PENNSYLVANIA
PUBLIC UTILITY COMMISSION
Harrisburg, PA 17105-3265
Public Meeting held June 30, 2011
Commissioners Present:
Robert F. Powelson, Chairman
John F. Coleman, Vice Chairman
Tyrone J. Christy
Wayne E. Gardner
James H. Cawley
Pennsylvania Public Utility Commission
Office of Consumer Advocate
Connie Speelman
George Poulin
Herbert B. Watson, Sr.
Lawrence LaStella
Katherine E. Swisher
Fred L. Phillips
Galen Harrill
Hordoffa Bulcha
Mrs. Paul Viscuso
Anton Koenig
Barry J. Leed
Douglas Wooley
Rosalie Pasquini
Anton Koenig
Rosemary Wilson
Jennifer Troupe Rummel
Judith Mitchell
Judith Ciotola
Office of Small Business Advocate
Jonathan Winterling
William and Geri Gilbert
Brian Ickes
Kellogg Company
George Knerr
David Fiorillo
v.
City of Lancaster – Bureau of Water
R-2010-2179103
C-2010-2197988
C-2010-2198077
C-2010-2198619
C-2010-2198821
C-2010-2199946
C-2010-2200324
C-2010-2200532
C-2010-2200534
C-2010-2200594
C-2010-2201209
C-2010-2201794
C-2010-2202121
C-2010-2202868
C-2010-2204301
C-2010-2204311
C-2010-2204407
C-2010-2204410
C-2010-2204414
C-2010-2204415
C-2010-2204436
C-2010-2204454
C-2010-2206497
C-2010-2206528
C-2010-2206541
C-2010-2208880
C-2010-2213105
TABLE OF CONTENTS
I.
HISTORY OF THE PROCEEDING .................................................................................. 1
II.
OVERVIEW OF THE CITY WATER SYSTEM .............................................................. 7
III.
GENERAL PRINCIPLES .................................................................................................. 8
IV.
RATE BASE ..................................................................................................................... 12
A.
B.
C.
D.
Depreciation Expense .................................................................................. 13
1.
Positions of the Parties ..................................................................... 13
2.
ALJ Recommendation ...................................................................... 15
3.
Exceptions and Replies .................................................................... 16
4.
Disposition ....................................................................................... 17
Utility Plant in Service ................................................................................ 18
1.
Positions of the Parties ..................................................................... 18
2.
ALJ Recommendation ...................................................................... 19
3.
Disposition ....................................................................................... 19
Depreciation Reserve .................................................................................. 19
1.
Positions of the Parties ..................................................................... 19
2.
ALJ Recommendation ..................................................................... 20
3.
Disposition ....................................................................................... 20
Additions to Rate Base (Prepayments)........................................................ 21
1.
Positions of the Parties ..................................................................... 21
2.
ALJ Recommendation ..................................................................... 22
3.
Disposition ....................................................................................... 22
V.
REVENUES ...................................................................................................................... 22
VI.
EXPENSES ....................................................................................................................... 23
A.
Agreed Upon Expense Issues ...................................................................... 24
B.
OPEB ........................................................................................................... 25
1.
Positions of the Parties ..................................................................... 25
2.
ALJ Recommendation ..................................................................... 27
3.
C.
D.
VII.
Disposition ....................................................................................... 29
Employee Vacancies ................................................................................... 30
1.
Positions of the Parties ..................................................................... 30
2.
ALJ Recommendation ..................................................................... 30
3.
Disposition ....................................................................................... 31
Rate Case Expense Normalization .............................................................. 31
1.
Positions of the Parties ..................................................................... 31
2.
ALJ Recommendation ...................................................................... 34
3.
Exceptions and Replies .................................................................... 36
4.
Disposition ....................................................................................... 38
RATE OF RETURN ......................................................................................................... 39
A.
Introduction ................................................................................................. 39
B.
Capital Structure .......................................................................................... 41
1.
Positions of the Parties ..................................................................... 41
2.
ALJ Recommendation ...................................................................... 46
3.
Exceptions and Replies .................................................................... 47
4.
Disposition ....................................................................................... 51
C.
Cost of Debt................................................................................................. 55
D.
Cost of Equity .............................................................................................. 55
1.
Overview .......................................................................................... 55
2.
Summary .......................................................................................... 56
3.
Comparison Groups.......................................................................... 59
4.
a.
Positions of the Parties .......................................................... 59
b.
ALJ Recommendation ........................................................... 61
c.
Exceptions and Replies ......................................................... 61
d.
Disposition ............................................................................ 62
Cost Rate Models ............................................................................. 62
a.
Positions of the Parties .......................................................... 62
b.
ALJ Recommendation ........................................................... 69
ii
5.
6.
7.
E.
c.
Exceptions and Replies ......................................................... 71
d.
Disposition ............................................................................ 72
Risk Adjustment ............................................................................... 73
a.
Positions of the Parties .......................................................... 73
b.
ALJ Recommendation ........................................................... 75
c.
Disposition ............................................................................ 75
Leverage Adjustment ....................................................................... 76
a.
Positions of the Parties .......................................................... 76
b.
ALJ Recommendation ........................................................... 77
c.
Exceptions and Replies ......................................................... 77
d.
Disposition ............................................................................ 79
Tax Adjustment ................................................................................ 79
a.
Positions of the Parties .......................................................... 80
b.
ALJ Recommendation ........................................................... 81
c.
Disposition ............................................................................ 81
Conclusion ................................................................................................... 82
VIII. RATE STRUCTURE AND RATE DESIGN ...................................................................... 83
A.
B.
Cost of Service Methodology ...................................................................... 83
1.
Positions of the Parties ..................................................................... 83
2.
ALJ Recommendation ...................................................................... 86
3.
Exceptions and Replies .................................................................... 87
4.
Disposition ....................................................................................... 90
Cost Allocation ............................................................................................ 90
1.
2.
Rental Income from Cellular Antennae Leases ............................... 90
a.
Positions of the Parties .......................................................... 90
b.
ALJ Recommendation ........................................................... 92
c.
Disposition ............................................................................ 92
Reimbursement for Meter Labor ...................................................... 93
a.
Positions of the Parties .......................................................... 93
iii
3.
C.
D.
E.
b.
ALJ Recommendation ........................................................... 94
c.
Exceptions and Replies ......................................................... 94
d.
Disposition ............................................................................ 95
Regulatory Expenses ........................................................................ 96
a.
Positions of the Parties .......................................................... 96
b.
ALJ Recommendation ........................................................... 97
c.
Exceptions and Replies ......................................................... 98
d.
Disposition ............................................................................ 99
Revenue Allocation ..................................................................................... 99
1.
Positions of the Parties ..................................................................... 99
2.
ALJ Recommendation .................................................................... 102
3.
Exceptions and Replies .................................................................. 103
4.
Disposition ..................................................................................... 105
Scale Back ................................................................................................. 106
1.
Positions of the Parties ................................................................... 106
2.
ALJ Recommendation .................................................................... 107
3.
Exceptions and Replies .................................................................. 107
4.
Disposition ..................................................................................... 108
Tariff Structure .......................................................................................... 109
1.
2.
3.
Separate Rate for Kellogg .............................................................. 109
a.
Positions of the Parties ........................................................ 109
b.
ALJ Recommendation ......................................................... 110
c.
Exceptions and Replies ....................................................... 111
d.
Disposition .......................................................................... 111
Evaluation of GMS Rate Structure ................................................ 112
a.
Positions of the Parties ........................................................ 112
b.
ALJ Recommendation ......................................................... 113
c.
Disposition .......................................................................... 113
Minor Tariff Changes ..................................................................... 113
iv
IX.
a.
Positions of the Parties ........................................................ 113
b.
ALJ Recommendation ......................................................... 114
c.
Disposition .......................................................................... 116
PUBLIC INPUT SESSIONS .......................................................................................... 116
A.
Manheim Township Public Library .......................................................... 116
B.
Millersville VFW ...................................................................................... 118
C.
Response to Public Input Testimony ......................................................... 119
X.
CONCLUSION ............................................................................................................... 120
XI.
ORDER ........................................................................................................................... 122
Annex A:
Tables -- Pre Irrevocable Trust Agreement
Table I -- Income Summary....................................................................... i
i
Table I(a) -- Rate of Return....................................................................... ii
Table II -- Summary of Adjustments......................................................... iii
Annex B:
Tables -- Post Irrevocable Trust Agreement
Table I -- Income Summary....................................................................... i
Table II -- Summary of Adjustments......................................................... ii
v
OPINION AND ORDER
BY THE COMMISSION:
Before the Pennsylvania Public Utility Commission (Commission) for
consideration and disposition is the Recommended Decision of Administrative Law
Judge (ALJ) Kandace F. Mellilo, issued on April 27, 2011, relative to the abovecaptioned general rate increase proceeding, and the Exceptions and Replies filed with
respect thereto.
Exceptions to the Recommended Decision were filed by the City of
Lancaster – Bureau of Water (Lancaster or City), the Office of Trial Staff (OTS), the
Office of Consumer, Advocate (OCA), Kellogg Company (Kellogg) and Mr. George
Poulin on or before May 17, 2011.
The City, the OTS, the OCA, the Office of Small Business Advocate
(OSBA), Kellogg and Mr. George Poulin each filed Reply Exceptions on or before
May 27, 2011.
I.
History of the Proceeding1
On August 27, 2010, the City filed Supplement No. 40 to Tariff Water – Pa.
P.U.C. No. 6, with the Commission to become effective October 26, 2010, containing
1
at 1-9.
For a full and complete history, please refer to the Recommended Decision
proposed changes in rates, rules, and regulations calculated to produce $8,608,0242
(99.8%) in additional annual revenues for the customers located outside the City limits.
The rates and service of these customers are subject to the jurisdiction of the
Commission, pursuant to 66 Pa. C.S. §§ 1301 and 1501. By letter dated June 3, 2010, the
City had been granted an extension of time, until August 31, 2010, to file using an
historic test year (HTY) ending December 31, 2009, and a future test year (FTY) ending
December 31, 2010.
The Press Release prepared by the City concerning the rate increase request
indicated that, if the entire request was approved, the total bill for a residential customer
using 12,000 gallons of water per quarter, with a 5/8 inch meter, would increase from
$33.59 to $63.38 per quarter, or by 88.7%. Tr. 87-88; City Statement (St.) No. 3 at 15.
On September 8, 2010, the OCA filed a Formal Complaint against the
proposed rate increase. The OTS filed a Notice of Appearance on October 21, 2010. The
OSBA filed a Formal Complaint on October 5, 2010. Kellogg, a large industrial
customer, filed a Formal Complaint on October 22, 2010.
The remaining Formal Complainants, most of which elected “inactive”
status, were as follows:
Connie Speelman at Docket No. C-2010-2198077
George Poulin at Docket No. C-2010-2198619
2
As will be further discussed herein, the City subsequently revised its
requested revenue increase to $8,192,036, as a result of various agreements and a Partial
Settlement. Pursuant to the Partial Settlement, the portion of the rate increase specifically
required to fund the OPEB (Other Post Employment Benefits) Trust Fund would not be
effective until an Irrevocable Trust Agreement has been finalized and filed with the
Commission. Partial Settlement, page 2.
2
Herbert B. Watson, Sr. at Docket No. C-2010-2198821
Lawrence LaStella at Docket No. C-2010-2199946
Katherine E. Swisher at Docket No. C-2010-2200324
Fred L. Phillips at Docket No. C-2010-2200532
Galen Harrill at Docket No. C-2010-2200534
Hordoffa Bulcha at Docket No. C-2010-2200594
Mrs. Paul Viscuso at Docket No. C-2010-2201209
Barry J. Leed at Docket No. C-2010-2202121
Douglas Wooley at Docket No. C-2010-2202868
Anton Koenig at Docket Nos. C-2010-2204311 and C-2010-2201794
Rosalie Pasquini at Docket No. C-2010-2204301
Rosemary Wilson at Docket No. C-2010-2204407
Jennifer Troupe Rummel at Docket No. C-2010-2204410
Judith Ciotola at Docket No. C-2010-2204415
Judith Mitchell at Docket No. C-2010-2204414
Jonathan Winterling at Docket No. C-2010-2204454
St. Philip the Apostle Church at Docket No. C-2010-2206276
William and Geri Gilbert at Docket No. C-2010-2206497
Brian Ickes at Docket No. C-2010-2206528
George Knerr at Docket No. C-2010-2208880
Anna Williams at Docket No. C-2010-2209068
David Fiorillo at Docket No. C-2010-2213105
Glass House Inc. at Docket No. C-2010-2215377
By its Order entered October 21, 2010, at Docket No. R-2010-2179103, the
Commission noted that Supplement No. 40 to Tariff Water – Pa. P.U.C. No. 6 would be
suspended by operation of law until May 26, 2011, unless permitted by Commission
Order to become effective at an earlier date. The Order also instituted an investigation
3
into the lawfulness, justness, and reasonableness of proposed Supplement No. 40, and
existing rates, rules, and regulations. The Order directed that the case be assigned to the
Office of Administrative Law Judge (OALJ) for the scheduling of such hearings as may
be necessary, culminating in the issuance of a Recommended Decision. This matter was
then assigned to ALJ Kandace F. Mellilo for the conduct of hearings, culminating in a
Recommended Decision for the consideration of the Commission.
On October 29, 2010, the City filed Revised Suspension Supplement No.
40 to Tariff Water – Pa. P.U.C. No. 6, to extend the suspension date of proposed rates
from May 26, 2011 to June 23, 2011, to coincide with a scheduled Public Meeting date.
The stated purpose of the extension was to provide sufficient time to completely and
reasonably litigate the case, with an opportunity for both litigation and settlement efforts.
Public input hearings were held as scheduled on December 2, 2010, at 1:30
p.m. and 6:30 p.m., at the Manheim Township Public Library and VFW Post 7294,
respectively. Six witnesses testified on the record at the Manheim Township Public
Library and three witnesses testified at the VFW later that day. A summary of the public
input testimony will be provided in a subsequent section of this Opinion and Order.
On January 5, 2011, the City filed Revised Suspension Supplement No. 40
to Tariff Water – Pa. P.U.C. No. 6, to further extend the suspension date of proposed
rates from June 23, 2011 to June 30, 2011. This was agreed to by the City because the
Commission had changed the June 23, 2011 Public Meeting date to June 30, 2011.
Hearings were held as scheduled on Tuesday, February 1, 2011, in
Harrisburg. Due to the stipulation into the record of most of the testimony, the remaining
scheduled hearing days of February 2 and 3, 2011 were cancelled as unnecessary. The
Parties at the hearing presented prepared statements, including the prepared rejoinder of
4
the City which was presented at the hearing and was supplemented by oral testimony of
its witnesses. A total of forty-two statements, some with accompanying exhibits,
schedules, and appendices, were admitted into evidence: Eighteen by the City, nine by
the OCA, six by the OTS, three by the OSBA and six by Kellogg. A total of forty-one
separate exhibits were admitted: Twenty-seven by the City, six by the OTS, and eight by
Kellogg. Two separate stipulations were admitted: OSBA and OCA Joint Stipulation
No. 1 and OSBA and Kellogg Joint Stipulation No. 1.
A total of five City witnesses appeared at the hearing for oral rejoinder and
cross-examination, and the remaining witnesses were excused as their testimony was
admitted by stipulation. Transcripts of the proceeding containing a total of 299 pages
were produced.
On February 22, 2011, the City and the OCA filed a Joint Petition in Partial
Settlement of Rate Investigation (Joint Petition or Partial Settlement) to resolve issues
concerning: (1) Other Post-Employment Benefit (OPEB) expenses (benefits other than
pensions); (2) depreciation; and (3) salaries, wages and other expenses related to
vacancies. While no other Party joined in the Partial Settlement, the OTS, which was the
only other Party with a previously stated position regarding these matters, indicated that it
would not oppose the Partial Settlement. The City provided a Statement in Support as an
Appendix to the Partial Settlement and the OCA provided a Statement in Support with its
Main Brief.
By letter dated February 28, 2011, the ALJ sent a copy of the Partial
Settlement to all Parties of record, whether active or inactive, and provided the
opportunity for the submission of comments/objections by March 15, 2011.
5
In accordance with the Procedural Order dated November 4, 2010, Main
Briefs were filed by the City, OCA, OTS, OSBA and Kellogg on February 24, 2011, and
Reply Briefs were filed by the City, OCA, OTS, OSBA and Kellogg on March 10, 2011.
Mr. George Poulin, a pro se Complainant, submitted a letter, which was provided to the
major Parties, in which he requested that the City’s revenue increase be capped at
$4,304,012. In addition, the City provided upon request an addendum to its Main Brief
tables (Schedule A-5) showing the allocation of the stipulated rate base reductions
between inside and outside customers.
On March 8, 2011, the ALJ received a second letter from Mr. George
Poulin, dated March 6, 2011 (March 6 letter), which specifically responded, inter alia, to
the terms of the Partial Settlement and requested that the Partial Settlement be rejected.
No other comments/objections were received from the other Parties concerning the
Partial Settlement.
The record closed on March 17, 2011, after the receipt of Reply Briefs and
comments on the Partial Settlement.
ALJ Mellilo’s Recommended Decision was issued on April 27, 2011. In
her Recommended Decision, the ALJ found that the City’s proposed Supplement No. 40
to Tariff Water- Pa. P.U.C. No. 6, proposing an annual increase of $8,608,024, should be
rejected. The ALJ stated that the rates contained in the Supplement were not just and
reasonable or otherwise in accordance with the Public Utility Code (Code) and the
Commission’s Regulations. The ALJ recommended that the Partial Settlement which
mitigates the rate increase be approved. The ALJ further recommend that the
Commission issue an Opinion and Order directing the City of Lancaster – Bureau of
Water to file a tariff allowing for recovery of no more than $7,393,104 in additional base
rate revenue or $16,087,906 in total allowable revenues, if the Irrevocable Trust
6
Agreement is finalized and proof provided to the Commission by the end of the
suspension of rates. The ALJ stated that if the Irrevocable Trust Agreement is not
finalized and filed by this time, then the Commission’s Opinion and Order should direct
the City of Lancaster – Bureau of Water to file a tariff allowing for recovery of no more
than $6,914,657 in additional base rate revenue or $15,609,459 in total allowable
revenues, subject to the remainder being placed into effect when the Irrevocable Trust
Agreement is finalized and filed. Also, the ALJ recommended that the City should also
be required to supplement the record with cost support for the $83 restoration charge in a
document identified as City Exhibit No. 8 and to either justify or change its existing
commodity block rate structure in its next base rate case.
Exceptions and Reply Exceptions to the Recommended Decision were filed
as noted above.
On June 8, 2011, the City filed Revised Suspension Supplement No. 40 to
Tariff Water – Pa. P.U.C. No. 6, to further extend the suspension date of proposed rates
from June 30, 2011 to July 15, 2011. This was agreed to by the City at the Commission’s
request to accommodate the administrative process.
II.
Overview of the City Water System
The City owns and operates a public water supply system which currently
serves approximately 17,365 accounts within the City and approximately 29,073 accounts
outside the City. Its service territory includes all of the City of Lancaster, Lancaster
Township, Manheim Township, Millersville Borough, West Lampeter Township and
portions of East Lampeter, Pequea, Manor, West Hempfield, and East Hempfield
Townships. The City water system also provides water for resale to other public water
suppliers through service agreements with East Petersburg Borough Authority, Leola
7
Sewer Authority and West Earl Authority. City St. No. 1 at 4, 6. Only water service
provided to customers outside the City limits is subject to rate and service regulation by
the Commission, pursuant to Section 1301 of the Code, 66 Pa. C.S. §1301.
III.
General Principles
The most fundamental principle in Commission rate proceedings is that
resultant rates must be just and reasonable and in conformity with the Regulations and
Orders of the Commission. 66 Pa. C.S. §1301. In addition, a public utility3 is entitled to
such rates as will provide it the opportunity to earn a fair rate of return on the value of its
property dedicated to public service. Pennsylvania Gas and Water Co. v. Pa. P.U.C.,
19 Pa. Commw. 214, 341 A.2d 239 (1975) (emphasis added); Bluefield Water Works and
Improvement Co. v. Public Service Comm’n of West Virginia (Bluefield), 262 U.S. 679,
692-3 (1923).
The Code provides that the burden of establishing the justness and
reasonableness of its rates is clearly on the City as to rates charged to customers outside
its municipal boundaries. 66 Pa. C.S. §§ 315(a) and 1301. The Pennsylvania
Commonwealth Court has interpreted Section 315(a) of the Code as follows:
Section 315(a) of the Public Utility Code, 66 Pa. C.S.
§315(a), places the burden of proving the justness and
reasonableness of a proposed rate hike squarely on the public
utility. It is well established that the evidence adduced by a
utility to meet this burden must be substantial.
3
The Public Utility Code provides that public utility service being provided
by municipal corporations, beyond their corporate limits, shall be subject to rate
regulation by the Commission, with the same force, and in like manner, as if such service
were provided by a public utility. 66 Pa. C.S. §1301.
8
Lower Frederick Twp. v. Pa. P.U.C., 48 Pa. Commw. 222, 226-227, 409 A.2d 505, 507
(1980) (emphasis supplied). See also, Brockway Glass v. Pa. P.U.C., 63 Pa. Commw.
