PENNSYLVANIA
PUBLIC UTILITY COMMISSION
Harrisburg, PA 17105-3265
Public Meeting held August 21, 2014
Commissioners Present:
Robert F. Powelson, Chairman
John F. Coleman, Jr., Vice Chairman
James H. Cawley
Pamela A. Witmer
Gladys M. Brown
Petition of Peoples TWP, LLC for Approval of a
P-2013-2344595
Distribution System Improvement Charge
Office of Consumer Advocate
v.
C-2013-2348849
Peoples TWP, LLC
1
OPINION AND ORDER
BY THE COMMISSION:
Before the Pennsylvania Public Utility Commission (Commission) for
consideration and disposition are the Exceptions of Peoples TWP LLC (Peoples TWP or
the Company) and the Office of Consumer Advocate (OCA) filed on April 23, 2014, to
the Recommended Decision (R.D.) of Administrative Law Judges (ALJs) Mary D. Long
and Jeffrey A. Watson, issued on April 3, 2014, relative to the above-captioned
proceeding. Replies to Exceptions were filed by Peoples TWP and the OCA on May 5,
2014. For the reasons set forth herein, we shall deny the Exceptions filed by Peoples
TWP and the OCA and adopt the Recommended Decision.
I.
History of the Proceeding
On January 31, 2013, Peoples TWP filed a Petition for Approval of a
Distribution System Improvement Charge (DSIC), which included a proposed
Supplement No. 28 to Tariff Gas – Pa. P.U.C. No. 7, to introduce a DSIC Rider into the
Company’s Tariff. Peoples TWP’s DSIC Petition was filed at Docket No.
P-2013-2344595. Peoples TWP also filed a Petition for Approval of its Long Term
Infrastructure Improvement Plan (LTIIP) on January 23, 2013, which was also filed at
Docket No. P-2013-2344595.
On February 19, 2013, the Pennsylvania Independent Oil and Gas
Association (PIOGA) filed a Petition to Intervene. The Office of Small Business
Advocate (OSBA) filed a Notice of Intervention and Answer to the Petition on February
20, 2013. Also on that date, the OCA filed an Answer to the Petition, a Notice of
Intervention and a Formal Complaint. The OCA’s Complaint was docketed at C-20132348849. On March 4, 2013, Peoples TWP filed an Answer to the OCA’s Complaint.
2
By Opinion and Order entered May 23, 2013 (May 2013 Order), the
Commission approved the Company’s LTIIP. The Commission also approved the
Company’s DSIC Petition subject to refund and recoupment following hearings and the
issuance of a recommended decision by an ALJ.1
A prehearing order was issued on June 24, 2013, wherein the OCA’s
Complaint was consolidated with Peoples TWP’s Petition and the Petition to Intervene of
PIOGA was granted.
In the May 2013 Order, the Commission assigned the following issues for
hearing and the preparation of a recommended decision:
a.
DSIC-recovery of costs related to customer-owned service lines,
reliability improvements, special meter technology, information
technology support, and vehicles, tools and equipment;
b.
Impact of accumulated deferred income taxes associated with DSIC
investments; and
c.
Calculation of state income tax component of the DSIC revenue
requirement.
Additionally, the OCA and the OSBA requested consideration of additional
issues related to the DSIC which were described in their respective prehearing
memoranda. Peoples TWP and PIOGA objected, arguing that only the three issues
explicitly ordered by the Commission should be considered by the Presiding ALJs. In
1
An individual, William Guntrum, filed a Formal Complaint on April 11,
2013. The Commission dismissed his Complaint in the May 23, 2013 Opinion and
Order. In the same Opinion and Order, the Commission also granted the Petition of
Peoples TWP, LLC for Approval of Limited Waivers of Certain Tariff Rules Related to
Customer Service Line Replacements, PUC Docket No. P-2013-2346156.
3
view of the limited nature of the additional matters to be addressed and in the interests of
judicial economy, the ALJs granted the requests of the OCA and the OSBA.
On November 6, 2013, the Parties contacted the ALJs to advise that a
Partial Settlement had been reached regarding cost recovery associated with customerowned service lines, other identified costs, and language included in the Company’s
DSIC tariff regarding competitive customers.
An evidentiary hearing was held on November 12, 2013. On November 20,
2013, a transcript of the technical evidentiary hearing was received by the ALJs.
On December 12, 2013, Peoples TWP, the OCA and the OSBA filed a
Proposed Stipulation of Certain Issues (Partial Settlement). PIOGA, the only other active
Party to this proceeding, did not join into the Partial Settlement, but indicated that it did
not oppose the Partial Settlement.
Main Briefs were filed by Peoples TWP and the OCA on December 12,
2013. Peoples TWP and the OCA filed Reply Briefs on January 9, 2014.
By Interim Order issued on January 13, 2014, the ALJs closed the record in
this matter. In their Recommended Decision, the ALJs approved the Company’s DSIC,
as modified by the Partial Settlement.
As previously noted, Exceptions were filed by Peoples TWP and the OCA
on April 23, 2014. On May 5, 2014, Peoples TWP and the OCA filed Replies to
Exceptions.
4
II.
A.
Discussion of the Partial Settlement
Terms and Conditions of the Partial Settlement
The Settling Parties agreed to the Partial Settlement covering all issues,
except for two issues related to the calculation of the DSIC charge, specifically, the
impact of accumulated deferred income taxes (ADIT) and the calculation of state income
taxes.
The Partial Settlement consists of the Proposed Stipulation of Certain
Issues containing the terms and conditions of the Partial Settlement, and four appendices.
Appendix A through C to the Partial Settlement are the Statements in Support of the
Partial Settlement submitted by Peoples TWP, the OCA and the OSBA, respectively.
Appendix D to the Settlement is a Letter submitted by PIOGA stating that it does not
oppose the Partial Settlement.
The essential terms and conditions of the Partial Settlement are set forth in
Section III. Partial Settlement ¶¶ 12-16 at 4-5. The Settling Parties agreed to the
following terms and conditions:
12.
The Company agrees to modify the language in its
DSIC surcharge tariff related to the application of the DSIC
to competitive customers as follows:
All Customer Classes. The DSIC shall be applied equally to
all customer classes, except that the Company may reduce or
eliminate the Rider DSIC to any customers with competitive
alternatives who are paying flexed or discounted rates and
customers having negotiated contracts with the Company, if it
is reasonably necessary to do so.
The Parties acknowledge that the DSIC may be waived or
reduced if a customer is paying flexed or discounted rates, or
5
has a negotiated contract, because the customer has an
economically viable competitive option, even if such option is
not physically installed. The Company further acknowledges
its intention to apply the DSIC to current competitive
customers if contractually eligible, and to negotiate with
competitive customers to attempt to include the DSIC in the
future, when flexed or negotiated rate contracts come up for
renewal.
13.
The Company agrees to withdraw its proposal to
include in the DSIC information technology hardware and
software that support Special Metering Technology (AMR).
The Company reserves the right to present a future claim to
include AMR technology support costs at such time when the
Company actually installs AMR support technology. The
Company shall clearly identify such claim in a future filing if
made. Other Parties reserve their right to oppose such a claim
if made.
14.
The Parties agree that the Company may include in its
DSIC investment in barcoding hardware, software, and
reading devices. Investment in barcodes affixed to DSICeligible plant also shall be included in the DSIC. Investment
in barcodes affixed to plant that is not DSIC-eligible shall not
be reflected in the DSIC.
15.
Investments in the replacement of customer-owned
service lines will be reflected in the Company’s DSIC.
16.
The Parties agree that gathering system improvements
may be reflected in the Company’s DSIC.
In addition to the specific terms to which the Settling Parties have agreed,
the Partial Settlement contains certain general, miscellaneous terms. The Partial
Settlement is conditioned upon the Commission’s approval of the terms and conditions
without modification. The Partial Settlement establishes the procedure by which any of
the Settling Parties may withdraw from the Partial Settlement and proceed to litigate this
case, if the Commission should act to modify the Partial Settlement. Partial Settlement
6
¶ 19 at 5. In addition, the Partial Settlement states that the Partial Settlement does not
constitute an admission against, or prejudice to any position which any of the Settling
Parties might adopt during subsequent litigation of this case, or in any other proceeding,
in the event the Partial Settlement is rejected by the Commission. Partial Settlement ¶ 20
at 6.
