new tariff's reference to a "change of form of the agricultural product" seems imprecise and subjective, there was apparently a consensus that lasted for nearly a decade about which activities this language was intended to cover. Unfortunately, that consensus began to fray in the mid-1990s, and since then the Commission has had to decide at least two cases (Producers and this one) in which the principal issue has been what constitutes a change of form of the relevant agricultural product.
As a result -- and as indicated by the summary of the parties' positions set forth above -- the debate in these cases has sometimes taken on a metaphysical tone, which in turn makes it difficult to determine just what the ground for decision has been in a particular case. However, it is our duty to construe the tariff as written, and in deciding this case we have tried to clarify the guidance set forth in our prior decisions so that any future disputes about the applicability of PG&E's agricultural tariffs will be easier to resolve.
We begin with the observation that PG&E has a stronger argument that cotton ginning constitutes a change of form in the agricultural product than was true of the fluid milk processing in Producers. Unlike milk processing, ginning results in a clear physical and visual separation of the cotton fiber and cottonseed, making it more difficult than in Producers to reunite these two products into their original, raw form. It also appears to be true that unginned cotton decomposes less rapidly than unpasteurized milk, so the argument that ginning is necessary to preserve the cotton for market is weaker than the argument in Producers that pasteurization and other processing was necessary to keep the milk in a marketable form. Finally, PG&E is surely correct in arguing that when the Legislature enacted Pub. Util. Code § 744, it did not intend agricultural rates to be available to broad groups of agricultural processors, because of the effects such eligibility would have on revenue allocation. (Ex. 13, pp. 13-15.)11
However, the force of these arguments is overcome by others that seriously undercut PG&E's position. The first and most obvious is that PG&E extends agricultural rates to many cleaning and storage processes that a reasonable person would consider a change of form of the relevant agricultural product. This is true of the carrot topping, raisin de-stemming, and leaf removal that were referred to so frequently in the parties' testimony. PG&E's attempts to justify these deviations from a rigid application of the change-of-form language as "de minimis," "cosmetic," or as merely facilitating the storage of produce, are unconvincing.
Nor do we find convincing PG&E's argument that cotton ginning can be most closely analogized to removing the pits from peaches or apricots, a process that clearly "invades the corpus" of the fruit and changes its form. As noted above, it is clear from the record that cotton ginning is essentially a separating and cleaning process; it does not require that the cotton fiber or cottonseed be severed, crushed or cut into.12
PG&E also exaggerates when it argues that if complainants' position were accepted, processing activities such as cattle slaughtering would be eligible for agricultural rates.13 The slaughtering of animals obviously represents a change of form of the affected livestock, and so is ineligible for agricultural rates under PG&E's tariffs. As the Presiding Officer's Decision (POD) in Case 00-01-021, Zacky & Sons Poultry Co. v. Southern California Edison Company, recently said of a suggestion that the logic of Producers supported the extension of agricultural rates to a chicken slaughtering facility located in Edison's territory, "the form of the chickens is changed at the . . . facility because the chickens are killed, plucked, have body parts removed, and are placed on ice . . . " (August 6, 2001 POD, p. 10, n. 13.)
PG&E's attempt to justify its treatment of cotton ginning on the basis of how this and other activities are classified under the SIC codes is unavailing, because PG&E concedes that since the agricultural tariff language was changed in 1988, its treatment of a number of agricultural processes has begun to diverge from how they are treated in the SIC Manual. Jolivette acknowledged that after PG&E's tariff language was changed pursuant to D.88-12-031, agricultural rates were extended, despite the SIC classifications, "to post harvest crop services which occurred off the farm, so long as those services did not change the form of the product." (Ex. 13, p. 10.) She also acknowledged that in the years since 1988, the divergence between the treatment of certain processes under the SIC codes and under PG&E's agricultural tariff has grown somewhat. (Id. at 10-12.)