238, 437 A.2d 1067 (1981).
Substantial evidence is such relevant evidence as a reasonable mind might
accept as adequate to support a conclusion. Dutchland Tours, Inc. v. Pa. P.U.C., 19 Pa.
Commw. 1, 337 A.2d 922 (1975).
The Commission has affirmed the utilities’ burden of proof in base rate
proceedings in numerous cases including, Pa. P.U.C. v. Aqua Pennsylvania, Inc.,
R-00038805, Order entered August 5, 2004, slip. op. at 7; Pa. P.U.C. v. National Fuel
Gas Distribution Corp, 1994 Pa. P.U.C. LEXIS 134 *5 (1994); Pa. P.U.C. v. Breezewood
Telephone Company (Breezewood), 74 PA PUC 431 (1991); and, Pa. P.U.C. v. Equitable
Gas Co., 57 PA PUC 423, 471 (1983). In the Breezewood case, the Commission made
the following ruling with respect to Breezewood Telephone Company’s (BTC) burden of
proof:
Thus, where a party has raised a question concerning an
element at issue, the affirmative burden of proving justness
and reasonableness of its claim is upon BTC.
74 PA PUC at 442.
It is also well-established that the burden of proof does not shift to parties
challenging a requested rate increase. Instead, the utility’s burden of establishing the
justness and reasonableness of every component of its rate request is an affirmative one
and that burden remains with the public utility throughout the course of the rate
proceeding. There is no similar burden placed on parties which are challenging a
9
proposed rate. As stated by the Pennsylvania Supreme Court in Berner v. Pa. P.U.C.,
382 Pa. 622, 631, 116 A.2d 738, 744 (1955):
[T]he appellants did not have the burden of proving that the
plant additions were improper, unnecessary or too costly; on
the contrary, that burden is, by statute, on the utility to
demonstrate the reasonable necessity and cost of the
installations . . . .
This does not mean, however, that in proving its case, a public utility must affirmatively
defend claims that no Party has questioned. As held by the Pennsylvania Commonwealth
Court:
While it is axiomatic that a utility has the burden of proving
the justness and reasonableness of its proposed rates, it cannot
be called upon to account for every action absent prior notice
that such action is to be challenged.
Allegheny Center Assocs. v. Pa. P.U.C., 131 Pa. Commw. 352, 359, 570 A.2d 149, 153
(1990); see also, Pa. P.U.C. v. Equitable Gas Co., 73 PA PUC 310, 359-60 (1990).
When, as in the instant case, a rate filing involves a municipality serving
both nonjurisdictional (inside) and jurisdictional (outside) customers, the costs of service
must be allocated between the two groups. In this rate case, the City developed a revenue
requirement on a total water system basis, and then prepared a cost of service study
(COSS) (City Ex. No. 4-A) which allocated operation and maintenance (O&M) expenses,
depreciation expense and rate base to jurisdictional customers based upon certain
allocation factors. These allocation percentages are to be based upon some reasonable
relationship to the jurisdictional customers’ relative cost, as compared to the total system
cost of service.
10
The opposing Parties have challenged various elements of the City’s rate
filing, and those issues remaining for litigation will be addressed in accordance with the
previously mentioned standard rate case principles. However, the City and the OCA
have also agreed to a Partial Settlement, unopposed by all but one party, with respect to
certain issues. The focus of inquiry for determining whether a proposed settlement
should be recommended for approval is not a “burden of proof” standard, as is utilized
for contested matters. Instead, the benchmark for determining the acceptability of a
settlement or partial settlement is whether the proposed terms and conditions are in the
public interest. Warner v. GTE North, Inc., Docket No. C-00902815, Opinion and Order
entered April 1, 1996; Pa. P.U.C. v. CS Water and Sewer Associates, 74 PA PUC 767
(1991). All objections to the Partial Settlement are considered in determining whether
the Partial Settlement should be recommended to be approved.
The policy of the Commission is clearly 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
would otherwise 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. This is because even a partial settlement tends to reduce
rate case expenses; an expense which, if prudently incurred, are entitled to be recovered
from ratepayers by public utilities as a cost of regulation. Butler Township Water
Company v. Pa. P.U.C., 81 Pa. Cmwlth. 40, 473 A.2d 219 (1984) (Butler Township).
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
11
Pennsylvania, et al. v. Pa. P.U.C., 485 A.2d 1217, 1222 (Pa. Cmwlth. Ct. 1084).
Moreover, any Exception or argument that is not specifically addressed herein shall be
deemed to have been duly considered and denied without further discussion.
IV.
Rate Base
The City’s final claimed net rate base is $132,730,611 ($90,865,029
jurisdictional), as shown in the City’s Main Brief tables at Sch. A-1 at 1, 3. The City also
provided an addendum to its Main Brief tables on April 12, 2011 (Sch. A-5), which
showed the allocation of the stipulated reduction to rate base between the inside and
outside customers. The City’s rate base claim is comprised of the original cost of
existing plant facilities, and proposed FTY additions including the Susquehanna and
Conestoga membrane treatment plants, less accumulated reserves for depreciation and
contributions in aid of construction (CIAC). In addition, the City included a claim for
cash working capital and for prepaid expenses.
In the rebuttal phase of the proceeding, the City updated its accrued
depreciation claim from $21,965,912 to $22,363,526, to bring forward the accrued
depreciation an additional six months to the FTY ended December 31, 2010. City St. No.
5-R at 3. However, as will be addressed below, it appears that the City did not adjust its
annual depreciation expense claim in its Main Brief tables to $3,387,716, as shown in
City St. No. 5-R, attachment p. 4, but retained its annual depreciation expense claim at
$3,373,507, which was the City’s claim as of June 30, 2010 ($2,340,703 jurisdictional).
See, City Ex. No. 5-B, p. II-6; City Main Brief tables, Sch. A-1 at 1, 3. The City’s annual
depreciation expense claim was, however, adjusted as a result of the Partial Settlement
with OCA to $2,190,684 (jurisdictional). City Main Brief (M.B.) tables, Sch. A-1 at 3.
12
The OTS and the OCA have proposed several rate base adjustments to the
City’s claims, some of which were “fall out” adjustments attributable to other
adjustments. However, no Party proposed any disallowance of the approximately $90
million plus additions to utility plant related to the new membrane treatment facilities.
The rate base issues involve depreciation, cash working capital, prepayments, and CIAC.
A.
Depreciation Expense
1.
Positions of the Parties
The City’s original claim for annual depreciation expense was $3,373,507,
as of June 30, 2010. City Ex. No. 5-B.
The OCA objected to the City’s depreciation expense claim, which was
based upon calculations using the Equal Life Group (ELG) remaining life method. The
OCA contended that the City’s property and depreciation records were insufficient to
provide the level of detail and accuracy necessary to support use of these precisiondependent procedures. OCA St. No. 2 at 9. Through use of the whole-life average
service life method, the OCA recommended a $301,000 reduction in the City’s allowable
depreciation expense (final litigation position). OCA St. No. 2 at 10; Partial Settlement
at 6-7. Mr. Poulin, in his comments to the Partial Settlement, agreed with the OCA that
the City’s record keeping was inadequate, but recommended that the City’s entire
depreciation claim be denied until a depreciation methodology had been approved by the
Commission. March 6 letter.
In the Partial Settlement, the City and the OCA agreed to split the
difference in their depreciation expense positions, for a disallowance of $150,500 in the
City’s depreciation expense claim. The Settlement reflected the City’s agreement to
13
calculate depreciation rates without use of the ELG procedure in this case. The City also
agreed to “upgrade its plant and depreciation accounting and records and obtain
verification from its auditors that its accounting procedures and reporting are consistent
with PaPUC requirements for Class A Water Utilities.” In addition, the City agreed to
improve its plant accounting and reporting before it implements the ELG procedure in its
next base rate case. Partial Settlement at 6-7.
The OTS indicated that the City’s proposed annual depreciation expense
claim of $3,373,507 was acceptable, but that the accrued depreciation claim must be
brought forward to account for the additional six months of depreciation expense
remaining in the test year. OTS St. No. 3 at 7.
In rebuttal, the City revised its accrued depreciation claim to $22,363,526
as of December 31, 2010. The City also contended that its annual depreciation expense
claim correspondingly should be updated to $3,387,716, to reflect depreciation expense
as of December 31, 2010. City St. No. 5-R at 3, attachment Table 1 at 4. The OTS
disagreed, and during surrebuttal, asserted that the City’s depreciation expense claim
should remain at $3,373,507. OTS St. No. 3-SR at 4.
The City argued that the revision of its accrued depreciation claim to reflect
the appropriate level at December 31, 2010, necessitated a corresponding increase to
annual depreciation expense from $3,373,507 to $3,387,717. City M.B. at 10. However,
in the tables attached to its Main Brief, the City indicated that the $3,373,507 amount was
as of December 31, 2010. City M.B., Sch. A-1 at 1.
The OTS contended that an increase in the annual depreciation expense to
$3,387,717 was not required because the $3,373,507 amount already reflected the
14
December 31, 2010 test year level, citing to City Ex. No. 4-A, Sch. B at 6. OTS M.B. at
9-10.
The OTS further explained that the City itself had characterized the
$3,373,507 depreciation amount as being based on a FTY ended December 31, 2010;
therefore, the $3,373,507 already matched the City’s accrued depreciation claim which
had been brought forward to December 31, 2010. OTS R.B. at 5.
2.
ALJ Recommendation
The ALJ concluded that the proposed resolution contained in the Partial
Settlement is in the public interest and should be approved. According to the ALJ, the
OCA had explained that annual depreciation expense in the revenue requirement is
dependent upon the level of detail and accuracy in the City’s accumulated depreciation
through the City’s use of the ELG procedure. The ALJ agreed with the OCA that the
City’s depreciation records were not sufficiently accurate for these purposes and to settle
this matter, the City agreed to improve its plant accounting and reporting before
implementing the ELG procedure in its next base rate case. As the City’s depreciation
study was performed using ELG and the associated depreciation rates were, therefore,
suspect, the ALJ noted that the OCA and the City agreed that depreciation rates will be
calculated without ELG for this case and that the difference in associated depreciation
should be split equally for settlement purposes. According to the ALJ, this is a
reasonable resolution and provides for improvement in the City’s record keeping before
the City can again propose the use of the ELG procedure. R.D. at 17.
With regard to the OTS issue as to the proper level of depreciation expense
for the test year ended December 31, 2010, the ALJ agreed with the City’s litigation
position that the proper level of depreciation expense as of test year ended December 31,
15
2010, is $3,387,717, if that expense is to be based upon the City’s depreciation study
utilizing the ELG procedure. However, according to the ALJ, the City has agreed in the
Partial Stipulation not to utilize the ELG procedure for purposes of calculating
depreciation in this case. The ALJ noted that in the tables attached to the City’s Main
Brief, the City reflected an adjusted annual depreciation expense in which it appears that
the City has agreed, for purposes of effectuating the Partial Settlement, to essentially
accept the OTS adjustment and utilize the lower annual depreciation expense amount of
$3,373,507 for purposes of this proceeding. The ALJ stated that this is an appropriate
resolution of the OTS depreciation expense adjustment and she recommended it be
approved. R.D. at 18.
3.
Exceptions and Replies
In his Exceptions, Mr. George Poulin disagrees with the ALJ’s approval of
the Partial Settlement. Mr. Poulin avers that the negotiation between the City and the
OCA was conducted contrary to the prehearing conference orders and that he was not
aware of the Partial Settlement in this case until he received a copy of the agreement.
Mr. Poulin opines that the Partial Settlement has a considerable impact on the ALJ’s
recommendation and he thought it would be helpful to the decision making process if he
would have been furnished with a copy of this information. Poulin Exc. at 1.
In reply, the City states that the Partial Settlement between the OCA and
itself is in the best interest of its customers and should be adopted. The City avers that
Mr. Poulin’s accusations that the City did not follow the prehearing order in regard to the
settlement are unfounded. The City references page 8 of this order where it states that
parties are encouraged to commence settlement discussions as soon as possible and that
no settlement would be filed prior to the opportunity for consumer input in the public
input hearings. The City maintains that it did not file any settlement documents until
16
after the public input hearings and that several members from the City attended both
public input sessions to field questions from consumers. The City also noted that
pursuant to the prehearing order, each Complainant received copies of the Partial
Settlement and had the opportunity to file comments, including Mr. Poulin. City R. Exc.
at 2.
The City avers that, as admitted by Mr. Poulin in his March 6 letter, it did
reach out to him to answer any questions he had about the Partial Settlement. The City
states that it and the OCA came to the Partial Settlement agreement because they felt that
the positions outlined in the agreement were warranted based on the evidence provided in
the case, and the proper safeguards under the Partial Settlement agreement were put into
place. The City opines that the Commission should adopt the Partial Settlement. City R.
Exc. at 2-3.
4.
Disposition
Based upon the evidence of record, we are in agreement with the ALJ that
the Partial Settlement is in the public interest and should be approved. We are not
convinced by Mr. Poulin that the Parties to the Partial Settlement failed to adhere to the
direction of the ALJ within the prehearing conference orders. As pointed out by the City,
it did reach out to Mr. Poulin to discuss the Partial Settlement, it did provide him with a
copy of the Joint Petition and it did provide Mr. Poulin and all other Complainants an
opportunity to submit comments on the Partial Settlement. This was all that was required
of the Parties by the ALJ’s Procedural Order issued November 4, 2010. While it was
unfortunate that Mr. Poulin was not included within settlement discussions by the Parties,
if that was his stated desire to participate, and while we would encourage the Parties to be
inclusive of individual complainants in the future in such discussions, there was no such
requirement in this instance. Therefore, the Exceptions filed by Mr. Poulin are denied.
17
With regard to the substance of the depreciation issue, we agree with the
ALJ that the Partial Settlement provides a reasonable resolution of this issue. Within the
Partial Settlement, the City has agreed to improve its plant accounting and reporting
before implementing the ELG procedure, has agreed to upgrade its plant and depreciation
accounting, has agreed to have its consultant calculate depreciation rates without ELG
and has agreed to calculate resulting depreciation rates designed to approximately equally
split the $301,000 depreciation expense difference between the City and the OCA. We
find this resolution reasonable and in the public interest and, therefore, adopt the
recommendation of the ALJ to approve
B.
Utility Plant in Service
1.
Positions of the Parties
The City originally proposed to shorten the life spans for the structures
remaining at the Susquehanna and Conestoga Treatment Plants after the membrane
upgrades were completed, by ten and eighteen years respectively. City Ex. No. 5-B at I2; OCA St. No. 2 at 12. The OCA disagreed with the City’s proposal to shorten the life
spans of the existing structures and also disagreed with the City’s forty-year service life
estimate for Account 320 – Purification System Equipment. OCA St. No. 2 at 12-16.
The OCA argued that the City does not have any plans to retire or remove the structures
and, in fact, intended to continue using them. The OCA further asserted that the City’s
proposal regarding Account 320 was purely arbitrary and not based on analysis. OCA St.
No. 2 at 16.
In the Partial Settlement, the City and OCA agreed to resolve their life span
and service life differences through improvements in the City’s plant accounting and
18
reporting and an adjustment to depreciation expense. No other Party took issue with the
City’s life span or service life proposal for treatment facilities.
2.
ALJ Recommendation
The ALJ agreed with the City and the OCA that the Partial Settlement
regarding this issue, which requires reporting and record keeping improvements and a
depreciation expense adjustment, is reasonable and in the public interest. Accordingly,
she recommended that it be approved. R.D. at 19.
3.
Disposition
Consistent with our discussion with regard to the previous issue, Mr.
Poulin’s Exceptions to the approval of the Partial Settlement are denied and the
recommendation of the ALJ to approve the Partial Settlement is adopted. We agree with
the ALJ that the City’s agreement within the Partial Settlement to improve its plant
accounting and reporting is in the public interest and is hereby approved.
C.
Depreciation Reserve
1.
Positions of the Parties
The City updated its accrued depreciation in the rebuttal phase of this
proceeding from $21,965,912 to $22,363,526, and this resolved the OTS issue that the
depreciation reserve should be brought forward an additional six months, to correspond
with the end of the FTY. OTS St. No. 3-SR at 3-4.
19
The OCA also took issue with the City’s depreciation reserve, claiming that
the City’s plant accounting and reporting were insufficient to support its calculations.
The OCA further explained that currently, the City does not maintain its accumulated
depreciation by plant account. Also, according to the OCA, it is difficult or not possible
to reconcile the City’s ratemaking book depreciation reserve and its financial and
reporting depreciation reserve. OCA St. No. 2 at 18; OCA St. No. 2S at 5.
To resolve the dispute concerning depreciation reserve, the City and the
OCA entered into the Partial Settlement.
2.
ALJ Recommendation
The ALJ agreed with the City and the OCA that the Partial Settlement
regarding this issue is reasonable and in the public interest. According to the ALJ, the
Partial Settlement addressed the OCA’s concern by providing for improvement in the
City’s plant accounting and reporting and verification that its procedures are consistent
with Commission and GASB requirements. The ALJ found that this provision will help
to improve the accuracy and reliability of the accumulated depreciation balance used to
calculate the City’s depreciation rates. As the Partial Settlement also provides for the
calculation of depreciation rates without ELG in this case and for a splitting of the OCA’s
depreciation expense adjustment, the ALJ recommended that it be approved.
3.
Disposition
Consistent with our discussion with regard to the previous issues, Mr.
Poulin’s Exceptions to the approval of the Partial Settlement are denied and the
recommendation of the ALJ to approve the Partial Settlement is hereby adopted.
20
D.
Additions to Rate Base (Prepayments)
1.
Positions of the Parties
In its original filing, the City claimed $120,866 ($83,124 jurisdictional) for
prepayments as part of its overall rate base claim. These prepayments were payments
made by the City in advance of actual goods and services received, and included
operating expenses such as insurance premiums, membership fees, postal box rentals and
equipment and maintenance contracts. City Ex. No. 3-A (Ex. D, X-6), Ex. No. 3-B,
Sch. 4.
The OTS opposed the City’s claim contending it was duplicative of the
same O&M expenses which had already been included in the City’s cash working capital
(CWC) rate base claim. The OTS asserted that the one-eighth method utilized by the
City for computing the CWC component incorporates the annual expense claim for all
cash O & M expenses. OTS St. No. 2 at 31.
The OTS further noted that the City failed to address the OTS prepayment
adjustment in its Main Brief and, as a result, argued that the City had failed to meet its
burden of proof pursuant to 66 Pa. C.S. §315(a), and the rate base adjustment should be
recommended to be approved. OTS M.B. at 11-12.
The City acknowledged that it had not responded to this issue in testimony
or in its Main Brief and further indicated that it concurred with the OTS recommendation
and that $120,866 ($83,124 jurisdictional) should be removed from the rate base claim.
City R.B. at 4.
21
2.
ALJ Recommendation
The ALJ recommended that prepayments of $120,866 ($83,124) be
removed from rate base as the City has acknowledged it should be removed. R.D. at 22.
3.
Disposition
No Party excepts to the ALJ’s recommendation in regard to the
prepayments adjustment. Finding the ALJ’s recommendation to be reasonable,
appropriate and in accordance with the record evidence, it is adopted.
V.
Revenues
The ALJ noted that under the category “Revenues” in its Main Brief, the
City indicated that it had made certain revenue adjustments, which were
noncontroversial. These adjustments were as follows: (1) an adjustment to reflect a rate
increase for inside customers, effective January 4, 2010; (2) an adjustment for net gain
and loss of customers during the FTY; (3) an adjustment for private fire line revenue; and
(4) an adjustment to impute revenues for City-owned properties that are not billed for
water service. City M.B. at 12. No Party challenged the City’s recitation of these four
adjustments, and they, therefore, will be accepted, except as otherwise noted in the tables
attached to this Opinion and Order.
The OCA indicated that the only revenue issue it had raised was related to
rate design allocation factor adjustments. This resulted in an upward adjustment to Other
Operating Revenues of $74,481 ($74,462 as modified in Sch. SJR-9 (revised)). OCA
M.B. at 11; OCA St. Nos. 4 at 9 and 4-S, Sch. SJR-9 and revised; OCA St. No. 1 at 28,
22
Sch. MAB-21. These allocation factor adjustments will be addressed in the Rate
Structure and Rate Design section of this Opinion and Order, infra.
The OTS raised a revenue issue concerning the allocation of rental income
from the City’s leasing of space on water storage tanks for cellular antennas. OTS M.B.
at 13-14. We will also address this issue in the Rate Structure and Rate Design section,
infra.
VI.
Expenses
The OCA and OTS have proposed adjustments to the City’s original claim
for O&M expenses in the following areas: (1) early retirement expenses;
(2) maintenance – vehicles expense; (3) grounds maintenance – contract services;
(4) chemical expenses; (5) professional services expense; (6) OPEB expense; and (7) rate
case expense. The OCA proposed an additional adjustment with respect to employee
vacancies and related medical insurance, Social Security and Medicare expenses and the
OTS proposed an adjustment with respect to power expense.4 (OTS St. No. 2 at 15-20).