Further the Partial Settlement provides that approval of the Partial
Settlement does not preclude the Settling Parties from filing Briefs, Reply Briefs,
Exceptions and Replies to Exceptions with respect to the issues reserved for litigation.
Partial Settlement ¶ 24 at 6-7.
The Settling Parties requested that the ALJs and the Commission approve
the Proposed Stipulation of Certain Issues, without modification. The Settling Parties
further requested that the Commission enter an Order consistent with this Partial
Settlement and which incorporates the Commission’s determination regarding the two
litigated issues. Partial Settlement at 7.
B.
Legal Standards
The policy of the Commission is to encourage settlements, and the
Commission has stated that settlement rates are often preferable to those achieved at the
conclusion of a fully litigated proceeding. 52 Pa. Code §§ 5.231, 69.401. A full
settlement of all the issues in a proceeding eliminates the time, effort and expense that
otherwise would have been used in litigating the proceeding, while a partial settlement
may significantly reduce the time, effort and expense of litigating a case. A settlement,
whether whole or partial, benefits not only the named parties directly, but, indirectly, all
customers of the public utility involved in the case.
7
Regulatory proceedings are expensive to litigate, and the reasonable cost of
such litigation is an operating expense recovered in the rates approved by the
Commission. Partial or full settlements allow the parties to avoid the substantial costs of
preparing and serving testimony and the cross-examination of witnesses in lengthy
hearings, the preparation and service of briefs, reply briefs, exceptions and replies to
exceptions, together with the briefs and reply briefs necessitated by any appeal of the
Commission’s decision, yielding significant expense savings for the company’s
customers. For this and other sound reasons, settlements are encouraged by longstanding Commission policy.
Despite the policy favoring settlements, the Commission does not simply
rubber stamp settlements without further inquiry. In order to accept a settlement such as
that proposed here, the Commission must determine that the proposed terms and
conditions are in the public interest. Pa. PUC v. York Water Co., Docket No.
R-00049165 (Order entered October 4, 2004); Pa. PUC v. C. S. Water and Sewer Assoc.,
74 Pa. P.U.C. 767 (1991).
As the petitioner or moving party, Peoples TWP has the burden of proof in
this proceeding to establish that it is entitled to the relief it is seeking. 66 Pa. C.S. §
332(a). Peoples TWP must establish its case by a preponderance of the evidence.
Samuel J. Lansberry, Inc. v. Pennsylvania Pub. Util. Comm’n, 578 A.2d 600 (Pa.
Cmwlth. 1990), alloc. den., 602 A.2d 863 (Pa. 1992) To meet the burden of proof, the
Company must present evidence more convincing, by even the smallest amount, than that
presented by any opposing party. Se-Ling Hosiery v. Margulies, 70 A.2d 854 (Pa. 1950).
In this case, the Company requests that the Commission approve the filing establishing
the proposed DSIC. The Settling Parties have reached an accord on many of the issues
and claims that arose in this proceeding and submitted the Partial Settlement. The
Settling Parties have the burden to prove that the Partial Settlement is in the public
interest.
8
The ALJs found that the proposed Partial Settlement is in the public interest
and recommended that it be approved without modification. The proposed Partial
Settlement was not opposed by any Party. R.D. at 10-11.
C.
Disposition of the Partial Settlement
As noted above, a Partial Settlement in principle of all but two issues was
reached prior to the date scheduled for evidentiary hearings, thereby negating the need for
the scheduled evidentiary hearings on the settled issues. As a result of the settlement in
principle, the Parties agreed to waive cross-examination, both with respect to the settled
issues and the issues reserved for litigation. A hearing was held on November 12, 2013,
to admit testimony and exhibits into the record.
According to the ALJs, the primary subject of the stipulation of settlement
resolves the Parties’ dispute relating to specific items of eligible property which is
included in the Company’s DSIC. The ALJs note that Section 13512 defines eligible
property as:
Property that is part of a distribution system and eligible for
repair, improvement and replacement of infrastructure under
this subchapter. Included property shall be as follows:
...
(2) For natural gas distribution companies and city natural
gas distribution operations, eligible property shall include:
(i) Piping.
(ii) Couplings.
(iii) Gas services lines and insulated and noninsulated
fittings.
(iv) Valves.
2
66 Pa.C.S. § 1351.
9
(v) Excess flow valves.
(vi) Risers.
(vii) Meter bars.
(viii) Meters.
(ix) Unreimbursed costs related to highway relocation
projects where a natural gas distribution company or city
natural gas distribution operation must relocate its
facilities.
(x) Other related capitalized costs.
Upon review of the accord reached by the Parties on the specific items of
“eligible property,” the ALJs found that the settlement was consistent with Section 1351
and Section 1353(a) (requiring that costs be related to improvements to ensure safe and
adequate service).3 The ALJs further stated that the compromise of the Parties relating to
the tariff language for competitive customers also represented a reasonable compromise.
Therefore, the ALJs recommended that the Partial Settlement modifying Peoples TWP’s
DSIC be approved. R.D. at 9-11.
Based on our review of the Partial Settlement, we find that there are several
items within the Partial Settlement that are reasonable and appropriate. We first note that
the Partial Settlement reaffirms the Company’s intent to apply the DSIC to all customers,
where possible, while recognizing that competition may make it impossible to apply the
DSIC in some situations. Next, Peoples TWP agreed to withdraw its original proposal to
include Special Metering Technology (AMR) hardware and software support costs in the
DSIC, while reserving its right to make such claim in the future. The OCA had opposed
the recovery of AMR technology through the DSIC as it opined that this was not
appropriate for cost recovery in a DSIC. Next, the Parties agreed that the Company may
include in the DSIC, investment in barcoding hardware, software and reading devices,
with the clarification that the investment in barcoding affixed to plant that is not DSIC3
66 Pa.C.S. § 1353(a).
10
eligible shall not be included. According to Peoples TWP, barcoding would allow for
enhanced tracking of pipeline assets. Lastly, the Partial Settlement provides that
investments in the replacement of customer-owned service lines and gathering system
improvements may be reflected in Peoples TWP’s DSIC. According to the Parties, due
to the unique circumstances and the efficiencies gained by replacing customer-owned
service lines, in coordination with the accelerated mains replacement program, recovery
of these costs through the DSIC is appropriate.
We find that these beneficial aspects within the Partial Settlement all
support a finding that the Partial Stipulation of Certain Issues is in the public interest.
The Partial Settlement resolves the majority of the issues within this proceeding and will
result in significant savings of time and expenses for all Parties involved by avoiding the
necessity of further administrative proceedings, as well as possible appellate court
proceedings. For the reasons stated herein and in the Settling Parties’ Statements in
Support, we agree with the ALJs’ conclusion that the Partial Settlement is in the public
interest. Accordingly, we shall adopt the ALJs’ recommendation to approve the Partial
Settlement without modification.
III.
A.
Discussion of Contested Issues
Burden of Proof
Typically in proceedings before the Commission, the public utility has the
burden to establish the justness and reasonableness of every element of any proposed or
existing rate in any proceeding. The standard of proof which a public utility must meet is
set forth in Section 315(a) of the Code, 66 Pa. C.S. § 315(a), which specifies that, “[i]n
any proceeding upon the motion of the Commission, involving any proposed or existing
rate of any public utility, or in any proceeding upon complaint involving any proposed
increase in rates, the burden of proof to show that the rate involved is just and reasonable
11
shall be upon the public utility.” The Commonwealth Court has upheld this standard of
proof.4
In this proceeding, the burden of proof lies squarely with Peoples TWP.