Finally, we find no merit in PG&E's arguments that practical marketing considerations were not relied upon in Producers, and should also not be a factor here. Although the decision in Producers was based primarily on the fact that pasteurization and other processing did not change the form of the raw milk, the decision clearly states that such processing is "necessary in order to realistically market the milk in the quantities Producers handles," and that the Commission did not believe the legislature intended to force dairy producers to sell their product into the small niche market for raw milk in order to benefit from agricultural rates. (74 CPUC2d at 681.) Thus, Producers supports complainants' argument that in determining when "production for sale" stops and processing begins under PG&E's agricultural tariff, the nature of the actual markets for the products, not theoretical markets, should be taken into account.14
Here, although PG&E argues that the market for unginned cotton "has simply been internalized by cotton growers" through their use of cooperative gins, and that unginned cotton could theoretically be sold to independent ginners, PG&E does not dispute complainants' evidence that there is no actual market for seed cotton in California. (PG&E Opening Brief, p. 11.) Moreover, in view of the evidence that seed cotton begins to decompose if not ginned within about a month, PG&E does not appear to be arguing that it would be feasible to sell California seed cotton to out-of-state ginners. Under these circumstances, we agree with complainants that ginning should be considered part of the "production for sale" of cotton as a crop, and that because ginning does not change the form of the seed cotton in a way that irremediably damages or changes its constituent parts, it qualifies for PG&E's agricultural rates.15
As noted in the introduction, because of our ruling that complainants are entitled to be served under agricultural rates, they are entitled to a refund of the difference between what they were billed for the ginning under PG&E's commercial tariffs and what they would have been billed for this service under PG&E's agricultural tariffs. As noted in Producers, complainants are entitled to these refunds for the period beginning three years prior to their requests to PG&E to have the overcharges returned to them. (74 CPUC2d at 682.)16
Assignment of Proceeding
Michael R. Peevey is the Assigned Commissioner for this proceeding, and A. Kirk McKenzie is the assigned ALJ and presiding officer.
1. On February 8, 2001, the Commission issued D.01-02-038, which extended the 12-month deadline for this proceeding pursuant to Pub. Util. Code § 1701.2(d).
2. After seed cotton is harvested, it is transported in a cotton trailer or module builder to the gin site, where it is stored in a large block prior to ginning.
3. If the moisture content of seed cotton becomes too great, it can cause the cotton fiber to discolor and decompose, and the cottonseed to rot and germinate.
4. Seed cotton must be ginned within approximately a month after harvest, owing to the increase in moisture brought about by decomposition of the leaves, twigs, cottonseed and open bolls in the cotton mass.
5. After the seed cotton has entered the gin, the first step is to blow warm air through it, which reduces its moisture content and causes some of the dirt, leaves and other debris to fall out.
6. The second step in the ginning process is to remove additional debris by banging the seed cotton around through a series of bars, and then using centrifugal force to sling off twigs and other heavy debris.
7. After the additional debris has been removed, the seed cotton goes to the gin stand, where the cotton fiber is separated from the cottonseed by means of either a saw gin or a roller gin.
8. A saw gin uses a rotating saw to grasp and pull the cotton fiber through narrowly-spaced ribs. Since cottonseed is too large to pass through the ribs, it drops out the bottom and is conveyed to either a seed pile or a truck. Most of the gins in California are saw gins.
9. A roller gin uses a roller to which the seed cotton adheres. As the seed cotton turns on the roller, it is met by a stationary bar and a rotary blade that gently pinches the cottonseed out of the cotton mass.
10. Neither saw gins nor roller gins sever, crush, cut into or otherwise damage either the cotton fiber or the cottonseed.
11. Ginning results in the separation of the cotton fiber from the cottonseed, but the appearance and texture of the cotton fiber and the cottonseed remain the same.
12. In California, the grower retains title to the cotton until after it has been ginned.
13. After the ginned cotton fiber has been baled, it is sold to a cotton merchant, whereas the cottonseed is sold either to feedmills (for use as livestock feed) or oil mills (for production of cottonseed oil).
14. All but two of the 90 gins in California are grower-owned, nonprofit farmers' cooperatives that pay no taxes, charge for ginning on a per-bale basis, and return a dividend to their members only if surplus funds remain at the end of the relevant accounting period.
15. There is no market for unginned cotton (i.e., seed cotton) within California.
16. The eligibility statement in PG&E's current agricultural tariffs provides that a customer will be served under these tariffs if "70 percent or more of the energy use is for agricultural end-uses," which are defined to "include growing crops, raising livestock, pumping water for irrigation, or other uses which involve production for sale, and which do not change the form of the agricultural product."
17. PG&E acknowledges that removing the tops off of carrots, removing the stems from sun-dried raisins, washing potatoes and carrots, and the waxing of apples are all eligible for agricultural rates under this eligibility statement, even though each of these activities changes the form of the agricultural product to some degree.
