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decided: August 9, 1978.


Appeals from the Order of Pennsylvania Public Utility Commission in case of Pennsylvania Public Utility Commission v. Philadelphia Electric Company -- Gas Division, Docket No. R.I.D. No. 227, Complaint Docket No. 21100-1975.


Henry M. Wick, Jr., with him Charles J. Streiff ; and, of counsel, Kenneth R. Pepperney ; and Wick, Vuono & Lavelle, for United States Steel Corporation.

Robert H. Young, with him Ernest R. vonStarck; Walter R, Hall, II ; and, of counsel, Edward G. Bauer, Jr., General Counsel; and Morgan, Lewis & Bockius, for Philadelphia Electric Company.

Charles F. Hoffman, Assistant Counsel, with him Daniel F. Joella, Assistant Counsel, and Barnett Satinsky, Chief Counsel, for Pennsylvania Public Utility Commission.

President Judge Bowman and Judges Crumlish, Jr., Wilkinson, Jr., Mencer, Rogers, Blatt and DiSalle. Opinion by Judge Rogers.

Author: Rogers

[ 37 Pa. Commw. Page 198]

The Philadelphia Electric Company (PECO), a utility which supplies manufactured and natural gas to the public, and the United States Steel Corporation (USS), a PECO customer, have filed petitions for review of a final order of the Pennsylvania Public Utility Commission (Commission) allowing PECO additional annual operating revenues of $9,234,000 and approving PECO's proposal for changes in its customers' rate structure. PECO's petition for review filed to this Court's docket No. 87 C.D. 1977 contests the Commission's failure to allow the full amount of additional annual revenues requested in the amount of $14,044,000. USS's petition at docket No. 69 C.D. 1977 challenges the Commission's approval of PECO's proposed new rate structure which eliminated class TC, which only USS previously occupied, and which placed USS in class L where rates were higher. PECO has intervened in USS's case on appeal for the purpose of defending the new rate structure. We have consolidated the cases for briefing, argument and disposition.

On April 3, 1975 PECO filed Supplements Nos. 35 and 36 to Tariff Gas -- Pa. P.U.C. No. 23, to become effective June 2, 1975. By Supplement No. 35 it sought Commission approval of rate increases which would yield additional annual revenues of $6,402,000. By Supplement No. 36 it sought additional annual revenues in the amount of $7,642,000. The test year was that ending December 31, 1974. The proposed annual additions would produce total annual operating revenues of $128,920,000, an approximately 12.2% increase in previously allowed revenues.

Supplements Nos. 35 and 36 also proposed a reorganization and reclassification of rate schedules and increases in gas rates to all except PECO's residential and small commercial customers. Supplement No.

[ 37 Pa. Commw. Page 19935]

proposed to place all of PECO's existing industrial customer classes in a single Rate L. The classes proposed to be joined in class Rate L were: Rate TC, a special rate charged only for direct service to USS from PECO's major gas supplier, Transcontinental Gas Pipeline Corporation (TRANSCO); Rate TE, a special rate charged only for direct service to three large industrial customers from PECO's other pipeline supplier, Texas Eastern Transmission Corporation; and Rate VL, the rate charged to PECO's other large volume industrial customers served through and connected to PECO's own distribution system.

By Supplement No. 36, PECO proposed that existing Rate G, applied to small commercial and residential customers, be divided into new rates GR and GC. Residential customers were to be subject to Rate GR while small commercial customers (those using 70 MCF of gas per month or less) would be transferred to Rate GC. PECO also proposed that existing Rate W, which applied to small industrial and large commercial customers, be eliminated and that customers on that schedule be placed in whichever of Rate GC or new Rate L provided the rate more favorable to the customer.

Supplements Nos. 35 and 36 would increase rates to PECO customers by the following percentages: to USS as a former Rate TC customer by 74.8%; to former Rate TE customers by 60%; to former Rate VL customers by 29.8%; to former Rate W customers by 24.1%; and, to former Rate G commercial customers by 3%. As noted, the Supplements proposed no increase of the rates of residential and small commercial customers.