Peoples TWP is the public utility seeking permission from the Commission to implement
a DSIC. The burden of proof does not shift to a statutory party or individual party
(whether an entity or an individual) which challenged the requested DSIC. Instead, the
utility’s burden, to establish the justness and reasonableness of every component of its
DSIC request, is an affirmative one and remains with the public utility throughout the
course of the proceeding.5
As we proceed in our review of the various positions espoused in this
proceeding, we are reminded that we are not required to consider expressly or at great
length each and every contention raised by a party to our proceedings. University of
Pennsylvania v. Pa. PUC, 485 A.2d 1217, 1222 (Pa. Cmwlth. 1984). Moreover, any
exception or argument that is not specifically addressed herein shall be deemed to have
been duly considered and denied without further discussion.
B.
Statutory Interpretation of Act 11
1.
Positions of the Parties
The positions of the opposing Parties in this proceeding are based upon
competing views regarding the standards to which the DSIC must adhere. The position
advocated by the OCA is that each and every element of the DSIC must be “just and
4
Lower Frederick Twp. v. Pa. PUC, 409 A.2d 505, 507 (Pa. Cmwlth. 1980).
See also, Brockway Glass v. Pa. PUC, 437 A.2d 1067 (Pa. Cmwlth. 1981).
5
There is no similar burden placed on parties which challenge a proposed
rate component. See, Berner v. Pa. PUC, 382 Pa. 622, 631, 116 A.2d 738, 744 (1955).
12
reasonable” as required by Section 1301 of the Public Utility Code (Code).6 The OCA
maintained that if the treatment of ADIT and the state tax gross-up are not just and
reasonable, the DSIC is not consistent with the Code and the Company’s position must be
rejected. OCA M.B. at 9-10.
In contrast, the Company draws the distinction between the Commission’s
review of a DSIC and the fuller review that is required in a base rate proceeding.
According to Peoples TWP, the law requires that the DSIC as a whole is just and
reasonable even if certain elements of the calculation depart from traditional ratemaking
techniques. Peoples TWP M.B. at 5-6.
2.
ALJs’ Recommendation
The ALJs concluded that the Commission’s focus in this proceeding should
be the overall effect of the calculated DSIC rate and whether, as a whole, the DSIC is just
and reasonable. The ALJs discussed the varying levels of review between general rate
increases pursuant to Section 1308(d) of the Code and Section 1307(a) surcharge
requests, which does not mandate the same level of scrutiny by the Commission as does a
request for a general rate increase. The ALJs note that the opposing Parties rely heavily
on competing views of the “intent” of the General Assembly in passing Act 11.
However, the ALJs state that when read as a whole, Act 11 of February 14, 2012, grants
the Commission significant discretion in the manner in which it chooses to implement
Act 11 and the calculation of various elements of the DSIC. Also, the ALJs point out
that, in passing Act 11, the General Assembly has required protections for ratepayers in a
DSIC in the form of a reset of the DSIC surcharge and the cap on earnings. According to
the ALJs, the purpose of these protections is a recognition that, by creating a simplified
6
66 Pa.C.S. § 1301.
13
framework for the more timely recovery of infrastructure improvement costs, the
application of certain ratemaking principles that are appropriate for the in-depth
investigation and review of a base rate are not necessary in the context of a DSIC. R. D.
at 12-14.
The ALJs stated that Peoples TWP argued that the OCA’s contention that a
rate can be declared unjust or unreasonable by looking in isolation at one or two base rate
components that are not included in the calculation is contrary to the OCA’s successful
position in Duquesne Light Co. v. Barasch, 488 U.S. 299 (1989)(Barasch). According to
the ALJs, in Barasch, the United States Supreme Court noted that in determining just and
reasonable rates, “the economic judgments required in rate proceedings are often
hopelessly complex and do not admit of a single correct result.”7 The ALJs stated that
the Supreme Court in Barasch acknowledged that there are many ways to achieve rates
that are just and reasonable, and went on to find that the disallowance of a single element
is not the appropriate standard for determining whether rates are just and reasonable.
According to the ALJs, the Court explained that this is due, in part, to the fact that “errors
to the detriment of one party may well be canceled out by countervailing errors or
allowances in another part of the rate proceeding.” 8 The ALJs found that the courts in
Pennsylvania have similarly concluded that there is no single way to arrive at just and
reasonable rates and that the Commission is “vested with discretion to decide what
factors it will consider in setting or evaluating a utility’s rates.”9 Id. at 14-15.
7
Id. at 314.
Id.
9
Popowsky v. Pa. Pub. Util. Comm’n, 683 A.2d 958, 961 (Pa.Cmwlth. Ct.
1996) (Equitable). Indeed, this is the notion which underlies OCA’s advocacy for and
the Commission’s approval of, black box settlements in base rate cases where the
Commission approves a settlement based on the overall rate agreed to by the parties
without scrutinizing every element of its calculation. See e.g., Pub. Util. Comm’n v.
Peoples TWP, LLC, PUC Docket No. R-2013-2355886 (Opinion and Order entered
December 19, 2013), slip op. at 27.
8
14
3.
Exceptions and Replies to Exceptions
In its Exceptions, Peoples TWP states that the ALJ erred in not concluding
that the General Assembly specifically adopted the Commission’s successfully designed
water utility DSIC mechanism. Peoples TWP avers that the Commission should modify
this portion of the Recommended Decision, and conclude that the General Assembly
recognized that the Commission’s original water DSIC calculation was successful and
produced just and reasonable rates. Peoples TWP further avers that the Commission
should conclude that the General Assembly intended that this calculation should continue
unchanged, and that the General Assembly ensured such treatment by codifying the
Commission’s calculation. Exc. at 2-3.
Peoples TWP states that, in developing the original water DSIC, the
Commission determined that the primary goal of the mechanism was to be a simple and
straightforward mechanism that was easy to reconcile. According to Peoples TWP, in
order to accomplish this goal, the original water DSIC excluded adjustments for ADIT,
but included a state income tax gross-up. However, Peoples TWP notes that the
Commission also included an earnings cap that prevented a utility from recovering under
a DSIC if the utility was exceeding its Commission-approved rate of return on equity.
According to Peoples TWP, the earnings cap captured the actual effect of ADIT and state
income tax deductions in the calculation of return, and thereby ensured that rates were
just and reasonable. Exc. at 3.
In reply, the OCA states that it disagrees with the ALJ’s ultimate
recommendation to approve Peoples TWP’s proposed DSIC formula. According to the
OCA, the ALJ’s conclusion that the plain language of the statute does not show intent for
the Commission’s existing DSIC rules and procedures for water companies to
automatically apply to other utilities should be adopted. The OCA avers that it is clear
from the plain language of the statute that the General Assembly did not dictate that the
15
model water tariff should be applied to all utilities, without change, or should prevent the
Commission from applying appropriate ratemaking standards. Instead, the OCA opines
that the General Assembly expressly provided, for water utilities only, that existing
orders and practices can stand. However, the General Assembly also gave the
Commission authority to amend or revoke any of its orders and other actions related to a
DSIC granted under Section 1307(g). 66 Pa. C.S. § 1358(a)(2). The OCA further noted
that the General Assembly also specified that the “unless provided otherwise, the
statutory provisions regarding the computation of the DSIC and customer protection
provisions shall not be construed as limiting the existing ratemaking authority of the
commission.” 66 Pa. C.S. § 1358(c). OCA R. Exc. at 1-3.
In its Exceptions, the OCA first states that the constitutional standard for
judicial review set forth in Barasch is not the relevant standard for determining the
justness and reasonableness of Peoples TWP’s DSIC calculation under the Code, because
Barasch involved a constitutional takings claim by the utility. Next, the OCA states that
if the reasonableness of rates in a rate proceeding is based solely on the overall return
produced by the utility’s total rates or only the end result, every ratemaking adjustment
would have no meaning and no ratemaking decision would be reviewable. The OCA
opines that this is clearly not the case in Pennsylvania where the Commonwealth Court
and Pennsylvania Supreme Court review individual ratemaking adjustments. OCA Exc.
at 3.
