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May 13, 1997


Appealed From No. R-00943271. State Agency Pennsylvania Public Utility Commission.

Before: Honorable James Gardner Colins, President Judge, Honorable Bernard L. McGINLEY, Judge, Honorable Doris A. Smith, Judge, Honorable Dan Pellegrini, Judge, Honorable Rochelle S. Friedman, Judge, Honorable James R. Kelley, Judge. Opinion BY Judge Smith. Dissenting Opinion BY Judge Pellegrini. Judge Kelley joins in this Dissenting opinion.

The opinion of the court was delivered by: Smith


FILED: May 13, 1997

The Office of Consumer Advocate (OCA) petitions for review of an order of the Pennsylvania Public Utility Commission (PUC) in a base rate case filed by Pennsylvania Power & Light Company (PP&L). The questions presented are (1) whether the PUC erred in permitting PP&L to charge current ratepayers for deferred prior period costs associated with a change in post-retirement benefits expense, where this Court previously held that recovery of these very costs would be prohibited by the rule against retroactive ratemaking; (2) whether the PUC's decision to permit PP&L to charge current ratepayers for costs incurred ten years earlier for carrying charges and operation and maintenance expenses associated with the Susquehanna Unit 2 nuclear plant violated the same rule; and (3) whether the PUC's decision to allow PP&L to charge ratepayers for gross receipts taxes that PP&L will not incur violated the actual taxes paid doctrine. *fn1



In December 1990 the Financial Standards Accounting Board issued its Statement of Financial Accounting Standards No. 106 (SFAS 106), which announced a change in the generally accepted method of accounting for a category of expenses apart from pension payments known as "other post-employment benefits" (OPEB), such as health insurance payments. SFAS 106 changed the generally accepted method of accounting from a cash or "pay as you go" basis to an accrual basis, which recognizes employees' currently earned right to such benefits in the future and provides for the availability of funds to meet those costs. The effective date of the change for large employers such as PP&L was January 1, 1993.

For Pennsylvania utilities, increased costs resulting from the change in OPEB accounting fall into three categories: (1) the ongoing incremental cost, that is, the increase under the new method over what the utility previously paid for this expense; (2) the "transition obligation," which is the requirement of accounting for OPEB rights that accrued before the effective date, a sizable amount that may be amortized over periods up to 20 years; and (3) any initial incremental costs that the utility incurs between the effective date and the time when these new expenses are recognized in approved rates. For PP&L this third category applies to the roughly 33 months between January 1, 1993 and September 27, 1995.

In June 1992 PP&L and other utilities jointly petitioned the PUC for pre-approval of SFAS 106 costs. In an order entered November 4, 1992, the PUC stated that recovery of SFAS 106 transition costs would not be deemed to be retroactive ratemaking but that circumstances varied among utilities, and the question should be handled on a case-by-case basis. One month after that order, with no base rate case pending, PP&L filed a petition seeking a declaratory order that its current incremental SFAS 106 costs would be deferred and would be recovered in a future rate case. The PUC granted PP&L permission to record these costs as a regulatory asset subject to recovery in a future rate case to the extent they were prudently incurred. OCA petitioned this Court for review. In Popowsky v. Pennsylvania Public Utility Commission, 164 Pa. Commw. 338, 642 A.2d 648 (Pa. Commw. 1994), appeal denied, 543 Pa. 733, 673 A.2d 338 (1996) (PP&L), this Court reversed.

PP&L filed its current base rate application, its first since 1984, on December 30, 1994, seven months after this Court's decision in PP&L. It requested recovery of the same initial incremental costs at issue in PP&L, approximately $31.1 million, to be amortized over 17.3 years, in addition to the ongoing incremental cost of $25 million per year. The Administrative Law Judge (ALJ) approved recovery, and the PUC affirmed, finding merit in PP&L's argument based upon Popowsky v. Pennsylvania Public Utility Commission, 164 Pa. Commw. 600, 643 A.2d 1146 (Pa. Commw. 1994), appeal denied, 543 Pa. 733, 673 A.2d 338 (1996) (PAWC). In that base rate case OCA challenged only the SFAS 106 transition obligation, and the Court concluded that the expense arose from an extraordinary and nonrecurring one-time event -- the change from cash to accrual accounting -- and that permitting recovery amortized over 20 years was not retroactive ratemaking. The PUC also cited Columbia Gas of Pennsylvania, Inc. v. Pennsylvania Public Utility Commission, 149 Pa. Commw. 247, 613 A.2d 74 (Pa. Commw. 1992), aff'd per curiam, 535 Pa. 517, 636 A.2d 627 (1994), and UGI Corp. v. Pennsylvania Public Utility Commission, 49 Pa. Commw. 69, 410 A.2d 923 (Pa. Commw. 1980).


