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decided: March 26, 1984.


Appeals from the Orders of the Pennsylvania Public Utility Commission in case of Walter W. Cohen, Consumer Advocate v. National Fuel Gas Distribution Corporation, No. C-812654, dated August 13, 1982 and December 3, 1982.


Michael W. Gang, with him W. Russel Hoerner and Anthony C. DeCusatis, Morgan, Lewis & Bockius, for petitioner.

Gary D. Cohen, Assistant Counsel, with him Albert W. Johnson, III, Deputy Chief Counsel, and Charles F. Hoffman, Chief Counsel, for respondent.

Philip F. McClelland, Assistant Consumer Advocate, with him Walter W. Cohen, Consumer Advocate, for intervenor, Office of Consumer Advocate.

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

Author: Rogers

[ 81 Pa. Commw. Page 150]

In these consolidated cases, the National Fuel Gas Distribution Corporation (NFG) seeks review of orders of the Pennsylvania Public Utility Commission (Commission)*fn1 the joint effect of which was to require refunds to customers of $3,245,727.00 said to represent "the interest accrued" to NFG on certain gas cost rate revenues determined by the Commission to have been unlawfully collected. The matters in controversy are the most recent to be born of the decision of the Commission in 1979 and 1980 to investigate and ultimately to disapprove purchases by NFG of synthetic natural gas (SNG) pursuant to a ten year contract with Ashland Oil Company, an unregulated petroleum refiner, which produced the SNG from liquid petroleum feedstocks at Ashland's Tonawanda, New York refinery. We recently considered a number of questions raised with respect to the Commission's orders entered August 28, 1980 and September 4, 1980 requiring NFG to refund to its customers $13,886,062 representing costs associated with the disapproved SNG purchases. National Fuel Gas Distribution Corporation v. Pennsylvania Public Utility Commission, Pa. Commonwealth Ct. , 464 A.2d 546 (1983). We there held that the Commission had failed adequately to describe in its adjudication the legal and factual basis for its refund requirement and we remitted the record to that body for further proceedings.

In the opinion filed in support of our order just described we explored in detail the circumstances which led to NFG contract for a supply of SNG and which later led the Commission to condemn the

[ 81 Pa. Commw. Page 151]

    maintenance of that supply. No purpose would now be served by repeating that history; it will suffice at this time to note that NFG's contract with Ashland Oil contains a provision the effect of which is to permit NFG to pay $.50 per MCF*fn2 as a penalty for gas produced by Ashland Oil under the contract but not taken by NFG for delivery and resale to its customers. In the context of the 1980 orders described above, the Commission held that NFG ought to have invoked the operation as this "take-or-pay" provision as, in 1978 and 1979, the cost of SNG rose to more than $6.00 per MCF, a figure upwards of twice the then prevailing price of natural gas. As we will shortly discuss at length, the cost to NFG of the gas it supplies to its customers is recovered in the form of gas cost rate (GCR) charges made a part of each customer's monthly bill. The gas cost rate charges, in turn, reflect a cost of anticipated gas purchases determined by the utility in accordance with a computational formula first promulgated by the Commission in 1978 and applicable to GCR filings made annually by NFG as one of the Commonwealth's Class-A gas utilities. Thus, GCR-1, for which each gas utility made application in July, 1978, governed the recovery from customers of the cost of gas supplied during the period from September, 1978 through August, 1979.

On July 31, 1981,*fn3 NFG filed with the Commission its calculations applicable to the GCR-4 period to commence on September 1, 1981. Specifically, NFG sought to establish by the filing a gas cost rate of $.2984 per MCF*fn4 based, inter alia, on the utility's projected

[ 81 Pa. Commw. Page 152]

    cost of gas from its suppliers (from which Ashland SNG had been excluded in conformance with the Commission's order eleven months earlier, but including the $.50 per MCF penalty attendant to a discontinuance of the Ashland source of supply); the amount of projected purchases and sales to customers; and certain overcollections from the GCR-3 period to be refunded to customers together with interest; each of which quantity and cost was incorporated into the computational formula mandated by the Commission in 1978 to yield the gas cost rate. The increase was intended to become effective on September 1, 1981, the first day of GCR-4.

On August 28, 1981, the four members of the Commission as it was then constituted, entertained a motion during the course of a duly convened public meeting attended by representatives of NFG the NFG's GCR-4, as submitted, be rejected on account of its inclusion of the $.50 per MCF penalty related to SNG not to be purchased from Ashland.*fn5 The Commission members evenly divided in their vote on the question and thus, as is reflected in the Commission's minutes, the motion failed. Thereafter, the following colloquy took place between Commissioner Cawley, who, with Commissioner Taliaferro, opposed the motion, and Joseph Malatesta, Esquire, then the Commission's Chief Counsel:

Commissioner Cawley : [T]he potential effects of denying incurred gas costs are catastrophic, I suspect, for all or most of these companies, and I would like you to check the law and make sure that they will go into effect as a result of a tie vote. Otherwise, we've got to do something about it quickly.

