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McCloskey v. Pennsylvania Public Utility Commission

Commonwealth Court of Pennsylvania

January 15, 2020

Tanya J. McCloskey, Acting Consumer Advocate, Petitioner
Pennsylvania Public Utility Commission, Respondent

          Argued: December 10, 2019




         Before this Court is the petition for review of Tanya J. McCloskey, Acting Consumer Advocate (Office of Consumer Advocate (OCA)), challenging the October 25, 2018 Order of the Pennsylvania Public Utility Commission (Commission) that approved a general rate increase filed by UGI Utilities, Inc.-Electric Division (UGI), which OCA contends results in utility rates that are not just and reasonable. The Commission ultimately approved an annual revenue increase for UGI of $3.201 million, or 3.6%. Although the underlying general rate proceeding involved the litigation or settlement of numerous issues, the only issues remaining for our consideration are: whether Sections 315, 1301, and 1301.1 of the Public Utility Code (Code), 66 Pa. C.S. §§ 315, 1301, 1301.1, support UGI's calculation of its rate base, [1] rather than OCA's calculation of that rate base, and whether the Commission's acceptance of UGI's calculations is supported by substantial evidence. OCA contends that the approved rates are inconsistent with the Code and the Commission's Decision is not supported by substantial evidence. The Commission, UGI, which has intervened, and the Energy Association of Pennsylvania (EAP), which has filed an amicus curiae brief in favor of affirmance, argue the Commission's determinations are supported by the plain language of Sections 315(e) and 1301.1(b) of the Code, the purpose of those statutory provisions, and the record.

         I. Background

         To better understand the nature of UGI's general rate proceeding, OCA's objections to UGI's proposed rate increase, and the Commission's Decision, we begin with some basic principles of ratemaking, the Commission's role in the ratemaking process, and changes to the ratemaking process made by the General Assembly in 2012 and 2016.

         A. Ratemaking Under the Code

         1. General Principles

         Section 1301(a) of the Code mandates that "[e]very rate made, demanded, or received by any public utility . . . shall be just and reasonable, and in conformity with [the] regulations or orders of the [C]ommission." 66 Pa. C.S. § 1301(a). Pursuant to the just and reasonable standard, a utility may obtain "a rate that allows it to recover those expenses that are reasonably necessary to provide service to its customers[, ] as well as a reasonable rate of return on its investment." City of Lancaster (Sewer Fund) v. Pa. Pub. Util. Comm'n, 793 A.2d 978, 982 (Pa. Cmwlth. 2002). There is no single way to arrive at just and reasonable rates, and "[t]he [Commission] has broad discretion in determining whether rates are reasonable" and "is vested with discretion to decide what factors it will consider in setting or evaluating a utility's rates." Popowsky v. Pa. Pub. Util. Comm'n, 683 A.2d 958, 961 (Pa. Cmwlth. 1996). "Under traditional ratemaking, utilities may not change rates charged to customers outside of a base rate case." McCloskey v. Pa. Pub. Util. Comm'n, 127 A.3d 860, 863 n.2 (Pa. Cmwlth. 2015).

         At issue here is a general rate filing governed by Section 1308(d) of the Code, which provides the procedures for changing rates, the time limitations for the suspension of the new rates, and the time limitations on the Commission's actions. 66 Pa. C.S. § 1308(d).[2] The Commission is required to investigate all general rate increase filings. Popowsky, 683 A.2d at 961. Section 315(a) of the Code places the burden of proving the reasonableness of a proposed rate on the utility. 66 Pa. C.S. § 315(a). The evidence necessary to meet that burden must be substantial. Lower Frederick Twp. Water Co. v. Pa. Pub. Util. Comm'n, 409 A.2d 505, 507 (Pa. Cmwlth. 1980). To meet this burden of proof, a utility uses a test year, which is a snapshot of time that reflects the typical conditions, revenues, expenses, and capital costs of the utility. See Green v. Pa. Pub. Util. Comm'n, 473 A.2d 209, 213-15 (Pa. Cmwlth. 1984) (describing generally items within a test year); City of Pittsburgh v. Pa. Pub. Util. Comm'n, 112 A.2d 826, 832 (Pa. Super. 1955) (indicating that a condition to be considered in examining a test year is the weather during that year). A utility could use a historic test year (HTY), the year prior to the filing of the rate case, or a future test year (FTY), the year ending shortly before the date the new rates would go into effect, to determine the amount of the rate base upon which its new rates would be calculated. Historically, in order for certain facility or related costs to be included in a utility's rate base, the facility had to be "used and useful" and "in service to the public" at the time the rate base was being calculated. Section 1315 of the Code, 66 Pa. C.S. § 1315.[3]However, the manner in which a utility could meet its burden of proof changed in 2012, when the General Assembly enacted a series of amendments to the Code, including to Section 315(e), which addressed the type of test year a utility could use to support its proposed rates.

