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decided: October 15, 1987.


Appeal from Order of the Commonwealth Court dated June 13, 1985 at No. 553 C.D. 1983, affirming the decision of Pennsylvania Public Utility Commission entered January 28, 1983 at R-821945. Appeal from Order of the Commonwealth Court dated June 13, 1985 at No. 1364 C.D. 1984, affirming the decision of Pennsylvania Public Utility Commission entered April 11, 1984 at R-832409. Nix, C.j., and Larsen, Flaherty, McDermott, Hutchinson, Zappala and Papadakos, JJ.

Author: Nix

[ 516 Pa. Page 146]


Before us are two consolidated appeals questioning the right of a public utility to recover certain costs from its ratepayers. We are called upon to decide whether section 1315 of the Public Utility Code ("Code"), 66 Pa.C.S. § 1315, bars an electric utility from amortizing costs incurred in connection with plant-construction projects which were cancelled prior to completion, and whether, if the statute must be so read, it violates constitutional safeguards. We must also determine whether vacant land, purportedly held by a utility company "for future use," is properly includible in its rate base.

[ 516 Pa. Page 147]

In 1973 the Central Area Power Coordinating Group ("CAPCO"), a group of various electric utility companies,*fn1 formulated a plan to construct seven nuclear electric plants. By 1977, despite considerable public opposition, CAPCO had forged ahead with the construction projects. In 1979 the Pennsylvania Public Utility Commission ("Commission"), on its own motion, began an investigation of the CAPCO program because of delays and other construction problems that were afflicting the projects. In January of 1980, about six months after the Commission had begun its investigation, CAPCO announced that construction would be cancelled on four of the seven nuclear plants.*fn2 The reasons assigned for that decision included: growing political and regulatory uncertainties arising from the nuclear accident at Three Mile Island, serious financial constraints of various CAPCO members, and a reduced need for additional future generating capacity.

The Duquesne Light Company ("Duquesne") had joined CAPCO in 1967, and was a substantial participant in the group's plant construction venture. Duquesne's share of the construction costs of the four cancelled plants was $34,697,389. In 1980, after the cancellation, Duquesne instituted rate proceedings before the Commission; and thereby sought the right to amortize, over a ten-year period, the construction costs it had borne with respect to the four plants. The same request was made in 1981. However, in each of those rate proceedings the Commission deferred ruling on the request until it received a report relative to its ordered investigation of CAPCO's construction problems.

In April 1982 Duquesne again came before the Commission. This time the company filed a tariff which proposed a change in its rates to increase its annual electric revenues by more than $165,000,000. In conjunction, the utility once more sought to amortize its expenditures on the cancelled plant projects. Several parties appeared in opposition to

[ 516 Pa. Page 148]

Duquesne's request, including the Office of the Consumer Advocate and several commercial complainants.*fn3 On October 15, 1982, during the pendency of the proceedings last mentioned, an Administrative Law Judge ("ALJ"), Joseph P. Matuschak, filed with the Commission the awaited investigation report.

The ALJ's "Report of Investigation" set forth his findings and recommendations concerning the CAPCO projects and Duquesne's participation therein. Among his determinations were the following: (1) that Duquesne acted prudently in joining in the ownership of the nuclear plants; (2) that the decision to delay until 1980 the cancellation of the four plants in question was prudent; and (3) that the interim decisions regarding the cancelled plants were prudent. In light of these findings or conclusions, ALJ Matuschak recommended that the Commission allow Duquesne to amortize, in rate proceedings over a period of ten years, its share of the construction costs of the four cancelled units. That recommendation, if accepted, would permit Duquesne to include in its reported operating expenses an additional $3,469,739 for each of the ten years of amortization.

On December 30, 1982, while the Duquesne rate case was still before the Commission, Act No. 335, P.L. 1473, was enacted into law. That statute amended the Public Utility Code by adding thereto section 1315. In parts here pertinent, the text of Act No. 335 is as follows:


Amending Title 66 (Public Utilities) of the Pennsylvania Consolidated Statutes, providing a limitation on the consideration of certain costs in the rate base for electric public utilities.

The General Assembly of the Commonwealth of Pennsylvania hereby enacts as follows:

[ 516 Pa. Page 149]

Section 1. Title 66, act of November 25, 1970 (P.L. 707, No. 230), known as the Pennsylvania Consolidated Statutes, is amended by adding a section to read:

§ 1315. Limitation on consideration of certain costs for electric utilities.