18. The code assigned to cotton ginning by the 1987 SIC Manual is 0724, which places it within the "crop services" industry group.
19. Since the elimination in D.88-12-031 of the on-the-farm/off-the-farm distinction from PG&E's agricultural tariff, differences have arisen between how certain agricultural processes are treated by the SIC Manual, and how PG&E treats these processes for purposes of determining agricultural rate eligibility.
20. From 1988 until the mid-1990s, a consensus existed between PG&E and its customers about which agricultural processes constituted a "change of form of the agricultural product" under PG&E's eligibility statement, and which did not.
21. On July 30, 2002, complainants and PG&E filed a stipulation in the PG&E bankruptcy proceeding pending in United States Bankruptcy Court for the Northern District of California, Case No. 01-30923 DM. This stipulation provides, among other things, that to the extent the automatic stay provisions of 11 U.S.C. § 362 are applicable to this proceeding, complainants and PG&E shall have immediate relief from such provisions to prosecute this proceeding through final judgment at the Commission, and any appeal thereof.
1. Even though the change-of-form language in PG&E's agricultural tariff eligibility statement can be considered subjective and imprecise, the Commission's duty in this case is to construe the tariff language as written.
2. The argument for treating cotton ginning as a change of form under PG&E's agricultural eligibility statement is stronger than the argument for treating fluid milk processing in that way, because (a) it would be more difficult to recombine cotton fiber and cottonseed than to recombine the various milk products that result from fluid milk processing, and (b) unginned cotton decomposes less rapidly than unpasteurized milk.
3. Under Producers, whether a market exists for the unprocessed form of a particular agricultural product is relevant to determining whether that process should be considered a change of form of the product.
4. PG&E conceded that for purposes of applying its agricultural eligibility statement, ginning should be considered part of the "production for sale" of cotton.
5. Carrot topping, raisin de-stemming and removing leaves from fruits and vegetables result in a change-of-form of these products under a common-sense definition of the term, so PG&E's decision to extend eligibility for agricultural rates to these processes is inconsistent with PG&E's decision to withhold such eligibility from cotton ginning.
6. Cotton ginning is not analogous to removing the pits from peaches and apricots, because pit removal involves cutting into these fruits, and thus changes their form.
7. Cotton ginning results in a separation of the cotton fiber from the cottonseed.
8. Cotton ginning is not analogous to the slaughtering of animals, because the latter clearly and drastically changes the form of the live animal.
9. Because cotton ginning results in the separation of the cotton fiber from the cottonseed without doing damage to either of them, ginning does not "change the form of the agricultural product" within the meaning of PG&E's current agricultural tariff eligibility statement.
10. Because cotton ginning is eligible for agricultural rates under PG&E's current agricultural eligibility statement, complainants are entitled to a refund equal to the difference between what they have been billed for their ginning activities under PG&E's commercial tariffs and what they should have been billed for these activities under PG&E's agricultural tariffs.
11. Each complainant should receive the refund described in the preceding Conclusion of Law for the period beginning three years prior to the date on which the complainant formally requested such a refund from PG&E, as set forth in Chart F attached to the complaint in this proceeding.
12. Complainants should receive electrical service from PG&E for their cotton ginning activities at the applicable agricultural rate so long as PG&E's current agricultural tariff eligibility statement remains in effect.
IT IS ORDERED that:
1. Pacific Gas and Electric Company (PG&E) shall refund to each complainant in this proceeding, for the period beginning three years prior to the date set forth under the column labeled "refund request date" in Chart F attached to the complaint herein, an amount equal to the difference between what such complainant was billed for its cotton ginning activities under the commercial tariff that PG&E applied, and what such customer should have been billed for its cotton ginning activities under PG&E's applicable agricultural tariff.
2. PG&E shall provide electrical service for cotton ginning activities to each complainant herein at PG&E's applicable agricultural rate so long as PG&E's current agricultural tariff eligibility statement remains in effect.
3. This proceeding is closed.
This order is effective today.
Dated , at San Francisco, California.
