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decided: December 5, 1979.


Appeals from the Order of the Pennsylvania Public Utility Commission in case of Pennsylvania Public Utility Commission v. Peoples Natural Gas Company, R.I.D. No. 308, Tariff Gas-Pa. PUC No. 37.


Robert H. Young, with him Walter R. Hall, II, Nancy M. Sproull, and, of counsel, John J. Mullally, Roger E. Wright, and Morgan, Lewis & Bockius, for The Peoples Natural Gas Company.

Henry M. Wick, Jr., with him Charles J. Streiff, and, of counsel, J. F. Wilson, and Wick, Vuono & Lavelle, for United States Steel Corporation.

Carl E. Rothenberger, Jr., with him Stephen A. George, Samuel W. Braver, and Buchanan, Ingersoll, Rodewald, Kyle & Buerger, for Allegheny Ludlum Industries, Inc.

Frank B. Wilmarth, Assistant Counsel, with him George M. Kashi, Acting Chief Counsel, for Pennsylvania Public Utility Commission.

President Judge Bowman and Judges Crumlish, Jr., Mencer, Blatt, DiSalle, Craig and MacPhail, Judges Wilkinson, Jr. and Rogers did not participate. Opinion by Judge Craig.

Author: Craig

[ 47 Pa. Commw. Page 515]

The Peoples Natural Gas Company (Peoples) has petitioned this court for a review of the final order of the Pennsylvania Public Utility Commission (PUC) entered January 13, 1978, disallowing approximately 12.5 million dollars of a requested 14.7 million dollar increase in Peoples' revenue from natural gas service.

These proceedings began when, on January 29, 1976, Peoples filed Tariff Gas-Pa. PUC No. 37 and Supplement No. 1 seeking increases in rates to become effective March 30, 1976. On March 23, 1976 the PUC suspended both tariffs until September 30, 1976, the initial six-month period provided by Section 308 of the Public Utility Law,*fn1 66 P.S. ยง 1148(b), and also instituted a proceeding at its Rate Investigation Docket (R.I.D.) 308 to determine the reasonableness of the proposed rates.

On September 29, 1976, on petition of Peoples, the PUC allowed Tariff No. 37 to become effective, while continuing its suspension of Supplement No. 1 for an additional 3 months. On December 29, 1976 the PUC issued an order fixing temporary rates, embodying a rate increase of approximately 6.35 million dollars.

On February 23, 1977 the PUC staff served a proposed order approving an increase of 7.34 million dollars in Peoples' service rates. After receiving briefs and oral argument, the PUC, on July 25, 1977, voted 3-to-1 to allow Peoples additional revenues of 2.22 million dollars, over 4 million dollars less than the rates in effect under the 1976 temporary rate order. The

[ 47 Pa. Commw. Page 516]

PUC entered its written final order on January 13, 1978.

On January 23, 1978 Peoples filed in this court its petition for review. The PUC adopted an order of February 1, 1978 continuing the temporary rates until final decision by this court.

The United States Steel Corporation (USS), at No. 230 C.D. 1978, and Allegheny Ludlum Industries, Inc. (Allegheny) at No. 235 C.D. 1978, filed petitions for review of the rate structure aspects of the January 13, 1978 commission order. Peoples intervened in both those proceedings; they have been consolidated with Peoples' petition for review of the commission's order, with which we must first be concerned.

1. Fair Value

Peoples submitted that the fair value of its gas plant at December 31, 1975, the end of the 1975 test year, should be found to be 292 million dollars. The PUC concluded that the fair value should be set at 265 million dollars, the same as the fair value allowed Peoples in R.I.D. 205, the last preceding Peoples rate proceeding. Peoples has posed issues as to several adjustments made by the PUC with respect to depreciated original cost and has also questioned the fair value conclusion reached by the PUC in relating adjusted original cost and trended original cost.

The questioned adjustments to original cost involve disallowance of part of the claimed total of minimum required bank balances, refusal to include in rate base a capitalization of employee benefit costs associated with 1974 plant construction, and deduction of part of a 1971 income tax refund from the original cost measure. Before examining the fair value conclusion, we will treat each of these adjustments in turn.

