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decided: December 11, 1985.


Appeals from the Order of the Pennsylvania Public Utility Commission in case of Pennsylvania Public Utility Commission et al. v. Philadelphia Electric Company, No. R-822291.


David B. MacGregor, with him, Walter R. Hall, II, Michael G. Nearing, Jack E. Jerrett and Michael A. McGrail, Morgan, Lewis & Brockius, Of Counsel: Edward G. Bauer, Jr., Vice President and General Counsel, and Irene A. McKenna, Assistant Counsel, for petitioner/intervenor, Philadelphia Electric Company.

Irwin A. Popowsky, with him, David Wersan, Assistant Consumer Advocate, David M. Barasch, Consumer Advocate and Susan L. Rockwell, Edward J. Riehl and Herbert Smolen, for petitioner/intervenor, David M. Barasch, Consumer Advocate.

Veronica A. Smith, Assistant Counsel, with her, Marlane R. Chestnut, Assistant Counsel, Albert W. Johnson, III, Deputy Chief Counsel, and Charles F. Hoffman, Chief Counsel, for respondent.

President Judge Crumlish, Jr., and Judges Rogers, Craig, MacPhail, Doyle, Barry and Palladino. Opinion by Judge Rogers. Dissenting Opinion by President Judge Crumlish, Jr. Judge Doyle joins in this dissent.

Author: Rogers

[ 93 Pa. Commw. Page 412]

We are asked to review an order of the Pennsylvania Public Utility Commission (Commission) entered November 23, 1983; docketed to No. R-822291 on the docket of the Commission; and disposing of the matter of the Philadelphia Electric Company's (PECO) Supplement No. 40 to Tariff Electric-Pa.

[ 93 Pa. Commw. Page 413]

P.U.C. No. 25 which supplement proposed rates designed to increase PECO's annual operating revenues by $228,233,000 based upon a future test year ended October 31, 1983. The Commission here determined, following investigation and hearing and on the basis of a Recommended Decision of an Administrative Law Judge (ALJ), that the proposed rates were unjust and unreasonable and instead permitted PECO to file a tariff or tariff supplement designed to produce an increase in annual operating revenues of $143,518,000.*fn1 PECO has filed a Petition for Review to No. 44 C.D. 1984. The Office of Consumer Advocate (OCA) has appealed to No. 3561 C.D. 1983.

Four issues are presented by PECO's Petition for Review.

A. Was it not error and confiscation of PECO's property for the Commission to disallow recovery of reasonable and prudent operating, maintenance and depreciation expenses which were deferred pursuant to a Commission Declaratory Order for adjudication in this proceeding?

B. Was it not error and confiscation of PECO's property to reduce net negative salvage expense by taking from PECO and awarding to ratepayers a portion of PECO recovery of its investment in assets dedicated to public service?

C. Was it not error and confiscation of PECO's property to reduce PECO's cash working capital allowance to reflect accrued bond interest where the record establishes that accrued bond interest is not a source of cash working capital for this utility?

[ 93 Pa. Commw. Page 414]

D. Was it not error and confiscation of PECO's property to reduce PECO's claimed utility plant in service on account of an alleged overestimation of test year end plant balances, where there is no record evidence to support such an adjustment?

Three issues are presented by the OCA's Petition for Review.

A. Was it not error to charge current ratepayers a return on investment in nuclear fuel which would not be used to provide actual service during the applicable test year?

B. Was it not error to charge current ratepayers a return on investment in land which would not be used to provide actual service during the applicable test year?

C. Was it not error to permit the inclusion in the rate base of transmission facility construction work in progress?

A. PECO's Appeal -- Deferred Maintenance and Depreciation Expenses

As indicated, PECO first challenges the Commission's disallowance of $41,400,000 representing operating and depreciation expense waived by the utility during the period between December 31, 1982 and November 23, 1983 in the operation of certain pollution control equipment*fn2 required by consent decree in litigation commenced by the United States Environmental Protection Agency and the Commonwealth Department of Environmental Resources to be installed in conjunction with PECO's Eddystone and Cromby

[ 93 Pa. Commw. Page 415]

    coal-fired electric generators. The capital cost of this pollution control equipment was approximately $285,000,000. It is undisputed that installation of this equipment permitted PECO to continue operating the coal-fired generators identified with concomitant cost advantages to the utility and its customers.

