decided: July 18, 1989.
DAVID M. BARASCH, CONSUMER ADVOCATE, PETITIONER,
PENNSYLVANIA PUBLIC UTILITY COMMISSION, RESPONDENT. THOMAS E. STAFFARONI, PETITIONER, V. PENNSYLVANIA PUBLIC UTILITY COMMISSION, RESPONDENT
PETITION FOR REVIEW.
Scott J. Rubin, Asst. Consumer Advocate, Harrisburg, Pa., for petitioner.
Anthony C. Lomma, John H. Appleton, Nogi, Appleton, Weinberger & Wren, Scranton, Pennsylvania, for Factoryville Water Co. (Notice of Intervention).
Daniel Delaney, Chief Counsel, Michael C. Schnierle, Dep. Chief Counsel, Bohdan R. Pankiw, Kevin J. Moody, Asst. Counsel, Harrisburg, Pennsylvania, for Pa. Public Utility Com'n.
Crumlish, Jr., President Judge, and Craig, Doyle, Colins, Palladino, McGinley and Smith, JJ. Palladino, J., dissents.
[ 127 Pa. Commw. Page 545]
Before us for consideration are two consolidated appeals which question the right of a public utility to recover the costs of facilities not presently used and useful in order to ensure repayment of principal and interest on a loan made by the Water Facilities Loan Board (Loan Board)*fn1 pursuant to the Water Facilities Restoration Act (Water Act).*fn2 Specifically, we must decide whether our Supreme Court's decision in Barasch v. Pennsylvania Public Utility Commission, 516 Pa. 142, 532 A.2d 325 (1987), aff'd sub nom., Duquesne Light Co. v. Barasch, 488 U.S. 299, 109 S.Ct. 609, 102 L.Ed.2d 646 (1989), which bars a utility, absent express legislative authorization, from including in its rates, in any manner, the cost of property which is not used and useful in providing utility service to current ratepayers, controls this case; or, whether the provisions of Section
[ 127 Pa. Commw. Page 5467518]
of the Water Act, 32 Pa.C.S. § 7518,*fn3 provide the express legislative authorization required by Barasch.
The genesis of this case was the November 27, 1987 filing with the Public Utility Commission (Commission) of a request for a rate increase of $36,366 by Factoryville Water Company*fn4 (Factoryville). The total amount of the increase represents the annual repayment of principal and interest of a loan obtained by Factoryville from the Loan Board pursuant to the Water Act.*fn5
In response, Thomas E. Staffaroni, a Factoryville customer and one of two petitioners herein, filed a formal complaint with the Commission. He alleged therein that the requested increase should be denied because, inter alia, the facilities financed by the loan were not used and useful in providing utility service to current ratepayers. Following several hearings, an Administrative Law Judge (ALJ) issued a recommended decision on March 31, 1988, in which he found that with the exception of two fire hydrants totaling $4,000 in value, none of the facilities financed by the loan were used and useful in providing utility service, and recommended that the increased tariff be rejected.*fn6
[ 127 Pa. Commw. Page 547]
Thereafter, on April 29, 1988, the Commission entered a summary form opinion and order which rejected the ALJ's recommendation. The Commission found Factoryville's proposed rates to be just and reasonable despite the barium contamination and disagreed with the ALJ's conclusion that facilities constructed with the proceeds of a Water Act loan must be in service as a condition precedent to recovery from the ratepayers of the funds needed to repay principal and interest to the Loan Board. The requested rate increase went into effect with this order.
Following the Commission's order, the Office of Consumer Advocate, the second petitioner herein, intervened on May 6, 1988 before the Commission in order to represent the interests of all of Factoryville's customers. Both petitioners filed petitions for reconsideration of the summary form order and, after a public meeting, the Commission declined by a tie vote to reconsider that order. Petitions for review were timely filed with this court by both petitioners, and consolidated by our order.*fn7
Petitioners contend that the Commission erred in permitting Factoryville to recover the costs of facilities not presently used and useful*fn8 in providing utility service, and
[ 127 Pa. Commw. Page 548]
cite our Supreme Court's decision in Barasch as support for that proposition. In Barasch, the Court held that two electric utilities were prohibited from recovering the costs from ratepayers of cancelled nuclear plants which were not used and useful in providing service, either by making such costs part of their rate base or by converting them into operating expenses through amortization. The Commission, however, declined to apply Barasch to the instant case, and stated in its long form opinion and order that while Barasch was applicable to electric utilities, it was not applicable to a water utility such as Factoryville.
We disagree. It is clear that Barasch first is a restatement in case law of the long-held premise that property owned by a utility may not be included in its rate base unless it is used and useful in the public service. As the supreme court summarized:
One of the cardinal principles of this state's public utility law is that, in the setting of rates for services to the public, a utility company is entitled to a return only on such of its property as is 'used and useful' in the public service . . . . The fact that a utility owns a property does not of itself justify its inclusion in the rate base; and the burden is on the utility to show that the property is 'used and useful' in the public service.