Prior to the rejoinder phase of this case, the Parties resolved all of the
above-mentioned O&M expense adjustment issues, with the exception of employee
vacancies and related expenses, OPEB expense and rate case expense.
In the Partial Settlement, the City and the OCA resolved their differences
with respect to employee vacancies and related expenses and OPEB expenses. The OTS,
4
In its Main Brief, in separate sentences on page 14, the City stated that it
had accepted both the OTS and the OCA proposed adjustments to power expense.
However, as noted in the City’s footnote reference to City St. No. 4R, pp. 6-7 in support
of these statements, the adjustment accepted was the OTS adjustment.
23
which did not join in the Partial Settlement, nonetheless agreed not to oppose the Partial
Settlement and to reflect the agreed upon adjustments in its Main Brief tables. Partial
Settlement, footnote 1. In his March 6 letter, Mr. Poulin objected to the proposed
resolution of the OPEB expense and apparently advocated at least a one-year waiting
period after establishment of the trust fund before rates to fund the OPEB Trust Fund
could be effective.
Accordingly, the only remaining O&M contested issue among the Parties,
other than Mr. Poulin, is the rate case expense issue. These matters will be addressed
below. Kellogg also has an issue concerning regulatory expense allocation (rate case
expense) which would impact the overall level of rate case expense to be borne by inside
customers. This matter will be addressed in the Rate Structure and Rate Design section
of this Opinion and Order.
A.
Agreed Upon Expense Issues
As stated above, the Parties agreed to resolve various expense issues, prior
to the rejoinder phase, as evidenced at the following locations in the record: (1) early
retirement expenses (City St. No. 4R at 9); (2) maintenance – vehicles expense (City St.
No. 4R at 9); (3) grounds maintenance – contract services and other expense variances)
(City St. No. 4R at 9-10); (4) chemical expenses (City St. No. 4R at 5-6); (5) professional
services expense (City St. No. 4R at 8-9; OCA St. No. 1S at 9); and (6) power expense
(City St. No. 4R at 6-7). The City reflected these adjustments in the rate case tables
attached to its Main Brief.
24
B.
OPEB
1.
Positions of the Parties
In direct testimony, both the OCA and the OTS had proposed to disallow
the City’s claim for increased OPEB expenses because the increase reflected the
actuarially determined annual required contribution (ARC) rather than the pay-as-you-go
amount. These Parties asserted that, since no trust fund had yet been established, no
actuarially determined contributions had yet been made and it would be improper to
recognize this unpaid amount in rates. Also, the Commission’s policy statement at 52 Pa.
Code §69.351(b) (4) states as follows:
If the Commission, after examination, grants current rate
recognition of OPEB costs exceeding the pay-as-you-go
amount, the excess amount should be placed in a dedicated
trust fund.
Accordingly, the OCA and the OTS recommended that only the pay-as-you-go amount
be reflected in rates, and that recognition of the ARC amount in rates await establishment
of an irrevocable trust fund, payment of the ARC amount and appropriate safeguards.
OCA St. No. 1 at 21-26, OCA St. No. 1S at 10-14; OTS St. No. 2 at 20-27; OTS St. No.
2-SR at 8-12.
In rebuttal, the City proposed that rates sufficient to begin payments into an
established OPEB Trust Fund be approved, contingent on trust fund establishment
requirements similar to those in Pa. P.U.C. v. PGW, Docket No. R-2009-2139884. City
St. No. 2R at 1-4. The City offered further clarification of its position in rejoinder
testimony, which provided the terms for the Partial Settlement on this issue, entered into
25
between the City and the OCA and unopposed by the OTS. City St. No. 2-OR. These
provisions are as follows:
OPEB: Other than Pension Employee Benefits
The OPEB issue is settled as follows:
The City receives an annual amount for outside-City
customers of $810,618, provided that it agrees to:
a.
No later than April 1, 2011, the City of Lancaster will
begin the process to establish an OPEB Trust Fund; and
b.
Provide to the Commission and the active parties to
this proceeding, a complete copy of the Irrevocable Trust
Agreement in a subsequent submission filed with the
Commission to inform them that the Trust Agreement has
been finalized. The Irrevocable Trust shall be established
prior to the effective date for the portion of the rate increase
specifically required to fund the OPEB Trust Fund; and
c.
Begin monthly OPEB deposits into the Irrevocable
Trust in the first full month following Commission approval
of this Settlement or the filing of the Trust Agreement,
whichever is later. Understanding that during the transition
year of 2011, the entire Annual Required Contribution will
not be deposited into the Irrevocable Trust, and the monthly
Trust contributions shall be equal to 1/12th of the 2011
Annual Required Contribution of $1,191,735 ($810,618
jurisdictional) less the actual expenses paid for retiree
medical insurance premiums paid directly from the Water
Fund in 2011, prior to the establishment of the Trust; and
d.
For 2012 and beyond, the monthly Trust contributions
shall be equal to 1/12th of the Annual Required Contribution
amount for the current year as shown in the then current
OPEB Actuarial Valuation; and
26
e.
The City shall also deposit into the OPEB Trust Fund
any payments from Water Fund retirees paid to the City as
contributions for retiree medical insurance and the City will
make a corresponding reduction to medical insurance pro
forma expense of $204,000 or $138,761 jurisdictional; and
f.
Maintain an accurate account of all monthly OPEB
deposits and during the initial five (5) year period, provide a
quarterly report and a yearly summary to the Commission and
the active parties to this case; and
g.
If, in any year, the required contribution is not made,
then the active parties shall have the right to take action
before the PA PUC in order to enforce these provisions and
request penalties.
Partial Settlement at 5-6.
The OCA asserted that the terms of the Partial Settlement represented a fair
resolution of this issue as the rates established in this case would not reflect the additional
ARC amount unless and until the City established the dedicated trust fund and met
certain conditions. In addition, according to the OCA, the Partial Settlement provided for
information on a regular basis to allow for appropriate monitoring going forward after the
higher amount is included in rates. OCA Statement in Support at 2-3
The only Party opposing this proposed Partial Settlement of the OPEB
issue was Mr. Poulin who, as stated above, apparently proposed a one-year waiting
period prior to reflection of the ARC amount in rates. March 6 letter.
2.
ALJ Recommendation
The ALJ concluded that the proposed resolution of the OPEB issue in the
Partial Settlement, which would disallow rate recognition of the additional ARC amount
27
until an irrevocable trust fund is established and certain conditions are met, is in the
public interest and should be recommended to be approved. According to the ALJ, the
Partial Settlement does not immediately provide for a rate increase sufficient to fund the
ARC amount, but instead, places the burden on the City to first establish the Irrevocable
Trust and provide proof to the Commission and the active Parties that the Trust
Agreement has been finalized.5 The ALJ states that this satisfies Mr. Poulin’s concern
who, as an active party, would be provided a copy of that Irrevocable Trust Agreement
when it is filed with the Commission. R.D. at 28-29.
In addition, according to the ALJ, the Partial Settlement sets forth funding
and reporting requirements and Mr. Poulin, as an active party to this case, would be
provided copies of the quarterly reports and yearly summary of deposits for the initial
five year period. If, in any year, the required contribution is not made, the active Parties
would have the right, under the Partial Settlement, to take action before the Commission
to enforce the provisions of the Partial Settlement and request penalties. As a result, the
ALJ found the above protections in the Partial Settlement to be sufficient to safeguard
ratepayers and assure that the appropriate trust fund is established and that required
contributions are made and utilized for their intended purpose. R.D. at 29.
Finally, the ALJ considered Mr. Poulin’s request that there be a one-year
waiting period after finalization of the Trust Agreement before the ARC amount is
reflected in rates. The ALJ stated that Mr. Poulin had not provided specific support for
this delay, other than his stated position that the increase will represent a hardship to
consumers in these difficult economic times. The ALJ concluded that the Partial
Settlement does take these economic realities into consideration and provides appropriate
5
The establishment of a dedicated trust fund prior to reflection of OPEB
amounts in excess of the pay-as-you-go amount is also consistent with the Commission’s
policy statement at 52 Pa. Code §69.351(b)(4), supra.
28
safeguards to consumers. The ALJ recommended that the proposed resolution of the
OPEB issue in the Partial Settlement be approved by the Commission. R.D. at 29-30.
The ALJ noted further that the Partial Settlement contemplates the
possibility of a two-stage rate increase; one at the end of the rate suspension period in this
case and another when the irrevocable trust fund is finalized and appropriate notice is
provided to the Commission. Accordingly, the Tables attached to the Recommended
Decision provided for these two possibilities. The ALJ explained that the first Table will
set forth the result after reflection of the ARC amount in rates and the alternate Table will
set forth the pay-as-you-go (normal) cost which would be reflected in rates until the
irrevocable trust fund is finalized. This alternate amount, as shown on City St. No. 2R,
attachments Section 1(Actuarial Valuation) at 4, for the Water Fund, is $493,969 (total)
or $335,998 (jurisdictional) after application of the 68.02% allocation factor (City St. No.
2-OR at 4). This results in a $474,620 reduction in the $810,618 amount provided in the
Partial Settlement ($810,618 - $335,998 = $474,620) plus the impact on cash working
capital and associated costs. R.D. at 30.
3.
Disposition
Consistent with our discussion with regard to the previous issues, Mr.
Poulin’s Exceptions to the approval of the Partial Settlement are denied and the
recommendation of the ALJ to approve the Partial Settlement is adopted. We are in
agreement with the ALJ that the resolution of the OPEB issue within the Partial
Settlement is in the public interest and is hereby approved. We note the agreement within
the Partial Settlement that a portion of the requested rate increase required to fund the
OPEB Trust Fund will not be permitted to become effective until the irrevocable trust
fund is finalized. Accordingly, the tables attached to this Opinion and Order will reflect
the two-stage rate increase which results.
29
C.
Employee Vacancies
1.
Positions of the Parties
The OCA proposed the disallowance of pro forma salary and related
medical insurance and Social Security/Medicare expenses associated with four vacancies
which were not planned to be filled until after the end of the FTY and/or had not yet been
filled. These positions were as follows: Water Plant Operation I-GF, additional Meter
Reader, Water/Wastewater Utilities Manager, and Building Maintenance Specialist.
OCA St. No. 1 at 4-7.
In the Partial Settlement, the City and the OCA agreed that these positions
would not be filled for the purpose of setting the revenue requirement in this case. As a
result, the total pro forma expenses for the salary, medical insurance and social
security/Medicare expenses are reduced by the following amounts: $99,013 ($65,276
jurisdictional) for the first two positions; $28,2886 ($19,341 jurisdictional) for the next
position; and $36,707 ($25,218 jurisdictional) for the last position. The City and the
OCA asserted that this resolution was fair and reasonable and in the public interest.
2.
ALJ Recommendation
The ALJ agreed with the City and the OCA that the Partial Settlement
regarding this issue is reasonable and in the public interest. According to the ALJ, the
Partial Settlement provides a resolution of these issues that is reasonable, given the
evidence in this proceeding. The ALJ recommended that the proposed resolution of
employee vacancies in the Partial Settlement be approved. R.D. at 32.
30
3.
Disposition
Consistent with our discussion with regard to the previous Partial
Settlement issues, Mr. Poulin’s Exceptions to the ALJ’s approval of the Partial
Settlement are denied and the recommendation of the ALJ to approve the Partial
Settlement is adopted. We agree with the ALJ that the resolution of the employee
vacancy issue within the Partial Settlement is in the public interest and is hereby
approved. We note that within the Partial Settlement, the City has agreed that it will not
fill the positions of Water Plant Operation I-GF, Meter Reader, Water/wastewater
Utilities Manager or Building maintenance Specialist for the purpose of setting the
revenue requirement in this case.
D.
Rate Case Expense Normalization
1.
Positions of the Parties
The City initially claimed a total rate case expense for this proceeding of
$481,334, normalized over a two-year period, or $240,667 annually. In rejoinder, the
City testified that rate case expenses associated with this case needed to be updated to
$535,926 ($267,963 annually). City St. No. 4 at 6; City St. No. 4-OR at 4.
The City’s two-year normalization was based on the projected filing of the
City’s next base rate case. The City indicated that it has capital projects outlined in its
twenty-year Master Plan that total $17,685,000 over the next five years, in addition to
normal operating cost increases, and these expenditures will require more frequent
filings. Also, according to the City, the instant filing was delayed due to staff time
needed for the new membrane treatment plants, and as a result of this delay, the City was
31
able to file one case to recover the treatment plant costs and save rate case expense. City
St. No. 4R at 7-8.
The OCA proposed a $120,334 reduction (jurisdictional) to the City’s
claim, based upon the approximate four (4) year average interval between the filing of the
City’s last four rate cases, on 12/23/1998, 2/5/2001, 12/9/2005, and 8/27/2010 (the
current case). This reduction would now be increased to $133,982, based upon the City’s
claimed rate case expense increase to $535,926 ($267,963 annually), for an annual
allowance of $133,981 ($267,963 – $133,982 = $133,981). OCA asserted that it has long
been the practice of the Commission to normalize pro forma rate case expense based
upon the average interval between prior rate case filings, as that is “known and
measureable” data for this purpose. OCA indicated that, while the City may intend to file
within two (2) years, there is no guarantee that it will do so. OCA St. No. 1 at 11-13;
OCA St. No. 1-SR at 7-8.
The OTS proposed a reduction of $115,102 in the City’s rate case expense
claim, which results in an allowable rate case expense of $125,565 ($240,667 - $115,102
= $125,565), based upon an approximate 46-month average interval between the filing of
the City’s last four base rate cases. The OTS adjustment would now be increased to
$128,156, based upon the City’s claimed rate case expense increase to $535,926
($267,963 annually), for an allowable rate case expense of $139,807 ($267,963 $128,156 = $139,807). Similar to the OCA, the OTS asserted that the City’s two-year
normalization was based upon a speculative future rate case filing date which was
inconsistent with the Commission’s past normalization practice. OTS St. No. 2 at 12-15;
OTS St. No. 2-SR at 6-8.
The City argued that its future filing date was not speculative. The City
claimed that it had adequately presented, in this case, a time line for future infrastructure
32
improvements that will cause it to come in for another rate case in two years. According
to the City, rates in this proceeding should be established so as to permit recovery of rate
case expenses before the next increase in two years. City M.B. at 17-18; City R.B. at 6.
The City also mentioned, in its Reply Brief, an additional post-hearing rate
case expense of $125,256 as of February 28, 2011. City R.B. at 6. The City followed up
with a letter dated March 17, 2011, requesting for the first time, that the additional
$125,256 in rate case expense be included in the normalized level of allowable expenses
in this case. In addition, the City requested that any Recommended Decision or Final
Commission Order include a true-up to permit recovery of all future rate case expenses
incurred in this matter, regardless of amount, and apparently without provision for other
Parties to respond. The City argued that no Party had objected to the level of rate case
expense presented of record, which was $535,926, and suggested that this was an
indication of the Parties’ acquiescence to any level of rate case expense eventually
claimed.
In response, the OCA cited several cases wherein rate case expense
normalization was based upon the historical average between rate case filings. See, Pa.
P.U.C. v. City of Lancaster Sewer, 2005 Pa. P.U.C. LEXIS 44 (Lancaster Sewer 2005);
Popowsky v. Pa. P.U.C., 674 A.2d 1149, 1154 (Pa. Commw. 1996) (Popowsky); Pa.
P.U.C. v. Roaring Creek Water Co., 73 PA PUC 373, 400 (1990); Pa. P.U.C. v. National
Fuel Gas Dist. Corp., 84 PA PUC 134, 175 (1995); Pa. P.U.C. v. West Penn Power Co.,
119 PUR4th 110, 149 (PA PUC 1990) (West Penn). It noted that the City had cited no
precedent for the allowance of a normalization based upon future intentions. The OCA
emphasized that four years was the approximate average interval between the filing of the
City’s last four rate cases, including the present one, and observed that the City had not
accurately predicted its future filing frequency in the past. It noted that, while the City
had requested a rate case expense normalization of eighteen months in its 2006 case, it
33
did not file the next case for fifty-six months. It characterized historical filing frequency
as the only information that met the “known and measurable” criteria for granting
expense claims in rate cases. OCA M.B. at 14-16, OCA R.B. at 2-3.
In its response, the OTS noted that the Commission practice is to normalize
rate case expense as it is a recurring expense wherein the amount incurred in the test year
is greater or lesser than that which the public utility may be expected to incur annually
during the estimated life of new rates. Butler Township, supra. The Parties agreed that
rate case expense should be normalized; however, the OTS, like the OCA, disagreed with
the City’s use of a two-year normalization period as it is based upon future intentions, not
actual experience. The OTS advocated use of a forty-six month normalization period as
it represents the average interval between the City’s last four base rate cases, including
the current case, and therefore is more reliable, reasonable, and measureable. OTS M.B.
at 19-22; OTS R.B. at 9-11.
The OCA and the OTS did not have a specific opportunity to respond to the
City’s additional rate case expense request as the extra record amount of $125,256 and
the true-up was not mentioned until the City’s Reply Brief and thereafter.
2.
ALJ’s Recommendation
The ALJ recommended that the Commission reject the City’s requested
two-year normalization period. The ALJ noted that in Lancaster Sewer 2005, supra, the
City had proposed an eighteen-month normalization of rate case expenses based upon
future expectations. The Commission rejected this approach and concluded that the
normalization period should be based upon the City’s actual history of rate filings and not
speculations as to future filings. The Commission’s ruling is in accord with Popowsky,
supra, wherein the Commonwealth Court held that the period of rate case normalization
34
is to be determined by examining the utility’s actual history of rate filings, not the
utility’s intentions. The ALJ agreed with the OTS and the OCA that the City’s proposed
normalization period is based on speculation and is, therefore, inconsistent with the
fundamental ratemaking principle that all ratemaking claims be based upon known and
measurable expenses. West Penn, supra. R.D. at 36.
The ALJ noted that the OTS proposal for a forty-six month normalization
period and the OCA proposal for a forty-eight month normalization period are both based
upon the filing intervals between the last four City base rate cases, and the two month
difference is apparently due to rounding. The ALJ recommended, to more precisely
calculate the normalization period, that the 1421.67 average number of days between rate
cases be used to derive a 47-month average between rate cases (1421.67/12 = 47.4 or 47
rounded). She recommended that the City’s last established rate case amount of record,
which is $535,926 as of January 31, 2011, be normalized over a period of forty-seven
months. The result is a total annual rate case expense allowance of $136,832
($535,926/47 x 12 = 136,832). R.D. at 36.
In response to the City’s request for the additional rate case expense of
$125,256 (as of February 28, 2011) and all future claims through a true-up, the ALJ
recommended that this request be denied. The ALJ noted that the City’s request relates
to alleged expenses that are not part of the record, and cannot be considered in her
Recommended Decision. 66 Pa. C.S. §332(d). According to the ALJ, no Party has had a
full and fair opportunity to respond to these claims, as there was no evidence submitted
for the record, no cross-examination, and no provision for testimony or exhibits;
therefore, no due process was provided. Furthermore, the City’s request for a true-up to
permit recovery of all future rate case expenses, regardless of justness and
reasonableness, constitutes a request to circumvent the Code and case law. 66 Pa. C.S.
§315(a); Popowsky, supra. Rate case expenses do not qualify for the automatic
35
adjustments provided by law under 66 Pa. C.S. §1307. Also, contrary to the City’s
contentions, the acceptance by the Parties of a certain level of rate case expense (i.e., the
$535,926 that was included in the evidentiary record) cannot be construed as a continuing
acceptance of any additional level of rate case expense, regardless of the amount. R.D. at
36-38.
3.
Exceptions and Replies
In its Exceptions, the City asserts that its update of rate case expenses as of
February 28, 2011, took place before the close of the record, was included within the rate
case file of this proceeding and should have been considered by the ALJ. The City avers
that all Parties did have a chance to review the City’s claim and respond if they believed
these expenses were not just or reasonable. The City further opines that it should be
allowed to update its rate case expense numbers, not only through the close of the record,
but also through the exceptions, reply exceptions and until the Compliance Tariff is
complete. City Exc. at 5-9.
The City argues that it has made significant efforts to eliminate rate case
expenses by accepting certain recommendations of other Parties and attempting to settle
with the Parties in the case in order to avoid further litigation. The City refers to the
Partial Settlement as an example of its successful avoidance of additional rate case costs.
The City requests that the Commission should allow Lancaster to recover legitimate rate
case expenses that are incurred until the litigation process is complete and to provide
Parties with its actual invoices as needed. According to the City, it would be unjust to
suggest that Lancaster not be entitled to recoup its rate case expenses through to the
conclusion of the case. City Exc. at 9-10.
36
In response, the OTS states that the fact that this additional rate case
expense amount of $125,256 was not presented until Reply Briefs and in a letter dated
March 17, 2011, establishes a prima facie case that no Party was given the opportunity to
respond as there is no provision for response to Reply Briefs. The OTS opines that the
burden of proof is on the utility and it is up to the City to provide enough evidence to
meet its burden and support its claim. The OTS avers that the City did have the option to
supplement the record with the invoices as the Commission’s rules of practice and
procedure establish that a party may petition to reopen the record in a proceeding at any
time after the record is closed, but before a final decision has been issued. The OTS
maintains that the City failed to avail itself of this option. If it had done so, the other
Parties would have been given an opportunity to review the supporting evidence and
respond accordingly. According to the OTS, the City’s failure to act has put it in a
position where it is now asking the Commission to allow a further increase in rates based
on non-record evidence. OTS R. Exc. at 5-8.