On May 16, 1975, USS filed a complaint and request for suspension alleging that the rate classification changes and increased rates proposed by Supplements Nos. 35 and 36 were unreasonable, discriminatory

[ 37 Pa. Commw. Page 200]

    and in violation of various provisions of the Public Utility Law,*fn1 66 P.S. § 1101 et seq. Seven additional complaints were filed.

The Commission took no action to suspend the operation of Supplement No. 35 and the rate increases contained therein became effective by operation of law pursuant to Section 308 of the Law, 66 P.S. § 1148. On June 2, 1975, the Commission suspended Supplement No. 36 for six months until December 2, 1975 and instituted an inquiry and investigation, docketed at RID 227, for the purpose of determining the fairness, reasonableness, justness and lawfulness of the rates, charges, rules and regulations and imposition of temporary rates. On November 25, 1975, the Commission suspended the effective date of Supplement No. 36 for an additional three months to March 2, 1976, the end of the maximum nine month statutory suspension period. On February 26, 1976, the rates which became effective June 2, 1975 (calculated to yield an increase in annual revenues of $6,402,000) were fixed as temporary rates, effective March 2, 1976, for a period of 90 days in accordance with Section 310 of the Law, 66 P.S. § 1150. The temporary rates effective March 2, 1976 were subsequently extended for 60 days through July 29, 1976, and further extended through November 29, 1976.

After six days of hearings on the rate making issues -- held between September 5, 1975 and January 6, 1976 -- the Commission staff prepared a proposed order which the Commission directed to be served on all parties of record for comment prior to final determination. In its final adjudication dated November 22, 1976, the Commission concluded, among other matters, (1) that the fair value of PECO's property used and useful in public service was $255,000,000, as

[ 37 Pa. Commw. Page 201]

    contrasted to the fair value of $300,000,000 claimed by PECO, and (2) that the fair rate of return on such property was 8.5%, as contrasted to the fair rate of return of 9.62% claimed by PECO. The Commission also disallowed $2,557,000 of annual depreciation expenses claimed by PECO. Based on these and other adjustments, the Commission refused PECO's request for an annual revenue increase of $14,044,000 and ordered PECO to file a tariff Supplement containing rates calculated to produce an annual revenue increase of $9,234,000. The Commission order approved the rate structure changes proposed by PECO in Supplement Nos. 35 and 36 and permitted PECO to file a detailed plan for recoupment of revenues due PECO from the application of the rates allowable to service rendered on and after March 2, 1976.

Although the scope of review provisions of Section 1106 of the Public Utility Law, 66 P.S. § 1437 were deleted by Section 20 of the Act of October 7, 1976, P.L. 1057, No. 215, we have held that our scope of review remains the same as it was under Section 1107 and case law thereunder. Pennsylvania Gas and Water Co. v. Pennsylvania Public Utility Commission, 33 Pa. Commonwealth Ct. 143, 381 A.2d 996 (1977). Our review is by this standard limited to a determination of whether constitutional rights have been violated, an error of law committed or whether the findings, determinations or order of the Commission are supported by substantial evidence.

I Appeal of USS -- Rate Structure

USS operates a large steel plant known as the Fairless Works at Morrisville, Pennsylvania. PECO supplies natural gas to the USS plant not by means of its distribution system but from a pipeline owned by TRANSCO through a gate station owned by PECO but serving only the Fairless Works. TRANSCO is

[ 37 Pa. Commw. Page 202]

    a major supplier of natural gas to PECO's distribution system by means of and through which PECO supplies all of its customers, except USS. USS is by far the largest PECO gas customer. The Rate TC under which it was uniquely served was also uniquely favorable to USS. Rate L, to which it was subjected by the final order of the Commission, increased USS's gas costs substantially.

