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decided: November 29, 1983.


Appeals from the orders of the Pennsylvania Public Utility Commission in case of Pennsylvania Public Utility Commission et al. v. UGI Corporation -- Gas Division, No. R-821899.


Philip F. McClelland, Assistant Consumer Advocate, with him H. Kay Dailey, Assistant Consumer Advocate and David M. Barasch, Acting Consumer Advocate, for petitioner/intervenor.

Frank B. Wilmarth, Assistant Counsel, with him Charles F. Hoffman, Chief Counsel, and Albert W. Johnson, III, Deputy Chief Counsel, for respondent.

Kenneth R. Myers, with him Larry R. Chatzkel and Michael G. Nearing, Morgan, Lewis & Bockius, and of counsel: Walter F. X. Healy and William N. Farran, III, for intervenor/petitioner.

President Judge Crumlish, Jr. and Judges Rogers, Williams, Jr., Craig, MacPhail, Doyle and Barry. Opinion by Judge Craig.

Author: Craig

[ 78 Pa. Commw. Page 547]

UGI Corporation -- Gas Utility Division (UGI) has appealed from Pennsylvania Public Utility Commission orders of December 22, 1982 and January 7, 1983. The first of these orders allowed UGI a gas rate increase totaling $21,290,543, instead of the $30,719,803 which UGI had sought by its Supplement No. 3 filing, using 1982 as test year. From that order, the Office of Consumer Advocate (OCA) has appealed, pursuing a different issue, discussed below. The second order, appealed only by UGI, embodied the commission's acceptance of UGI's second version of a tariff to comply with the first order.

[ 78 Pa. Commw. Page 548]

In the rate increase filing, UGI had also proposed a new Rate FS (Flexible Service) for large interruptible customers with the capacity to burn either gas or oil, customers previously served under Rate S (Seasonal). UGI has stressed the need to retain such customers in the face of competition from low cost No. 6 high sulphur residual fuel. During the proceedings UGI modified its sales projections downward, contending that lowered oil prices would mean that not even the reduced gas rate would prevent a loss of sales to customers capable of using oil as an alternative.

However, in the December 22 order, the PUC found that gas sales would increase, not decline, to 66.9 bcf (billion cubic feet), as the utility itself had originally estimated for the test year. The PUC approved rate FS but required that rate FS be made available to non-interruptible customers on Rate LF (Load Factor).

The PUC thereafter disapproved UGI's original compliance filing, which UGI claims would have provided the increase allowed by the commission. The finally-approved compliance filing, UGI contends, will yield $3,640,115 less revenue than was approved. The PUC and this court both have denied UGI's request to stay the commission's January 7 order.

The questions in general are whether the commission erred in (1) refusing to accept UGI's projections of a decline in gas sales levels, (2) refusing to recognize the revenue deficiency which, UGI contends, would result from the implementation of Rate FS, and (3) extending the reduced Rate FS to firm customers.

UGI Appeal -- Gas Sales Projections

In this case an important background factor is the federal government's Natural Gas Policy Act, 15 USC § 3301 et seq., mandating the gradual decontrol of natural gas prices. UGI's case is that gas prices have

[ 78 Pa. Commw. Page 549]

    risen above the market price for oil, when compared on an equivalent energy basis.

The guiding principle, that the PUC must allow just and reasonable rates, means that a public utility is entitled to recover necessary operating expenses while earning a fair return on the investment in plant used and useful in providing the service. City of Pittsburgh v. Pennsylvania Public Utility Commission, 42 Pa. Commonwealth Ct. 242, 247, 400 A.2d 672, 674 (1979). Obviously, the regulatory agency must allow the utility a fair opportunity to implement the lawful return.

Rate setting is a process which necessarily involves valuation of economic elements in the future tense. Because "rates must be fixed for the future as well as for the present," such future "estimates . . . must necessarily enter into the disposition of any rate case." Peoples Natural Gas Co. v. Pennsylvania Public Utility Commission, 141 Pa. Superior Ct. 5, 17, 14 A.2d 133, 138 (1940).