The OCA states that the ALJs have confused the constitutional takings
standard applied in Barasch with the statutory ratemaking standard that applies to this
proceeding. According to the OCA, in Barasch the Court addressed the standard for
judicial review of the constitutional question of whether the rates were confiscatory, i.e.
whether the negative allowances rise to the level of the confiscation of utility property for
purposes of the Fifth and Fourteenth Amendments. Barasch at 305-08, 312. In this
proceeding, the OCA avers that there is no utility property being taken and no
16
disallowance, as this is about costs never even incurred by the utility. Moreover, the
OCA notes that the present proceeding is about the interpretation of the Code and
whether, under Pennsylvania law, a specific rate authorized by statute is just and
reasonable if it allows a return on non-investor supplied funds and recovers state income
taxes that are not paid by the utility. Id. at 3-4.
The OCA further states that the ALJs erred in finding that the Commission
has significant discretion to “truncate” or ignore traditional ratemaking requirements in
implementing the DSIC. According to the OCA, while the ALJs are correct that the
General Assembly vested the Commission with discretion in the manner it calculates
various elements of the surcharge, that authority is subject to the overriding requirement
that the rates must comply with all provisions of the Code and the Courts’ interpretations,
the Commission’s regulations, case precedent and the ratemaking principles that bear
upon it. The OCA avers also that the ALJs’ conclusion that the purpose of the consumer
protections in Act 11 was to allow a simplified framework does not withstand scrutiny.
The OCA states that the consumer protections cannot be used as an excuse to allow a
utility to recover costs that it never even incurred. According to the OCA, one of the
fundamental requirements of Act 11 is that it is limited to costs actually incurred. Id.
at 9.
In its reply to the OCA’s Exceptions, Peoples TWP states that the OCA’s
argument fails to acknowledge that the General Assembly has the authority to establish
just and reasonable rates that are calculated in a way that differs from the Section 1308(d)
base rate mechanism, and has exercised that authority in establishing the DSIC
mechanism. Peoples TWP notes that in enacting the DSIC mechanism, the General
Assembly specifically chose a simple mechanism that was easy to calculate. According
to Peoples TWP, the plain language of the statute and its legislative history make it
readily apparent that the General Assembly modeled the Act 11 DSIC upon the
Commission’s historic water DSIC, including the exact language on how to calculate the
17
DSIC charge. Peoples TWP explains that the Commission’s historic water DSIC did not
include the proposals made here by the OCA, and that the historic model was applied
successfully to the water industry for sixteen years. Peoples TWP opines that the OCA’s
contention that the Commission cannot continue to calculate the DSIC as it has done
historically is unfounded, because the General Assembly has codified the Commission’s
historic calculation through Act 11. Peoples TWP R. Exc. at 2-4.
Next, Peoples TWP states that the DSIC surcharge is not required to
include the OCA’s two additional components in order for rates to be just and reasonable.
Peoples TWP asserts that the ALJs correctly reached this conclusion based, in part, on the
decision rendered by the Supreme Court of the United States in Barasch, which the OCA
contends is misplaced. According to Peoples TWP, the OCA’s contention is incorrect as
it attempts to distinguish the holding in Barasch by arguing that the case was a takings
case under the Fifth and Fourteenth Amendments. However, Peoples TWP avers that the
OCA overlooks the import of the Court’s conclusion, which was that a rate cannot be
declared unjust or unreasonable by looking in isolation at one or two base rate
components that are not directly included in the calculation. Peoples TWP opines that
rather than confirming that there is a single mechanism that establishes just and
reasonable rates, or even that there are specific components that must be included in all
rate making mechanisms, the Supreme Court acknowledged that the true test of just and
reasonable rates is whether the end result of the rates is just and reasonable. Thus,
Peoples TWP asserts that the Court in Barasch reached a result similar to the result
reached by the Commonwealth Court in Equitable, that the legislative body has the
authority to develop a ratemaking mechanism that does not incorporate every aspect of a
base rate case, so long as the end result is just and reasonable. Id. at 8-9.
Lastly, Peoples TWP states that the earnings cap not only ensures that the
resulting rates are just and reasonable, it takes into account the very same tax effects that
the OCA raises in this proceeding. Peoples TWP explains that it is important to
18
emphasize that the earnings cap provisions are an integral component of the DSIC rate.
According to Peoples TWP, the earnings cap prohibits a utility from utilizing a DSIC
unless it is in an under-earning position; that is, its earnings are less than its authorized
profit level. Peoples TWP explains that the earnings cap relies on the Company’s
quarterly earnings reports, wherein the Company’s calculation of rate base for earnings
report purposes includes the current book amount of ADIT, as well as the depreciation
deductions allowed for Pennsylvania Corporate Net Income Tax. Thus, Peoples TWP
asserts that, in order for the Company to get the benefit of a DSIC, it must be in an underearning position after taking into consideration the very tax matters that the OCA is
concerned about. Peoples TWP opines that the earnings cap provides the DSIC with a
mechanism to ensure that rates are just and reasonable, and that they do not produce a
profit above Commission-authorized levels. Id. at 12-14.
4.
Disposition
Based on our review of the record in this proceeding and the positions of
the Parties, we concur with the ALJs’ conclusion that the Commission was granted
significant discretion in implementing Act 11. We find that Peoples TWP’s assertion that
the General Assembly intended for the Commission to automatically adopt the DSIC
formula used by water utilities was not mandated by the plain meaning of Act 11 or the
Act’s legislative history. We arrive at this determination consistent with our recently
decided Petition of Columbia Gas of Pennsylvania, Inc. for Approval of a Distribution
System Improvement Charge, Docket No. P-2012-2338282 (Order entered May 20, 2014)
(Columbia DSIC Opinion and Order). In that proceeding, we denied a similar exception
filed by Columbia Gas, stating as follows:
In interpreting a statute, the best indication of legislative
intent is the plain language of the statute. Commonwealth v.
Fithian, 599 Pa. 180, 961 A.2d 66, 74 (2008). The Statutory
Construction Act provides that, “[w]hen the words of a statute
19
are clear and free from all ambiguity, the letter of it is not to
be disregarded under the pretext of pursuing its spirit.” 1 Pa.
C.S. § 1921(b). When the words of a statute are not explicit,
a ruling body may consider, among other things, the
contemporaneous legislative history. 1 Pa. C.S. § 1921(c)(7).
Legislative history may include previous drafts of bills, as
well as statements made by legislators during the statute’s
enactment. Commonwealth v. Wilson, 529 Pa. 268, 275-276,
602 A.2d 1290, 1294-1295 (1992). While statements made
by legislators during the statute’s enactment may be properly
considered as part of the contemporaneous legislative history,
such statements are not dispositive of legislative intent.
Commonwealth v. Alcoa Properties, Inc., 440 Pa. 42, 46 n.1,
269 A.2d 748, 750 n.1 (1970).
In this case, the plain language of the statute does not require
the Commission to automatically adopt the DSIC formula
used by water utilities. Rather, it is clear from the plain
language of the statute that the General Assembly intended to
authorize the Commission to retain its full ratemaking
authority and to establish the technical mechanics of the
DSIC calculation. For example, Section 1358(c) of the Code,
relating to construction of the statute, expressly provides as
follows:
Except as otherwise expressly provided under
this subchapter, nothing under this subchapter
shall be construed as limiting the existing
ratemaking authority of the commission,
including the authority to permit recovery of
operating expenses through an automatic
adjustment clause, or as indicating that the
existing authority of the commission over rate
structure or design is limited.
As such, the Commission has the power and authority under
the Code to examine, investigate, and audit all aspects of the
data, operation, and implementation of the DSIC to the same
extent it would have in reviewing a non-DSIC rate issue. See,
Final Implementation Order at 44. Additionally, Section
1358(d) of the Code states that the Commission shall
establish the specific procedures to be followed for approval
of a DSIC.
20
Columbia DSIC Opinion and Order at 16-17.
While Peoples TWP has presented evidence that language from the water
DSIC model tariff was included in Act 11, there is no evidence that the General
Assembly intended that the Commission be required to automatically adopt all aspects of
the DSIC formula used by water utilities. Such a conclusion would be contrary to the
plain language of the statute, which provides the Commission with authority and
discretion in determining the method of calculating the DSIC provisions of Act 11.