Except for such non-revenue producing, nonexpense reducing investments as may be reasonably shown to be necessary to improve environmental conditions at existing facilities or improve safety at existing facilities or as may be required to convert facilities to the utilization of coal, the cost of construction or expansion of a facility undertaken by a public utility producing, generating transmitting, distributing or furnishing electricity shall not be made a part of the rate base nor otherwise included in the rates charged by the electric utility until such time as the facility is used and useful in service to the public. Except as stated in this section, no electric utility property shall be deemed used and useful until it is presently providing actual utility service to the customers.

Section 2. This act shall be applicable to all proceedings pending before the Public Utility Commission and the courts at this time. Nothing contained in this act shall be construed to modify or change existing law with regard to rate making treatment of investment in facilities of fixed utilities other than electric utilities.

Section 3. This act shall take effect immediately. APPROVED -- The 30th day of December, A.D. 1982. (Emphasis added.)

On January 28, 1983, almost one full month after the enactment and effective date of the above statute, the Commission entered an order which accepted the recommendation of the ALJ concerning the ten-year amortization of Duquesne's portion of the construction costs of the four cancelled electric plants. The Commission's order thus meant that in the rate proceeding then before it, and for nine additional years, Duquesne could include in its reported operating expenses a one-tenth amortization charge of

[ 516 Pa. Page 150]

$3,469,739. The Commission's order also granted Duquesne leave to increase its electric operating revenues by approximately $105,850,000.

In response to the Commission's order of January 28, 1983, the OCA petitioned for reconsideration and modification, asserting that the order violated the newly-enacted section 1315 of the Code. The Commission granted reconsideration, but proceeded to affirm its order after concluding that section 1315 did not prohibit its treatment of the costs in question. In the Commission's view, the statute was not intended to prevent "the recovery of prudent investment in a plant which is prematurely retired or one which is cancelled by reason of a change in economic circumstances." According to the Commission, section 1315 of the Code only barred adding the costs of incomplete construction to an electric utility's rate base, and did not disallow passing those costs on to ratepayers through amortization. Regarding the express dictate in section 1315 that such costs "shall not be made part of the rate base nor otherwise included in the rates charged " (emphasis added), the Commission opined that the foregoing statutory language was intended solely to prevent the regulatory agency from giving a utility dual benefits of the costs, i.e., including the costs in the rate base and in some other rate making process. The Commission further concluded that the proscription in section 1315 was but a mirror of the agency's historic regulatory approach to the costs of construction work in progress.

On May 18, 1983, in response to the Commission's denial of the request for modification, the OCA petitioned the Commonwealth Court to review the Duquesne rate order. A petition for review was also filed, jointly, by the several commercial complainants. The sole issue raised in both appeals was the validity of the Commission's decision to allow Duquesne to recover, in its rates, its share of the costs of the cancelled plants.

In July of 1983 another CAPCO member, Pennsylvania Power Company ("Penn Power"), filed a tariff proposing to

[ 516 Pa. Page 151]

    raise its annual electric revenues by $19,980,000. In connection with that request Penn Power sought to amortize over a span of ten years the sum of $9,569,665, which represented its share of the costs of the four terminated construction projects. As a further matter, Penn Power sought to add $824,074 to its rate base because of certain investments denominated "land held for future use." This latter item referred to interests in unimproved land held by the utility purportedly for future use as the sites electric substations and transmission wires. According to the utility's projections, the land would be devoted to such uses within the next ten years. Another request made by Penn Power was that it be allowed to normalize the income-tax consequences of a change in depreciation methodology. Each of the foregoing requests was opposed by the OCA.

By an order dated April 11, 1984, the Commission granted Penn Power a rate increase of $15,364,000. Relying on its decision in the Duquesne rate case, the regulatory agency accorded Penn Power the same ten-year amortization right.*fn4 As for the land investments, the utility was permitted to include their cost in its rate base. To justify that part of its decision, the Commission pointed to what was described as its traditional policy of allowing such investments to be included in a utility's rate base if the property is held pursuant to a definite plan for its use within a "reasonable time." The agency determined that the land interests in question, though conceivably to remain unused for up to ten years, met that requirement. In this regard, the Commission observed that "historically" land or facilities held by a utility for future use in the public service have been a subject "separate and distinct from that of construction work in progress." In the agency's perception, the legislature did not intend to abrogate that policy in enacting section 1315 of the Code. Penn Power also prevailed on its tax normalization claim.

[ 516 Pa. Page 152]

The Commission's order in favor of Penn Power caused the OCA to file another petition for review with the Commonwealth Court. As in the Duquesne case the challenge was made that the order of the regulatory agency, in its treatment of certain costs incurred by the utility, violated section 1315 of the ...

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