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decided: January 25, 1980.


Appeals from the Order of the Pennsylvania Public Utility Commission in case of Pennsylvania Public Utility Commission, Philip Starr, Mark P. Widoff, Consumer Advocate, Bethlehem Steel Corporation, Hershey Foods, Inc. v. UGI Corporation, No. R-77110518.


Kenneth R. Myers, with him Frank M. Thomas, Jr., John R. Doubman, Jr., and, of counsel, Morgan, Lewis & Bockius, for petitioner, UGI Corporation.

David A. Ody, Assistant Consumer Advocate, and David L. Kurtz, Assistant Consumer Advocate, for respondent, Mark P. Widoff.

Gilbert L. Hamberg, Assistant Counsel, with him Steven A. McClaren, Deputy Chief Counsel, and George M. Kashi, Chief Counsel, for respondent.

President Judge Bowman and Judges Wilkinson, Jr., Rogers, Blatt, DiSalle, Craig and MacPhail. Judges Crumlish, Jr. and Mencer did not participate. Opinion by Judge Rogers. This decision was reached prior to the expiration of the term of office of Judge DiSalle.

Author: Rogers

[ 49 Pa. Commw. Page 72]

UGI Corporation (UGI), a public utility providing gas service to about 200,000 customers in eastern and south central Pennsylvania, filed Supplement No. 42 to Tariff Gas -- PA PUC No. 3 designed to produce additional annual revenues of $12.6 million, an increase of 9.5% over existing rates. The test year was the twelve month period ending March 31, 1978. Complaints against the proposed new rates were filed by three customers and the Office of Consumer Advocate (OCA). The Pennsylvania Public Utility Commission (PUC) suspended operation of the proposed rates and ordered that hearings be held regarding their lawfulness.

Administrative Law Judge Joseph L. Cohen conducted 19 days of evidentiary hearings and three days of public comment hearings and thereafter issued a Recommended Decision in which he found that UGI had justified $5,786,600 of the proposed increase of annual revenues. Exceptions were filed by all of the parties. PUC eventually entered an order approving rates designed to produce additional annual revenues of only $4,602,554.

Denial by the PUC of approximately $8,000,000 of the rate relief sought by UGI was effected by reductions in UGI's claimed fair value rate base, adjustments in the computation of rate of return and the disallowance of numerous items of claimed expense. Only UGI and OCA have filed petitions for review from the order. UGI has presented eight questions for our consideration and OCA four.

[ 49 Pa. Commw. Page 73]

Our scope of review is "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." U.S. Steel Corp. v. Page 73} Pennsylvania Public Utility Commission, 37 Pa. Commonwealth Ct. 195, 201, 390 A.2d 849, 853 (1978).

We shall first examine the questions presented by UGI.

UGI's Appeal -- UGI's Claim For The Inclusion of Depreciation Deficiency in Either Rate Base or Operating Expense

UGI and the Commission agree that UGI, at the end of its test year, had calculated depreciation*fn1 for its plant-in-service of $42,806,619 and that it had booked depreciation in the amount of $37,578,987, resulting in a $5,427,632 depreciation reserve deficiency.*fn2 UGI contends that PUC's failure to include this depreciation deficiency in either UGI's rate base or as an operating expense will prevent it from recovering the full cost of its property devoted to the public service and was thus an error of law.

[ 49 Pa. Commw. Page 74]

A utility seeking to recover a depreciation deficiency from rates has the burden of proving that the deficiency is genuine. Pennsylvania Power & Light Page 74} Co. v. Pennsylvania Public Utility Commission, 10 Pa. Commonwealth Ct. 328, 339, 311 A.2d 151, 158 (1973). The genuineness of a deficiency is proved by the utility's demonstrating that it has not received revenues sufficient to pay all of its operating expenses together with a fair return on its rate base during the years when the deficiency was created. See generally, U.S. Steel Corp. v. Pennsylvania Public Utility Commission, supra, 37 Pa. Commonwealth Ct. at 212-19, 390 A.2d at 858-61; Pennsylvania Power & Light Co. v. Pennsylvania Public Utility Commission, supra, 10 Pa. Commonwealth Ct. at 339-42, 311 A.2d at 158-59.