Rather, the evidence indicates that the General Assembly intended to adopt a mechanism
similar to the DSIC formula used by water utilities, while leaving the technicalities of the
DSIC to the expertise of the Commission.
Furthermore, the OCA advocated that each and every element of the DSIC
must be “just and reasonable” as required by Section 1301 of the Code. As stated earlier,
the ALJs avers that the Supreme Court in Barasch, acknowledged that there are many
ways to achieve rates that are just and reasonable, and went on to find that the
disallowance of a single element is not the appropriate standard for determining whether
rates are just and reasonable. The OCA’s argument was also addressed in the Columbia
DSIC Opinion and Order. In that Order, we reaffirmed the Final Implementation Order
and the significance of the statutory earnings cap where we stated as follows:
We also do not agree with the OCA that failure to include the
ADIT adjustment in the DSIC calculation will result in a
DSIC rate that is unjust or unreasonable. As we stated in our
Final Implementation Order, consumers will remain
protected against over-earnings by the earnings cap
provisions under Section 1358(b)(3) of the Code. Final
Implementation Order at 39. As Columbia points out, its
quarterly earnings reports, which are used to determine the
Company’s achieved rate of return for earnings cap purposes,
capture both upward and downward impacts of a wide variety
of individual adjustments that would be considered in a base
rate proceeding, including the current book amount of ADIT.
21
Columbia R. Exc. at 13-14. Thus, we do not agree with the
OCA that the earnings cap will fail to protect customers from
being charged DSIC rates that are unjust or unreasonable.
Additionally, we agree with the ALJs’ reliance on the
Duquesne case for the conclusion that the total effect of the
rate should be considered in determining whether the DSIC is
just and reasonable. See, R.D. at 45-46. While the main issue
in that case was whether a Pennsylvania law amounted to a
taking of a public utility’s property in violation of the Fifth
Amendment, that case also included a discussion of
ratemaking principles and the applicable law for determining
just and reasonable rates. The United States Supreme Court,
in Duquesne, addresses and relies upon the landmark case of
FPC v. Hope Natural Gas Company, 320 U.S. 591 (1944), for
its statement that there is not any single formula that must be
used in determining just and reasonable rates. Duquesne, 488
U.S. at 315, 316. As Columbia indicates, the Court
acknowledged that the test for determining whether rates are
just and reasonable involves an analysis of whether the end
result of the rates is just and reasonable.
Columbia DSIC Opinion and Order at 36-37.
Additionally, in our recent decision in the Petition of Little Washington
Wastewater Company (LWWC) for Approval of a Distribution System Improvement
Charge, Docket No. P-2013-2366873 (Order entered July 24, 2014) (LWWC DSIC
Opinion and Order), we emphasized that the “earnings cap” is one of the customer
protections legislated by the General Assembly as part of Act 11. We also recognized the
significance of the “earnings cap” in the Final Implementation Order when we
considered, and rejected, the OCA’s proposed ADIT adjustment, as follows:
[C]onsumers remain protected against over earnings by the
earnings cap under Section 1358(b)(3) which “captures the
revenue impact of all other adjustments and insure[s] that the
DSIC does not result in unreasonable rates.”
Final Implementation Order at 38-39; LWWC DSIC Opinion and Order at 11-12.
22
As such, we cannot conclude, based on the evidence in this proceeding, that
that the General Assembly intended that the Commission automatically adopt the DSIC
formula historically used by water utilities. Further, we shall adopt the ALJs’ conclusion
that the Commission was granted significant discretion in implementing Act 11, and that
the Commission’s focus in this proceeding should be the overall effect of the calculated
DSIC rate and whether, as a whole, the DSIC is just and reasonable. For these reasons,
we shall deny the Exceptions filed by Peoples TWP and the OCA on this issue.
C.
Accumulated Deferred Income Taxes
1.
Positions of the Parties
Peoples TWP takes the position that ADIT should be treated the same way
in its DSIC calculation as this item has historically been treated in water company DSIC
calculations. In Peoples TWP’s view, it should be permitted to calculate its DSIC in the
same manner. Peoples TWP M.B. at 6-11.
The OCA contended that Peoples TWP should be required to include an
adjustment for deferred income taxes in calculating its DSIC. The OCA conceded that
Peoples TWP’s treatment of ADIT is consistent with how this matter has been
historically treated by the water distribution companies. However, the OCA pointed out
that Act 11 does not bind the Commission to past practice. OCA M.B. at 22-23.
2.
ALJs’ Recommendation
The ALJs found that Peoples TWP’s treatment of ADIT is consistent with
the treatment of this item by the water companies as well as the Commission’s Final
Implementation Order issued on August 2, 2012, at Docket No. M-2012-2293611 (Final
Implementation Order) and does not violate any specific language in Act 11. The ALJs
23
stated that the purpose of this proceeding was not to revisit the policy decisions already
made by the Commission in its Final Implementation Order. The ALJs noted that while
the Final Implementation Order is not binding, its purpose was to provide guidance to
utilities in order to ensure consistency of practice. According to the ALJs, the OCA must
put forth some factual basis which would make it inappropriate to apply the policy set
forth in the Final Implementation Order to the Company’s DSIC. The ALJs found that
the OCA did not offer any compelling reason to treat Peoples TWP differently from
water utilities nor did it offer any specific facts relating specifically to Peoples TWP that
mandate departing from Commission policy. Rather, the ALJs concluded that the
arguments made by the OCA would require an evaluation of the policy decisions already
made by the Commission. R.D. at 15-16.
The ALJs explained that their purpose was not to revisit policy decisions
already made by the Commission, but to determine whether it was appropriate to depart
from that policy due to the facts presented in this case. In regard to the ADIT adjustment,
the ALJs found that the OCA made no new arguments that were not made and rejected by
the Commission in the Final Implementation Order. Nevertheless, the ALJs noted that
the Commission provided the OCA with an additional opportunity to put forth evidence
specific to Peoples TWP that may require a different result. According to the ALJs, the
OCA had not done so. The ALJs stated that it is true, as OCA thoroughly explained in its
briefs, that ADIT should be recognized when developing base rates pursuant to Section
1308(d). However, the ALJs concluded that a DSIC surcharge is not a base rate and
different principles apply. The ALJs stated that including ADIT in the DSIC calculation
would defeat the goal of the Commission to implement a straightforward mechanism
which was easy to calculate. In addition, the ALJs found that based upon a review of the
record, the arguments advanced by Peoples TWP are consistent with the position taken
by the Commission as expressed in the Final Implementation Order. The ALJs
concluded that no persuasive evidence had been presented in this matter to justify the
inclusion of ADIT in the DSIC calculation. They further concluded that the OCA had not
24
convincingly argued that Act 11 does not grant the Commission sufficient discretion to
exclude ADIT from the DSIC calculation. Id. at 16-17.
Next, the ALJs stated that the Commission recognized, in its Final
Implementation Order, that the impact of ADIT is already factored into the DSIC through
the calculation of the earnings cap, which prohibits Peoples TWP from exceeding its
allowable rate of return. The ALJs noted that the Company’s DSIC will be reset to zero
if the data included in the most recent Annual or Quarterly Earnings report filed with the
Commission shows that Peoples TWP would earn a rate of return that would exceed the
allowable rate of return used to calculate its fixed costs under the DSIC as described in
the pre-tax return section.10 According to the ALJs, since earnings are reviewed
quarterly, the earnings cap adequately addresses the concern associated with ADIT for
plant additions under the DSIC, without the complication of reviewing these issues in
each quarterly DSIC filing. They noted that the Commission in the Final Implementation
Order explained that consumers remain protected against over earnings by the earnings
cap under Section 1358(b)(3), which captures the revenue impact of all other adjustments
and insures that the DSIC does not result in unreasonable rates. Id. at 17-19.