Sections 301 and 304 of the Public Utility Law, 66 P.S. §§ 1141, 1144, govern rates. Section 301 provides that:

Every rate made, demanded or received by any public utility, or by any two or more public utilities jointly, shall be just and reasonable, and in conformity with regulations or orders of the commission. . . .

Section 304 declares that:

No public utility shall, as to rates, make or grant any unreasonable preference or advantage to any person, corporation, or municipal corporation, or subject any person, corporation, or municipal corporation to any unreasonable prejudice or disadvantage. No public utility shall establish or maintain any unreasonable difference as to rates, either as between localities or as between classes of service. . . . Nothing herein contained shall be deemed to prohibit the establishment of reasonable zone or group systems, or classifications of rates. . . .

The late Judge Harry A. Kramer, for this Court, collected the cases interpreting Section 304 and summarized the law as follows:

[ 37 Pa. Commw. Page 203]

[U]nder Section 304, so long as the classification of customers is reasonable or is founded upon some reasonable basis, a utility may Page 203} charge different rates for different classes of customers. The question of whether the classification utilized by the utility is reasonable is a question of fact to be determined by the finder of the fact, namely the PUC. See Deitch Co. et al. v. Pennsylvania PUC, 204 Pa. Superior Ct. 102, 203 A.2d 515 (1964). The leading case on classification is Alpha Portland Cement Company v. Public Service Commission, 84 Pa. Superior Ct. 255 (1925). The Pennsylvania Superior Court there held that the preference to one class of customers was not unreasonable unless it could be proven that it created a prejudice to other customers. . . .

[ 37 Pa. Commw. Page 204]

Our Pennsylvania Superior Court in the case of Carpenter v. Pennsylvania Public Utility Commission, 141 Pa. Superior Ct. 447, 450, 15 A.2d 473, 474 (1940), in a case involving electric utility rates, succinctly set forth the applicable law on the subject of discrimination and unreasonable preferences. It said: 'Both at common law and under our statutes, the discrimination forbidden is one that is unreasonable and without factual basis. Alpha Portland Cement Company v. Public Service Commission, 84 Pa. Superior Ct. 255, 270. In that case, Gawthrop, J., speaking of similar provisions in prior statutes said at page 272 [of 84 Pa. Super.]: " [The Act] contains no requirement that rates for different classes of service be either uniform or equal, or even equally profitable to the utility. The requirement is merely that rates for one class of service shall not be unreasonably prejudicial and disadvantageous to a patron in any other class of service. Before a rate can be declared unduly preferential and therefore unlawful, it is essential that there be Page 204} not only an advantage to one, but a resulting injury to another. Such an injury may arise from collecting from one more than a reasonable rate to him in order to make up for inadequate rates charged to another, or because of a lower rate to one of two patrons who are competitors in business. There must be an advantage to one at the expense of the other." See to the same effect, American Lime and Stone Company v. Public Service Commission, 100 Pa. Superior Ct. 158, 161; Hunter v. Public Service Commission, 110 Pa. Superior Ct. 589, 595, 596, 168 A.2d 540; Reading Coach Company v. Public Service Commission, 125 Pa. Superior Ct. 493, 497, 190 A. 172; Pennsylvania R.R. Company v. Public Utility Commission, 135 Pa. Superior Ct. 5, 18, 4 A.2d 622.' . . . . We believe this to be sound law on the subject. . . . [In] Deitch Company, et al. v. Pennsylvania PUC, supra, . . . again the Superior Court said, at pages 109-10 Pa. and at page 519, A.2d:

'This section of the statute [Section 304] like its predecessor, does not forbid reasonable classification of service or rates, and what is reasonable under the circumstances is primarily an administrative question for the Commission to decide. . . .

'The question of the reasonableness of rates and the difference between rates in their respective classes is an administrative or factual question wherein the findings of the Commission, if supported by competent evidence, will not be disturbed. . . .' (Emphasis added.)

Philadelphia Suburban Transportation Co. v. Public Utility Commission, 3 Pa. Commonwealth Ct. 184, 192-94, 281 A.2d 179, 185 (1971).