         2. Act 11 of 2012 - Section 315(e) of the Code

         By the Act of February 14, 2012, P.L. 72, No. 11 (Act 11), the General Assembly amended Section 315(e) to allow a utility to use a "fully projected future test year" (FPFTY) to satisfy its burden of proving the reasonableness of its proposed rates. 66 Pa. C.S. § 315(e) (emphasis added). The FPFTY is "the 12-month period beginning with the first month that the new rates will be placed in effect after application of the full suspension period permitted under section 1308(d) [(a period not to exceed seven months)]." Id. Section 315(e) requires that:

Whenever a utility utilizes a [FTY] or a [FPFTY] in any rate proceeding and such [FTY] or a [FPFTY] forms a substantive basis for the final rate determination of the [C]ommission, the utility shall provide, as specified by the [C]ommission in its final order, appropriate data evidencing the accuracy of the estimates contained in the [FTY] or a [FPFTY], and the [C]ommission may after reasonable notice and hearing, in its discretion, adjust the utility's rates on the basis of such data.

Id. As part of the Act 11 amendments to Section 315(e), the General Assembly added the following: "Notwithstanding section 1315 (relating to limitation on consideration of certain costs for electric utilities), the [C]ommission may permit facilities which are projected to be in service during the fully projected future test year to be included in the rate base." Id.

         In its Implementation of Act 11 of 2012 Final Order, 299 P.U.R.4th 367 (August 2, 2012), 2012 WL 3249678 (Final Implementation Order), issued after holding a working group with stakeholders, the Commission explained the Act 11 amendments were intended "to reduce regulatory lag[4] due to the use of rate case inputs that [were] outdated by the time new base rates bec[a]me effective." Id. at 2. The addition of the ability of a utility to use a FPFTY, the Commission indicated, would substantially reduce "the risks associated with regulatory lag" "because the new rates w[ould] be consistent with the test year used to establish those rates for at least the first year." Id. at 3. The Commission further noted the exemption to Section 1315's "used and useful" requirement now included in Section 315(e) allowed it discretion in deciding whether to include in a utility's rate base facilities that are not yet used and useful but are projected to be during the FPFTY. Id. at 3-4. The Commission indicated that, where a FPFTY is used and a utility is permitted to include a facility that is not yet in service, it "expect[ed] that in subsequent base rate cases, the utility [would] be prepared to address the accuracy of the [FPFTY] projections made in its prior base rate case." Id. at 5. OCA "support[ed]" the Commission's interpretation in its comments during the Act 11 implementation process and indicated that the use of the FPFTY could result in fewer rate increases on customers in the future. Id. at 4.

         The General Assembly did not end its amendments to the ratemaking provisions of the Code in 2012.

         3. Act 40 of 2016 - Section 1301.1 of the Code

         In 2016, the General Assembly enacted the Act of June 12, 2016, P.L. 332, No. 40 (Act 40), in which it added Section 1301.1 to the Code, 66 Pa. C.S. § 1301.1. Act 40 addressed the computation of income tax expenses for ratemaking purposes and eliminated the use of the consolidated tax savings adjustment (CTA). The CTA required a utility to adjust its rate base to account for the amount of tax savings it received by filing its taxes jointly with its parent and/or affiliated entities. In eliminating the use of the CTA, Pennsylvania joined the majority of states, which do not use the CTA. See H. 200th Sess., Feb. 8, 2016, at 117.[5] Section 1301.1(a) provides:

