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decided: December 18, 1984.


Appeal from the Order of the Pennsylvania Public Utility Commission in case of Pennsylvania Public Utility Commission, William J. Green and The City of Philadelphia, University of Pennsylvania v. Philadelphia Electric Company -- Steam Division, Nos. R-822101, R-822101C001 and R-822101C002.


Louis J. Carter, for petitioners.

Julian S. Suffian, Assistant Counsel, with him, Albert W. Johnson, III, Deputy Chief Counsel, and Charles F. Hoffman, Chief Counsel, for respondent.

Thomas P. Gadsden, with him, Robert H. Young and Jack E. Jerrett, Morgan, Lewis & Bockius, and of Counsel: Edward G. Bauer, Jr., Vice President & General Counsel, and Irene A. McKenna, for intervenor, Philadelphia Electric Company.

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

Author: Rogers

[ 86 Pa. Commw. Page 412]

A number of customers of the Philadelphia Electric Company -- Steam Division (the Utility), including the University of Pennsylvania, seek review of an Order of the Pennsylvania Public Utility Commission (the Commission) entered and adopted April 29, 1983. Because the brief in opposition to the Commission order is that of the University of Pennsylvania, we will refer to the petitioners collectively as "the University." The order authorizes the Utility to file tariffs or their revisions or supplements designed to produce annual revenues*fn1 not in excess of $69,416,000.00, an increase in annual revenues of $4,407,000.00. The Utility proposed by suspended rates to have become effective on September 28, 1982, a revenue increase of $8,363,000.00. An Administrative Law Judge (ALJ) recommended an increase of $3,822,000.00.

Philadelphia Electric Company provides its customers with steam, electric and gas service.*fn2 Only the first is here at issue. The operations of the Utility's Steam Division encompass a five and one-half square mile area in Central and West Philadelphia. In 1982, 563 commercial and industrial customers were served with 5,094 million pounds of steam primarily for use in space heating. Three steam production facilities, primarily low and high

[ 86 Pa. Commw. Page 413]

    pressure boilers and plants for water purification, are located along the thirty-six miles of steam distribution mains and laterals constituting the "downtown loop." The Willow and Edison Stations are low pressure steam production facilities located at the eastern end of the distribution loop. Schuylkill Station is a dual purpose plant serving primarily as a source of high pressure steam but also as a source of electric generation. This dual nature of the Schuylkill Station has given rise to a number of the issues in this litigation.

By Order of the Commission*fn3 adopted September 17, 1982, an investigation was commenced as to the justness and legality of the Utility's proposed increase in annual revenues. The matter was the subject of some twelve days of hearings conducted by ALJ Isador Kranzel producing a voluminous record of exhibits, compilations of data, and 1250 pages of transcribed testimony. The recommended decision of the ALJ issued on March 11, 1983, over seventy pages in length, contains detailed justification for the various determinations as to fair value of the Utility's steam division property, rate of return fairly to be received by the Utility's investors on the value of that property, and operating expenses necessary to be recovered by the Utility. Thereafter, responding to exceptions and cross-exceptions taken to the ALJ's decision and embodying fifty-six pages of discourse and analysis exclusive of explanatory tables, the Commission, on April 29, 1983, entered the decision and order here subject to review.

The Issues

The petitioners divide the many questions here presented into two categories. First, the University

[ 86 Pa. Commw. Page 414]

    contends that various costs incurred by the Utility and properly attributable to the provision of electric service have been unfairly and unlawfully included in the expenses to be recovered out of steam consumer charges. Specifically, the University here asserts that the Commission's decision is inadequate with regard to its rejection of these allegations of unlawful "cost shifting" and, therefore, that the record must be remanded for further proceedings and the production of a more extensive adjudication.

In addition, the University contends that the Commission erred in its specific determinations, including errors in the allocation of the burden of proof, with respect to the Utility's rate base, operation and maintenance expenses, depreciation schedule, calculation of cash working capital, and claim for necessary fuel inventory. These issues will be considered seriatim.