[ 47 Pa. Commw. Page 517]

    a. Original Cost Adjustment: Minimum Bank Balances

As an element of rate base, Peoples claimed a minimum bank balance total of 2.9 million dollars in this proceeding, the same amount which had been allowed by the commission in R.I.D. 205. The PUC, however, here disallowed $400,000 and approved only 2.5 million dollars for that element.

Peoples submitted in evidence letters from its three major banks setting forth requirements which, in terms of the absolute minimum amounts set forth, totaled 2.8 million dollars. Peoples also submitted evidence of an average daily balance over the 1975 test year of $2,440,600 in those three banks. In addition, Peoples presented evidence of additional balances in other banks so that the average daily balance in all banks was $3,112,200.

Peoples does not dispute the principle that bank balances are to be included in the rate base only to the extent that they represent requirements of the banking institutions. Peoples has not pointed to any evidence of banking requirements other than the letters from the three major banks, and we believe that the PUC was correct in concluding that the actual test year experience showed that those three institutions were actually requiring aggregate balances slightly under 2.5 million dollars, instead of the 2.8 million dollars set forth in the letters or the 2.9 million dollars claimed. The mere existence of continuing balances in other banks, without evidence that such balances were required, do not satisfy Peoples' burden to identify them as minimum amounts.

We therefore conclude that the PUC was correct in disallowing $400,000 as to minimum bank balances. The evidence here is distinguishable from the uncontradicted testimony as to balance requirements which

[ 47 Pa. Commw. Page 518]

    we held to be sufficient in Equitable Gas Co. v. Pennsylvania Public Utility Commission, 45 Pa. Commonwealth Ct. 610, 405 A.2d 1055 (1979). Moreover, the fact that the PUC allowed the full 2.9 million claimed in R.I.D. 205 for the test year 1974 does not in any way prevent the PUC from reexamining the evidence presented as to the test year 1975 in the present proceeding.

     b. Original Cost Adjustment: Employee Benefit Costs

In the previous proceeding at R.I.D. 205, the PUC ordered that employee benefit costs associated with 1974 plant construction should be disallowed as current operating expense, but capitalized as a rate base element; thus such costs in the amount of $1,275,070, accrued in 1974, were added by the PUC to the rate base in that case.

With respect to employee benefit costs of $1,084,909 related to 1975 construction, which Peoples again sought to apply to operating expenses, the PUC again found that costs of that sort should be disallowed as operating expenses and capitalized as an addition to rate base.

However, the commission refused to include in the rate base for this proceeding the same $1,275,070 which the PUC had capitalized in R.I.D. 205. The PUC here excluded the latter amount on the ground that Peoples, despite its awareness of the order in R.I.D. 205, had failed to accept that conclusion and persisted in presenting the 1974 figure as operating expense instead of part of rate base. PUC counsel characterizes Peoples' position as a continued collateral attack on the R.I.D. 205 order and, in effect, suggests that Peoples should not be allowed the amount as rate base element because it has not expressly requested it to be so considered.

[ 47 Pa. Commw. Page 519]

We must characterize this approach of the PUC as somewhat illogical and perhaps slightly punitive in tone. If the PUC itself deems that employee benefit costs associated with 1974 construction should be capitalized as part of the rate base, then, absent a successful challenge of that position by the utility, that amount is properly part of the rate base and should be so treated, consistently with the PUC's treatment of the like 1975 amount.

     c. Original Cost Adjustment: 1971 Income Tax Refund

In both R.I.D. 205 and this proceeding, the PUC has required that a federal income tax refund received in 1974 with respect to 1971 income taxes, in the amount of $1,948,430, be flowed through to ratepayers by amortizing it over a ten-year period against income, with the unamortized portion as of 1975, $1,558.774, being excluded from the original cost measure of value.

Peoples argues that, because it would not be permitted to recover from customers any additional income tax which might now be levied for 1971, it is likewise improper to require the benefit of a tax refund to be given to the ratepayers, without evidence of excessive revenues having been received by Peoples in the tax year involved. Peoples cites Pennsylvania Power & Light Co. v. Pennsylvania Public Utility Commission, 10 Pa. Commonwealth Ct. 328, 311 A.2d 151 (1973), holding that a past deficiency in collections of depreciation cannot be subsequently recouped without evidence of an inadequate return in the year of the deficiency, that citation being offered by way of analogous support for Peoples' premise as to income tax assessments for past years.