In its Reply Exceptions, the OCA opines that the City fails to recognize the
distinction between the broader rate case file and the more narrow evidentiary record.
According to the OCA, the physical inclusion of the City’s March 17, 2011, letter in the
rate case file means the letter is a matter of record. However, the OCA points out that the
contents of the letter were not moved or admitted into the evidentiary record and cannot
be relied on to support a higher expense claim. 52 Pa. Code § 5.402. Furthermore, the
OCA states that the other Parties did not have a specific opportunity to respond to the
Company’s request for an additional $125,256. The OCA maintains that the City did not
request recovery until March 17, 2011, the day the record closed. The OCA notes that
the City had the opportunity to estimate a reasonable level of costs to complete the
known phases of litigation but failed to do so. OCA R. Exc. at 2-5.
37
In its Reply Exceptions, Kellogg avers that the amounts in question were
not claimed on the record of this proceeding and, absent a request to reopen the record or
a stipulation of the Parties allowing such update, cannot be allowed based upon a letter or
a position taken in its Reply Brief. Kellogg R. Exc. at 2-3.
4.
Disposition
Upon our consideration of the Recommended Decision and the Exceptions
and Reply Exceptions filed by the Parties, we shall adopt the recommendation of the ALJ
on this issue. We agree with the ALJ’s recommendation that the normalization period for
rate case expenses for the City should be set at forty-seven months. This normalization
period is reasonable as it is based upon the actual filing intervals between the last four
base rate filings of the City, not on the City’s projection of potential future filings.
Furthermore, we also adopt the recommendation of the ALJ that the City’s additional
request of $125,256 for additional rate case expense should be denied. While we agree
with the City that the amount in question may have been included within the case file of
this proceeding, this request occurred too late in the proceeding to allow the intervening
Parties to respond to its accuracy and reasonableness. Simply stated, the City’s request
for an increased amount of rate case expense was not included within the evidence of
record and therefore, cannot be permitted.
Based upon the foregoing discussion, we shall deny the Exceptions of the
City, and we adopt the findings and recommendations of the ALJ. We find that the total
allowable rate case expense allowance in this proceeding should be based on the City’s
last established rate case amount of record, which is $535,926 as of January 31, 2011,
normalized over a period of forty-seven months. The result is a total annual rate case
expense allowance of $136,832 ($535,926/47 x 12 = 136,832).
38
VII.
A.
Rate of Return
Introduction
It has been determined in this Commonwealth that a public utility is entitled
to an opportunity to earn a fair rate of return on the value of its property which is
dedicated to public service. Pennsylvania Gas & Water Company v. Pennsylvania Public
utility Commission, 341 A.2d 239 (Pa. Cmwlth. 1975). This is consistent with
longstanding decisions by the United States Supreme Court, including Bluefield Water
Works and Improvement Company v. Public Service Commission of West Virginia
(Bluefield), 262 U.S. 679, 690-93 (1923) and Federal Power Commission v. Hope
Natural Gas Company (Hope Natural Gas), 320 U.S. 591, 603 (1944). In Bluefield,
supra, the United States Supreme Court provided criteria by which regulators are guided
for purposes of determining a fair rate of return for a public utility. The Court said:
A public utility is entitled to such rates as will permit it to
earn a return on the value of the property which it employs
for the convenience of the public equal to that generally being
made at the same time and in the same general part of the
country on investments in other business undertakings which
are attended by corresponding risks and uncertainties; but it
has no constitutional right to profits such as are realized or
anticipated in highly profitable enterprises or speculative
ventures. The return should be reasonably sufficient to assure
confidence in the financial soundness of the utility and should
be adequate, under efficient and economical management, to
maintain and support its credit and enable it to raise the
money necessary for the proper discharge of its public duties.
A rate of return may be reasonable at one time and become
too high or too low by changes affecting opportunities for
investment and business conditions generally.
39
The United States Supreme Court focused particularly upon the equity
return in Hope Natural Gas, stating:
. . . It is important that there be enough revenue not only for
operating expenses but also for the capital costs of the
business. These include service on the debt and dividends.
. . . [T]he return to the equity owner should be commensurate
with risks on investments in other enterprises having
corresponding risks. That return, moreover, should be
sufficient to assure confidence in the financial integrity of the
enterprise, so as to maintain its credit and attract capital.
The overall rate of return position of the Parties is summarized in the
following tables:
CITY OF LANCASTER
Capital Type
Long-Term Debt
Common Equity
Total
Capital Structure
50%
50%
100%
Cost Rate
4.66%
11.25%
Weighted Cost
2.33%
5.63%
7.96%
Capital Structure
83.8%
16.2%
100%
Cost Rate
4.66%
9.69%
Weighted Cost
3.91%
1.57%
5.48%
Capital Structure
83.8%
16.2%
100%
Cost Rate
4.66%
8.75%
Weighted Cost
3.91%
1.42%
5.33%
OTS
Capital Type
Long-Term Debt
Common Equity
Total
OCA
Capital Type
Long-Term Debt
Common Equity
Total
40
KELLOGG
Capital Type
Long-Term Debt
Common Equity
Total
B.
Capital Structure
83.6%
16.4%
100%
Cost Rate
4.66%
9.50%
Weighted Cost
3.90%
1.56%
5.46%
Capital Structure
Capital structure involves a determination of the appropriate proportions of
debt and equity used to finance the rate base. This is crucial to developing the weighted
cost of capital, which, in turn, determines the overall rate of return in the revenue
requirement equation. OTS St. No. 1 at14.
1.
Positions of the Parties
The Capital Structure recommendations of the Parties in this proceeding are
summarized in the following table:
Capital Type
City (1)
OCA (2)
OTS (3)
Kellogg (4)
(%)
(%)
(%)
(%)
Debt
50.00
83.80
83.80
83.60
Common Equity
50.00
16.20
16.20
16.40
Total
100.00
100.00
100.00
100.00
(1)
(2)
(3)
(4)
City St. No. 6 at 10, Sch. 1
OCA St. No. 3 at 13
OTS St. No. 1 at 7; OTS Ex. No. 1, Sch. 1
Kellogg St. No. 1 at 2
41
As noted above, the City proposed a 50.00% debt/50.00% equity
hypothetical capital structure for use in this proceeding (pro forma at December 31,
2010). City St. No. 6, Sch. 1. The other Parties proposed the use of the City’s actual
capital structure as of December 31, 2009, of 83.8% debt/16.20% equity, with Kellogg’s
slightly different actual capital structure likely due to rounding. OTS St. No. 1 at 12;
OCA St. No. 3 at 13; Kellogg St. No. 1 at 6. Since Mr. Poulin apparently accepted the
OCA cost of capital recommendations, he also by implication accepted the OCA
recommended actual capital structure, from which these cost rates are derived. March 6
letter; OCA St. No. 3, Ex. JRW-1.
The City proposed the use of a hypothetical capital structure due to the
City’s atypical actual capital structure of 83.8% debt/16.20% equity as of 12/31/2009.
The City asserted that its recommended 50.00% debt/ 50.00% equity hypothetical
represented current water industry practice and was in line with Standard & Poor’s
(S&P’s) implied ratios based upon published financial benchmarks. Lancaster contended
that use of an industry standard eliminated the large cost rate adjustments resulting from
differences in financial risk between the comparison group and the City. The City further
noted that the Commission had used these more conventional ratios in past cases
involving water utility systems. City St. No. 6 at 10-11.
The City compared its hypothetical capital structure recommendation to the
composite capital structure of its comparison group, infra: the Water Group Followed by
Analysts (Water Group). Lancaster’s analysis indicated that the hypothetical ratio
compared favorably to the Water Group on a current and projected (2014) basis, with a
debt percentage of 50.0%, 49.70%, and 50.0% for the City, current, and projected Water
Group, respectively. The equity ratios were 50.0%. 50.3% and 49.5% for the City,
42
current Water Group and projected Water Group, respectively. City St. No. 6 at 11,
Table 1.
The City contended that the Commission will use hypothetical capital
structures in municipal utility cases where the actual capital structure is atypical, and
cited to Lancaster Sewer 2005, supra; Pa. P.U.C. v. City of Lancaster -Water (Lancaster
Water 1999), 197 PUR 4th 156, 161-162 (1999); and Pa. P.U.C. v. City of Bethlehem,
(City of Bethlehem), 84 PA PUC 275, 304 (1995). The City emphasized the Lancaster
Sewer 2005, supra, holding wherein the Commission agreed with the ALJ that
Lancaster’s actual capital structure of 73.23% debt/26.77% equity was atypical and a
hypothetical capital structure should be used. City M.B. at 24-25. The City also cited to
Pa. P.U.C. v. Borough of Media (Borough of Media), 77 PA PUC 446 (1992) wherein the
Commission had previously considered whether a municipal utility such as the City
should be viewed differently than investor-owned utilities in terms of financial risk of its
capital structure. The Commission ruled that the Borough was in the business of
providing water outside of its corporate limits, and would therefore be treated as a
business enterprise with respect to its capital structure.
In addition, the City referenced Carnegie Natural Gas Co. v. Pa. P.U.C.
(Carnegie Natural Gas), 433 A.2d 938, 940 (Pa. Commw. 1981), wherein the
Commonwealth Court concluded that, when a utility’s actual capital structure is too
heavily weighted on either the debt or equity side, the Commission must make
adjustments. Carnegie Natural Gas was viewed by the City as particularly relevant since
the utility therein was wholly-owned by U.S. Steel, similar to the City which has a
“subsidiary” relationship with the City of Lancaster. Also, like the City, the utility in
Carnegie Natural Gas was not in control of its capital structure and did not raise its own
capital in the markets. The Court in Carnegie Natural Gas stated that, under these
circumstances, the resulting capital structure of the subsidiary may be atypical, and
43
appropriate adjustments can be accomplished through a comparison to a barometer
group’s capital structure. The City contended that, just as in Carnegie Natural Gas, it
had proposed an adjustment to its atypical capital structure that was consistent with the
capital structures of the Water Group utilized in the City’s cost of capital analysis. City
M.B at 26-27.
The OCA advocated use of the City’s actual capital structure because it
would be inappropriate to allow the City to benefit by collecting revenues in the form of
higher rates to fund capital costs that do not exist. The OCA emphasized that the City of
Lancaster had the discretion to capitalize the Water Fund in any manner that it saw fit,
and it did not need to meet public market norms for capital structure ratios. According to
the OCA, use of the actual capital structure was appropriate since this is the capital
structure that funds the City’s jurisdictional rate base. OCA St. No. 3 at 14; OCA St. No.
3S at 2-3.
The OCA cited to several Commission cases in support of its position,
including Emporium 2006; Emporium 2001; Lancaster Water 1999; and Pa. P.U.C. v.
Western Utilities, Inc. (Western Utilities), 88 PA PUC 124 (1998). The OCA contended
that Pennsylvania courts have upheld the Commission’s use of the actual capital
structure, and that hypothetical capital structures have generally been used to reduce costs
to ratepayers, not increase costs. Emporium Water v. Pa. P.U.C., 955 A.2d 456 (Pa.
Commw. 2008), appeal denied, 599 Pa. 702, 961 A.2d 860 (2008); T.W. Phillips Gas and
Oil Co. v. Pa. P.U.C., 81 Pa. Commw. 205, 217, 474 A.2d 355, 362 (1984). In other
words, according to the OCA, a hypothetical capital structure may be used by the
Commission where a utility’s actual capital structure would be unreasonable and
uneconomical. Big Run Tel. Co. v. Pa. P.U.C. (Big Run), 68 Pa. Commw. 296, 301-02,
449 A.2d 86, 89 (1982). In the instant case, in the OCA’s view, it would be unreasonable
and uneconomical to use a hypothetical rather than the actual capital structure as it would
44
require ratepayers to pay higher equity costs which the utility does not incur. OCA M.B.
at 20-25.
The OTS also advocated rejection of the City’s proposed hypothetical
capital structure and use of the actual capital structure for cost of capital purposes. The
OTS stated that using a 50% debt/50% equity capital structure would shift 33.8% of the
City’s capital from debt to equity, thus allowing the City to charge its customers the
higher equity cost rate for that portion of misplaced capital. In the OTS’ view, it would
be inappropriate to use a hypothetical capital structure and thereby allow the City to
charge higher rates for capital costs that do not exist. OTS St. No. 1 at 11-14.
OTS further submitted that the City’s reliance on comparisons to the capital
structures of publicly-traded water companies for its proposed capital structure
adjustment was in error because the City is not publicly traded and those capital structure
ratios are therefore meaningless. OTS M.B. at 26-27. OTS disputed the City’s assertion
that a large financial risk adjustment would be necessary if the actual capital structure
was used as the City is able to attract capital at a very low 4.66% debt cost rate. The
OTS, like the OCA, asserted that it was the City’s decision to capitalize the Water Fund
at 84% debt/16% equity and that this decision should stand. OTS M.B. at 27-28.
Kellogg stated that it is essential, due to the magnitude of the City’s
requested rate increase, to use the City’s actual capital structure for determining weighted
cost rates so as not to unduly burden ratepayers. Kellogg used an actual capital structure
ratio of 83.6% debt/16.4% equity which differed very slightly (20 basis points) from the
actual capital structure ratio of 83.8% debt/16.2% equity used by the OCA and the OTS.
Kellogg conducted an analysis of other municipal water utilities’ capital structures and
found a wide variation in ratios. Kellogg indicated that the City’s actual debt ratio had
been significantly lower in recent years, but had risen precipitously due to financing of
45
the new membrane treatment facilities. According to Kellogg, despite the greatly
increased debt percentage, the City had been able to secure financing at competitive
interest rates and that the same market forces that require lower debt ratios for investorowned utilities do not hold true for municipal utilities. Kellogg St. No. 1 at 2-8.
Kellogg argued that the City had not demonstrated the reasonableness of
using a hypothetical capital structure for the City in this case. Kellogg submitted that the
Commission should re-examine its holding in Borough of Media, supra, in light of the
Bluefield and Hope Natural Gas, supra, principles of allowing a utility only to earn a
return sufficient to attract capital and maintain financial integrity. According to Kellogg,
allowing a return based on a capital structure which reflects more equity than actually
utilized effectively produces a higher cost of equity than is justified. Kellogg M.B.
at 4-15.
2.
ALJ Recommendation
The ALJ recommended that the City’s proposed hypothetical 50.00% debt/
50.00% equity capital structure be used for determining the City’s cost of capital in this
proceeding. The ALJ cited Carnegie Natural Gas, supra, wherein the Commonwealth
Court ruled that the Commission must make adjustments to a utility’s capital structure
when that capital structure is too heavily weighted on either the debt or equity side. The
ALJ stated that the Court also ruled that appropriate adjustments can be accomplished
through comparison to a barometer group’s actual capital structures. According to the
ALJ, the Court held that the Commission need not show actual harm to ratepayers (e.g.,
higher debt costs) before imposing a hypothetical capital structure. See also, Pa. P.U.C.
v. The Columbia Water Company (Columbia Water Company), Docket No. R-20082045157, et al., Opinion and Order entered June 10, 2009 at 67-71. R.D. at 47.
46
According to the ALJ, the City presented comparative evidence that its
actual capital structure was atypical when compared to the composite capital structures of
the water utilities in its barometer group. The ALJ observed that the equity ratios of
these barometer group companies were more than three times larger than the City’s 16%
actual common equity ratio. She noted that the hypothetical capital structure
recommended by the City compared favorably with these comparable companies’ capital
structures. Many of these same water utilities were utilized in the barometer groups of
those Parties that performed a cost of capital analysis. Also, the ALJ stated that she
considered the arguments that investor-owned utility capital structures should not be used
for comparison purposes and did not find them to be persuasive. Instead, she agreed with
the City that investor-owned utility comparisons are appropriate. R.D. at 48.
The ALJ noted that in Borough of Media, the Commission specifically
addressed the question as to whether a municipal utility should be evaluated differently
than an investor-owned utility in terms of the financial risk of its capital structure. She
stated that in that case, the Commission ruled that the Borough was in the business or
providing water outside of its corporate limits, and would, therefore, be treated as a
business enterprise with respect to its capital structure. R.D. at 49.
The ALJ also maintained that use of the City’s actual capital structure
would warrant an additional and substantial equity return adjustment. She stated that use
of a hypothetical capital structure would avoid the necessity for risk adjustments for
capital structures that would otherwise be overweighted with debt when compared to a
barometer group. R.D. at 50.
3.
Exceptions and Replies
47
In its Exceptions, the OTS contends that such use of a hypothetical capital
structure in this proceeding would adversely affect ratepayers and is not needed.
According to the OTS, the ALJ fails to provide any justification or sustainable support
for the conclusion that the City’s capital structure is unreasonable or uneconomical. The
OTS avers that this proceeding is not so far removed from Emporium 2006, Emporium
2001 and Western Utilities. The OTS notes that in those cases it appeared that the
concern of the Commission was in shifting low cost equity into higher cost debt. The
OTS opines that while the disparity between the debt cost and the claimed equity return
in those cases may have been larger than it is in this case, there would still be a
substantial portion of low cost debt that would have to be shifted to higher cost equity
should the Commission impose this hypothetical capital structure. OTS Ex. at 3-6.
In its Exceptions, the OCA submits that the actual capital structure
represents the City’s decision on how to capitalize its’ rate base and this actual
capitalization forms the basis upon which the Water Bureau and the City attract capital.
The OCA notes that the City’s debt rate of 4.66% fully reflects the capitalization
determined by the City to be appropriate. The OCA criticizes the ALJ’s reliance on the
comparison of the City’s capital structure to the comparison’s group’s capital structures
because the companies in the comparison groups are publicly traded companies and need
to meet public market norms for capital structure ratios. According to the OCA, the City
is not traded as a separate entity and does not need to meet those same requirements.
OCA Exc. at 4-5.
Furthermore, the OCA avers that if there is low cost debt that is being
treated as higher cost equity through the use of a hypothetical capital structure, then
ratepayers are paying excessive costs and not receiving the benefit of the lower cost debt.
The OCA maintains that the Commission has an obligation to, among other things;
protect consumers from excessive costs of capital. Pa. P.U.C. v. Carnegie Natural Gas
48
Co., 54 PaPUC 381, 392 (1981). The OCA states that the way to protect consumers in
this case is to use the actual capital structure, which would allow consumers to pay the
costs incurred to capitalize the City’s rate base. OCA Exc. at 5-7.
Kellogg also excepted to the ALJ’s recommendation to utilize a
hypothetical capital structure. Kellogg avers that, notwithstanding the prior Commission
decisions cited by the ALJ, utilization of a hypothetical capital structure for the City will
result in excessive rates in violation of the standards established in the cases of Bluefield
and Hope Natural Gas. According to Kellogg, the proposed capital structure would
produce rates for the City which exceed those necessary for a utility to maintain its
existing capital and attract new capital. Kellogg states that by allowing a hypothetical
capital structure for a municipal utility that has been able to maintain a debt cost of
4.66% despite its financial leverage, the ALJ fails to recognize that the risks and
uncertainties faced by the City do not correspond with the risks and uncertainties of
investor owned utilities, which are compelled to utilize a more balanced capital structure.
Kellogg Exc. at 4-6.
Kellogg submits that although there are circumstances where the use of a
hypothetical capital structure may be appropriate, the City did not demonstrate the
reasonableness of using a hypothetical capital structure in this case. According to
Kellogg, this is because it did not show that the increase in financial leverage has a
substantial impact on the cost of debt to the City. Kellogg avers that there is extensive
evidence in this case showing that the City’s cost of debt does not change significantly as
a result of changes in the amount of debt in its capital structure. In fact, Kellogg
maintains that the City has been able to substantially increase the debt funding of the
Water Fund without increasing its debt cost. This increase in the debt portion of the
capital structure without an increase in its debt cost speaks to the significant difference
between the effect of leverage on municipal debt cost as compared to investor owned
49
debt cost and makes using investor owned capital structure a poor proxy for municipal
utility capital structures, according to Kellogg. Kellogg Exc. at 6-8.
Additionally, Kellogg submits that the Borough of Media decision should
be revisited by the Commission because allowing a capital structure for a municipal
utility which reflects more equity than actually utilized effectively produces a higher
return on equity than is justified to meet the objectives of attracting capital and
maintaining financial integrity. Kellogg avers that while there can be little dispute that in
that case a hypothetical capital structure was allowed, that determination was not based
upon any specific finding that the capital structure resulted in additional financial risk.
Rather, Kellogg notes that the Commission’s justification for its decision was only that
because Media was in the business of providing water service beyond its municipal
limits, the capital structure should reflect that by use of the hypothetical capital structure.
The Commission did not state that the borough of Media experienced additional financial
risk because of its capital structure. Kellogg Exc. at 10-12.