[ 81 Pa. Commw. Page 153]

    order of the Commission has been issued permitting the tariff rider to become effective. 66 Pa. C.S. § 1307(a) and (b).


B) NFG's GCR No. 4 is unjust and unreasonable in violation of Section 1301 of the Public Utility Code, 66 Pa. C.S. § 1301, because it is designed to collect "take or pay" charges of $.50 per MCF pursuant to a contract with Ashland SNG Corporation [sic].

NFG filed a responsive answer and the matter was assigned to Administrative Law Judge (ALJ) Herbert S. Cohen. An evidentiary hearing was conducted on January 7, 1982, at which time the effect of the Commission's order entered one week earlier, on December 30, 1981, was considered. In the December 30 order, docketed to M-FACG 8004, as we have indicated, the Commission required NFG to refund some $13 million to its customers representing the cost of Ashland SNG previously purchased by the utility. The Commission additionally ordered as follows:

5. That the prior collection of the $.50 per MCF take or pay penalty through the operation of GCR-2, GCR-3, and GCR-4 is hereby approved, subject to audit pursuant to the provisions of 66 Pa. C.S. § 1307(d) and further National Fuel Gas Distribution Corporation shall be permitted to include the costs of the $.50 per MCF penalty in all future GCR's, during the life of the contract. . . .*fn6

[ 81 Pa. Commw. Page 155]

NFG contended that this decision rendered moot the objection of the Consumer Advocate to the effectuation of the utility's GCR-4 charges because the only opposition ever voiced to that filing was predicated on its inclusion, now expressly approved, of the $.50 per MCF penalty charge.

The Consumer Advocate requested an opportunity to review in detail the Commission's December 30, 1981 order. This request was granted by the ALJ and written argument was submitted in which the Consumer Advocate pressed a modified objection to the effect that, although the utility's GCR-4 was now unobjectionable, NFG should be required to refund to its customers the difference between the GCR revenues collected between the implementation of GCR-4 on September 1, 1981 and its approval on December 30, 1981 and the revenues that would have been collected during the same period had GCR-3 remained in force.

In support of its position the Consumer Advocate contended that Section 1307 of the Code requires prior approval by the Commission of GCR filings; and that

[ 81 Pa. Commw. Page 156]

    the December 30, 1981 Order, to the extent it indicated retroactive approval of NFG's GCR-4, was on a number of grounds beyond the power of the Commission. In a decision dated June 1, 1982, the ALJ rejected these contentions and dismissed the Complaint of the Consumer Advocate.

Specifically, the ALJ held that neither Section 1307 of the Code nor the Commission's 1978 Order creating the GCR procedure require prior Commission approval of GCR filings; that the Commission is possessed of the power to approve retroactively a utility's GCR filing and that the Commission had, in its December 30, 1981 Order, done so with respect to NFG's GCR-4; and that the December 30 Order rendered moot any objections to that GCR-4.

Exceptions were filed and by order adopted August 13, 1982 and entered October 4, 1982, the Commission reversed the decision of the ALJ and concluded that NFG's implementation of GCR-4 prior to December 30, 1981 was unlawful. The text of the Commission's opinion in support of its Order, including the text of the pertinent statutory provisions follows:

During the pendency of the proceeding at R-79090956, on July 30, 1981, NFG filed its GCR No. 4 and related Tariff Supplement No. 3 to become effective September 1, 1981. Included within this filing was the $.50 perMCF penalty for SNG not taken under the Ashland contract.

At the public meeting held August 28, 1981, the four Commissioners then sitting considered, inter alia, the question of whether NFG should be allowed to implement its GCR 4. The decision resulted in a 2-2 tie. Effective September 1, 1981, NFG began charging rate payers the higher fuel costs contained in GCR 4. By

[ 81 Pa. Commw. Page 157]

Order entered December 30, 1981, a majority of the Commission approved NFG's GCR 4.

The OCA argues that NFG possessed no authority to charge its customers the GCR 4 rate until such a rate was expressly approved, and that as a result, NFG has collected $8,203,762*fn7 more under GCR 4 than it would have been entitled to if GCR 3 had been in effect from September 1 to December 31, 1981.

In his Initial Decision, the Administrative Law Judge concludes that our December 30, 1981 Order properly permitted NFG to include the $.50 per MCF penalty in its GCR 4 on and after December 30, 1981. He further finds that Section 1307(a) of the Public Utility Code provides the mechanism whereby an automatic adjustment clause may be collected and that Section 1307(b) ...

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