I. Cost Shifting From Electric to Steam Consumers.

Schuylkill Station

As indicated above, a number of issues here pressed have their origin in the dual role of the Utility's Schuylkill Station; producing by means of its No. 3 turbine generator both high pressure steam and electricity. Prior to January, 1981, the expenses, including carrying and operating costs, of Unit No. 3 were the subject of an accounting methodology which accomplished an even division of those expenses between electric and steam consumers. Steam consumers were additionally credited for the electric generation provided by the dual operation in an amount which, if the credit had been continued in 1981, would have equaled $1,964,000.00. This credit was calculated with reference to the monthly average Philadelphia area steam generating fuel cost.

[ 86 Pa. Commw. Page 415]

In January, 1981, due, in part, to the retirement of the last three low pressure turbine generators at Schuylkill Station, the Utility altered the accounting methodology described above so as to place on steam consumers the whole of the carrying and operating costs of Turbine No. 3 as well as the related boilers and equipment. Additionally, the Utility replaced the "net generation credit" previously available to offset steam service costs with a reduced "avoided cost" credit calculated with reference to the expense to the Utility in the absence of Unit No. 3 of purchasing additional electric power from the multi-state PJM*fn4 electric generation pool. The record is less than clear as to the precise effect of these changes. However, it appears to be conceded that increased annual carrying costs alone will be in excess of $2.2 million and that the recalculated credit for electric production will reduce by 25%-45% those intra-utility revenues previously available to offset costs of steam production.

The University does not now directly attack the legality of the Utility's revision of its Schuylkill Station accounting methodology. Rather, it contends that an alternative methology proposed by it received inadequate consideration by the Commission and that we should remand for such consideration.

The University's proffered resolution of the Schuylkill Station expense division issue is predicated on the applicability of provisions of the United States Public Utility Regulatory Policy Act of 1978 (PURPA)*fn5 which requires compensation to be paid by public utilities to private owners of electric generating facilities (for example, homeowners installing

[ 86 Pa. Commw. Page 416]

    domestic photovoltaic arrays or wind or water powered generators) who make excess electricity available to the utilities' distribution network. PURPA provides that compensation to such private owners of generating facilities is to be calculated with reference to the Utility's capacity and operating cost of providing electricity by means of the next generation facility to be placed on line, in the instant case, the nuclear Limerick facilities. The University asserts that adoption of its proposal would result in annual revenues to the steam division derived from its electric counterpart in excess of the revenue increase requested by the Utility in these proceedings.

The ALJ rejected the University's proposal primarily because the electric power produced by Unit No. 3 is not a reliable source of electric generation inasmuch as the electric production of Unit No. 3 is a functional by-product of steam requirements, which, in turn, are at the maximum during the winter season when excess electric capacity is not needed. Peak electric usage and the commensurate peak electric capacity requirement of the Utility is during the summer season when Turbine No. 3 is generally scheduled for maintenance and is operating at only a nominal rate. Therefore, the ALJ concluded that it would be inappropriate to assess electric consumers with a capacity charge for power produced by Unit No. 3.

The Commission expressly affirmed this rationale as follows:

PECO-Steam, in opposing this adjustment [use of the co-generation regulation responsive to PURPA] argues that the availability of Schuylkill Turbine No. 3 has not avoided any capacity costs or diminished [the utility's] need to invest in any new electric generating facilities . . . . therefore, [the utility] argues the only cost avoided, by virtue of these sales [of electricity

[ 86 Pa. Commw. Page 417]

    produced by Turbine No. 3] is the price which the Company would otherwise have to pay to purchase power on the PJM Interconnection which is precisely what Electric Operations is being charged at the present time. . . .

The ALJ has recommended that this adjustment not be made. The University has excepted arguing that it is undenyable [sic] that the Schuylkill Station is available for electric generation purposes even if the steam produced is a by-product.

In order for us to consider the imposition of a capacity charge, it is important that we consider not only the availability of a particular unit, but the ability to utilize that plant as a reliable source of electricity. Although it is entirely possible that the Schuylkill Station Turbine No. 3 could serve primarily as an electric generation facility, with the steam by-product being utilized for Steam Operations, this plant has been dedicated to the production of steam with electricity produced as a by-product. The record before us indicates that the entire Schuylkill Station operates for the benefit of PECO's steam heating customers and its use or non-use is a function of the demand for steam. As such, we shall consider its capacity available for the production of ...

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