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decided: May 20, 1987.


Appeal from the Order of the Pennsylvania Public Utility Commission in the case of Pennsylvania Public Utility Commission v. Equitable Gas Company, No. R-850038, dated August 29, 1985.


Charles E. Thomas, Jr., with him, Thomas T. Niesen, Lawrence B. Nydes and Amy M. A. Klodowski, Thomas & Thomas ; Of Counsel: William A. Mogel, with him, William R. Mapes, Jr., and Randall C. Smith, Ross, Marsh & Foster, for petitioner.

Alphonso Arnold, Jr., Assistant Counsel, with him, John F. Povilaitis, Deputy Chief Counsel, and Charles F. Hoffman, Chief Counsel, for respondent.

Michael A. Finio, Deputy Attorney General, Antitrust Section, with him, Eugene F. Waye, Deputy Attorney General, Chief, Antitrust Section, and LeRoy S. Zimmerman, Attorney General, for Intervenor, Office of Attorney General.

Robert P. Haynes, III, Assistant Consumer Advocate, with him, H. Kay Dailey and Craig R. Burgraff, Assistant Consumer Advocates, and David M. Barasch, Consumer Advocate, for Intervenor, Office of Consumer Advocate.

David Kleppinger, McNees, Wallace and Nurick, for Intervenor, Equitable Industrial.

President Judge Crumlish, Jr., and Judges Craig, MacPhail, Doyle, Barry, Colins and Palladino. Opinion by Judge Palladino.

Author: Palladino

[ 106 Pa. Commw. Page 242]

Equitable Gas Company (Equitable) petitions for review of an order of the Pennsylvania Public Utility Commission (PUC) which adopted, with modification, the recommended decision of an Administrative Law Judge (ALJ) which found Equitable's Computation of Annual Purchased Gas Adjustment to be unjust and unreasonable.

On March 1, 1985, Equitable filed a Computation of Annual Purchased Gas Adjustment (Section 1307(f) Filing) with the PUC pursuant to Section 1307(f) of the

[ 106 Pa. Commw. Page 243]

Public Utility Code (Code).*fn1 The Section 1307(f) Filing proposed increases in rates effective September 1, 1985 which reflected Equitable's projected natural gas costs for twelve months ending August 31, 1986. In addition,

[ 106 Pa. Commw. Page 244]

    pursuant to 52 Pa. Code § 53.64, Equitable included a reconciliation plan for the treatment of $14.3 million in alleged undercollected natural gas costs. On March 11, 1985, the PUC instituted an investigation to determine the lawfulness, justness and reasonableness of the proposed rates in Equitable's Section 1307(f) Filing. A Complaint against the Section 1307(f) Filing was filed by the Office of Consumer Advocate (OCA). The

[ 106 Pa. Commw. Page 245]

    complaints were consolidated with the PUC's investigation. On March 15, 1985, at a pre-hearing conference, the investigation was consolidated with the PUC's investigation into Supplement No. 50 to Tariff Gas -- Pa. P.U.C. No. 20 filed by Equitable on January 4, 1985 to increase base rate revenues by approximately $36,273,000. Throughout April and May of 1985, thirteen evidentiary hearings were held and a consolidated Public Input Hearing was held on May 2, 1985. On June 26, 1985, the ALJ issued his Recommended Decision finding Equitable's Section 1307(f) Filing unjust and unreasonable. Exceptions and Reply Exceptions to the Recommended Decision were filed by Equitable, OCA and by the PUC Trial Staff (Trial Staff) before the full PUC. The Recommended Decision was adopted, in material part, by the PUC in its order on August 29, 1985.

Equitable petitioned for review to this court challenging 1) the constitutionality of Act 74*fn2 and 2) the PUC's order. In addition, Equitable and Kentucky West Virginia Gas Company instituted a complaint in the United States District Court for the Middle District of Pennsylvania seeking injunctive and declaratory relief against enforcement of the Order and Act 74. By order entered November 6, 1985, the complaint was dismissed by the district court on the basis of the abstention doctrine.*fn3 This order was appealed to The United States Court of Appeals for The Third Circuit which reversed the district court's order and remanded the

[ 106 Pa. Commw. Page 246]

    case for disposition on the merits.*fn4 On remand, the district court upheld the constitutionality of Act 74 and held that it was not violative of the Commerce Clause,*fn5 the Supremacy Clause,*fn6 the first, fifth and fourteenth amendments,*fn7 the Natural Gas Act, 15 U.S.C. § 717 et seq. and the Natural Gas Policy Act, 15 U.S.C. § 330 et seq.*fn8

As the challenge to the constitutionality of Act 74 has been addressed by the District Court, we will limit*fn9

[ 106 Pa. Commw. Page 247]

    our review to the question of whether the PUC's order is supported by substantial evidence and in conformity with the law.*fn10


Equitable is the regulated utility division of Equitable Resources, Inc. Equitable is engaged in the production, purchase, storage, transportation, transmission, distribution and sale of natural gas. Equitable's principal service areas are the greater Pittsburgh area and other portions of Southwestern Pennsylvania.

Equitable's gas supply is composed of (1) company produced gas from wells located in Pennsylvania and West Virginia; (2) gas purchased from local producers in Pennsylvania and West Virginia; and (3) gas purchased from three Federal Energy Regulatory Commission (FERC) regulated interstate pipeline suppliers: Kentucky West Virginia Gas Company (Kentucky West), Texas Eastern Transmission Corporation (TETCO) and Tennessee Gas Pipeline Company (Tennessee). Kentucky West is a wholly-owned subsidiary of Equitable Resources, Inc.

Prior to the enactment of Act 74 gas utilities in Pennsylvania were permitted to recover the cost of gas acquired to supply retail demand through a proceeding known as a Gas Cost Rate (GCR) proceeding.

The Gas Cost Rate mechanism for the automatic adjustment of gas cost charges is authorized by Code Section 1307, 66 Pa. C.S. § 1307 entitled 'Sliding scale of rates; adjustments' and by the

[ 106 Pa. Commw. Page 248]

Commission's Order of May 21, 1978, Docket No. M-78050055, reported at 52 Pa. P.U.C. 217-220. Such mechanisms are common and are denominated variously 'fuel adjustment clauses,' 'purchased gas adjustment clauses,' 'escalator clauses,' and 'pass-through procedures.' With differences in the details of operation, each mechanism allows the regulated gas utility to reflect in customer charges changes in the price paid by the utility for the gas it distributes without the necessity of preparation or approval of a revised tariff. That is, these mechanisms by means of a formula like the one set forth at 52 Pa. P.U.C. page 219, pass through to customers changes in the utility's cost of gas. The constitutional validity of a similar automatic adjustment mechanism, the Energy Cost Rate applicable to electric utilities, was recently upheld in Allegheny Ludlum Steel Corporation v. Pennsylvania Public Utility Commission, 501 Pa. 71, 459 A.2d 1218 (1983).

The GCR here at issue is a 'levelized' adjustment mechanism which means that the cost of gas passed through to the customer remains constant for a specified period -- here one year -- with an opportunity during subsequent annual periods for the utility to reconcile past over-collections or under-collections by charging increased or decreased rates to the extent that its predictions as to the cost of its purchased gas fell short of or were greater than the utility's actual experience [, i.e. Reconciliation.]

National Fuel Gas Distribution Corporation v. Pennsylvania Public Utility Commission, 76 Pa. Commonwealth Ct. 102, 113 n. 6, 464 A.2d 546, 552 n. 6 (1983) (NFG 1). The relevant period of inquiry for over/under collections

[ 106 Pa. Commw. Page 249]

    would be the June preceding the September implementation ...

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