UGI advances two theories in support of recovering its asserted depreciation deficiency. Its principal argument is based primarily upon Section 1703(c) of the Public Utility Code, 66 Pa. C.S. § 1703(c). Section 1703(b) provides, and its predecessor, Section 503 of the Act of May 28, 1937, P.L. 1053, formerly 66 P.S. § 1213(b), provided, that a public utility should file statements giving the details of its computation of annual depreciation for the Commission's review and correction. Before 1976 Section 503 of the Act of May 28, 1937 provided that in rate proceedings the Commission "may give consideration to statements submitted [by the utility] hereunder, in addition to such other factors as may be relevant." In 1976, by Section 12 of the Act of October 7, 1976, P.L. 1057, the word "may" was changed to "shall". Section 1703(c) of the Public Utility Code retained the amended wording. UGI contends that the use of the mandatory shall rather than the discretionary may require the Commission to accept the utility's book figures on depreciation deficiency without any inquiry into their genuineness. Moreover, UGI contends that the party opposing its figures should have the burden to prove them wrong.

[ 49 Pa. Commw. Page 75]

We do not believe that UGI's interpretation of the 1976 amendment was what the Legislature intended. The change from "may give consideration" to "shall give consideration" we believe was meant only to require the Commission to consider the utility's statements in rate cases, in contrast to its previous privilege of simply ignoring them. We do not discern legislative intent to overrule prior holdings that the utility must prove that its depreciation deficiency is genuine. This is not a case where a legislative overruling of case law is a "necessary incident[] or logical consequence[]" of statutory language. Commonwealth v. Cartwright, 350 Pa. 638, 645, 40 A.2d 30, 33 (1944), quoting Endlich, The Interpretation of Statutes § 422. Cf. Delaware Institution District v. Middletown Township, 6 Pa. Commonwealth Ct. 146, 151, 293 A.2d 885, 888 (1972), aff'd, 450 Pa. 282, 299 A.2d 599 (1973).

Furthermore, Section 1703(c) expressly permits the Commission to consider, in addition to the utility's depreciation statements, such "other factors as may be relevant", which would be an unnecessary exercise if the Commission were bound to accept the utility's depreciation statement as correct. Section 1703(c) also states that the Commission "shall not be bound in rate proceedings to accept, as just and reasonable for rate-making purposes, estimates of annual depreciation established in the provisions of this section." (Emphasis added.) Finally, Section 1703 refers to annual depreciation figures. In the case at bar, UGI and the Commission are in dispute over the genuineness of the accrued depreciation figures which form the basis of UGI's alleged depreciation reserve deficiency. We therefore hold that Section 1703(c) has not removed the utility's burden in a rate case of proving that an alleged depreciation reserve deficiency is genuine.

[ 49 Pa. Commw. Page 76]

UGI further contends that the Commission erred in concluding that UGI failed to prove that it did not earn its operating expenses plus a fair return on the fair value of its plant-in-service. Our scope of review in this area is limited to an examination of whether the Commission violated UGI's constitutional rights, committed an error of law, or made findings or orders which are not supported by substantial evidence. United States Steel Co. v. Pennsylvania Public Utility Commission, supra, 37 Pa. Commonwealth Ct. at 201, 390 A.2d at 853. In this aspect of the case, UGI raises questions concerning the propriety of the acceptance of the Commission's prosecuting staff's conclusion that UGI's book reserve included an amount for negative salvage which should be removed and that life tables should be used for UGI's steel mains effecting a reduction in its calculated reserve. These complaints, while interesting, go only to the amount of the deficiency; they do not demonstrate that the deficiency in any amount was genuine as the law in the field uses that word -- that is, that during the period in which the deficiency arose UGI did not earn its operating expenses plus a fair return on the fair value of its plant-in-service.

UGI's Appeal -- Treatment of UGI's Unsuccessful Gas Exploration Costs

In 1977, UGI entered into a joint venture for new gas exploration with Amoco Production Company. UGI provided an initial sum of $6.5 million for exploration and drilling with the option to invest additional sums. In return, UGI is part owner of gas wells developed with its funds, with right to a share of the wells' production and to purchase Amoco's share of gas production from the joint wells. In addition, UGI may purchase 27,000 billion cubic feet (BCF) of gas discovered by Amoco before the inception of the joint

[ 49 Pa. Commw. Page 77]

    venture. The first year of the joint venture commenced during the test year used in this case.

Prior to entering into the venture, UGI filed a petition asking the Commission for approval of some form of recovery of the costs of unsuccessful exploration and drilling. Petition of UGI Corporation, P-88, P.U.C. Order 2 (1977). The Commission's order stated that it would give "fair rate treatment" to "all prudent and reasonable exploratory project expenses including those incurred by the drilling of unsuccessful wells." Thereafter, during the course of gas exploration, UGI incurred net unsuccessful well costs of $1.2 million.