The PUC counters that the refund resulted from Peoples' independent decision, after its original 1971 tax return, to revise its 1971 tax position and apply accelerated

[ 47 Pa. Commw. Page 520]

    depreciation to that year, resulting in a tax reduction and refund as to 1971. However, having used a lesser depreciation allowance for 1971 originally, Peoples had earned a return on a portion of the rate base which has now been treated as depreciated during that year, so that there is justification for applying the tax benefit of the 1971 adjustment to the ratepayers, who have been charged on the basis of the property portion not depreciated originally.

Because Peoples has here submitted no evidence to distinguish the factual situation from that which supported the PUC's like conclusion in R.I.D. 205, we affirm the PUC's decision as to this income tax refund adjustment, both as to its exclusion from rate base and its application, in considering expenses, to the reduction of income tax expense, as hereinafter noted.

     d. Fair Value Conclusion

In reviewing the PUC's final determination as to fair value, we will use the figures employed by the parties in their briefs, without re-including the 1974 employees benefit costs, for the sake of simplification in discussion.

Peoples takes issue with the PUC's finding of fair value in two respects: (1) the finding ignores substantial accepted increases to the companies' original and trended original cost measures; and (2) the PUC insufficiently weighted the trended original cost measure of value. The argument stresses that the current fair value determination, at 265 million dollars, is the same as that found in the last rate proceeding.

Peoples contends that the commission's fair value determination is arbitrary and capricious, in that, although the PUC recognized an increase in plant investment of approximately 4.5 million dollars, it failed to reflect that increased investment in its fair value finding.

[ 47 Pa. Commw. Page 521]

As to Peoples' trended original cost measures, the PUC stated: "Our review of respondent's trended original cost study methodology employed in these proceedings indicates that it generally results in a reasonable estimate of trended original cost." Nevertheless, the PUC concluded that the fair value of respondent's property used and useful in the public services remained at 265 million dollars, rejecting Peoples' claim of 292 million dollars. The commission's finding of fair value is 120.5% of the original cost figure.

Although this court has consistently refused to accept magic numbers or formulae in the process of evaluating the Commission's fair value determinations, we have held that where the percentage of fair value to original cost is relatively low, the fair value determination may be suspect, especially where the PUC has not made findings adequate to allow us to perform our judicial role. As President Judge Bowman, writing for this court in Pennsylvania Gas and Water Co., Water Division v. Pennsylvania Public Utility Commission, 33 Pa. Commonwealth Ct. 143, 151, 381 A.2d 996, 1000 (1977), observed:

Once again, we decline to conclude that this figure alone [121 percent of net original cost] establishes an abuse of discretion per se, because there may exist a situation, however improbable, in which stability of prices for materials, increased labor productivity, enhanced technological efficiency, or some combination thereof would make reproduction cost sufficiently low that a reasonable fair value figure may exceed net original cost by a lesser percentage. (Emphasis in original.)

In that case, with no evidence of such an improbable situation, and in the light of other aspects (including a fair value finding less than the fair value found for an earlier test period just two years removed), we held that the PUC had abused its discretion.

[ 47 Pa. Commw. Page 522]

However, in that case the fair value finding (at 121 percent of net original cost) was 57 percent of the average of five-year trended original cost and original cost -- the accepted five-year trended original cost being there 274.9 percent of original cost. Here, with the accepted five-year trended cost at 162.1 percent of original cost, the fair value finding (120.5 percent of original cost) equals 92 percent of the average of five-year trended original cost and original cost.

Thus, with cost-measure differences here of lesser magnitude, we cannot condemn the fair value finding on the basis of its relationship to original cost.

Nevertheless, the PUC order gives us no basis for approving a fair value at such a ratio. The PUC, enumerating but not responding to the issues raised as to the fair value determination, concluded that: "Taking all of the 'relevant facts' into consideration, we do not find our fair value finding of $265,000,000 to be unjust or unreasonable."

The problem is that the PUC order, although acknowledging that its fair value determination remains the same as that earlier found in R.I.D. 205, and noting Peoples' claim that original cost and trended original cost measures have since increased, gives no inkling ...

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