In reply, the City opines that the arguments espoused by the OTS, the OCA
and Kellogg to use Lancaster’s actual capital structure are not supported by evidence and
would break from the Commission’s past practice and regulatory policies. The City
argues that the ALJ reiterated the case law it cited and agreed that it fully supported the
use of a hypothetical capital structure. The City cites Carnegie Natural Gas wherein,
contrary to the arguments made by the other Parties, the Commonwealth Court held that
the Commission need not show actual harm to ratepayers before imposing a hypothetical
capital structure. City R. Exc. at 3-4.
The City also notes that the other Parties continue to debate whether a
municipal utility should be evaluated differently than an investor owned utility in terms
of the financial risk of its capital structure. Lancaster refers to the Borough of Media case
50
which specifically addresses this question, wherein the Commission ruled that the
Borough was in the business of providing water outside of its corporate limits, and would
therefore be treated as a business enterprise with respect to its capital structure. The City
reiterates that this rationale was confirmed by the Commission with respect to municipal
utilities in subsequent cases including Lancaster Sewer 2005, Lancaster Water 1999 and
the City of Bethlehem 1995. City R. Exc. at 4-5.
4.
Disposition
Upon our consideration of the Recommended Decision and the Exceptions
and Reply Exceptions filed by the Parties, we are persuaded by the arguments of the
opposing Parties to adopt the City’s actual capital structure and shall reject the
recommendation of the ALJ on this issue. We conclude that based upon the unique
circumstances in this proceeding that the actual capital structure must be used for
ratemaking purposes to achieve a fair balance between consumers and the City. The
OTS, the OCA as well as Kellogg have correctly argued that the use of a hypothetical
capital structure will produce an inflated overall rate of return that would adversely affect
customers.
In considering this matter, we note that we have employed the hypothetical
capital structure in prior proceedings. In 1974, the Commonwealth Court considered the
capital structure of the Dauphin Consolidated Water Supply Company, a wholly-owned
subsidiary of GWC, a holding company. See Lower Paxton Township v. Pennsylvania
Public Utility Commission and Dauphin Consolidated Water Supply Company, 317 A.2d
917 (Pa. Cmwlth. 1974) (Lower Paxton). In considering this issue, the Court stated, as
follows:
51
In this case, the record discloses that Dauphin has a capital
structure wherein 100 % is equity capital. Under such
circumstances the PUC must make adjustments based upon
substantial evidence in order to reach a fair result. In such
cases our Superior Court has approved PUC adjustments
whereby the capital structure and cost of capital of the parent
company were utilized in determining the same for the
subsidiary. It is also conceivable that there may be evidence
on the record which will permit the PUC to utilize the capital
structure and cost of capital statistics of comparable public
utilities instead of those of the company or its parent.
Id. at 921 (citations omitted).
The Lower Paxton case indicates that, while the Commission must make
adjustments to a utility’s unbalanced capital structure, those adjustments are subject to
the Commission’s discretion. Accordingly, while the Court allows for a hypothetical
capital structure, it does not mandate its use. In examining the facts of the case before
them, the Court observed, as follows:
The PUC concluded that it believed a capital structure of 55
% debt and 45 % equity was the “most probable and practical
for use in these proceedings.” . . . The capital structure of a
public utility is a determination representing a judgment
figure which should be left to the regulatory agency and
should not be disturbed except for a manifest abuse of
discretion. The record does not disclose such an abuse of
discretion.
Id. at 921-922.
Another case where the company had a capital structure of 100 % equity
was Carnegie Gas. In Carnegie Natural Gas Company v. Pennsylvania Public Utility
52
Commission, 433 A.2d 938 (Pa. Cmwlth. 1981) (Carnegie), the Court sanctioned
adjustments to a utility’s capital structure where the actual capital structure is out of
balance. In Carnegie, the Commonwealth Court echoed the general rule followed in the
Lower Paxton case:
Where a utility’s actual capital structure is too heavily
weighted on either the debt or the equity side, the
commission, which is responsible for determining a capital
structure which allocates the cost of debt and equity in their
proper proportions, must make adjustments to the utility’s
capital structure.
Id. at 940.
When the Court considered the record evidence in Carnegie, it observed the
variability of capital structures in the barometer groups of both the small and large gas
companies. From this evidence, the Court assumed that the Commission had the right to
exercise discretion with regard to setting a hypothetical capital structure:
From these figures we cannot extract an infallibly correct
capital structure to which the commission must absolutely
adhere. However, we conclude that the record does contain
substantial evidence upon which the commission properly
exercised its discretion by imputing to Carnegie a
hypothetical capital structure within a fair and realistic range.
Carnegie at 941.
Clearly, the Commission has discretion in whether to use a hypothetical
capital structure. However, the Commission must always balance the interest of the
utility and the customers when considering a hypothetical capital structure. The
Commonwealth Court stated that a water company with a variable capital structure was
53
not entitled to have its cost of capital computed on an ideal capital structure. Thus, there
are no magic numbers for the proper percentage of debt and equity. However, the Court
also concluded that “it was proper for the commission to adjust the existing capital
structure to arrive at one which would be fair and reasonable to both the utility and the
ratepayers in the computation of the cost of capital.” Riverton Consolidated Water
Company v. Pennsylvania Public Utility Commission, 140 A.2d 114, 121-122 (Pa. Super.
1958) (Riverton).
In the instant proceeding, we agree with the Exceptions of the OTS that this
case is not so far removed from Emporium 2006, Emporium 2001 and Western Utilities,
as in those cases it seemed that the concern of the Commission was in shifting low cost
equity into higher cost debt. While the disparity between the debt cost and the claimed
equity return in those cases may have been larger than it is in this case, there would still
be a substantial portion of low cost debt that would have to be shifted to higher cost
equity if the ALJ’s recommendation to utilize the hypothetical capital structure is
adopted. We note that the City’s debt cost rate in this proceeding is at 4.66%, which
reflects the City’s ability to tax. This illustrates that the City’s taxing power lowers the
City’s financial risk when compared to an investor-owned utility. Since Lancaster’s
status as a municipally owned utility provides it with the opportunity to obtain debt at this
low cost rate as a result of the City’s ability to tax, this low cost debt should not be
shifted to higher cost equity at the expense of the City’s customers. As a result, we do
not find that the City has to be treated like an investor owned utility for ratemaking
purposes.
Additionally, we note that the actual capital structure represents the City’s
decision, in which it has full discretion, on how to capitalize the Water Bureau’s rate
base. This actual capitalization forms the basis upon which the Water Bureau and the
City attract capital. The City’s debt cost rate of 4.66%, which all Parties have accepted
54
for ratemaking purposes, fully reflects the capitalization determined by the City to be
appropriate. We find that the ALJ’s reliance on the comparison of the City’s capital
structure to the comparison groups’ capital structures inappropriate in this instance. The
utilities in the comparison group are publicly traded companies that need to meet market
norms for capital structure ratios. As the City is not traded as a separate entity and does
not need to meet these same requirements the use of a hypothetical capital structure is
misplaced. We find that using the City’s hypothetical capital structure would impose
excessive costs on customers because it requires customers to pay equity returns of over
10 percent on debt that costs, on average, 4.66 percent. On the other hand, use of the
actual capital structure, as espoused by the OTS, the OCA and Kellogg, does not result in
excessive costs to customers.
Based upon the foregoing discussion, we shall grant the Exceptions of the
OTS, the OCA and Kellogg and will reject the finding and recommendation of the ALJ.
C.
Cost of Debt
The City proposed to use its embedded long term debt cost rate of 4.66% at
December 31, 2010. City St. No. 6R at 11. This cost of debt was accepted by the Parties
performing a cost of capital analysis and was unopposed by any Party. The ALJ
recommended that the Commission accept the City’s 4.66% actual embedded cost of debt
rate for use in this case. R.D. at 51. No Exceptions were filed to this issue. Finding the
recommendation of the ALJ to be reasonable, we adopt it without further comment.
D.
Cost of Equity
1.
Overview
55
Although there are various models used to estimate the cost of equity, the
Discounted Cash Flow (DCF) method applied to a barometer group of similar utilities,
has historically been the primary determinant utilized by the Commission. The DCF
model assumes that the market price of a stock is the present value of the future benefits
of holding that stock. These benefits are the future cash flows of holding the stock, i.e.,
the dividends paid and the proceeds from the ultimate sale of the stock. Because dollars
received in the future are worth less than dollars received today, the cash flow must be
“discounted” back to the present value at the investor’s rate of return.
2.
Summary
In the instant proceeding, six of the active Parties (the City, OCA, OTS,
OSBA, Kellogg, and Mr. Poulin) presented a cost of equity position or limitation on a
reasonable rate of return on equity. The Parties’ positions were generally developed
through comparison groups’ market data, costing models, reflection or rejection of risk
and leverage adjustments, and a tax savings adjustment, as will be further addressed,
infra. The following table summarizes the cost of common equity claims made and the
methodologies used by the Parties in this proceeding. It should be emphasized that the
OSBA did not perform a study, and that its equity position is only a cap.
56
DCF
CAPM
RP
ROE
Risk
Leverage
ROE
Tax
(%)
(%)
(%)
(%)
(%)
(%)
(%)
Adjusted
(%)
CITY
10.6
10.5
10.2
10.4
0.25
0.6
11.25
9.23
OCA-
8.9
7.8
--------
8.75
0.25
0
9.00
7.38
8.5
7.3
---------
8.53 to
8.45
--------
9.69
0
0
9.69
7.75
8.2 to
7.7 to
CE
9.5
0
0
9.5
7.80
8.9
7.9
9.0 to
Water
OCAGas
OTS
10.87
Kellogg
10.0
10.78
OSBA
10.78
The City, proposed a common equity cost rate of 11.25%, based on the
results of DCF, Risk Premium (RP), and Capital Asset Pricing Model (CAPM) studies,
and risk (25 basis points) and leverage adjustments (60 basis points). The City’s analysis
used market data from a comparison group of six water companies, the Water Group.
After adjusting the common equity cost rate for an 18% tax adjustment factor, the City’s
resulting cost of equity is 9.23% (6.95% overall). City St. No. at 29; City Ex. No. 6-A,
Schs. 1, 2, 14, 19 and 20.
The OCA proposed a common equity cost rate of 9.0%, based primarily on
the results of its DCF analysis, and to a lesser extent the CAPM, with allowance of the
additional risk adjustment of 25 basis points and no leverage adjustment. The OCA used
market data from both a gas and water comparison group, based upon its assessment that
57
financial data for the water group was insufficient. The OCA adjusted its common equity
cost rate by a 22% tax adjustment factor, to derive a tax-equivalent equity cost rate for
the City of 7.38% (5.11% overall). OCA St. No. 3 at 2-3, 53. Mr. Poulin adopted the
OCA position on cost of equity and overall rate of return. March 6 letter.
The OTS proposed a common equity cost rate of 9.69%, based on the DCF
results and the CAPM as a check, with no additional risk or leverage adjustment. The
OTS used market data from a barometer group of six water companies, four of which
were also in the City’s comparison group. After adjusting the common equity cost rate
for a 20.00% tax adjustment factor, the OTS’ resulting cost of equity is 7.75% (5.16%
overall). OTS St. No. 1 at 43-44, 51, 57; OTS Ex. No. 1, Schs.1- 2; City Ex. No. 6-A,
Sch. 7.
Kellogg proposed a common equity cost rate of 9.50%, based primarily on
the DCF, with consideration of the CAPM and Comparable Earnings Method (CE), and
with a recommendation at the high end of the range in lieu of any further risk or other
adjustments. Kellogg used market data for two comparison groups: a group of eight
Value Line water utilities and the same comparison group of six water companies used by
the City. After adjusting the common equity cost rate for an 18% tax adjustment factor,
Kellogg’s resulting cost of equity is 7.80% (5.175% overall). Kellogg St. No. 1 at 9-10,
22-23.
The OSBA proposed a cost of equity cap of 10.78%, based on the return on
equity granted in Pa. P.U.C. v. Aqua Pennsylvania, Inc. (Aqua PA 2008), 2008 WL
4145509, 17 (Pa. P.U.C. 2008). The OSBA took no position on the other issues relating
to the equity cost rate, and took no position on the overall rate of return. OSBA St. No. 3
at 5.
58
3.
Comparison Groups
a.
Positions of the Parties
As the City’s common stock is not traded, the Parties performing a cost of
capital analysis (the City, OCA, OTS, and Kellogg) used market data from groups of
utility companies, termed comparison or barometer groups, which have reported
information and are asserted to be of similar risk.
Each Party utilized a comparison group of water utilities, but the OCA also
advocated use of a comparison group comprised only of natural gas distribution
companies. The only area of controversy concerning barometer groups is the OCA’s use
of this gas proxy group.
The City opposed use of the OCA’s comparison group of natural gas
distribution companies given the availability of data for water companies. City St. No.
6R at 19. As support for its position, the City observed that every other Party performed
their studies using only water comparison groups. City M.B. at 33.
The City cited to Columbia Water Company, supra, a 2009 Commission
case, wherein the OCA had made similar arguments for use of a gas company
comparison group in determining cost of equity for a water utility. According to the City,
the ALJ in that case agreed with the OTS position that natural gas distribution companies
were too dissimilar to be used as a proxy for a water distribution company in a rate of
59
return analysis.6 The City indicated it was unaware of any Commission ruling that had
permitted a gas group to be used as a comparison group in a water rate case. City M.B.
at 33-34. In its Reply Brief, the City reiterated its arguments, and concluded that the
Commission should not include data from the gas group in its analysis to determine the
appropriate return on equity for a water utility. City R.B. at 21.
The OCA asserted that a gas proxy group should be used, in addition to a
water comparison group, because the financial data and analysts’ coverage of the water
companies was very limited. The OCA highlighted the regulatory similarities between
the two industries and indicated that the return requirements should be comparable,
although it noted that gas distribution companies face competition; whereas, water
utilities do not. OCA St. No. 3 at 11
In its Main Brief, the OCA explained that sufficient data was not available
for the DCF analysis using water data alone, and that it had used selection criteria for its
gas group to enhance comparability. The OCA also noted that it had assessed the relative
riskiness of the water and gas proxy groups and had found that the gas group was actually
slightly less risky than the water group. The OCA took this factor into account in
determining a cost of equity recommendation for the City. OCA M.B. at 26-27. Based
on the foregoing, the OCA concluded that it had provided sufficient support for its use of
natural gas distribution companies in its cost of capital analysis. OCA R.B. at 8-9.
6
While the City is correct that the ALJ in Columbia Water Company
specifically ruled against use of gas companies as a proxy for a water company in
barometer groups, it does not appear that the Commission specifically ruled on the issue
in its Opinion and Order.
60
b.
ALJ Recommendation
The ALJ recommend that only comparison groups containing water utilities
be used for determining the City’s cost of equity in this proceeding. The ALJ stated that
she had not been convinced that gas companies are sufficiently comparable and therefore
would not recommend that the Commission depart from its past practice of determining
water utility rates of return through reported financial and analysts’ data for other water
utilities. The ALJ noted that it is particularly telling that, while the OCA contended there
was insufficient data to perform a DCF analysis, all of the other Parties performed their
studies using only data regarding water utilities. R.D. at 55-56.
c.
Exceptions and Replies
In its Exceptions, the OCA maintains that the gas proxy group provides
relevant information as an addition to the water proxy group results and the Commission
should consider such in its cost of equity determination. The OCA reiterates that the
financial data needed to perform a DCF analysis for the Water Proxy Group is limited,
while the data for gas companies are much more complete. The OCA notes that the
return requirements of investors in these industries are similar as both industries are
capital intensive, heavily regulated and provide for the distribution and delivery of an
essential commodity. Furthermore, the OCA opines that the DCF results for the Gas
Proxy Group provide a better indicator than the DCF results for the Water Proxy Group.
OCA Exc. at 11-13.
In response, the City notes that the OCA’s arguments for use of the gas
comparison group have previously been rejected by the Commission, Columbia Water
Company. In fact, the City states that it is not aware of the Commission ever allowing a
gas group to be used as a comparison group in a water case. City R. Exc. at 10-12.
61
d.
Disposition
Upon our consideration of the Recommended Decision and the Exceptions
and Reply Exceptions filed by the Parties, we shall adopt the recommendation of the ALJ
on this issue. We are not persuaded by the arguments of the OCA that insufficient
financial data is available to perform a DCF analysis for water companies as each of the
other Parties presented DCF studies using only data from other water utilities. We would
also disagree with the OCA’s statement that the industries are that similar considering the
traditionally regulated nature of water utilities in Pennsylvania as compared to the more
competitive and restructured natural gas industry in which Pennsylvania consumers are
no longer limited to purchase natural gas from its traditional natural gas distribution
company. For this reason, we agree with the City and the ALJ that natural gas
distribution companies are too dissimilar from a water distribution company to be used as
a proxy in a rate of return analysis.
Based upon the foregoing discussion, we shall deny the Exceptions of the
OCA, and we adopt the finding and recommendation of the ALJ that comparison groups
containing water utilities only be used for determining the City’s cost of equity in this
proceeding.
4. Cost Rate Models
a. Positions of the Parties
The City developed its cost of equity recommendation using the DCF,
CAPM, and RP models. According to the City, several different models should be
employed as the security price for which the equity cost rate is being estimated reflects
62
the application of many models. The City also cautioned about the impact of recent
mergers and merger speculation on stock prices and indicated that these impacts must be
considered when determining the weight to be given to the DCF results. City St. No. 6 at
28-31.
The City derived an average dividend yield of 3.5% for its barometer Water
Group, based upon the most recent months’ yield at the time of direct testimony
preparation, July 2010, and the twelve-month average yield ending July 2010. This was
adjusted for ½ the expected growth rate, for a resultant dividend yield of 3.6%. City St.
No. 6 at 32; City Ex. No. 6-A, Sch. 14.
For its growth rate, the City used both historical and projected growth rates
from four sources for the Water Group as shown in City Ex. No. 6-A, Sch. 15: First Call,
Reuters, Zacks Investment Research and Value Line. According to the City, historical
growth rates were not separately shown in its analysis because they are already
considered in the projections. The City concluded that the range of growth rates supports
the reasonableness of an expected 7.0% growth rate based on five-year projected growth
rates. The City then derived a 10.6% market value DCF cost rate for its comparison
group (3.6% + 7.0% = 10.6%). City St. No. 6 at 35.
The City further indicated that less weight should be given to the market
value DCF result due to current market capitalization ratios and the impact the market-tobook ratio has on the DCF results. The City applied the Hamada Model and determined
that the comparison group market value DCF result should be adjusted upward by at least
0.6% since it is going to be applied to book value. The end result is that the City’s book
value DCF cost rate for the comparison group is 11.2%. City St. No. 6 at 40-42.
63
Regarding the CAPM analysis, the City indicated that the CAPM is based
on the assumption that investors hold diversified portfolios and that the market only
rewards non-diversifiable risk when determining the price of a security because
company-specific risk is removed through diversification. Further, investors are assumed
to require higher returns for additional risk. This assumption is captured through use of a
beta that provides an incremental cost of an additional risk over and above a risk-free rate
(a long-term Treasury yield of 4.3%). The City used a beta of 0.73 for the comparison
group. City St. No. 6 at 42-43.
A market premium is also necessary to determine a CAPM derived cost
rate. The market premium is then multiplied by the company specific beta to develop a
risk adjusted market premium. The City determined that the average projected market
premium is 10.1%, based upon the Value Line average projected total market return for
the next three to five years of 14.4%, less the risk free rate of 4.3%. The City performed
adjustments to reflect that Value Line market premiums have been on the high side and to
reflect small size risk. After considering historical and projected returns, as impacted by
market volatility, the City derived an average market value CAPM for its comparison
group of 10.5%, or 11.1% after application of the 0.6% leverage (market-to-book)
adjustment previously mentioned (10.5% + 0.6% = 11.1%). City St. No. 6 at 43-45.
In its RP analysis, the City determined the common equity investors’
premium over the long-term debt cost for the comparison group to be 4.5%, based upon
the published projected and probabilistic forecasted risk premium. Adding the risk
premium of 4.5% to the prospective cost of newly issued long term debt of 5.7% resulted
in a market value risk premium derived cost of equity of 10.2% (4.5% + 5.7% = 10.2%).
The City then added the 0.6% leverage adjustment previously discussed, for a 10.8%
book value cost of equity. City St. No. 6 at 45-49.
64
The three above-described methods resulted in a comparison group equity
cost rate range of 10.8-11.2%, and a determination by the City that the cost rate is at the
midpoint or 11.0%. To reflect risk differences between the City and the comparison
group, the City added a twenty-five basis point adjustment, with a resultant 11.25% cost
of equity recommendation for the City. City St. No. 6 at 50-51.
The City further noted that If the Commission decides to adjust the City’s
cost of equity rate to reflect a tax savings adjustment (as was done in Lancaster Sewer
2005), the City’s recommendation as to cost of equity would then be 9.23% (an 18% tax
adjustment factor), to reflect that the City’s return is not subject to personal income taxes.
City St. No. 6 at 51-52.