If an expense or investment is allowed to be included in a public utility's rates for ratemaking purposes, the related income tax deductions and credits shall also be included in the computation of current or deferred income tax expense to reduce rates. If an expense or investment is not allowed to be included in a public utility's rates, the related income tax deductions and credits, including tax losses of the public utility's parent or affiliated companies, shall not be included in the computation of income tax expense to reduce rates. The deferred income taxes used to determine the rate base of a public utility for ratemaking purposes shall be based solely on the tax deductions and credits received by the public utility and shall not include any deductions or credits generated by the expenses or investments of a public utility's parent or any affiliated entity. . . .

66 Pa. C.S. § 1301.1(a). However, recognizing that a differential could result between the ratemaking procedures used prior to the effective date of subsection (a) (applying the CTA), and the computation now in effect (excluding the CTA), the General Assembly mandated in subsection (b) how the revenue from that differential should be used. Per that subsection, "the differential shall be used as follows: (1) fifty percent to support reliability or infrastructure related to the rate-base eligible capital investment as determined by the commission; and (2) fifty percent for general corporate purposes." 66 Pa. C.S. § 1301.1(b). The General Assembly's restriction on the use of this revenue applies until December 31, 2025. 66 Pa. C.S. § 1301.1(c)(1).

         With these principles and statutory provisions in mind, we turn to the facts of UGI's rate case.

         B. UGI's Rate Case

         "UGI provides electric distribution services to approximately 61, 832 residential, commercial[, ] and industrial customers." (Commission Opinion (Op.) at 2.) It maintains over 1200 miles of underground and overhead primary distribution lines, 12 distribution substations, and 49 distribution circuits. Its last base rate case was in 1996. On January 26, 2018, UGI filed a new tariff, which was to become effective on March 27, 2018, that UGI later amended to reflect certain changes in federal tax law. "UGI proposed a rate base change that would have increased its annual revenues by $7.705 million, or 8.6%, based on a . . . FPFTY[] ending September 30, 2019." (Id. at 1.) The use of September 30, 2019, as the end of the FPFTY reflects the use of a "year-end rate base methodology" (year-end methodology). (Id. at 18.) UGI asserted the proposed rate increase reflected the business environment it currently faced, including the "accelerated investment in the repair, replacement or improvement of an aged and aging distribution system; the modernization of core technology systems . . .; and modest increases in employee wages and salaries since its last base rate case in 1996." (Id. at 1-2.) UGI claimed that it was prevented from earning a fair rate of return on its investment at the present rate levels due to the growth in capital and operating costs, as well as stagnation in customer usage and growth trends. (Id.)

         UGI further asserted that under Act 40, it was required to compute what the CTA would have been, here, $75, 400, and then certify that this amount (Act 40 savings) would be used in accordance with Section 1301.1(b). Pointing out that its capital expenditures for reliability and infrastructure projects for the FPFTY exceeded $11 million, which was far greater than 50% of $75, 400, and that its general corporate expenses likewise far exceeded the 50% requirement, UGI contended it complied with Section 1301.1(b)'s requirements.

         By operation of law, the tariff was suspended, pursuant to Section 1308(d) of the Code, until October 27, 2018. In accordance with the requirement that all general rate cases be investigated, Popowsky, 683 A.2d at 961, the Bureau of Investigation and Enforcement (I&E) began an investigation of the proposed general rate increase.

         C. Objections to UGI's Rate Case

         OCA, along with others including the Office of Small Business Advocate (OSBA) and two UGI customers, filed complaints against UGI's proposed rate increase. (Commission Op. at 3.) I&E also opposed UGI's proposed rates. OCA, OSBA, and I&E particularly objected to UGI's calculation of its rate base using facilities and costs that were projected to be in effect as of the end of the FPFTY. They asserted that using this calculation would allow UGI to overcollect because the proposed rates included costs that would not be incurred by UGI on the day the rates went into effect, October 27, 2018, but would be incurred throughout various points within the FPFTY, ending September 30, 2019. Instead, they proposed using an "average rate base methodology" that would combine the costs listed for the beginning of the FPFTY and the costs listed at the end of the FPFTY and divide the total by two. (Id. at 15.) This methodology, they contended, resulted in a more just and reasonable rate. They also suggested that the same methodology be applied to UGI's depreciation expenses. OCA contended this position was supported by the decision of the Illinois Commerce Commission in Re North Shore Gas Company, (Ill. C.C. No. 12-0511/0512, June 18, 2013), 2013 WL 3762292, which rejected the use of year-end methodology in favor of an average rate base methodology.