11 As Jolivette points out in her direct testimony, the legislative history of AB 44 and AB 174, both of which were enacted in 1986 and were sponsored by the same member of the Assembly, seem to draw a clear distinction between agricultural production and processing. (Ex. 13, pp. 13-15.) 12 Because of our conclusion that cotton ginning is essentially a separating and cleaning process, technically we do not need to decide whether PG&E's "invade the corpus" test is a reasonable one for determining whether a change of form has occurred. However, in view of the cross-examination concerning this matter, we think it is appropriate to make a few observations. First, we agree with complainants that PG&E witness Jolivette seemed unsure of just what the "invade the corpus" test would encompass. (Complainants' Opening Brief, p. 11, n. 5.) Although she seemed to testify at first that she would find a change of form if there was either an invasion of the corpus of the agricultural product or a change in the product's appearance, texture, taste or smell, she later agreed that this was too broad, because it could cover fluid milk processing, where it is clear that no invasion of the corpus occurs. (Tr. 114-116.) Despite the ambiguities in its testimony, we tend to agree with PG&E -- as the discussion in the text indicates -- that obvious invasions of the corpus of an agricultural product, such as animal slaughtering and peach pitting, constitute a change in form of the product. 13 For example, in attacking the complainants' argument that cotton fiber and cottonseed cannot realistically be produced for sale unless they undergo ginning, PG&E states:"[The tariff phrase `other uses involving production for sale'] cannot be interpreted to expand the applicability of the agricultural tariffs to all activities necessary to prepare a product for sale. If that were the case, then slaughterhouses and orange juice factories would be eligible for rates under the agricultural tariffs because beef cannot be 'produced for sale' unless beef cattle are slaughtered and orange juice cannot be 'produced for sale' until the orange juice is squeezed." (PG&E Opening Brief, pp. 4-5.)See also, Ex. 13, p. 7. In addition to the obvious hyperbole, this passage and others from PG&E fail to address complainants' position. Complainants' witness Kerkorian argued in his rebuttal testimony that cattle slaughtering could not be analogized to cotton ginning because (1) title to cattle usually passes before they are slaughtered, whereas title to cotton typically does not pass until after ginning, (2) slaughtering involves major cutting of the animal's carcass, whereas ginning merely separates the cotton fiber from cottonseed, and (3) slaughtering transforms a living commodity into a dead one, whereas seed cotton is already dead before it is ginned. (Ex. 8, p. 17.) PG&E did not address these common-sense distinctions. 14 We note that in their opening brief, complainants claim they are arguing only that practical marketing considerations should be taken into account, not that they are determinative:
"Complainants do not suggest that the question of 'marketability' should replace the primary inquiry concerning the 'change of form' of the product. Instead, 'marketability' should inform and influence that inquiry." (Complainants' Opening Brief, p. 6, n. 3.)15 In view of our holding today, we need not reach complainants' alternative argument that cotton ginning qualifies for PG&E's agricultural tariffs because, under Harris Farms, it can be considered "necessary and integral" to the production of cotton. However, in view of the effort that both complainants and PG&E have devoted to this question in their briefs, we think it is appropriate to make a few observations about it. In Harris Farms, we held that two feedmills operated by a livestock company solely for the purpose of assuring itself a reliable supply of cattle feed (and not for sale to others) were eligible for agricultural rates, and that PG&E had erred by placing the feedmills on commercial rates. Our decision concluded that the feedmills were eligible for agricultural rates because they were "dedicated and integral to a defined agricultural end-use, raising livestock," and also because "the Harris feedmills are as essential a part of cattle raising as the farm shop," which PG&E conceded was eligible for service at agricultural rates. (43 CPUC2d at 241.) However, Harris Farms did not announce a broad rule that any activity that might be considered "necessary and integral" to an agricultural end-use should automatically qualify for service under PG&E's agricultural tariffs. This is not surprising, because as PG&E points out, "the feedmills were granted agricultural rates because they were used to raise the livestock," whereas "cotton ginning is not 'necessary and integral' to the raising of crops," because it occurs after the cotton crop has been harvested. (PG&E Reply Brief, pp. 12-13.) Moreover, it seems obvious that the phrase "necessary and integral" is so broad and subjective that it could give rise to as many disputes as the "change of form" tariff language we are construing here. 16 Each of the complainants first requested refunds of the overcharges in the Fall of 1999. Thus, under the authorities cited in Producers (Pub. Util. Code § 736 and D.86-06-035, 21 CPUC2d 270, 278), they are entitled to refunds back to the Fall of 1996. The precise dates of complainants' requests to PG&E are set forth in Chart F, which is attached to the complaint.