The City asserted that all other Parties’ cost of equity positions, with the
exception of the OSBA, were entirely unreasonable, based upon recent Commission
decisions in Aqua PA 2008 and Columbia Water Company, supra, and should not be
accepted by the Commission. It contended that the low proposed returns of 9.69%, 9.0%
and 9.5%, recommended by the OTS, the OCA (including Mr. Poulin) and Kellogg,
respectively, would have a negative impact on the City and its customers due to financing
disadvantages. The City noted that Value Line’s projected returns for the comparison
group range from 10.0% to 13.5% and that these returns highlight the unreasonableness
of the other Parties’ recommendations. It contended that the OCA recommendation of
9.0% was based solely on an erroneous assumption, that utility stock prices should equal
book value.
The City claimed that the OCA, the OTS and Kellogg DCF recommended
equity cost rates were below the zone of reasonableness due to their growth rate
selection, which the City viewed as personally derived, and relied upon historical growth.
As an example, the City pointed to the OTS’ use of a historical, log linear growth rate
65
averaging 5.17%, when the average published projected growth rate for the OTS
comparison group was 7.52%. OTS Ex. No. 1, Sch. 18. It claimed that Wall Street
analysts had already considered historical growth rates in developing their projections. It
criticized the OCA and Kellogg market value DCF determinations as relying on a selfcalculated growth rate, and contended that these Parties also relied upon internal growth
estimates which measure growth in book value, not stock price, and are not a good proxy
for investors’ growth expectations.
The OCA applied the DCF and the CAPM to two previously-mentioned
comparison groups which it termed “proxy groups”: the “Water Proxy Group” and the
“Gas Proxy Group.” OCA St. No. 3 at 2. For the DCF dividend yields, the OCA used
the median of the six month and December 2010 dividend yields, and adjusted the results
by one-half the expected growth to reflect growth for the coming year. The result was a
3.35% dividend yield for the Water Proxy Group and a 4.15% dividend yield for the Gas
Proxy Group. OCA St. No. 3 at 27-28.
For its DCF growth rate analysis, the OCA used both historic and projected
growth rates. The OCA concluded that an expected growth rate of 4.25% would be
reasonable for the Gas Proxy Group, and an expected growth rate of 5.5% would be
reasonable for the Water Proxy Group. OCA St. No. 3 at 37. Therefore, the OCA
derived an 8.5% DCF equity cost rate for the Gas Proxy Group and an 8.9% DCF equity
cost rate for the Water Proxy Group. OCA St. No. 3 at 38.
For its CAPM analysis, the OCA used 4.25% for the risk-free rate, based on
U.S. Treasury bond yields. OCA used the median beta of 0.75 for the Water Proxy
Group and 0.65 for the Gas Proxy Group. In deriving the equity risk premium or market
premium, the OCA employed a variety of expert sources and determined that the market
premium should be 4.68%. Based on these three CAPM inputs for each comparison
66
group, the OCA calculated a CAPM equity cost rate of 7.80% for the Water Proxy Group
and 7.30% for the Gas Proxy Group. OCA St. No. 3 at 40-49.
The OCA gave primary weight to the DCF and concluded that the DCF
results of the Gas Proxy Group provided a better indicator than the DCF results for the
Water Proxy Group. As a result, the OCA determined that the appropriate equity cost
rate for a water company is in the 8.5% to 9.0% range. The OCA checked that range
against its CAPM results and noted that the range was reasonable given the lower CAPM
results for both comparison groups. As the OCA found that water companies are slightly
more risky than gas companies, it recommended the midpoint of the range, or 8.75%, as
an appropriate equity cost rate for a water company. OCA St. No. 3 at 49.
The OCA added the 25 basis point risk adjustment used by the City to
reflect the risk differential for the City as compared to the average Water and Gas Proxy
Group companies. Therefore, the OCA’s resulting equity cost rate recommendation for
the City is 9.00% (8.75% + .25% = 9.00%), before reflection of the tax adjustment factor.
The OCA did not accept the sixty basis point leverage adjustment. However, the OCA
did adjust its recommended equity cost rate for the City by a tax factor adjustment of
22%, for a final cost of equity recommendation of 7.38%. OCA St. No. 3 at 52-53.
The OCA cited many Commission decisions, including Columbia Water
Company and Emporium 2006, in support of its position that the Commission favors use
of the DCF and has relied on the DCF approach for setting equity returns for many years.
OCA M.B. at 29-30.
The OTS used the DCF exclusively in deriving a cost of equity
recommendation, but used the CAPM as a check on the reasonableness of the result. For
the DCF dividend yield, the OTS placed equal emphasis on the most recent spot and
67
fifty-two week average dividend yields, to avoid problems of short-term aberrations, and
derived a 3.35% dividend yield after adjustment for future growth. OTS St. No. 1 at 45.
For the growth rate analysis, the OTS used both projected earnings forecast and a loglinear regression analysis to mitigate the effects of lower base year earnings and upward
bias. The expected growth rate result for the barometer group prior to the log-linear
regression analysis was 7.52%. After the analysis, the average growth rate was 5.17%.
This resulted in a DCF range of 8.53 to 10.87%, with a midpoint of 9.69%. The OTS
recommended a DCF equity cost rate for Lancaster at the midpoint of 9.69% (7.75% after
application of the OTS 20% tax factor adjustment). OTS St. No. 1 at 45-50.
The OTS also performed a CAPM analysis as a check on its DCF cost of
equity finding of 9.69%, and as 9.69% is within the top end of the range of CAPM results
(8.45% midpoint), the reasonableness of the DCF result was confirmed. OTS St. No. 1
at 51-56.
The OTS pointed to the Commission’s decision in Lancaster Sewer 2005,
wherein the Commission stated that it had relied primarily upon the DCF methodology in
arriving at the determination of the proper cost of equity, and that its actions in prior
cases did not compel the use of a composite of the DCF and other methods. OTS R.B.
at 16-17.
Kellogg applied the DCF, CAPM, and a CE analysis to two water company
comparison groups. For the DCF dividend yields, Kellogg used the average daily closing
stock price for the most recent three-month period (September – November 2010), and
the current annualized dividend rate for each company. The result was a median
dividend yield for each group of 3.23%. Kellogg Sch. GAW-3 at 1.
68
For the DCF growth rate analysis, Kellogg used both historic and projected
growth rates, as most utility analysts agree that, in general, historical growth is a
reasonable barometer of future growth. Based upon this analysis, Kellogg determined
that a proper DCF cost of equity is in the range of 8.2% to 8.9%. Kellogg St. No. 1 at
13-14.
For his CAPM analysis, Kellogg used a three-month average yield
(September –November 2010) for 20-year U.S. Treasury bonds of 3.60%. Kellogg used
the most current Value Line betas for each company in the comparison groups, in the
range of 0.70 to 0.95. Kellogg derived a market risk premium of 5.54%. The resulting
cost of capital is in the range of 7.7 to 7.9%. Kellogg St. No. 1 at 16-17.
For its CE analysis, Kellogg used expected returns to be earned on the book
value of similar risk enterprises for the study period 1992 to 2009. Based on this
analysis, a cost of equity of no more than 9.0% to 10.0% was indicated, according to
Kellogg. Kellogg St. No. 1 at 18-20.
Based on these three methodologies, Kellogg determined that primary
weight should be given to the DCF and CE analyses, which results in a cost of equity of
8.5% to 9.5% applicable to investor-owned utilities. Due to the City’s additional debt
leverage, Kellogg used the upper end of the range or 9.5%, and then adjusted this
downward by an 18% tax savings factor, to produce a recommended allowed return on
equity of 7.8%. Kellogg St. No. 1 at 21-22.
b.
ALJ Recommendation
The ALJ agreed with the OTS position and recommended that the City’s
cost of equity be determined by using the DCF methodology, with another methodology
69
as a check on the DCF reasonableness. While the City has cited Aqua PA 2004, supra,
and PPL 2004, supra, as authority for its claim that the Commission has rejected sole
reliance upon one methodology, such as the DCF, the ALJ disagreed with the City’s
interpretation. According to the ALJ, in those cases, the Commission agreed that the cost
of equity could be determined by using the DCF method, but that other financial models
should be used as checks on the reasonableness of the DCF results. The ALJ noted that
the Commission specifically addressed the implications of its Aqua PA 2004, supra, and
PPL 2004, supra, holdings in, supra, as noted by OTS in its Reply Brief. The
Commission stated as follows in Lancaster Sewer 2005, supra, 2005 Pa. PUC LEXIS 44,
*161:
We have primarily relied upon the DCF methodology in
arriving at our determination of the proper cost of common
equity. Our previous actions in PPL, PAWC and Aqua do not
compel the use of other methods such as RP and CAPM to
form an equity return based upon a composite of the DCF and
other methods. However, we conclude that methods other
than the DCF, such as the CAPM and RP methods, can be
used as a check upon the reasonableness of the DCF derived
equity return calculation.
The Commission further confirmed its endorsement of this approach in
Aqua PA, supra, as follows:
The ALJs recommended determining Aqua’s cost of common
equity using the DCF method, with other standard financial
models (including CE, RP and CAPM) being used as checks
upon the reasonableness of the DCF results. . . .Finding the
ALJs’ recommendation to be reasonable, appropriate and
otherwise in accord with the record evidence, it is adopted.
Also, the ALJ noted that even more recently, in Columbia Water Company,
supra, a 2009 decision, the Commission reaffirmed its use of the DCF as it noted, at slip.
70
op. p. 78: “we primarily rely on the DCF methodology while using the other cost of
equity methodologies as a check on the DCF results.” R.D. at 66-67.
The ALJ noted her agreement with the OTS use of DCF with reliance on
the CAPM analysis as a check on the reasonableness of the DCF result and with the fact
that OTS used only water utilities companies in its barometer group. As a result, the ALJ
recommended a 9.69% cost of equity for the City, prior to reflection of any other
adjustments. R.D. at 67-68.
c.
Exceptions and Replies
In its Exceptions, the City avers that its DCF derived common equity cost
rate of 10.6% should be adopted over the ALJ’s adoption of the OTS analysis because the
City utilized a more precise methodology than the OTS method. The City maintains that
its intent in using multiple capital models was to follow past decisions by the
Commission and perform an adequate check upon the reasonableness of the DCF results.
The City requests that the results from these other models be taken into consideration in
the Commission’s decision making process. The City opines that the application of any
single model to estimate common equity cost rates is not appropriate because the stock
price for which the equity cost rate is being estimated reflects the application of many
models used in the valuation of the investment. According to the City, noted financial
texts, investor organizations and professional societies all endorse the use of more than
one valuation method. City Exc. at 10-12.
In reply, the OTS avers that the City placed too much reliance and
emphasis on the RP and CAPM methods with the result that its cost of common equity
position is not based on sound ratemaking principles. The OTS states that it has followed
71
Commission precedent in determining the appropriate cost of equity in this proceeding
and its analysis should be adopted by the Commission. OTS R. Exc. at 3-5.
In its Reply Exceptions, the OCA notes that the Commission has relied on
the DCF approach for setting returns on equity for many years. The OCA avers that the
language in Columbia Water supports the approach taken by the ALJ, namely, the
primary use of the DCF methodology and the use of the other methodologies as checks
on the reasonableness of the DCF results. Furthermore, the OCA opines that the City’s
additional models suffer from many flaws and should be rejected. OCA R. Exc. at 6-7.
In its Reply Exceptions, Kellogg notes its support for the assessment of
other cost models as a check on the reasonableness of the DCF method. In its opinion,
those models support the reasonableness of the ALJ’s recommendation, based on the
DCF model, of a 9.69% cost of equity. Kellogg further asserts that the City’s CAPM and
CE models produced excessive results because of their use of inconsistent data. Kellogg
R. Exc. at 3-4.
d.
Disposition
Upon our consideration of the Recommended Decision and the Exceptions
and Reply Exceptions filed by the Parties, we shall adopt the recommendation of the ALJ
on this issue that the City’s cost of equity in this proceeding should be based upon the use
of the DCF methodology with the other methodology results used as a check on the
reasonableness of the DCF results. We find that is exactly what was recommended
within the position of the OTS in this proceeding. We note that we have primarily relied
upon the DCF methodology in arriving at previous determinations of the proper cost of
equity and utilized the results of methods other than DCF, such as the CAPM and RP
methods, as a check upon the reasonableness of the DCF derived equity return
72
calculation, tempered by informed judgment. We are not persuaded by the arguments of
the City that we should alter that procedure in this particular proceeding.
Based upon our analysis and review of the record evidence, we adopt the
ALJ’s recommended adoption of the OTS methodology, but do not accept the ALJ
recommendation that the cost of equity be set at 9.69%. Instead, and based upon our
prior determination to utilize the City’s actual capital structure to determine an
appropriate cost structure, and informed judgment, we find it reasonable and appropriate
to adjust the City’s cost of equity upward to 10.00% in this proceeding. We note that a
higher cost of equity is necessitated by our adoption of the City’s actual capital structure,
but it is important to note that our allowance of a 10.00% return on equity falls squarely
within the range of the DCF results as calculated by the OTS (8.53 to 10.87%). We
conclude that 10.00% is the appropriate cost of equity allowance in this proceeding and
also find that, based on our other conclusions to be discussed supra, that this cost of
equity should not be further adjusted.
Based upon the foregoing discussion, we shall deny the Exceptions of the
City, and we adopt the finding and recommendation of the ALJ, in part, and adopt a cost
of equity for the City of 10.00% as being reasonable and appropriate under the
circumstances in this proceeding.
5.
Risk Adjustment
a.
Positions of the Parties
The City proposed a twenty-five basis point adjustment in the cost of equity
to reflect the risk difference between the City and the comparable group. In its Main
Brief, the City argued that this adjustment was warranted due to the additional business
73
risk associated with its small size, capital intensity, a high variability in earnings, and the
debt leverage in the proposed OTS, OCA and Kellogg capital structures. City M.B.
at 46-49
The OCA accepted the City’s twenty-five basis point adjustment to account
for greater financial risk as the City of Lancaster has a lower bond rating than the average
of the two OCA comparable groups. OCA M.B. at 41.
The OTS opposed reflection of the City’s proposed twenty-five basis point
adjustment which it characterized as unnecessary. The OTS disputed the City’s claim
that a smaller company requires less financial leverage than a larger company to balance
out investment risk, and contended that size does not negatively impact the utility
industry. The OTS pointed to the City’s low cost of debt as evidence that small size has
not affected the City. The OTS also disagreed with the City’s capital intensity claims and
contended that the City’s calculation had not been supported. It disputed the City’s
contentions concerning a low bond rating as purely speculative. Finally, the OTS
asserted that the City’s debt service coverage is adequate without the need for further
“add-ons.” OTS M.B. at 40-44; OTS R.B. at 17-18.
Kellogg made no specific risk adjustment in its cost of capital study for the
City’s business or financial risk, but as stated previously, used the upper end of the equity
cost rate range for its recommendation. Kellogg contended that no other risk adjustment
was appropriate, especially because the municipality had the ability to tax. Kellogg M.B.
at 28.
74
b.
ALJ Recommendation
The ALJ recommended that the City’s twenty-five basis point adjustment
for additional financial and business risk vis-à-vis the comparable group be rejected. The
ALJ noted that this adjustment is at least partially to reflect an increased financial risk, as
indicated by reference of the Parties to the increased debt leverage vis-à-vis the
comparable group, and alleged associated bond rating differences. However, the ALJ
stated that she had already accounted for any additional financial risk through a
recommendation of a hypothetical capital structure for the City. According to the ALJ,
any further financial risk adjustment, without quantification of the portion which is
business risk and the portion which is financial risk, would at least be a partial double
count. R.D. at 69.
Furthermore, the ALJ stated that the purpose of the hypothetical capital
structure was to avoid the necessity for risk adjustments for capital structures, such as the
City’s, which are over weighted with debt when compared to a barometer group. Use of
the hypothetical capital structure places the City on an “equal footing” to the comparison
group and therefore, no further adjustment is necessary. R.D. at 69
c.
Disposition
No Party excepts to the ALJ’s recommendation in regard to the ALJ’s
rejection of the City’s twenty-five basis point risk adjustment. We agree with the finding
of the ALJ that the risk adjustment is not appropriate in this proceeding but differ with
her reasoning employed as we did not adopt the ALJ’s recommendation to use a
hypothetical capital structure. We are persuaded by the arguments of the OTS and
Kellogg that this adjustment is simply unnecessary and note that we have concluded
previously that a higher cost of equity be adopted to reflect our adoption of the City’s
75
actual capital structure. No additional risk adjustment is warranted in this instance.
Finding the ALJ’s conclusion that the risk adjustment be rejected as reasonable,
appropriate and in accordance with the record evidence, it is adopted.
6.
Leverage Adjustment
a.
Positions of the Parties
The City asserted that an additional sixty basis point market-to-book
adjustment is required to the DCF-derived cost of equity to account for the application of
a market-derived DCF cost rate to a book value cost rate. It explained that marketderived cost rates reflect the financial risk or leverage associated with capitalization ratios
based on market value, and therefore must be adjusted for book value. The City
contended that a similar adjustment was accepted by the ALJ and the Commission in
Lancaster Sewer 2005. City M.B. at 44, 49-50; City R.B. at 32-34.
The OCA and the OTS rejected the City’s proposed sixty basis point
market-to-book adjustment as lacking logical or empirical basis. These Parties indicated
that the proposal was not really a “leverage” adjustment, and the OCA contended that a
market-to-book ratio above 100% simply means that the company is expected to earn
more than investors require. No adjustment is needed in that situation, according to the
OCA. OCA M.B. at 41-43; OCA R.B. at 14-15; OTS M.B. at 44-46.
Kellogg used the high end of its cost of equity range for the City and did
not specifically adopt the leverage adjustment. Kellogg M.B. at 28-29; Kellogg R.B.
at 19.
76
The OSBA proposed a 10.78% return on equity cap, based upon the
Commission’s award in Aqua PA 2008. To the extent that the Commission has
considered market-to-book adjustments in the past when the DCF is understating the cost
of equity, the OSBA’s position is relevant to this issue. OSBA M.B. at 5.
b.
ALJ Recommendation
The ALJ recommended that the sixty basis point market-to-book
adjustment be accepted as the Commission has concluded that the DCF method tends to
understate the equity cost rate when market-to-book ratios are greater than 100%, which
they are at present. According to the ALJ, the Commission has accepted a market-tobook adjustment in many cases including Lancaster Sewer 2005, PPL 2004, Aqua PA
2004, and Pa. P.U.C. v. Philadelphia Suburban Water Co., 219 PUR 4th 272 (2002). The
ALJ concluded that the 9.69% DCF-derived cost of equity for the City is understated and
that the sixty basis point adjustment is necessary. As a result, the ALJ’s recommended
cost of equity for the City is 10.29% (9.69% + .60% = 10.29%). R.D. at 71-72.
c.
Exceptions and Replies
In its Exceptions, the OTS contends that the ALJ’s recommendation is in
error because it assumes that an adjustment to calculated cost of common equity findings
is necessary. The OTS avers that the addition of this discretionary adder does nothing but
inflate the objective return on equity by adding subjective basis points. The OTS opines
that the ALJ’s reasoning, that the DCF analysis understates the cost of equity when
market-to-book ratios are greater than 100%, is flawed. The OTS points out that the
Commission failed to include a leverage adjustment in Aqua 2008, wherein the marketto-book ratio was also greater than 100%. The OTS maintains that it would be
unwarranted to grant this adjustment especially if the Commission would grant the use of
77
a hypothetical capital structure. However, the OTS avers that any enhancements to the
results of the market based DCF calculations are unnecessary and will harm ratepayers
whether a hypothetical or actual capital structure is used. OTS Exc. at 6-8.
In its Exceptions, the OCA argues that an upward adjustment to the DCF
result is not needed in this situation. According to the OCA, when market value exceeds
book value that means a company is expected to earn more than investors require, and
therefore, it would be illogical to adopt an additional leverage adjustment. The OCA
states that the City’s proposal would raise the ROE for utilities that already have high
returns on common equity and lower the ROEs for utilities that have low returns on
common equity. Furthermore, the OCA submits that no regulatory commissions have
adopted the City’s leverage adjustment previously. OCA Exc. at 8-10.
Kellogg also excepts to the ALJ’s recommendation submitting that the ALJ
erred and that it agrees with the arguments raised by the OCA. Kellogg avers that it did
not endorse a market-to-book “leverage adjustment” in this case because of the City’s
significant debt leverage. Instead, Kellogg states that it utilized the upper end of its
market based cost of equity findings to establish the cost of equity. Kellogg avers that no
further adjustment to the cost of equity is appropriate because the DCF is applied to a
book value rate base, as the Commission determined in Aqua PA 2008 and other cases.
Kellogg Exc. at 12-13.
In reply, the City notes that while it agrees that a leverage adjustment is not
always warranted, the current case is distinguishable from the Aqua 2008 case and further
avers that other Commission rulings support the use of a leverage adjustment. The City
states that the Commission has accepted a market-to-book adjustment in many other
cases including PPL 2004, Aqua PA 2004 and Pa. P.U.C. v. Philadelphia Suburban
Water Co., 219 PUR 4th 271 (2002). The City also points out that the OCA’s claim that
78
no regulatory commission has ever adopted its leverage adjustment is untrue, citing to the
2005 Lancaster Sewer rate case in which a leverage adjustment was adopted by the
Commission. City R. Exc. at 12-15.
d.
