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decided: July 19, 1984.


Appeal from the Order of the Pennsylvania Public Utility Commission in case of Investigation and Order pertaining to Incremental Pricing Tariffs for gas utilities, No. I-79110324, F. 1-F. 16, dated November 3, 1982.


Edward J. Grenier, Jr., with him, Glen S. Howard and James P. Rathvon, Sutherland, Asbill & Brennan, and Stephen A. George, Buchanan, Ingersoll, Rodewald, Kyle & Buerger, P.C., for petitioner.

Lee E. Morrison, Assistance Counsel, with him, Daniel P. Delaney, Deputy Chief Counsel, and Charles F. Hoffman, Chief Counsel, for respondent.

Daniel Clearfield, Assistant Consumer Advocate, with him, David M. Barasch, Acting Consumer Advocate, and Debra Miller, Legal Assistant, for intervenor, Office of Consumer Advocate.

John Winship Read, with him, Rodney G. Hoffman, Kirkpatrick, Lockhart, Johnson & Hutchison, and Norman J. Kennard and Martha W. Bush, for intervenor, Allegheny Ludlum Steel Corporation.

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

Author: Rogers

[ 84 Pa. Commw. Page 78]

The Process Gas Consumers Group ("PGCG" or "Consumers Group"), an association of industrial consumers of natural gas including the corporate owners of gas consuming facilities located in this Commonwealth, here seeks review of an Order of the Pennsylvania Public Utility Commission ("PUC" or "Commission") entered November 3, 1982 and requiring each of the Commonwealth's sixteen jurisdictional gas utilities to "submit for [Commission] approval a residential conservation program funded by [the utility's] portion of the accumulated BFR."*fn1 A description of the general goals to be achieved by the required residential conservation program is contained in the opinion accompanying the Commission's order. The BFR

[ 84 Pa. Commw. Page 79]

    referred to is a Boiler Fuel Rider required by Commission Order entered and adopted on December 7, 1979 and applicable to large industrial users of gas as a boiler fuel. The BFR is a species of surcharge and has the effect of raising the cost of gas to industrial gas users to the cost of the least expensive alternative boiler fuel -- No. 6 high sulfur fuel oil. Funds produced by the imposition of the BFR have been held in escrow by each utility pursuant to the December 7, 1979 Order pending investigation and decision by the Commission as to the appropriate disposition of those funds. We were informed at argument that approximately fifteen million dollars have been, thus far, produced by operation of the BFR.

As indicated, the Commission, in the order here challenged, has determined that the fund produced by the BFR should be expended by each utility in the creation and operation of a program of residential conservation. The consumers group contends that the Commission is without statutory power to require expenditures for such a purpose and that the fund should instead be distributed to the small industrial, commercial, agricultural, and residential gas users unaffected by the BFR.*fn2 Before commencing our analysis of this contention, we will describe the factual and legal circumstances that prompted the Commission to promulgate the BFR and to determine the disposition of BFR funds described above.

The National Gas Policy Act of 1978

One of five statutes relating to the consumption of sources of energy enacted by the United States Congress

[ 84 Pa. Commw. Page 80]

    in 1978, The National Gas Policy Act,*fn3 mandates, inter alia, a system of incremental pricing intended to ameliorate some of the anticipated adverse effects of federal price deregulation of natural gas producers. Specifically, Title II of the Act*fn4 requires the Federal Energy Regulatory Commission (FERC) to promulgate by rule a system designed to pass through to large industrial users the increased cost of deregulated gas at the well head. The means by which this goal is accomplished includes surcharges assessed by interstate pipelines and local distribution companies which are calculated to produce a gas cost to the industrial customer no greater than the cost of alternative low grade fuel oil. All such surcharges received by the pipelines and distribution companies are required to be used to offset anticipated increases in the cost of gas to so-called "exempt" or "high priority" gas consumers including residential, commercial, and agricultural users.

As indicated, a fundamental tenet of the federal incremental pricing program is the recognition that the natural gas supplied to industrial boiler fuel users cannot be raised in price beyond that of alternative fuel oil. For this reason, the rate of surcharge collected from each industrial consumer is limited by regulation to no more than the difference in cost of natural gas and No. 6 high sulfur fuel oil, the product of which quantity multiplied by the consumer's energy usage by volume*fn5 is called the consumer's "maximum surcharge absorption capability" or MSAC.