In presenting its case for a rate increase to the Commission, UGI did two things; it expensed the $6.5 million initial investment over 28 years, and it claimed in rate base the net unsuccessful well costs. Since a utility cannot capitalize an item in its rate base and at the same time recover the item as an expense from ratepayers, Pittsburgh v. Pennsylvania Public Utility Commission, 187 Pa. Superior Ct. 341, 353, 144 A.2d 648, 655 (1958), the Commission chose to allow only the amortization of $6.5 million as an expense.

UGI claims that the $1.2 million dry hole costs should have been allowed in its rate base and that the Commission's allowance of the $6.5 million investment as an amortizing expense denies UGI's stockholders a fair rate of return on their investment in gas exploration, thus shifting the risk of unsuccessful wells directly onto the shoulders of UGI's investors. UGI relies upon the Commission's prior statement that "fair rate treatment" would be given unsuccessful well costs. The Commission counters that its treatment of these expenses is proper because it directly reflects the amount of benefits, in terms of additional gas, derived by UGI customers. The Commission reasons that UGI

[ 49 Pa. Commw. Page 78]

    customers should not have to pay UGI a continuing return on an investment which might well yield no benefit to them beyond that shown in the test year. This, according to the Commission, is "fair rate treatment."

UGI says that it is entitled to earn a fair rate of return on its whole investment. The Commission in response points, however, to a principle of utility law that the utility rate base should include only the "value of the utility's property used and useful in rendering its public services." Pennsylvania Power & Light Co. v. Pennsylvania Public Utility Commission, 10 Pa. Commonwealth Ct. at 334, 311 A.2d at 155.

It must be kept in mind that the test year utilized in this case was also the first year of the UGI-Amoco venture. There is therefore little history to shed light on the productivity, or lack of the same, of the wells drilled or proposed to be drilled. The Commission reasoned that UGI's right to purchase 27,000 BCF of gas might prove to be substantially all of the gas certain to accrue from the venture. By dividing the 27,000 BCF into UGI's $6.5 million investment, the Commission found that UGI paid $0.24 per million cubic feet (MCF) for the right to purchase this gas. Since 886,000 MCF were obtained by UGI during the test year, the Commission allowed UGI $215,000 (886,000 MCF X $0.24 per MCF = $214,589) as an expense for the price of the gas. Assuming a steady rate of use, UGI will recoup its initial $6.5 million investment in 28 years. These figures are precisely those used by UGI in its own expense figures originally submitted to the Commission. The Commission, as noted, rejected UGI's claim that the $1.2 million dry well costs should be included in rate base.

We agree that this record provides little support for a finding that UGI will realize substantially more than 27,000 BCF, or 886,000 MCF per year from its

[ 49 Pa. Commw. Page 79]

    joint venture. If the record were otherwise -- that is, showed that substantial gas supplies had or would be obtained, UGI's costs whether for producing or dry wells would be includable in rate base, and the Commission concedes as much.

In the area of adjustments to rate base, the Commission has wide discretion. Duquesne Light Co. v. Pennsylvania Public Utility Commission, 174 Pa. Superior Ct. 62, 69-70, 99 A.2d 61, 69 (1953). The Commission acted within a sound discretion in allowing UGI to claim the $6.5 million initial payment as an expense and in disallowing the inclusion of $1.2 million dry well costs in rate base, at this time and on this record.

UGI's Appeal -- Cash Working Capital Element of UGI's Rate Base

UGI claims the Commission erred in allowing only $1,970,000 instead of its claimed $3,804,000 for cash working capital in its rate base. Cash working capital represents the utility's need for cash to meet current obligations arising out of the rendition of services for which revenues have not yet been received. The need arises because utilities typically pay their obligations on a current basis, whereas revenues come into the utility only after services have been provided. "Cash working capital ordinarily is the amount of cash required to operate a utility during the interim between the rendition of service and the receipt of payment therefor." Pittsburgh v. Pennsylvania Public Utility Commission, 370 Pa. 305, 309, 88 A.2d 59, 61 (1952).

UGI claimed cash working capital needs of $3,804,000 for operation and maintenance expense and $1,320,000 for compensating bank balances. The Commission allowed only $1,970,000. UGI claims that the Commission committed three errors, the ...

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