The ALJs noted that the OCA contended that calculating ADIT is not
overly complicated, relying on the fact that other jurisdictions include the ADIT
adjustment in their surcharge mechanisms. The ALJs found that the practices of other
jurisdictions may bear some examination by the Commission in the future. However,
stated the ALJs, the fact that making the ADIT adjustment is possible does not negate the
fact that the Commission has determined that it is counter to the stated goal of Act 11 to
provide a simplified method of cost recovery for infrastructure improvements. The ALJs
concluded that the OCA had not demonstrated a compelling reason why the customer
10
Peoples TWP St. 1-R at 12.
25
protections of Act 11 are inadequate. Therefore, the ALJs concluded that the OCA’s
proposal was clearly contrary to the simple mechanism envisioned by the General
Assembly and the Commission and should, as such, be rejected. Id. at 19-20.
Lastly, the ALJs noted that the OCA had argued that changed
circumstances exist which make the inclusion of ADIT, outside of the earnings cap,
appropriate at this time. While this may be true, the ALJs found that the Commission has
been granted the discretion to consider those changes, but has chosen, as a policy, to
continue to exclude ADIT from the DSIC calculation. According to the ALJs, there is
nothing in Act 11 which requires the Commission to do otherwise. Therefore, the ALJs
concluded that the OCA had not demonstrated that, in the case of Peoples TWP’s
proposed DSIC calculation, it was necessary to depart from that policy or that the factual
record demonstrates that Peoples’ DSIC calculation, as a whole, results in a rate that is
not just and reasonable. Id. at 20.
3.
Exceptions and Replies to Exceptions
In its Exceptions, the OCA states that the ALJs erred by not requiring
Peoples TWP to include ADIT in the DSIC calculation. The OCA asserts that ADIT is
simply the cumulative balance of the deferred taxes generated over time and represents a
source of zero cost capital because the utility has paid less in taxes to the federal
government than it has collected in rates. The OCA explains that, under standard
ratemaking practice, the balance of ADIT is recognized as either a source of zero cost
capital, as it is in Pennsylvania and most other states, or it is included in capital structure
with a zero cost. The OCA avers that the DSIC rate must be calculated so that ratepayers
do not pay costs that the utility does not incur. In the opinion of the OCA, the DSIC
formula proposed by the Company can overstate its investment balance by including zero
cost capital generated by ADIT. As a result, the OCA submits that Peoples TWP must
change its tariff to reflect ADIT as an offset to the DSIC rate base, so that ratepayers do
26
not pay a return on funds that were not supplied by investors. According to the OCA, the
evidence supports its position that recognition of ADIT is necessary to correctly calculate
surcharge rate base and that ADIT can, in fact, be readily calculated for surcharge
purposes. OCA Exc. at 10-13.
Next, the OCA disagrees with the ALJs’ conclusion that including an ADIT
adjustment in the DSIC calculation is too complex for a surcharge mechanism and should
only be calculated in the context of a full base rate proceeding. The OCA contends that
calculating ADIT is not too complex and that it is part of the surcharge calculation in
other states. According to the OCA, Peoples TWP overstates the difficulty of calculating
ADIT. In response to Peoples TWP’s position that the ADIT is too complex because it is
impacted by the Company’s tax position, which will not be known until after the end of
the tax year, the OCA avers that this is not a reason to ignore the ADIT, it just means that
recognition of ADIT will not reduce the DSIC rate base at this time. However, the OCA
maintains that the DSIC formula established in this proceeding should correctly calculate
the investment on which Peoples TWP is entitled to earn a return. The OCA avers that
then, when Peoples TWP is no longer in a loss carry forward position, the tariff will
provide for the appropriate adjustment to DSIC rate base and revenue requirement. Id. at
13-14.
The OCA maintains that the flaw underlying the Company’s arguments
against adjusting for ADIT is that failure to recognize ADIT will overstate the investment
balance and allow Peoples TWP to earn a return on funds that were not supplied by
investors. According to the OCA, this obvious flaw explains why utilities in every state
that was examined on the record and in briefs in this case deduct ADIT from the
surcharge rate base either by statute, by regulation or simply as a matter of routine
course. The OCA believes that the fact that utilities in at least eleven other states include
ADIT in an infrastructure surcharge calculation is also relevant to the reasonableness of
requiring that Peoples TWP make the adjustment in this case. Id. at 16-17.
27
Lastly, the OCA asserts that the earnings cap alone does not prevent the
DSIC rate from being overstated. The OCA states that earnings reports are not subject to
the type of review and scrutiny that occur in a rate case, and the question of whether or
not a utility is “overearning” may be a product of a myriad of factors unrelated to the
DSIC. According to the OCA, the only way to ensure that the surcharge does not include
a return on zero cost capital is to directly adjust the DSIC rate base calculation for ADIT.
The OCA further notes that the applicable regulations in New Jersey impose an earnings
cap and still require utilities to reflect the offset for deferred taxes in the infrastructure
surcharge calculation. Id. at 17-19.
In reply, Peoples TWP states that inclusion of ADIT would complicate the
DSIC unnecessarily. Peoples TWP explains that ADIT is a dynamic element that is
constantly shifting based on available tax deductions, the mix of plant in service and the
Company’s current tax position. According to the Company, these dynamic changes
cannot be accurately captured in the simple formula used to compute the DSIC charge,
and are not reflected in the OCA’s proposed adjustment. Peoples TWP further asserts
that the OCA’s arguments that the annual reconciliation process will overcome the
difficulties in providing accurate projections of incremental ADIT cuts directly against
the OCA’s argument that ADIT is not overly complicated. Peoples TWP opines that the
reconciliation provided for in the statute is intended to be simple and straightforward, and
not to include the likelihood of significant changes in the charge to customers due to
changes in the Company’s tax position. Peoples TWP R. Exc. at 16-17.
Next, in reply to the OCA’s argument that the practice of utilities in other
states is to include ADIT in the DSIC calculation, Peoples TWP states that the practices
of other states are irrelevant to a determination of how a Pennsylvania statute should be
construed. According to Peoples TWP, the jurisdictions the OCA relied upon in this
proceeding have mechanisms that are dissimilar to the Pennsylvania mechanism in a
number of critical ways. See Peoples TWP M.B. at 22-23, Peoples TWP R.B. at 20-21.
28
Peoples TWP opines that there is no meaningful application to be drawn from the OCA’s
reliance on other jurisdictions. Peoples TWP R. Exc. at 18.
4.
Disposition
Based on our review of the record in this proceeding and the positions of
the Parties, we concur with the ALJs’ conclusion that Peoples TWP’s treatment of ADIT
is consistent with the treatment of this item by water companies as well as the
Commission’s Final Implementation Order and does not violate any specific language in
Act 11. We arrive at this determination consistent with our recently decided Columbia
DSIC Opinion and Order, as well as our decision in the LWWC DSIC Opinion and
Order.
As noted by the ALJs, the purpose of this proceeding was not to revisit the
policy decisions already made by the Commission in its Final Implementation Order.
The ALJs noted that while the Final Implementation Order is not binding, its purpose
was to provide guidance to utilities to ensure consistency of practice. The Commission
initially declined to adopt the OCA’s proposed adjustment for ADIT in its Final
Implementation Order. Furthermore, in the Columbia DSIC Opinion and Order, we
reaffirmed the Final Implementation Order and once again declined to adopt the OCA’s
proposed ADIT adjustment, stating as follows:
Moreover, we have previously addressed this issue in our
Final Implementation Order, in which we declined to adopt
the OCA’s proposal to include an adjustment for ADIT in the
DSIC calculation. As we indicated in our Final
Implementation Order, we believe that the DSIC is intended
to be a straightforward mechanism that is easy to calculate
and audit, and does not require a full rate case analysis. We
concluded that the inclusion of an ADIT adjustment would be
inconsistent with that goal and would likely lead to litigation
over the DSIC calculation. Final Implementation Order
29
at 39. Thus, we agree with Columbia that, through the
enactment of Act 11, the General Assembly intended to
establish a surcharge mechanism to produce just and
reasonable rates without the need for the type of
comprehensive and detailed analysis required in a base rate
proceeding under Section 1308(d) of the [Public Utility]
Code.
