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 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.¹⁶

We have previously addressed the applicability of the PG&E tariff to the processing of agricultural products in Harris Farms, Inc. v. Pacific Gas and Electric Company, D.92-02-025 (Harris Farms), Producers Dairy,

and Air Way Gins.

In Harris Farms, we found that a feedmill operated by a livestock-raising operation was entitled to receive electric service under an agricultural tariff, rather than a commercial tariff. The livestock operator used all of the product of the feedmill as feed for its livestock, and there was not a reliable or economical outside supplier of livestock feed. We reasoned that whether the form of the agricultural products used as livestock feed was changed during processing was not relevant, because the feedmills were an integral part of the livestock raising operation, not a separate commercial enterprise. Harris Farms does not apply to this case, because hulling and shelling is not an integral part of growing almonds and occurs after the almonds are grown.

In Producer's 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.¹⁷ 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."¹⁸ 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."¹⁹

As in Producer's 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 § 744²⁰ was not to expand the class of customers entitled to an agricultural rate to include a broad group of agricultural processors.²¹

Here, applying Air-Way Gins, we find that almond hulling and/or shelling changes the form of the agricultural product by separating the almond into three constituent parts: the almond meat, the hull, and the shell. The appearance of the almond changes dramatically from a fuzzy hull, surrounding the hard shell that completely encloses the almond meat, to three separate agricultural products. Even if there were not available markets for hulls and shells so that hulls and shells were merely agricultural residues, almond hulling and shelling may therefore be distinguished from the processing of milk discussed in Producer's Dairy, which did not significantly change the appearance of the milk. Hulling and shelling may also be distinguished from the ginning discussed in Air-Way Gins itself, which did not significantly change the cottonseed or cotton fiber, because almond hulls and shells are squeezed, crushed, cut into, broken, and fractured during hulling and shelling. Complainants therefore do not qualify for an agricultural rate, regardless of whether a viable market exists for almond hulls and shells or whether hulls and shells are agricultural products in their own right.

We reject 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. Since the hulls and shells are broken and cut into during processing, hulling and shelling more closely resemble removing the pits from peaches and apricots, which as noted in Air-Way Gins, change the form of the agricultural product.

We recognize that it could be argued that 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. However, in § 740.11, the Legislature indicates that agricultural commodity processors should not be eligible for discounted agricultural rates at the expense of cost-shifting to other classes of customers. It appears that granting hullers and shellers a discounted agricultural rate would inevitably shift costs to other customer classes, possibly including low-income customers. Moreover, as discussed later in this decision, we believe that the Commission should further consider the appropriate scope of agricultural tariffs, in view of § 740.11, at a policy level, to ensure that similarly situated customers are treated consistently. Since this proceeding results from a customer complaint, it is not the proper forum for us to develop broad policies regarding eligibility for agricultural tariffs.²²

We also reject Complainants' argument that hulls and shells are merely agricultural residues, rather than agricultural products. Although in the past, hulls and shells would have constituted agricultural residues because almond growers did not have a viable economic use for these products, the development of markets for hulls and shells as cattle feed and cattle bedding means that hulls and shells are now agricultural products in their own right, even though hulls and shells generate smaller profits than almond meats.²³

Our determination that hulling and shelling does not qualify for an agricultural rate does not force almond producers or hullers and shellers to find less profitable markets for their almond products in order to qualify for favorable electricity rates. California's market for unshelled almonds generates substantial revenue for almond growers.²⁴ Although the primary market exists for unshelled almonds, there is a smaller, but viable market for in-shell almonds, especially almonds to be sold to India and China. In addition, a substantial market exists for the hulls to be used as cattle feed in this State. The sale of shells also generates revenue, albeit less than the sale of hulls. The existence of a market for almond hulls and shells enables hullers and shellers who accept the hulls and shells as payment for their work to have viable businesses and almond growers that utilize these businesses to produce the almonds at a lower cost because of reduced expenses for hulling and shelling.²⁵

Our decision today also does not unfairly penalize utility customers who have found an economically viable use for what would otherwise be agricultural residues. Almond growers, hullers and shellers who are able to develop markets for hulls and shells and generate revenue through the sale of these products will be rewarded for their efforts by their profits. The role of agricultural tariffs is to provide discounted rates for customers engaged in truly 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. In addition to the economic benefits from sale of hulls and shells for cattle feed and bedding, we acknowledge that such sale may mitigate the environmental problem that disposal of the hulls and shells otherwise would create. However, regardless of the applicability of the PG&E tariff, 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). Although we support the environmentally sound processing of agricultural products, we are not authorized under the statute to promote environmental goals by expanding the applicability of the tariff to customers who are otherwise not entitled to an agricultural rate.

As a result, Complainants do not qualify to receive electric service at an agricultural rate under PG&E's tariff and are not entitled to a refund or an award of interest.

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.²⁶

The PG&E tariff also differs from the comparable Edison tariff, which provides that eligibility for an agricultural rate depends on whether the electricity is used in connection with the production, harvesting and preparation of agricultural products for market on land owned by the same utility customer for the production of agricultural products.²⁷ In contrast, PG&E's tariff was modified in 1988 to remove the "on the farm/off the farm" standard for whether a particular activity qualified for an agricultural rate.²⁸ Under the Edison tariff, an agricultural rate is not available to customers who process agricultural products raised by others. As a result, utility customers performing the same activity could receive inconsistent treatment as to eligibility for an agricultural rate based solely on whether their businesses are located in PG&E's or Edison's service territory.²⁹

In addition, in 2001, the Legislature enacted § 740.11, which urges the Commission to consider extending agricultural rates to all agricultural commodity processing customers, as consistent with other constitutional and statutory objectives, to the extent that applying agricultural rates to these customers would not result in cost shifting to other customer classes. (However, neither PG&E nor Complainants discussed § 740.11, and given the precatory language of the statute, we conclude that it has no impact on the interpretation of the PG&E tariff as it now exists.)

Since in § 740.1, the Legislature previously defined customers eligible for an agricultural rate to include "persons or corporations whose primary purpose is the agrarian production of food or fiber,"³⁰ the change proposed by § 740.11 could broaden the applicability of agricultural tariffs. The Commission may wish to consider the question of what types of customers should be eligible for agricultural rates in view of §§ 740.1 and 740.11. Moreover, the development of a Commission policy regarding agricultural rates would help to ensure that similarly situated customers are treated consistently statewide, rather than being subject to different eligibility criteria based on the language of the particular utility's tariff.

In short, there are good reasons for the Commission to reconsider its rules and policies regarding discounted agricultural rates. The result of that reconsideration, however, would have prospective effect only. In terms of Complainants' eligibility under the PG&E tariff as it exists today, they fail to qualify for an agricultural rate for these specific almond hulling and/or shelling operations.

¹⁶ Tariffs filed with the Commission are administrative regulations and are subject to the same rules that govern the interpretation of statutes. Zacky & Sons Poultry Co., dba Zacky Farms, vs. Southern California Edison Company (Zacky Farms), D.03-04-058. To interpret a tariff, the Commission must first look at its language, giving the words their ordinary meaning and avoiding interpretations which make any language surplus. Id. The Commission must interpret the words of a tariff in context and in a reasonable, common-sense way. Id. If the tariff language is clear, the Commission need not look further to interpret the tariff. Id.