[ 37 Pa. Commw. Page 205]

The principles applicable to rate structure classifications here particularly pertinent are: (1) that a prior rate schedule is not res judicata on the question of discrimination or reasonableness. City of Pittsburgh v. Pennsylvania Public Utility Commission, 178 Pa. Superior Ct. 46, 112 A.2d 826 (1955), and (2) that mere differences in rates between classes of customers does not establish unreasonable discrimination, Philadelphia v. Pennsylvania Public Utility Commission, 162 Pa. Superior Ct. 425, 57 A.2d 613 (1948), and (3) that the agency with the power to fix rates is invested with a "flexible limit of judgment."

USS first says that in approving the consolidation of Rates TC, TE and VL into a single Rate L, the Commission has arbitrarily combined customers of widely diversified gas usage characteristics. We disagree. Section 304 specifically authorizes "reasonable . . . classifications of rates. . . ." Customer classifications and attending rate differences may be justified by a variety of considerations, including:

'[T]he quantity of [service] used, the nature of the use, the time of the use, the pattern of the use, or . . . differences of conditions of service, or cost of service. . . .'

Philadelphia Suburban Transportation Co. v. Public Utility Commission, supra, 3 Pa. Commonwealth Ct. at 197, 281 A.2d at 186.

It is uncontested that all of PECO's new Rate L customers are large volume users of gas, USS being only the largest. Customers may be classified on the basis of the quantity of gas used. Pittsburgh v. Pennsylvania Public Utility Commission, 178 Pa. Superior Ct. 46, 68, 112 A.2d 826, 836 (1955). The record demonstrates, as we note later, that the consolidation of the various rate schedules was indicated by PECO's cost of service study as a means of equalizing rates

[ 37 Pa. Commw. Page 206]

    among the various industrials and among industrials and other classes of consumers.

Next USS complains that PECO's new rate structure, approved by the Commission, includes no rate increases to residential and small commercial users and gathers the additional annual revenues allowed PECO by increasing the rates of industrial customers and, to a lesser degree, by rate increases to large commercial customers. USS contends that the burden of additional revenues should fall on all PECO's customers and that the exemption of residential and small commercial users unreasonably prefers them and unreasonably prejudices the Rate L customers. We disagree. A similar argument was made in Natona Mills, Inc. v. Pennsylvania Public Utility Commission, 179 Pa. Superior Ct. 263, 116 A.2d 876 (1955), where a rate structure effected a 21.42% rate increase in the rates of a class of customers called LP consisting of twenty-seven large users but made no increase in the rates of the utility's 45,281 general customers. Five of the large users appealed the Commission's approval of this structure, invoking Section 304. The Superior Court noted that:

[T]here is no law or usage in the industry which sets up a formula for determining a proper ratio between the rates of large industrial and, for example, domestic or residential users. The charge of discrimination in this case rests largely on an assumption that, except for the allocation of the item of administrative expense to the large power users, the rates were substantially in balance between the various classes of rate payers. The assumption has little support in the testimony. (Emphasis added.)

Natona Mills, Inc. v. Pennsylvania Public Utility Commission, supra, 179 Pa. Superior Ct. at 268-69, 116 A.2d at 879.

[ 37 Pa. Commw. Page 207]

The Superior Court then held that a cost of service study introduced by the public utility provided substantial evidence in support of the Commission's conclusion that the proposed increases in the large users' rates were not excessive:

Cost studies introduced by [the utility] indicated that sales to LP customers produced a return of about 3% on the cost of production facilities allocated to LP service as compared to an overall [fair rate of] return of 5.22% on fair value of [utility] property as a whole. Appellants criticize this testimony but on the issue of discrimination it is significant that although the Commission did not agree 'with every detail' of the allocation study, it nevertheless accepted it as giving support to the finding 'that the proposed energy charges in Rate LP would not be excessive.'

Natona Mills, Inc. v. Pennsylvania Public Utility Commission, supra, 179 Pa. Superior Ct. ...

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