Columbia DSIC Opinion and Order at 35-36.
Summarizing our view of the OCA’s proposed ADIT adjustment, we held
as follows:
Accordingly, we find that the inclusion of an ADIT
adjustment as proposed by the OCA is not required by
Act 11, would add unneeded complexity to the DSIC
calculation, and is unnecessary to ensure that the DSIC rates
will be just and reasonable. As we stated in our Final
Implementation Order, the historic water DSIC, which was
used successfully for many years, did not include an
adjustment for ADIT. Final Implementation Order at 39.
Accordingly, we will deny the OCA’s Exception on this
issue.
Columbia DSIC Opinion and Order at 37.
In the LWWC DSIC Opinion and Order, we again rejected the OCA’s
proposed ADIT adjustment and the portion of the Recommended Decision addressing
ADIT, consistent with the Final Implementation Order and the Columbia DSIC Opinion
and Order. The LWWC DSIC Opinion and Order concluded that the OCA failed to
demonstrate why we should reach a different result in that proceeding than the result we
reached previously in the Columbia DSIC Opinion and Order. LWWC DSIC Opinion
and Order at 9.
Accordingly, we conclude that Act 11 does not require the Company to
include recognition of ADIT in the calculation of its DSIC. Therefore, we shall deny the
30
Exceptions filed by the OCA on this issue and we shall adopt the ALJs’ recommendation.
D.
Gross-Up of State Taxes
1.
Positions of the Parties
In its DSIC filing, Peoples TWP included a state income tax gross-up to
reflect that additional revenues produce greater taxes. The Company argued that this
gross-up is consistent with the Commission’s historic calculation of the water DSIC.
According to the Company’s testimony, no witnesses were aware of any water DSIC that
did not include a state income tax gross-up. Peoples TWP St. 1-R at 9-10, 12; Peoples
TWP St. 3-R at 7-8. Peoples TWP R.B. at 22.
The OCA has proposed that the state income tax gross-up included in
Peoples TWP’s DSIC calculation be disallowed. The OCA argued that the Company
used the full statutory income tax rate to calculate its DSIC rate, but that Peoples TWP
will not pay state income taxes on its DSIC income. The OCA contended this results
from the fact that the deductions for the repair allowance and accelerated depreciation far
exceed the state taxable income that will be generated by the DSIC. The OCA asserted
that the approach used by the Company is contrary to the “actual taxes paid” doctrine
which requires that state income tax deductions must be reflected in rates on a current
basis. The OCA further contended that, in order to make the DSIC calculation correct,
the flow-through of the state income tax deductions associated with DSIC plant must be
accounted for in determining the state income taxes that are included in the DSIC pre-tax
rate of return. OCA St. 1 at 12-13; OCA M.B. at 28-34; OCA Reply Brief at 30-31.
The OCA proposed that the Company should reflect incremental flowthrough tax deductions for accelerated depreciation on DSIC-eligible plant additions and
remove the state tax gross-up. Id.
31
Peoples TWP countered that, historically, water companies have been
permitted to gross-up state taxes and that there is no reason why a gas utility should not
be permitted to do the same. Further, according to Peoples TWP, the actual taxes paid
doctrine does not and should not apply to DSIC proceedings. However, Peoples TWP
maintained that the purpose of the state tax gross-up in the DSIC is to simplify the
calculation. Peoples TWP explained that the OCA’s incremental deduction proposal
should be rejected because it would incorporate inaccurate tax adjustments into the DSIC
and would require a much more complicated and extensive calculation than the
calculation intended by Act 11. Further, Peoples TWP contended that the “actual taxes
paid” doctrine is a concept applicable to base rate proceedings, where a utility’s complete
tax structure can be analyzed. Peoples TWP M.B. at 24-27.
2.
ALJs’ Recommendation
The ALJs found that Peoples TWP’s treatment of the gross-up of state taxes
is consistent with the treatment of this item by water companies as well as the
Commission’s Final Implementation Order and does not violate any specific language in
Act 11. According to the ALJs, the DSIC calculation does not necessarily adhere to all
traditional ratemaking principles. Rather, the ALJs aver that it is meant to be a simplified
method for the recovery of specific costs in order to avoid the many complex and
controversial elements of a base rate proceeding. The ALJs opine that the flow through
of tax deductions and the determination of a utility’s taxable income is often one of the
most controversial and contentious aspects of a base rate proceeding. Additionally, the
ALJs state that the customer protections in the statute are for the purpose of off-setting
any potential harm to ratepayers caused by the truncated calculation of the surcharge.
Specifically, tax depreciation deductions allowed for Pennsylvania net income tax
32
purposes are reflected in the calculation of the Company’s earnings reports.11 Thus,
according to the ALJs, if Peoples TWP is overearning its authorized return as a result of
tax depreciation deductions or other benefits, it is not permitted to charge the DSIC.12
Accordingly, the ALJs conclude that it is the overall effect of the rate which must be just
and reasonable. R.D. at 15, 22-23.
3.
Exceptions and Replies to Exceptions
In its Exceptions, the OCA asserts that the ALJs erred by not requiring
Peoples TWP to reflect its actual state income taxes in the DSIC calculation. The OCA
argues that Pennsylvania law requires that state income tax deductions be reflected in
rates on a current basis, consistent with the “actual taxes paid” doctrine. The OCA
contends that the Pennsylvania Supreme Court rendered the seminal decision regarding
the flow-through of income tax benefits in Barasch v. Pa. PUC, 507 Pa. 496, 521, 491
A.2d 94, 107 (1985), where it determined that the Commission could only find rates just
and reasonable if those rates are based on actual taxes paid. The OCA also contends that
the Court affirmed this position weeks later in the context of consolidated taxes, finding
that, where an expense is not actually incurred, it is improper to include it in the rates
charged to ratepayers. OCA Exc. at 19 (citing Barasch v. Pa. PUC, 507 Pa. 561, 493
A.2d 653 (1985)).
The OCA also argues that the Commission has recognized that flowthrough of the benefits associated with utilizing accelerated depreciation in the
calculation of state income taxes is “mandated.” OCA Exc. at 20 (citing Pa. PUC v.
Metropolitan Edison Co., 60 Pa. P.U.C. 349, 398 (1985)). In addition, the OCA notes the
Commission’s statement that:
11
12
Peoples TWP St. 1-R at 12.
66 Pa.C.S. § 1358(b).
33
Barasch, [507 Pa. 561, 493 A.2d 653] stands for the
proposition that the Commission does not have the authority
to permit the inclusion of hypothetical expenses not incurred,
and more specifically, establishes the “actual taxes paid”
doctrine, prohibiting a utility from collecting “phantom
taxes.”
OCA Exc. at 20 (citing Pa. PUC v. Jackson Sewer Corp., Docket No. R-00005997
(Order entered September 28, 2001 at 34).
The OCA asserts that the ALJs did not address the “actual taxes paid”
doctrine or the requirement in Act 11 that limits DSIC recovery to costs “incurred” by the
utility. Rather, the OCA states that the ALJs relied on arguments set forth by Peoples
TWP, which the OCA contends are flawed. The OCA states that it wished to correct
what it viewed as an apparent misunderstanding in the Recommended Decision regarding
the OCA’s income tax recommendation. The OCA explains that it is not proposing that
the calculation of pre-tax return should always eliminate all state income taxes from the
gross-up in the DSIC calculation. Rather, the OCA states that the state income tax rate
used to calculate the DSIC revenue requirement should reflect the state income tax
expense actually paid. Thus, it is the OCA’s position that, for the DSIC that took effect
on July 1, 2013, the gross-up for state income taxes should be zero percent because
Peoples TWP’s state income tax benefits exceed the state taxable income that will be
generated by the DSIC, and Peoples TWP will pay no state income taxes on DSIC
revenues. Id. at 22.