On December 21, 1982, at about the time the pollution control equipment first became operational, PECO presented to the Commission a Petition for Declaratory Order in which the utility prayed for the issuance of an order approving PECO's proposed deferred accounting of the approximately $3,500,000 per month in operating and depreciation expenses associated with the pollution control facilities. In support of this prayer, PECO averred that the pollution control facilities would be completed and in service prior to December 31, 1982; that the pollution control facilities were solely of benefit to the utility's customers in permitting the use of fuel of low cost high sulfur coal mined in the Commonwealth; that "the operation of these new facilities will impose significant additional cost upon PECO, which costs will not be recovered by current rate levels"; that the utility's estimate of its 1983 year end mortgage indenture coverage ratio in the absence of the relief requested in the Petition for Declaratory Order was 1.92 which estimated ratio would "adversely impact [PECO's] ability to raise capital required to finance its construction program"; and that approval of PECO's method of deferred accounting would result in an interest coverage ratio adequate for this purpose.

The OCA interposed a response to the utility's Petitions contending, inter alia, that it was altogether unclear whether PECO was seeking the Commission's determination that the costs associated with the control equipment are recoverable from the ratepayers

[ 93 Pa. Commw. Page 416]

    or was merely seeking Commission approval of a deferred accounting mechanism to be employed by the utility until such later time as the substantive issue of cost recovery could be decided in the context of PECO's pending general rate increase request. If an accounting method approval were at issue, the OCA argued, no such approval from the Commission was required or appropriate. If the utility was seeking a determination of the recoverability of specified costs then it was the OCA's position that such substantive rate relief could not be granted outside the statutory rate increase request proceeding.

In its reply to OCA's responsive pleading, PECO made clear that it merely sought approval of an accounting method and that it was not seeking a determination from the Commission that the pollution control costs were recoverable from the ratepayers; the utility's prayer follows:

Wherefore, [PECO] respectfully requests . . . that the Commission issue a Declaratory Order approving deferred accounting for operation, maintenance and depreciation expense associated with pollution-control facilities recently completed for the Eddystone and Cromby generating stations and containing a statement that the justness and reasonableness of the amortization of such costs will be adjudicated as an issue in [PECO's] next rate proceeding.

The necessity of this relief, in the utility's view is described in this reply as follows:

Under applicable accounting principles and standards to which [PECO's] certified public accountants must conform, unilateral action by [PECO] to defer these costs and request their future recovery does not permit a determination [by the accountants] that there is prospect

[ 93 Pa. Commw. Page 417]

    of cost recovery . . . [PECO] has been specifically informed by its Auditors that unless the requested Declaratory Order is obtained, [PECO's] certified financial statements must be conditioned by a footnote if such deferral occurs as the result of unilateral [PECO] action. Such footnote will fully explain the $48 million reduction in pre-tax earnings which will result should the deferred accounting procedure not be approved. (Emphasis in the original.)

By Order adopted February 18, 1983 and entered March 18, 1983, the Commission granted the prayer of PECO's Petition for Declaratory Order with the following express limitation on the scope of the matters thereby decided:

We therefore will state that approval of PECO's petition cannot and should not be construed as constituting resolution of any substantive issue; rather, that we only are permitting the company to position itself so as to be able to make a clear claim for recovery of the costs separately accounted for. In order to ensure that [PECO's] shareholders understand that the Commission is providing no assurances that the deferred account will be recoverable, and as a condition of our approval of PECO's request to use deferral accounting, [PECO] is required to place the following language as a footnote to all public financial statements which report on periods subsequent to the commencement of operations at the pollution control facilities.

The Pennsylvania Public Utility Commission has authorized deferred accounting for the operation, maintenance and depreciation expenses associated with the pollution control facilities at the Eddystone and Cromby generating stations,

[ 93 Pa. Commw. Page 418]

. . . However, the Commission has not ruled that these deferred expenses are recoverable from ratepayers. This decision will be rendered in the next rate case in which the company seeks such recovery. If ultimately denied, current pre-tax earnings would be reduced by [dollar amount to be inserted in the quarter reported].

In its proposed Tariff Supplement No. 40, the utility claimed $14,200,000*fn3 representing the annual portion of the deferred pollution control facilities' operating, maintenance, and depreciation expense amortized over a three year period. The Commission denied this claim, reasoning as follows:

It is necessary to reiterate that the Declaratory Order (entered March 18, 1983) made no resolution, and imported no implicit approval, of any substantive issues raised by way of [PECO's] Petition. Moreover, the Declaratory Order contained no disposition, either inferred or implied, of the propriety of recovery or the appropriateness of any amortization period for any expense which might subsequently be determined to be allowable by the Commission.

Both Trial Staff and the OCA urge the Commission to reject [PECO's] claim. Noting that actual, total recovery of particular expenses incurred by a utility is not, and never has been, a regulatory objective, Trial Staff cautions that favorable treatment of [PECO's] claim would open 'the Pandora's Box of retroactive ratemaking'. Trial Staff further asserts that

[ 93 Pa. Commw. Page 419]

[PECO] has not advanced any reason justifying any extraordinary treatment of the expense. Finally, Trial Staff characterizes [PECO's] claim as retroactive ratemaking in that the expenses which PECO seeks to recover will be ...

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