Disposition
Upon our consideration of the Recommended Decision and the Exceptions
and Reply Exceptions filed by the Parties, we shall reject the recommendation of the ALJ
on this issue. We are persuaded by the arguments espoused by the OTS, the OCA and
Kellogg that the ALJ’s recommendation is in error as any adjustment to the results of the
market based DCF as we have previously adopted are unnecessary and will harm
ratepayers. Consistent with our determination in Aqua 2008 there is no need to add a
leverage adjustment to the 10.00% DCF based cost of equity determination previously
adopted in this proceeding.
Based upon the foregoing discussion, we shall grant the Exceptions of the
OTS, the OCA and Kellogg and we reject the finding and recommendation of the ALJ.
7.
Tax Adjustment
As stated by the Commission in Lancaster Sewer 2005, 2005 Pa. PUC
LEXIS 44, *148, this particular issue arises due to the fact that interest paid to municipal
bond holders is exempt from taxation. Thus, a tax savings factor has been recognized
based upon the premise that investors will accept a lower return in exchange for the tax
exemption.
79
a.
Positions of the Parties
According to the City, if the Commission decides that a tax adjustment on
the equity cost rate is warranted it recommends a maximum tax adjustment of 18%, as
was granted by the Commission in Lancaster Sewer 2005. This adjustment factor was
based on the spreads between corporate and municipal bonds with similar credit ratings
and with matching terms or lives. City St. No. 6 at 52. The City noted that Kellogg has
accepted the 18% tax adjustment factor. The OSBA has not taken a position on this
issue. OSBA R.B. at 5.
The OTS recommended a tax adjustment factor of 20% for the City. The
OTS claimed that the City had failed to provide any support in this case for its
recommended 18% tax adjustment, other than the fact that an 18% factor was adopted in
Lancaster Sewer 2005. OTS St. No. 1 at 56-57. The OTS asserted that the tax rate of
20% represents the marginal tax rate for the largest block of municipal investors. OTS
M.B. at 47-52; OTS R.B. at 19-20.
The OCA recommended a 22% tax adjustment factor. The OCA conducted
a study of yields on 30-year AA-rated industrial bonds versus 30-year AA-rated national
and Pennsylvania municipal bonds over the past year. According to the OCA, the
average spread over that year for the industrial series over municipal was 22%. OCA
St. No. 3 at 52-53. The OCA cited to several cases in support of tax savings recognition,
including a 1998 Lancaster Water case wherein a 28% tax savings adjustment was upheld
by the Commonwealth Court.7 OCA M.B. at 43-44; OCA R.B. at 15-16.
7
See, City of Lancaster Water v Pa. P.U.C. (Lancaster Water 2001), 769
A.2d 567 (Pa. Commw. 2001), appeal denied, 568 Pa. 725, 797 A.2d 916 (2002).
80
b.
ALJ Recommendation
The ALJ recommended that the Commission adopt a tax savings
adjustment, as it has done for many years in municipal utility base rate cases. See,
Lancaster Sewer 2005; Lancaster Water 1999; City of Bethlehem, supra. In addition,
Commonwealth Court has expressly approved utilization of a tax savings adjustment
recognizing the difference in long-term bond costs for taxable bonds versus municipal or
tax-free bonds, as was recommended by the OTS herein. Lancaster Water 2001, supra.
The ALJ further recommended that the OTS 20% tax savings factor
adjustment be adopted in this case. She agreed with the OTS that the City has not met its
affirmative burden of proof as to the justness and reasonableness of its proposed 18% tax
adjustment, but has endeavored to support its position only through critiquing other
Parties’ positions. According to the ALJ, this is insufficient. The ALJ found that OTS
has provided sufficient support for its position and has adequately responded to the
criticisms of the City. The ALJ stated that she was particularly persuaded by OTS’ 20%
marginal tax rate evidence and concluded that it was this tax savings rate which is the
most appropriate to use. R.D. at 75.
c.
Disposition
No Party excepts to the ALJ’s recommendation in regard to her adoption of
the OTS recommended 20% tax savings factor adjustment. Finding the ALJ’s
recommendation to be reasonable, appropriate and in accordance with the record
evidence, it is adopted.
81
E.
Conclusion
Based on the foregoing, the Commission concludes that the City’s actual
capital structure should be used for determining the weighted cost of capital in this
proceeding. The City’s cost of equity capital is appropriately determined by the DCF
analysis performed by the OTS, with other methods utilized as a check on the
reasonableness of the DCF results. The Commission adopts a recommended cost of
equity rate of 10.00%, exclusive of any tax adjustment. In addition, the market-to-book
adjustment of .60% is not granted and the City’s proposed twenty-five basis point
adjustment for financial and business risk is rejected. The tax savings factor to be used is
the 20% factor appropriately supported by the OTS, for a tax-adjusted equity return of
8.00% (10.00 x .80 = 8.00%).
The following table summarizes our determinations concerning the city’s
capital structure, cost of debt and cost of common equity, as well as the resulting
weighted costs and overall tax adjusted rate of return of 5.21%:
Capital
Ratio
Cost Ratio
Type
Weighted
Tax
Tax
Cost
Adjusted
adjusted
Return
Debt
83.80
4.66
3.91
4.66
3.91
Equity
16.20
10.00
1.62
8.00
1.30
Total
100.00
5.53
82
5.21
VIII. Rate Structure and Rate Design
This section of the Opinion and Order addresses allocation issues,
particularly as they relate to inside and outside customers, and the design of rates to
recover these costs. Public utility rates should enable the utility to recover its cost of
providing service and should allocate this cost among the utility’s customers. West Penn,
supra.
In this rate filing, the City was required to prepare a cost of service study,
which is contained in City Ex. No. 4-A, as revised at City Ex. No. 3-R-1. Since the
Commission has jurisdiction only with respect to customers outside of the City, it is
necessary to support the proposed outside customer rates with costs associated with
providing water service to these customers. The information in City Ex. No. 4-A
includes a description of the methods used in the study, the allocation of costs, and the
factors on which the allocations were based.
A.
Cost of Service Methodology
1.
Positions of the Parties
The City’s cost of service study was based on the widely used base-extra
capacity method of cost allocation. According to the City, the base-extra capacity
method is preferred in the industry and has been accepted by the Commission on
numerous occasions. City St. No. 3R at 8. During the rebuttal stage, the City prepared a
revised cost of service study (City revised COSS) to reflect acceptance of some OCA
allocation changes and certain maximum day ratios proposed by Kellogg. City St. No.
3R at 6; City Ex. 3-R-1
83
The OCA accepted the base-extra capacity methodology as used in the
City’s original and revised COSS, but presented various modifications to the allocation
factors in an alternate COSS (OCA COSS), which was revised in surrebuttal testimony.
OCA St. No. 4, Sch. SJR-8; OCA St. No. 4S, Sch. SJR-8 Revised. OCA M.B. at 46. The
OCA submitted that the Kellogg COSS was flawed even as a commodity-demand COSS,
as indicated by, for example, the allocation of the City’s new treatment plant.
Specifically, the OCA pointed out that Kellogg allocated itself $1.93 million of the City’s
$94.7 million investment in the treatment plant, or about two percent of the treatment
plant’s rate base value, even though Kellogg uses more than four percent of the City’s
water. OCA M.B. at 54; OCA St. No. 4R at11.
The OSBA did not take issue with the City COSS, as revised, but proposed
different class revenue allocations based upon the results of that study. OSBA St. No. 1
at 2-3.
Kellogg rejected the City revised COSS in favor of its own COSS (Kellogg
COSS) which utilized the commodity-demand methodology for allocation of certain
costs. Kellogg St. No. 2 at 11-13; Kellogg Ex. HSG-1. The Kellogg COSS was also
updated within surrebuttal testimony. Kellogg St. No. 2SR, Ex. HSG-1R. Kellogg
described the base-extra capacity methodology utilized in the City revised COSS as
allocating four basic categories of cost – base, extra capacity, customer and fire
protection costs. The calculation of the extra capacity costs is the focus of Kellogg’s
concern, as this calculation, central to the base-extra capacity method, must be based on a
determination of “maximum day” and “maximum hour” usage by class as compared to
the system maximum day and maximum hour. Customer class demand studies are
performed to provide an empirical basis for these numbers, which can significantly affect
the resulting allocation factors, according to Kellogg. Kellogg M.B. at 32-34.
84
Kellogg’s interpretation of the City’s discovery responses was that the City
had relied upon a 1990 Pennsylvania-American Water Company (PAWC) customer class
demand study dated February 20, 1991 (1991 PAWC study), and a 1996 Philadelphia
Suburban Water Company (PSWC) customer class demand study in developing the
“maximum day” and “maximum hour” ratios. Consequently, Kellogg concluded that
demand data in the City COSS was outdated, unreliable, and inappropriate to use as a
reasonable proxy for the City.
In lieu of the 1991 PAWC study data, Kellogg used a 2009 PAWC
customer class demand study (sample data for 1993-2000), and actual 2009 data for
Kellogg (to the extent that a separate customer class is established for Kellogg) in the
Kellogg COSS. Kellogg claimed that the reliability of the 2009 PAWC study using
1993-2000 data had been acknowledged by the City; whereas, the reliability of the 1991
PAWC study had been questioned. The 2009 PAWC study also showed significantly
lower maximum day and maximum hour factors for the industrial class in comparison to
the other classes, according to Kellogg. Kellogg M.B. at 36-40.
Kellogg also contended that the base-extra capacity methodology does not
appropriately allocate capacity costs in accordance with causation. Moreover, it asserted
that the methodology is inconsistent as costs that vary with usage are allocated based on
average usage, while costs that reflect maximum demand are allocated both on average
usage and maximum day/maximum hour extra demand. Kellogg claimed that, out of the
City’s proposed revenue requirement of $24.9 million, approximately 70% of costs are
driven by capacity requirements. Kellogg M.B. at 45-48.
As a result of perceived cost allocation deficiencies in the City’s base-extra
capacity COSS, Kellogg advocated that the commodity-demand methodology be used to
allocate costs. In its COSS, Kellogg took the capacity costs that the City allocated using
85
base-extra capacity allocators and allocated them based on Maximum Day and Maximum
Hour allocators. Kellogg urged the Commission to reject the City revised COSS.
Kellogg M.B. at 47.
The City responded that Kellogg’s use of the commodity-demand
methodology was not consistent with the Commission’s preference for the base-extra
capacity method for water COSS. The City also contended that the Kellogg COSS was
invalid for reliance upon unsupportable and mismatched class demand data as previously
discussed. It contended that, contrary to Kellogg’s assertions, the base-extra capacity
method does reflect maximum and average demands. It submitted that the revised COSS
prepared by the City using the Commission-preferred base-extra capacity method should
be used for allocation and rate design purposes in this proceeding. City M.B. at 69-75;
City R.B. at 41.
2.
ALJ Recommendation
The ALJ noted that the Commission has repeatedly stated that cost
of service studies are to be utilized as “guides,” and are not considered to be an exact
science. PPL 2004, supra; see also, Pa. P.U.C. v. PAWC, 71 PA PUC 210, 283 (1998);
Pa. P.U.C. v Duquesne Light Co., 57 PA PUC2, 51 PUR 4th 198 (1983). However, in
accordance with Lloyd v. Pa. P.U.C. et al. (Lloyd), 904 A.2d 1010, 2006 Pa. Commw.
LEXIS 438 (2006), as noted by the OSBA, the revenue allocations to the various classes
must be based on a cost of service study. R.D. at 82.
The ALJ recommended that the City revised COSS, using the base-extra
capacity methodology, be utilized in this proceeding for purposes of allocating
costs/revenues and designing rates. She stated that, the base-extra capacity method is
preferred in the industry and has been accepted by the Commission on numerous
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occasions. The ALJ claimed she was unaware of any COSS prepared under the
commodity-demand method that has been accepted by the Commission. The ALJ also
noted that the base-extra capacity method is considered superior by the AWWA Manual
M1 which states that the base-extra capacity method better reflects system diversity than
the commodity-demand method. The ALJ recommended that the Kellogg COSS be
rejected. R.D. at 82-83.
3.
Exceptions and Replies
In its Exceptions, Kellogg first criticizes the City’s use of the 1991 PAWC
Customer Class Demand Study as being outdated and unreliable. Also, Kellogg avers
that the 1996 PSWC Study used by the City is outdated and has not been shown to be a
reasonable proxy for the City. According to Kellogg, the 2009 PAWC Demand Study it
used, which used sample data for the period 1993-2000, is more reliable, more recent and
applicable to the City’s service area. Kellogg states that despite the clear superiority of
the data it used, the ALJ agreed with the OCA’s and the City’s claims that the Kellogg
allocation study relied upon “unsupportable and mismatched class demand data.”
Kellogg submits that there is nothing unsupportable or mismatched about the data utilized
by its witness as the use of 2009 data for Kellogg and data from the 2009 PAWC study
was reasonable given that the City has never performed a customer class demand study,
was unable to provide more recent customer load data for its customers and that Kellogg
had actual data available for itself. Kellogg Exc. at 13-19.
Next, Kellogg submits that, contrary to the ALJ’s conclusion, the data
relied upon by the City is unreliable and outdated and should be rejected. Kellogg states
that the 1991 PAWC study relied upon by the City is older and unreliable and should give
the Commission concern. Kellogg opines that the ALJ’s position is in error and should
be rejected. Kellogg further asserts that although the base-extra capacity methodology
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for cost allocation has been utilized by this Commission for many years to allocate costs
for water utilities, the base-extra capacity methodology does not appropriately allocate
capacity costs in accordance with the causation of such costs. Kellogg claims that the
simple fact is that the costs of certain facilities are driven by the capacity or demand
needed to serve them, and not by a weighted average of usage and extra demand.
Kellogg submits that while there is well-established commission precedent to utilize the
base-extra capacity methodology, this does not justify continuing to use the methodology
when it is not supported by principles of cost causation. Kellogg Exc. at 19-24.
In reply, the City asserts that Kellogg’s arguments are not supported by the
record evidence. According to the City, the base-extra capacity method is preferred in
the industry and has been accepted by the Commission. As noted by the ALJ, the City is
unaware of any COSS prepared under the commodity-demand method that has been
accepted by the Commission. The City cites the AWWA Manual M1 which states that
the base-extra capacity method better reflects system diversity than the commodity
demand method. The City opines that Kellogg’s criticism of the base-extra capacity
shows that it does not fully understand the methodology and avers that the Kellogg
witness had not conducted a cost of service allocation study for a water utility prior to
this proceeding. City R. Exc. at 15-17.
In regard to Kellogg’s claim that the 2009 PAWC Demand Study is more
reliable, the City asserts that there was no 2009 PAWC study ever done as part of a
COSS for PAWC. The City maintains that this “newer” demand data to which Kellogg
refers appears in the PAWC rate case study in 2001 and that Kellogg attempts to support
its position using data that was never there. The City avers that the ALJ correctly noted
that Kellogg used a mix of demands for different time periods, different utilities and
different generations of technologies when estimating class demands. The City further
maintains that it provided ample support for the basis of its COSS and that its witness
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used sources in addition to the 1991 PAWC study for purposes of estimating class
demand factors. According to the City, its witness used his judgment based on
observations of Lancaster’s service areas, filed studies conducted by his firm for other
Pennsylvania water utilities and generally accepted maximum day and hour ratios. City
R. Exc. at 17-18.
In its reply exceptions, the OCA first points out that the commoditydemand and base-extra capacity methods are intended to produce similar results citing the
AWWA M1 Manual, 5th Ed. at 59. Secondly, the OCA posits that while a treatment plant
must be sized to meet maximum demands, the plant is used every hour of every day to
meet both average and maximum demands. Therefore, according to the OCA, costs for
the treatment plant should be allocated based on both average and peak demands. The
OCA maintains that the extra cost of the plant to meet maximum-day demands should be
allocated to customers based on their peak demands, but much of the plant’s cost should
be allocated on average demand. The OCA asserts that Kellogg’s position ignores this
reality by considering only the maximum day demands. The OCA opines that the baseextra capacity method is preferred as it is more precise and more transparent.
Furthermore, the OCA criticizes Kellogg’s analysis as it did not measure demands for the
same time periods for all customer classes. The OCA avers that by selecting demand data
from different time periods, Kellogg has artificially and unreasonable altered the relative
relationship among the customer classes. OCA R. Exc. at 13-15.
In its Reply Exceptions, the OSBA notes that it accepted the City’s COSS
and avers that even if the Commission were to accept Kellogg’s COSS, there would be no
difference in the relative rate increase needed to bring the Commercial class to cost. The
OSBA maintains that under each Party’s final COSS, the outside-City Commercial class
would need a relative rate increase of no more than 1.21 times the outside-City system
average increase in order to be at cost of service. OSBA R. Exc. at 5-7.
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4.
Disposition
Upon our consideration of the Recommended Decision and the Exceptions
and Reply Exceptions filed by the Parties, we shall adopt the recommendation of the ALJ
on this issue that the Commission adopt the City’s revised COSS using the base-extra
capacity methodology. We are in agreement with the City and the OCA that the baseextra capacity method is preferred in the industry and has been previously accepted by
this Commission. As stated by the OCA, for example, the costs for the treatment plant
should be allocated based on both average and peak demands not just the maximum day
demands as used by Kellogg. We also recognize that Kellogg utilized demand data from
different time periods which has artificially altered the relative relationship among the
classes. This is unacceptable.
Based upon the foregoing discussion, we shall deny the Exceptions of
Kellogg, and adopt the finding and recommendation of the ALJ.
B.
Cost Allocation
1.
Rental Income from Cellular Antennae Leases
a.
Positions of the Parties
In the City revised COSS, the City used factor 17 to allocate $239,910 in
rental income that it receives from cellular antennae leases on water tanks outside the
City that serve outside customers. Using factor 17 resulted in 31.1% of these revenues
being allocated to inside-City customers and 68.9% being allocated to outside-City
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customers, although 100% of the water tank costs are allocated to outside-City customers
(using factor 5B). City St. No. 3R, at 4; OCA St. No. at 7.
The OCA objected to the City’s allocation of rental income. The OCA
stated that, as outside-City customers are being asked to support all of the cost of the
water tanks, they should receive all the revenue from leasing space on those tanks, using
allocation factor 5B. OCA St. No. 4 at 7. Both the OTS and Kellogg agreed with the
OCA position on this issue. OTS St. No. 2 at 28-29; Kellogg St. No. 2SR at 8.
In response to the OCA’s position, the City characterized the OCA’s
opposition to the rental income allocation as being based on the location of the tanks
outside the City. The City indicated that the location was immaterial to how the revenue
should be allocated. The City stressed that the City had invested in water facilities that
provide an opportunity to receive rental income, thus reducing the overall cost to provide
water service. Accordingly, this rental income, according to the City, should be a credit
to the allocated cost of providing water service to all customers both inside and outside
the City. City St. No. 3R at 4; City St. No. 3-OR (redacted), at 1-2. City M.B. at 67-68.
In response to the City, the OCA supported its position that customers
which are allocated 100% of the cost of a facility should also benefit through receiving
credit for 100% of the rental income associated with those facilities. OCA cited to prior
Commission decisions in Pa. P.U.C. v. Roaring Creek Water Co. (Roaring Creek 1997),
87 PA PUC 826 (1997); and Pa. P.U.C. v. UGI Corp. (UGI 1982), 56 PA PUC 575
(1982), which held that utilities must credit customers for income from rental property
since the capital costs of the premises were included in rate base. The OCA also cited to
a recent case, Columbia Water Company, supra, wherein the ALJ and the Commission
determined that a water company’s rental income from rate base property must be
included in revenues for ratemaking purposes. Referring to these cases, the OCA
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reasoned that since only outside-City customers are paying the costs of the water tanks
generating the income, only outside-City customers should receive the revenue associated
with that property through allocation factor 5B. OCA M.B. at 48-50.
b.
ALJ Recommendation
The ALJ agreed with the OCA position on this issue and recommended that
it be adopted by the Commission. According to the ALJ, and contrary to the City’s
characterization, the OCA’s position is not based on the location of the water tanks; it is
based on the subset of customers who are actually paying the costs of the tanks. The ALJ
observed that the City had not disputed the OCA’s claim that 100% of the costs of the
facilities are being allocated to outside-City customers through allocation factor 5B. She
stated that in accordance with the Commission precedent cited by the OCA (Columbia
Water Company; Roaring Creek 1997; UGI 1982; supra), the rental income should be
credited 100% to the outside-City customers. Accordingly, the ALJ stated the City
revised COSS should be changed to use allocation factor 5B instead of allocation factor
17 with respect to the rental income received for the cellular antennae leases. R.D. at
86-87.
c.
Disposition
No Party excepts to the ALJ’s recommendation in regard to her adoption of
the OCA’s position concerning rental income from cellular antennae leases. Finding the
ALJ’s recommendation to be reasonable, appropriate and in accordance with the record
evidence, it is adopted.
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2.
Reimbursement for Meter Labor
a.
Positions of the Parties
This issue relates to the reimbursement provided by Lancaster Sewer
customers to Lancaster Water customers for costs relating to the meter shop as the water
meter readings are used to bill sewer customers. In its original COSS, the City allocated
meter shop costs and reimbursement for meter labor using factor 8 (all customers with
meters), which resulted in an allocation of about 66% to outside-City customers and
about 34% to inside-City customers.