UGI's filing, in its original terms, predicted 66.9 bcf of sales. UGI witness Chaney considered that up to 9 bcf of sales could possibly be lost by customers switching to fuel oil -- that concern being the basis for the Rate FS proposal. With an estimate that 9 bcf of load could transfer to the flexible rate, the witness estimated that 7.2 bcf out of the 9 bcf could be preserved, thus initially predicting a loss of about 2 bcf, which would reduce projected total sales to 64.9 bcf. Later in the hearings, UGI offered new estimates, claiming decreasing oil prices as a basis, in the spring of 1982, for foreseeing a further drop to 59.9 bcf. In even later testimony, UGI then submitted a new sales estimate at 56.9 bcf. However, upon cross-examination, UGI's initial witness acknowledged that, by mid-1982, all but one of the earlier-switching customers had switched back to gas use.

[ 78 Pa. Commw. Page 550]

UGI's testimony particularly stressed the sales loss impact which could accrue from the gas cost rate (GCR) automatically incorporated as a result of increased prices of gas to UGI, originally estimated to be $1.48 per mcf; however, the actual GCR increase was $.91.

Understandably, UGI witnesses differed in their estimates of the extent of load loss, with drops of 7 bcf and 10 bcf being variously predicted. UGI's sales projections did not go unchallenged. A PUC staff witness pointed to company actions reflecting optimism rather than pessimism, and a witness for the Office of Consumer Advocate testified in support of UGI's original projections, which contrasted with the utility's subsequent downward revisions.

UGI's contention is that the PUC erred as a matter of law in refusing to consider the projections of decline. However, the PUC order does not provide any foundation for such an issue. The commission, as the administrative law judge had done, considered and weighed the evidence relating to loss of sales, finally finding that such loss remained highly speculative and incapable of accurate quantification. Stressing the volatility of oil and gas price relationships, the order noted the return of customers who had earlier switched to oil. The PUC also noted the fact, mentioned above, that the GCR increase resulted in a substantially smaller evaluation of gas prices than initially expected.

Although the PUC order commented upon the absence of any showing that UGI had "acted prudently," noting that "UGI may be lax" in keeping the price of gas as low as possible, and also ruminated about the appropriateness of considering plant attributable to a loss customer to be still used and useful as to remaining customers, such dicta were not determinative.

[ 78 Pa. Commw. Page 551]

The determinative issue with respect to sales projections is whether or not the PUC's findings on the point, in relation to conflicting evidence, were based upon substantial evidence. 2 Pa. C.S. § 704. Big Run Telephone Co. v. Pennsylvania Public Utility Commission, 68 Pa. Commonwealth Ct. 296, 449 A.2d 86 (1982). With UGI having the burden of proof, 66 Pa. C.S. § 315(a), as to all factors affecting proposed rates, Lower Frederick Township Water Co. v. Pennsylvania Public Utility Commission, 48 Pa. Commonwealth Ct. 222, 409 A.2d 505 (1980), we conclude that, on this record of testimony and exhibits, the PUC was entitled to weigh the evidence and reject the company's projections as insufficiently convincing. Although there is "a very definite forward-looking aspect in the ratemaking process," City of Pittsburgh, 42 Pa. Commonwealth Ct. at 245, 400 A.2d at 674, the commission was entitled to regard oil and gas price volatility as a situation calling for normalizing adjustments, Pittsburgh v. Pennsylvania Public Utility Commission, 187 Pa. Superior Ct. 341, 361, 144 A.2d 648, 659 (1958).

The commission was entitled to give weight to UGI's own rising sales projections for 1983 to 1987 (405a) and was also entitled to take note of UGI's support of the application submitted to the Federal Energy Regulatory Commission by Columbia Gas Transmission ...

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