Barasch, 516 Pa. at 162, 532 A.2d at 334-35 (citations omitted).
The court next made it clear that the used and useful principle applies to all Pennsylvania public utilities, not merely the electric utilities which were parties to Barasch. The utilities in that case contended that Section 1315 of the Public Utility Code (Code), 66 Pa.C.S. § 1315 (prohibiting the inclusion in rates of property which is not used and
[ 127 Pa. Commw. Page 549]
useful), denied them equal protection because that Section applied only to electric utilities. The court found this argument "palpably erroneous," and stated further that:
Given what we have already said about the fundamental principles of this state's public-utility jurisprudence, it should be clear that no utility of any type is permitted, without express and valid legislative authorization, to charge ratepayers for property which is not used and useful in the production of current utility service.
Barasch, 516 Pa. at 169, 532 A.2d at 338 (emphasis added). Finally, the Court also made it clear that the principle applied to all utility property, "regardless of whatever convenient accounting label the utility might employ to characterize a non-qualifying outlay." Id. at 166, 532 A.2d at 337.
Given the above, we believe that the Commission erred as a matter of law by failing to apply the Barasch holding to the instant case. As such, Factoryville's ratepayers may not be required to foot the bill for the presently unusable facilities unless the General Assembly has expressly authorized such a charge.
The Commission contends that the General Assembly has provided just such an express authorization in Section 7518 of the Water Act, 32 Pa.C.S. § 7518. That Section states that:
[ 127 Pa. Commw. Page 550]
For the limited and special purpose of ensuring repayment of principal and interest on loans made pursuant to this chapter, the Public Utility Commission shall approve such security issues, affiliated interest agreements and rate increase requests as are necessary and appropriate. For this purpose, the Public Utility Commission shall establish such expedited practices, procedures and policies as necessary to facilitate and accomplish repayment of the loans. Nothing in this chapter shall be construed as to require approval of Page 550} rate increases greater than that necessary to accomplish the repayment of loans made pursuant to this chapter.
(Emphasis added.) The Commission also points to the legislative findings contained at Section 7503 of the Water Act, 32 Pa.C.S. § 7503, as additional support for this proposition.*fn9
According to the Commission, the General Assembly has, through these two Sections of the Water Act, "committed to the Commission's sound discretion the responsibility to determine when a rate increase is convenient, essential or suitable to accomplish repayment of [a Water Act] loan, whether or not the facilities constructed with the loan proceeds are 'used and useful' in the traditional ratemaking sense." Restricting its authority in rate cases of this type to strict application of the used and useful principle would, argues the Commission, be contrary to the purposes of the
[ 127 Pa. Commw. Page 551]
Water Act and would render it nugatory for most small water facilities.
We do not agree. The plain language of Section 7518 requires only that the Commission approve such rate increases as are necessary and appropriate. That the General Assembly failed to indicate what factors should guide the Commission in determining whether a rate increase is necessary and appropriate does not commit to the Commission the unfettered discretion to make that determination. Rather, the Commission's determination is governed by the provisions of the Public Utility Code, 66 Pa.C.S. §§ 101-3315, and the fundamental principles of our public-utility jurisprudence.
Section 1301 of the Code, 66 Pa.C.S. § 1301, provides that "[e]very rate . . . shall be just and reasonable." When attempting to set these "just and reasonable" rates, the Commission is guided by general ratemaking principles, including the "used and useful" principle. The Commission contends, however, that the General Assembly's failure to specify in Section 7518 of the Water Act that rate increases to ensure payment of Water Act Loans be granted subject to existing ratemaking principles constitutes the valid and express legislative authorization to grant such rate increases without regard to the used and useful principle. To the contrary, we believe that if the General Assembly had intended that the Commission grant rate increases to ensure payment of Water Act Loans without regard to existing ratemaking principles, it need merely have so stated in the Water Act. We refuse to read into the Water Act an abrogation of either the Public Utility Code or established ratemaking principles without the express legislative statement required by Barasch.
Further, the Commission argues that our refusal to vest in it broad discretion to approve rate increases without regard to existing ratemaking principles would result in reluctance by the Loan Board to extend credit to small
[ 127 Pa. Commw. Page 552]
water utilities. We find this argument unpersuasive. In general, the Water Act provides for in Section 7517, 32 Pa.C.S. § 7517, security from default, and in Section 7514, 32 Pa.C.S. § 7514, a thorough examination of both the project and the borrower's credit worthiness. It does not make potential approval of rate increases by the Commission a criterion for loan approval.*fn10
Accordingly, the order of the Public Utility Commission granting the rate increase requested by Factoryville Water Company is reversed.*fn11
NOW, July 18, 1989, the order of the Pennsylvania Public Utility Commission in the above-captioned matter is reversed.