         OCA further sought a downward adjustment to UGI's rate base in the amount of $75, 400, UGI's Act 40 savings. OCA contended that UGI did not prove that it would use that $75, 400 as required by Section 1301.1(b) because it had not provided an accounting for those funds and, therefore, UGI should not be able to retain those funds. OCA observed that UGI's approach to satisfying this requirement should be rejected as it would not show actual use of the funds for the required purposes.

         II. Recommended Decision and the Commission Decision

         A. Recommended Decision

         Following the receipt of witness testimonies, documentary evidence, other evidentiary filings, and an evidentiary hearing, two Administrative Law Judges (ALJs) issued a Recommended Decision. After providing an overview of the amendments to Section 315(e) of the Code, the ALJs held that, following Act 11, a utility may use the FPFTY in a base rate case to project items such as revenues, operating expenses, and capital expenditures throughout the 12-month period beginning with the first month the rates go into effect. (Recommended Decision (R.D.) at 13.) Noting that while a fundamental principle of regulating utilities is that a public utility be permitted to include projects in a rate base and earn a reasonable return on its investments only when the project becomes used and useful, the ALJs concluded that Act 11 altered this principle by allowing the use of the FPFTY to address the risks associated with regulatory lag. Citing the plain language of Section 315(e) and the policy behind its enactment, the ALJs accepted the use of the year-end methodology proposed by UGI. The ALJs were particularly persuaded by the exemption from Section 1315's "used and useful" requirement given to utilities that sought to meet their burden of proof using a FPFTY. (R.D. at 18-19.) However, the ALJs did not approve all of UGI's projected facilities. They rejected UGI's proposed "Electrical Engineering and Operations Center" (Operations Center), which added $17.3 million to UGI's FPFTY, as being in its preliminary planning stages and because there was no "reasonable certainty that it [would] be in operation in the FPFTY." (Id. at 22-24.) The ALJs rejected, as not persuasive, the Illinois Commerce Commission's decision in North Shore Gas Company, observing that decisions of other jurisdictions were not relevant to Pennsylvania rate cases due to, among other reasons, differences in statutory language and ratemaking principles. (R.D. at 21.) The ALJs acknowledged OCA's concern regarding the possibility of a utility overcollecting based on overstated projections, but indicated such issues could be addressed through protections the Commission could invoke, including verifications in subsequent rate filings or the imposition of an audit. (Id. at 22.)

         The ALJs likewise agreed that UGI satisfied the requirements of Act 40, the language of which the ALJs found to be clear and unambiguous. (Id. at 110.) Reasoning that Act 40 does not state within Section 1301.1(b) any specific requirements for demonstrating the use of funds, the ALJs held that UGI was not required to show exactly where the Act 40 savings would be spent. (Id.) The ALJs found that the testimony of UGI's witness explaining how UGI's capital and general corporate purpose expenditures far exceeded the 50% threshold found in Section 1301.1(b) supported UGI's ability to retain the full $75, 400. (Id. at 111.) Finding OCA's contrary argument to be unpersuasive and without support in the Code, the ALJs recommended the Commission approve UGI's retention of the full $75, 400 to be used in accordance with Act 40.

         B. Exceptions and Replies

         OCA filed exceptions to the ALJs' acceptance of UGI's proposed rate base calculated using the year-end methodology. OCA contended that because the plain language of Act 11 did not specifically address the type of methodology to be used in conjunction with a FPFTY, the average rate base methodology must be used to ensure the proposed rates would be just and reasonable as required by Section 1301. UGI responded that the use of the year-end methodology was consistent with the plain ...

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