The OCA concludes that while the Commission has expressed the intent
that the DSIC be a straight forward and simple mechanism, that intent can only be
exercised in matters over which the Commission has discretion. According to the OCA,
the Commission has no discretion to ignore the requirement to flow through state income
tax benefits in the DSIC rate because the flow-through of state income tax benefits is a
requirement of just and reasonable rates under Pennsylvania law. The OCA maintains
34
that its proposed correction to the gross-up for state income taxes ensures that ratepayers
are charged only for state income taxes actually paid, consistent with the language of
Act 11 and Section 1301 as it has been interpreted by the Courts and the Commission.
Id. at 27.
In its Replies to Exceptions, Peoples TWP states that the record in this
proceeding shows that the adoption of the OCA’s proposal regarding the gross-up for
state income taxes would result in double-counting of state tax depreciation deductions
and would be fundamentally unfair. Further, the Company asserts that the earnings cap
accounts for state income tax depreciation benefits. According to Peoples TWP, the
OCA’s proposal produces inaccurate and unfair results that would complicate the DSIC
mechanism, and are not required to produce just and reasonable rates. The Company
maintains that the only way to determine Peoples TWP’s actual taxes paid for state
income taxes would be to conduct a full rate case tax analysis which would be contrary to
the intent of the general assembly in adopting a simple surcharge mechanism. Peoples
TWP opines that conducting such a tax analysis would subject the DSIC mechanism to
disputes over the proper calculation of state tax liability. Peoples TWP maintains that the
ALJs properly rejected the OCA’s proposal as too complex for the surcharge mechanism
adopted by the General Assembly. Peoples TWP R. Exc. at 19-21.
In regard to the OCA’s assertion that the ALJs erred in not applying the
actual taxes paid doctrine to the DSIC surcharge, Peoples TWP claims that the actual
taxes paid doctrine involves a complex set of base rate calculations to determine the tax
liability of a utility. Peoples TWP asserts that in the case of the DSIC, the General
Assembly concluded that the Commission’s historic water DSIC mechanism was best
suited to deriving just and reasonable rates, and that it also accounted for the complexities
of actual taxes through the earnings cap. According to Peoples TWP, this approach is
more effective than the OCA’s incremental deductions approach, which double-counts
state tax deductions and does not reflect “actual taxes.” The Company maintains that the
35
earnings cap formula captures all of the moving parts associated with the tax deductions,
unlike the OCA’s proposal. As a result, Peoples TWP opines that adoption of the OCA’s
proposal is unnecessary in order to ensure that actual state income tax deductions are
considered in determining whether the DSIC rates are just and reasonable. Id. at 22-23.
4.
Disposition
Based on our consideration of the record in this proceeding and the
positions of the Parties on this issue, we shall adopt the ALJs’ recommendation that
Peoples TWP’s treatment of the gross-up of state taxes is consistent with the treatment of
this item by water companies as well as with the Commission’s Final Implementation
Order and does not violate any specific language in Act 11. We arrive at this
determination consistent with our recently decided Columbia DSIC Opinion and Order,
as well as our decision in the LWWC DSIC Opinion and Order. We note that the ALJs’
recommendation in the instant proceeding is consistent with the Columbia DSIC Opinion
and Order, wherein we rejected the OCA’s proposed state income tax adjustment, as
follows:
Based on our consideration of the record and the positions of
the Parties on this issue, we decline to adopt the OCA’s
proposal to eliminate the state tax gross-up included in
Columbia’s DSIC calculation. While we agree that
Columbia’s rates should reflect the state taxes that the
Company actually pays, we are not convinced that
eliminating the state tax gross-up included in the DSIC
calculation would properly achieve that result. As Columbia
points out, its base rates currently reflect deductions for the
repairs allowance and accelerated depreciation that may no
longer apply, because such deductions have been reduced or
eliminated after the test year considered in the Company’s
last base rate proceeding. Therefore, to reflect these same
types of deductions in relation to DSIC eligible plant in the
DSIC calculation may result in overall rates that are further
out of alignment with Columbia’s actual tax position. As
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Columbia argues and the ALJs concluded, the only way to
determine Columbia’s actual taxes paid for state income tax
purposes would be to conduct a full rate case analysis, which
could subject the DSIC calculation to litigation regarding the
proper determination of the Company’s state tax liability.
Columbia R. Exc. at 14; R.D. at 63. However, as we stated
with regard to the ADIT issue, we believe that the DSIC is
intended to be a straightforward mechanism that is easy to
calculate and audit and does not require a full rate case
analysis.
In addition, as we stated in our discussion of ADIT,
Columbia’s customers will remain protected by the earnings
cap provision of Act 11. The Company’s quarterly earnings
reports, which are used to determine its achieved rate of
return for earnings cap purposes, reflect a wide variety of
individual adjustments that would be considered in a base rate
proceeding, including Columbia’s state income tax
deductions. Accordingly, we believe that the earnings cap
will ensure that customers will not be charged DSIC rates that
are unjust or unreasonable. For the foregoing reasons, we
shall deny the OCA’s second Exception.
Columbia DSIC Opinion and Order at 46-47.
In the LWWC DSIC Opinion and Order we concluded this issue by stating the
following:
As such, we reject the OCA’s proposed state income tax adjustment and its
proposed elimination of the state income tax gross-up, consistent with the
Final Implementation Order and the Columbia DSIC Opinion and Order.
We note that the only way to determine the Company’s actual taxes paid
for state income tax purposes would be to conduct a full rate case analysis,
which could subject the DSIC calculation to litigation regarding the proper
determination of the Company’s state tax liability.
LWWC Opinion and Order at 20.
Accordingly, we shall adopt the ALJs’ recommendation that Peoples
TWP’s treatment of the gross-up of state taxes is consistent with the treatment of this
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item by water companies as well as the Commission’s Final Implementation Order and
does not violate any specific language in Act 11. Therefore, we shall deny the
Exceptions filed by the OCA on this issue.
IV.
Conclusion
Based upon our review, evaluation and analysis of the record evidence in
this proceeding, we shall deny the Exceptions filed by Peoples TWP and the Exceptions
filed by the OCA, consistent with the discussion contained in the body of this Opinion
and Order. Further, we shall adopt the ALJs’ recommendation that we approve the
Partial Settlement, and reject the OCA’s proposed adjustments to the DSIC calculation.
We find that Peoples TWP has met its burden of proof for approval of its DSIC
calculation under Act 11. We conclude that Peoples TWP is not required to include an
ADIT adjustment in its DSIC calculation and that it is permitted to include the state
income tax gross-up in its DSIC calculation; THEREFORE,
IT IS ORDERED:
1.
That the Exceptions filed by Peoples TWP, LLC on April 23, 2014,
2.
That the Exceptions filed by the Office of Consumer Advocate on
are denied.
April 23, 2014, are denied.
3.
That the Recommended Decision of Administrative Law Judges
Mary D. Long and Jeffrey A. Watson, issued on April 3, 2014, is adopted, consistent with
this Opinion and Order.
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4.
That the Formal Complaint filed by the Office of Consumer Advocate
at Docket No. C-2013-2348849 is marked satisfied as to the matters agreed upon in the
Stipulation of Settlement, but is dismissed in all other respects.
5.
That the Distribution System Improvement Charge calculation
proposed by Peoples TWP, LLC is hereby approved, effective July 1, 2013, consistent with
this Opinion and Order.
6.
That the distribution system improvement charge application provided
by Peoples TWP, LLC, to its customer classes shall provide as follows:
The DSIC shall be applied equally to all customer classes,
except that the Company may reduce or eliminate the Rider
DSIC to any customer with competitive alternatives who are
paying flexed or discounted rates and customers having
negotiated contracts with the Company, if it is reasonably
necessary to do so.
7.
That Peoples TWP, LLC shall file a tariff supplement to establish a
Distribution System Improvement Charge, on ten days’ notice to be effective July 1, 2013,
consistent with this Opinion and Order.
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8.
That, upon acceptance and approval by the Commission of the tariff
supplement and supporting data filed by Peoples TWP, LLC, as being consistent with this
Opinion and Order, this proceeding shall be marked closed.
BY THE COMMISSION,
Rosemary Chiavetta
Secretary
(SEAL)
ORDER ADOPTED: August 21, 2014
ORDER ENTERED: August 21, 2014
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