As a consequence, a non-exempt consumer subject to a state approved tariff which prices natural gas at

[ 84 Pa. Commw. Page 81]

    the equivalent alternative fuel cost before the imposition of any surcharge has no capacity to absorb any price increment and is denominated a "zero MSAC."

The FERC regulations called for by the NGPA were issued on September 28, 1979. As we have noted, approximately ten weeks later, on December 7, 1979, the Commission initiated the Boiler Fuel Rider. The effect of the BFR was to ensure that all large industrial gas consumers in Pennsylvania are zero-MSAC thereby preventing any surcharge under the NGPA from "flowing back" to out-of-state pipeline companies. As the Commission candidly wrote:

The Commission believes that the interest of all gas consumers in Pennsylvania can best be achieved by Commission regulatory action directing the establishment of rates, in a uniform fashion, within the existing Pennsylvania regulatory framework, which will enable gas distribution companies to report zero MSAC's. Thus, Pennsylvania can, in effect, "exempt" itself from the Federal incremental pricing program by having gas distribution utility rates which conform the effective rate charged non-exempt industrial boiler fuel load customers to the alternate fuel price established by FERC. Through the establishment of such rates, which would meet the specific characteristics of this state, the Commission estimated that about $10 million dollars, which would otherwise flow back to interstate natural gas pipeline companies, would be retained within the state.*fn6

[ 84 Pa. Commw. Page 82]

With respect to disposition of the funds produced by operation of the BFR, the matter here directly at issue, the Commission in December, 1979, ordered an investigation and the receipt of proposals formulated by interested parties. Hearings were conducted in May and June, 1980 before Administrative Law Judge (ALJ) Charles F. Hoffman and proposals were submitted, most notably, by the Governor's Energy Council,*fn7 the Commission's trial staff, the Hospital Association of Pennsylvania, and a number of gas consumers including the PGCG.

Insofar as the issues raised by this appeal are concerned, these proposals can be divided into two broad categories. Apart from the consumers and consumer groups including PGCG, evidence was adduced before the ALJ in support of various plans for the expenditure of BFR funds so as to decrease natural gas usage through conservation. The specific plans included insulation grants and subsidized loans with or without provision for low income residential consumers, subsidized energy audits, and financial assistance including grants to hospitals desirous of engaging architectural and other professional technical assistance in attempting to reduce energy usage. Gas consumers, including PGCG, on the other hand, proposed refunding of the BFR revenues to consumers other than those subject to the federal surcharge by means of each utility's GCR. In his extensive recommended decision

[ 84 Pa. Commw. Page 83]

    dated February 27, 1981, ALJ Hoffman found it unnecessary to weigh the relative substitute merits of the various proposals. Instead, the ALJ determined that only those proposals involving GCR refunds were within the power of the Commission to mandate. Specifically, it was recommended

     a. That revenues accumulated in escrow accounts by the various jurisdictional gas utilities be flowed to exempt*fn8 customers through the operation of the utilities' GCR.

Following the filing of exceptions and a remand by the Commission at which time ALJ Hoffman reiterated his conviction that expenditure of BFR funds for conservation programs was beyond the Commission's statutory power, the Commission, on November 3, 1982, entered the order here challenged approving broadly the residential conservation plans supported by a number of parties as follows:


1. that each affected gas utility shall, within 90 days of the entry date of this Opinion and Order, submit to the Commission for its approval a residential conservation program funded by their portion of the accumulated BFR funds, but which may be supplemented by other utility funds, which contains the programs outlined in Section III of this Opinion and Order [including an audit supplement program, instruction in basic home weatherization improvements, installation of gas water heater insulating jackets, home insulation loan subsidies, and optional programs for commercial and small industrial gas consumers "designed to improve

[ 84 Pa. Commw. Page 84]

    the efficiency of natural gas consumption. . . ."] These programs and corresponding publicity activities should be designed to effectively spend currently accumulated BFR funds within two ...

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