In Philadelphia Elec. Co. v. Pennsylvania Public Utility Commission, 93 Pa. Commw. 410, 502 A.2d 722 (Pa. Commw. 1985) (PECO), this Court explained the prospective nature of ratemaking as follows:

The general rule is that there may be no line examination of the relative success or failure of the utility to have accurately projected its particular items of expense or revenue and an excess over the projection of an isolated item of revenue or expense may not be, without more, the subject of the Commission's order of refund or recovery, respectively, on the occasion of the utility's subsequent rate increase requests.

An exception to this rule in the case of retroactive recovery of unanticipated expenses has been recognized where the expenses are extraordinary and nonrecurring.

PECO, 502 A.2d at 727-728. In PP&L the Court stated that if retroactive ratemaking is permitted, the use of the future test year in ratemaking is rendered meaningless; the general principle is that customers who use power should pay for its production rather than requiring future customers to pay for past use.

OCA begins by stressing that the initial SFAS 106 incremental costs at issue here are precisely the costs that were at issue in PP&L. There this Court, relying upon PECO, pronounced later recovery of initial SFAS 106 costs to be retroactive, not within the exception for extraordinary expenses and burdensome to future ratepayers. In OCA's view PP&L should control the outcome here. OCA further contends that the PUC erred in relying upon PAWC, because the initial incremental costs were not involved in that appeal -- only the transition obligation was at issue.

OCA also disputes the PUC's reliance on Columbia Gas, noting that the Court in PP&L concluded that it was not inconsistent. In Columbia Gas the Court rejected the utility's claims for pollution investigation costs from past periods that could have been claimed in intervening rate filings. The Court approved recovery of uncollectible billings that were caused by a PUC-imposed budget payment program, because they were deemed to have been claimed at the first opportunity. OCA argues that the present case is distinguishable because the effect of SFAS 106 was an accounting change, which did not require PP&L to expend additional dollars to fund these liabilities from current rates. Also, as the Court noted in PP&L, the company could have filed a base rate case sooner in order to assure that the initial incremental costs would be reflected in rates.

In UGI Corp. the Court approved recovery of expenses for studies over a period ending six months before the future test year of the feasibility of proposals to enhance the utility's supply capability. The Court stated that those expenses resulted from legitimate business activities conducive to efficiency. They were deemed not to be too remote because similar types of expenditures would be expected to recur. In OCA's view, they were regarded as a proxy for future like expenses. Here, OCA notes, PP&L seeks recovery of the initial incremental costs in addition to the ongoing incremental costs.

OCA finds a closer analogy in PECO. There the Court affirmed the PUC's disallowance of initial costs the utility incurred for operating and depreciation expenses for expensive pollution control facilities that it was required to install under a consent order in order to continue burning cheap, low-quality coal at two power plants. Although the PUC previously approved deferred consideration of these costs in a future rate case, it later determined on the merits that allowing them would constitute retroactive ratemaking. This Court agreed and concluded also that

the expenses were neither extraordinary nor nonrecurring so as to fall within the exception, noting that the utility had been granted prospective operating, maintenance and depreciation for the facilities, a Conclusion that OCA likens to that in PP&L. In its reply brief OCA asserts that PP&L essentially "bet" ratepayers' funds on the outcome of the petition proceeding in PP&L ; it lost the gamble, and that should be the end of the matter.

The PUC responds by referring to PAWC :

In this case also [as in Columbia Gas ], PAWC had no opportunity to seek recovery of its OPEBs until the issuance and acceptance of SFAS 106 and the Commission's approval of accrued accounting treatment of such obligations. We, therefore, hold that PAWC's application is timely; that the transitional obligation arises from an extraordinary and non-recurring one time event--the change from cash to accrual accounting--and the allowance of the recovery of that obligation amortized over a period of twenty years is not retroactive ratemaking.

PAWC, 643 A.2d at 1150. The PUC refers also to its adoption of a policy statement for implementation of SFAS 106 effective June 19, 1993, 52 Pa. Code § 69.351, which included a statement of its intent to allow deferred recovery in base rates of SFAS 106 costs prudently incurred.

The PUC further argues that the situation here is virtually identical to that in City of Pittsburgh v. Pennsylvania Public Utility Commission, 370 Pa. 305, 88 A.2d 59 (1952) (Bell Telephone). There the Supreme Court held that payments to fund accrued pension rights that were not accounted for when the utility moved from cash to accrual pension funding more than twenty years earlier did not result from ...

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