In rebuttal, the City changed its position. According to the City, the meter
labor reimbursement revenues should have been allocated mostly to the benefit of
inside-City customers, because only about 16% of outside-City water customers are also
sewer customers. In contrast, the City states that about 84% of the inside-City water
customers are sewer customers. The City developed a revised allocation factor, factor
12A, in the City revised COSS to allocate meter labor revenue by the number of meter
readings for sewer bills, which resulted in inside-City customers receiving credit for 84%
of the reimbursement instead of about 34%. However, the meter shop cost allocation was
not similarly changed. The impact of this revision is that outside-City customers
continue to be allocated about 66% of the meter shop costs but now only receive 16% of
the reimbursement from sewer customers. Inside-City customers continue to be allocated
about 34% of meter shop costs, but now receive 84% of the meter labor reimbursement
revenues. City St. No. 3R at 5-6; City Ex. No. 3-R-1, Sch. B at 3; Sch. C at 30.
The OCA challenged this mismatch in the meter labor reimbursement. The
OCA objected to the unfairness of the revised proposal, and determined that, based on the
reduction in reimbursement, outside-City customers would pay an average of $9.80 per
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meter annually, while inside-City customers would pay only $1.55 annually per meter.
The OCA recommended a return to the City’s original proposal, and a corresponding
correction to the City revised COSS to use factor 8 for meter labor reimbursement,
consistent with the allocation of related costs. OCA St. No. 4S at 3-6.
The City responded that the meter labor reimbursement is for meter reading
costs, not meter maintenance costs, and cites to City Ex. No. 3-R-2. City R.B. at 40.
b.
ALJ Recommendation
The ALJ recommended that the Commission accept the OCA position on
this matter and that the City revised COSS be changed again to use factor 8 for meter
labor reimbursement. According to the ALJ, the City has the burden of proof and she
was not convinced by the City’s justification for the change from factor 8 to a new factor
12A for the meter labor reimbursement. The ALJ maintained that this issue should be
resolved similarly to the rental income issue, supra, in that the reimbursement for meter
labor costs should be allocated in the same manner in which the costs are allocated,
through factor 8 as advocated by the OCA. The ALJ further noted that the City has not
established that it has changed the cost allocation to factor 12A, but has only changed the
meter labor reimbursement to factor 12A. In her view, this causes a mismatch as outsideCity customers continue to be allocated about 66% of meter shop costs but receive only
about 16% of the meter labor reimbursement. The ALJ opined that the mismatch is
improper and must be corrected through the COSS change as noted above. R.D. at 88.
c.
Exceptions and Replies
The City maintains that the meter reading labor reimbursement should have
been allocated mostly to the benefit of the inside-City customers and that factor 12A is
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used to properly reflect how these costs should be allocated. The City avers that the
revenue received from the City’s Sewer Fund was for reimbursing the Water Fund for
meter reading costs because the sewer utility uses the meter reading information for
billing purposes. The City believes this revision correctly and fairly allocates costs based
on the number of meter readings for sewer bills. The City criticizes the OCA position as
these dollars have nothing to do with a meter “labor” issue. In its opinion, doing what the
OCA suggests would cause a “mismatch” and unfairly give benefits to many customers
who are not contributing to the reimbursement costs of both the sewer and water systems.
City Exc. at 18-21.
In reply, the OCA avers that if the City position is adopted, the effect would
be to allocate more than 84% of this revenue to inside-City customers even though
inside-City customers pay only 36% of the meter shop’s costs. The OCA opposes this
mismatch because meter shop costs are correctly allocated to all customers with meters.
The OCA states that the effect of its allocation is that inside-City and outside-City
customers are generally allocated an equivalent amount of the net costs of the meter shop,
between $6.50 and $7.00 per meter per year. In contrast, the OCA avers that the effect of
the City’s proposal would be that outside-City customers would pay six times more per
meter than would inside-City customers, $9.80 per meter per year versus $1.55.
Additionally, the OCA submits that it makes no difference whether the costs are for
meter reading or maintenance. The OCA points out that the City has allocated meterrelated costs in one way, but then allocated the reimbursement in a different way. OCA
R. Exc. at 10-12.
d.
Disposition
Upon our consideration of the Recommended Decision and the Exceptions
and Reply Exceptions filed by the Parties, we shall adopt the recommendation of the ALJ
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on this issue. We agree with the analysis of the OCA that the City’s proposal results in a
mismatch of 84% of the revenue related to the meter reimbursement being allocated to
inside-City customers who pay only 36% of the costs of the meter shop. This result is
unreasonable and is not accepted. The City is directed to allocate meter shop costs and
the reimbursement for meter labor in its COSS using factor 8, as it originally proposed.
Based upon the foregoing discussion, we shall deny the Exceptions of the
City, and adopt the finding and recommendation of the ALJ.
3.
Regulatory Expenses
a.
Positions of the Parties
This issue involves the same costs as the rate case expense issue previously
addressed. Kellogg has used the term “regulatory expenses” but they are properly
characterized as “rate case expenses.”
Kellogg proposed that “regulatory” or “rate case expenses”, which were
100% allocated to outside-City customers in the City revised COSS, be allocated among
all rate classes, including inside-City customers. Kellogg stated that the expenses should
be universally allocated because the COSS is used to determine the revenue requirement
and revenue allocation for all classes, both inside and outside the City. Accordingly, the
Kellogg COSS allocated approximately 31.4% of costs to inside-City customers,
according to Kellogg Ex. HSG-1, Sch. A at 1; Kellogg Ex. HSG-1, Sch. C at 4; Kellogg
St. No. 2 at 13.
The City failed to address Kellogg’s issue in its rebuttal testimony. The
ALJ noted that the matter could involve a legal question as to jurisdiction since the issue
96
involved whether the Commission was empowered to allocate regulatory costs to nonregulated inside-City customers. She noted that a similar issue had been raised in
Lancaster Sewer 2005 and the Parties were referred to that case for possible legal
precedent. Tr. 181-182.
In its Main Brief, the City referred to Lancaster Sewer 2005, supra, as
requiring that 100% of “regulatory” or “rate case expenses” be allocated to outside-City
customers. M.B. at 75-76.
Kellogg did not discuss Lancaster Sewer 2005 in its Reply Brief or
endeavor in any way to distinguish the holding in that case from the instant situation.
Instead, Kellogg relied upon the City’s failure to address the issue at the appropriate time
in its testimony as being deemed a waiver of any objection, and asserted that Kellogg’s
position should therefore be adopted. Kellogg R.B. at 30-31.
b.
ALJ Recommendation
The ALJ recommended that the Commission reject Kellogg’s proposed
allocation of regulatory expenses to inside-City customers in the COSS. The ALJ offered
that while it would have been preferable for the City to have addressed the matter in its
testimony, she concluded that the matter involves a jurisdictional question which cannot
be waived by the Parties. According to the ALJ, as stated by the Pennsylvania Supreme
Court in Roberts v. Matorano, 427 Pa. 581, 235 A.2d 602 (1967), jurisdiction may not be
conferred by the parties where none exists. Indeed, subject matter jurisdiction is a
prerequisite to the exercise of the power to decide a controversy. Hughes v. Pa. State
Police, 152 Pa. Commw. 409, 619 A.2d 390 (1992), alloc. den., 637 A.2d 293 (1993).
R.D. at 90.
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The ALJ noted that Kellogg proposed an allocation to inside customers of a
portion of the costs associated with preparation of the COSS for this rate case, contending
that costs are determined on a system-wide basis and inside-City customers should
therefore share in these costs. She stated that as in Lancaster Sewer 2005, the proposal
would entail an allocation of the cost of regulation to non-regulated customers, and there
is no authorization for this cost assessment in the Public Utility Code. The ALJ
concluded, therefore, that these regulatory costs are appropriately assessed 100% to
outside-City customers, in accordance with Commission precedent in Lancaster Sewer
2005, supra. R.D. at 91.
c.
Exceptions and Replies
In its Exceptions, Kellogg avers that it has been unable to find any place
where the Commission rejected a similar adjustment in Lancaster Sewer 2005 and
submits that there is no precedent supporting this position. Furthermore, Kellogg opines
that the absence of rebuttal testimony on this issue is determinative of the issue in
Kellogg’s favor. Kellogg Exc. at 25.
In reply, the City notes that it did produce the relevant part of the Lancaster
Sewer 2005 rate case Recommended Decision which clearly discusses and rejects the
notion that rate case expense should be split between inside and outside customers. The
City avers that the arguments rejected in that case were the same arguments that Kellogg
used in its testimony and briefs in this proceeding. The City maintains that since outside
customers caused the costs to be incurred, it is reasonable that they bear 100% of the
costs. City R. Exc. at 19-20.
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d.
Disposition
Upon our consideration of the Recommended Decision and the Exceptions
and Reply Exceptions filed by the Parties, we shall adopt the recommendation of the ALJ
on this issue. We find that the expenses at issue here, the rate case expenses associated
with the preparation and litigation of this proceeding, are a direct result of this
Commission’s regulatory requirements. As such, they are not incurred or caused by
inside-City customers of Lancaster. It is simply against the basic principle of cost
causation to allocate the cost of regulation to non-regulated inside-City customers.
Inside-City customers did not require the City to expend these funds and they should not
be required to contribute to the recovery of such costs.
Based upon the foregoing discussion, we shall deny the Exceptions of
Kellogg, and adopt the finding and recommendation of the ALJ.
C.
Revenue Allocation
1.
Positions of the Parties
The Parties proposed the following class revenue allocations at the City’s
full revenue request, using the City COSSs unless noted otherwise (source - OSBA Sch.
BK-1R, BK-2R):
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Outside
Rate Class
City
% Increase
OSBA
% Increase
OCA
% Increase
Kellogg %
City COSS
Residential
90.6%
89.2%
86.8%
91.8%
94.5%
Commercial
127.5%
127.5%
127.0%
127.5%
126.3%
Industrial
148.1%
157.6%
156.3%
132.7%
101.4%
97.1%
98.5%
96.9%
97.1%
140.4%
0.0%
0.0%
0.0%
20.0%
0.0%
105.0%
105.0%
103.5%
105.0%
104.0%
Oth. Water Util.
Private Fire
Sys. Ave.
Kellogg %
Rev. COSS
The City stated that its proposal was reasonable and makes a significant
move towards cost of service indicators and, as such, should be adopted. City St. No. 3R
at 2.
Kellogg made proposals using the City’s COSSs, if accepted, and the
Kellogg COSS. The Commission has already recommended infra that the Kellogg COSS
be rejected due to the flaws previously discussed.
Kellogg indicated that in the event the Commission does not adopt the
Kellogg COSS and elects to use the City COSS, as revised, the Commission should
nonetheless adjust the City revised COSS to utilize the maximum day and maximum hour
ratios and 1.51 system maximum day ratio it has recommended. If these ratios are
utilized, according to Kellogg, the cost indicated increase to the industrial class based on
the City revised COSS would be reduced, and Kellogg’s proposed revenue allocation
would be reasonable. Kellogg advocated rejection of the 1.50 maximum day ratio for the
industrial class as had been proposed by the City. Kellogg M.B. at 52.
In the event the Commission rejects the Kellogg COSS and the abovementioned maximum day and maximum hour ratios, Kellogg nonetheless proposed that
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the increase to the industrial class (148.1% in the City M.B. at 72) be mitigated to a much
larger extent than proposed by the City. Kellogg emphasized the economic impact of
such a large increase on its operations, as noted in the testimony of its Plant Manager
Timothy Fritz, and urged the Commission to apply principles of gradualism to moderate
the effect. Kellogg M.B. at 54.
In response to Kellogg’s significantly lower revenue allocation to the
industrial class, particularly when using the Kellogg COSS, the City noted that both the
OSBA and the OCA had recommended higher increases to the outside industrial class of
157.6% and 156.3%, respectively. The City claimed that a higher increase of 164.2% to
the industrial class was indicated by the City COSSs, but that the City had proposed a
148.1% increase to mitigate rate shock. City St. No. 3R at 7.
The OCA allocated a greater percentage increase to the industrial class and
a lesser percentage to residential customers. In support of its allocation, the OCA
indicated that the City’s proposed industrial rates would recover less than the cost of
service and the proposed residential rates would recover more than the cost of service.
The OCA noted that the City’s rationale for limiting the increase to the industrial class
was so that no class received more than a 150% increase in rates. However, the OCA
observed that the system average increase in the City revised COSS is 105.0%; thus, the
maximum increase to the industrial class should be approximately 157.5%, and the OCA
revenue allocation proposal is within this limit. OCA M.B. at 55.
The OCA noted another concern with the City’s proposed under recovery
from the industrial class in that the City’s third block consumption charge, a rate used
almost exclusively by industrial customers, is less than the base cost of water. OCA St.
No. 4 at 11. The OCA posited that, as a general rule, a utility should never sell water to a
permanent retail customer at less than the base cost of water. OCA M.B. at 55-56.
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The OSBA proposed a greater movement towards cost of service than the City’s
proposal. OSBA St. No. 3 at 1. Similar to the OCA, the OSBA would allocate an over
150% increase to the industrial class (157.6% as indicated in OSBA Sch. BK-1R).
The OSBA disputed the City’s contention that the OSBA proposed revenue
allocation does not reflect gradualism. The OSBA asserts that its proposal does reflect
gradualism, because its revenue allocation falls short of moving to full cost of service in
this case. Also, like the OCA proposal, the OSBA proposal limits class increases to no
more than 1.50 times the system average, which restricts movement of the industrial class
towards cost of service. OSBA St. No. 3 at 1-2.
The City responded to the OSBA proposal observing that it generally
moved revenues closer to cost of service for the residential and industrial classes, but that
the City proposal mitigated the increase to industrial customers, which required the
highest increase based on cost of service indicators. The City contended that to remove
most of the subsidy in one rate case was not consistent with gradualism, and that the City
would support moving all classes to cost of service in the next case. City St. No. 3R at 2.
2.
ALJ Recommendation
The ALJ concluded that the City’s revenue allocation proposal is the most
reasonable and recommended that it be used by the Commission. According to the ALJ,
this proposal appropriately balances the competing interests so that no one class bears an
inordinate share of the allowed revenue increase. It is also based on and supported by the
City revised COSS. In response to the OSBA’s position that more movement towards
cost of service is warranted, the ALJ noted that the Commonwealth Court in Lloyd,
supra, considered whether subsidization of one customer class by another class could be
102
acceptable, so long as movement towards cost was being accomplished. As noted by the
ALJ, the Court ruled that gradualism could not justify continued subsidization over an
extended period of time, but that a plan for gradual elimination of the subsidy could be
possible. The City correctly observed that the OSBA’s proposal in this case moved too
quickly to remove almost all subsidies and therefore was not reasonable. In the opinion
of the ALJ, the City’s plan for moving the classes to cost of service in the next base rate
case, is reasonable and in accord with the public interest. R.D. at 94-95.
3.
Exceptions and Replies
In its Exceptions, the OCA submits that the ALJ’s recommendation should
not be adopted and requests that the City’s revenue allocation be modified to permit
approximately $61,000 more revenue to be recovered from the Industrial class than the
City proposed. Specifically, the OCA avers that rates should be established to recover
the cost of serving each customer class, with a limit that no class receive an increase of
more than 1.5 times the outside-City system average rate increase. The OCA offers that
any amount unrecovered due to that limitation should be recovered from the other retail
classes in proportion to that class’s revenues. The OCA also opines that every effort
should be made to ensure that the third-block charge is at least equal to the base cost of
water. OCA Exc. at 14-15
Kellogg also excepts to the ALJ’s recommendation stating that if the ALJ
was seeking to provide some reasonable moderation of the revenue increase to the
industrial class, the City’s allocation of a rate increase that is 1.41 times the system
average increase does not accomplish it. Kellogg avers that the City’s proposal does not
balance the interests of achieving cost of service and gradualism. Kellogg opines that the
City’s proposed revenue increase to the industrial class should be mitigated to a much
larger extent than proposed because of the magnitude of the increase. Also, Kellogg
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faults the ALJ for failing to give adequate consideration to the economic impact of this
increase on the industrial class. As a result of this impact, Kellogg submits that the
Commission should more gradually move industrial and Kellogg rates toward cost-ofservice, moderating the impact to limit the effect on job reductions and possible plant
relocations and outsourcing of processes. Kellogg further submits that the rate increase
to the industrial class should be set somewhere between 101.4% and 132% at the
proposed revenue requirement, or somewhere between 98% and 126% of the system
average increase, depending upon Commission use of the Kellogg Allocation Study or
the City Allocation Study. Kellogg Exc. at 26-31.
In reply, the City reiterates that in order to mitigate rate shock, it proposed
that no class should receive more than a 150% increase in rates. With regard to OCA’s
concern with the third block consumption charge, Lancaster notes that it is only giving a
subsidy to customers in the third block for purposes of gradualism, and that in the next
rate case, it plans to move all classes to the cost of service. The City opines that the
OCA’s recommendation to permit $61,000 of additional revenue to be recovered from
the Industrial class when compared to the City’s cost allocation is a significant movement
which should be rejected. City R. Exc. at 20-21.
In reply to Kellogg’s argument, the City states that while it is increasing the
rates for Industrial customers, it will still be charging this class below the cost to serve
water in order to avoid rate shock. City R. Exc. at 22.
In its Reply Exceptions, the OCA responds to Kellogg by noting that the
City’s proposed rates for outside-City customers would recover less than the cost of
service from Industrial customers and more than the cost of service from Residential
customers. The OCA avers that if Kellogg’s alternative revenue allocation proposal were
adopted, the disparity would increase even more. The OCA opines that its allocation
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provides a reasonable balance by moving the Industrial class toward cost of service but
limiting that movement so that no class receives more than a 150% increase above the
system average increase. OCA R. Exc. at 17-18.
In reply to the OCA exceptions, Kellogg states that the OCA’s proposal for
an increased revenue allocation to the industrial class is inappropriate as every dollar of
rate increase to the industrial class is potentially harmful to industrial operations and
manufacturing jobs in the Lancaster community. Kellogg avers that the purpose of a
policy of gradualism is to moderate impacts by moving classes toward cost of service
over more than one rate case. According to Kellogg, the OCA, the City and the ALJ seek
to move the industrial class almost the entire way to the City’s cost of service rather than
moving part of the way in this case and the rest of the way in the next rate case. Also,
Kellogg avers that the OCA’s argument concerning the third block consumption charge
assumes a fiction that every customer uses the same amount of water each hour of the
year and should be rejected. Kellogg R. Exc. at 6-9.
The OSBA also responded to both Kellogg and the OCA by noting that it
did not except to the ALJ’s decision on this subject because resolution of this issue
should have no impact on the rate increase imposed on the Commercial class. The OSBA
states that regardless of the full requirement revenue allocation proposal adopted by the
Commission, the relative rate increase needed by the Commercial class to reach its cost
of service is 1.21 times the system average increase. OSBA R. Exc. at 7-12.
4.
Disposition
Upon our consideration of the Recommended Decision and the Exceptions
and Reply Exceptions filed by the Parties, we shall adopt the recommendation of the ALJ
on this issue. We conclude that the ALJ’s adoption of the City’s revenue allocation
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proposal provides the most appropriate balance between the competing interests in this
case. While this proposal does not transition the City’s revenue allocation totally to cost
of service in this proceeding per Lloyd, it endorses the concept of gradualism in that a
reasonable transition plan to cost based rates over a reasonable timeframe is
contemplated. The City recognized the importance of mitigating the rate increase to the
industrial class and we find that its proposal is reasonable, in the public interest and is
adopted. We also agree with the City that removal of the entire subsidy in one rate
proceeding is not consistent with the principle of gradualism.
Based upon the foregoing discussion, we shall deny the Exceptions of
Kellogg and the OCA, and adopt the finding and recommendation of the ALJ.
D.
Scale Back
1.
Positions of the Parties
If the Commission grants an increase less than what the City originally
proposed, the City recommended that the original proposed increase be scaled back
proportionately by class (except for Private Fire which should receive no increase). The
City’s position is that the entire scale back should come from consumption charges and
the proposed customer charges should be left unchanged. The City indicated that it had
not increased its customer charges in more than five years, and that the customer charge
increases requested were fair, reasonable, and results in a lower customer charge than
those of most water utilities in Pennsylvania. City Ex. No. 4-A, Sch. F; City R.B. at 48.
According to Kellogg, the scale back should be performed in the same way
as the allocation of the City’s proposed revenue requirement, with Private Fire being
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maintained at the present level of revenue and all other classes, except Other Utilities,
being set at cost of service. Kellogg R.B. at 36.
The OCA proposed a scale back which would result in each class (except
private fire which should receive no increase) recovering approximately the same
percentage of the class’s cost of service as would be recovered under the OCA rate
design. The OCA indicated that its rate design was not substantially different from the
City’s. The OCA opposed the Kellogg proposed scale back as it is based on the Kellogg
COSS which the OCA has recommended be rejected. The OSBA proposal, according to
the OCA, would require that the COSS be re-run and that final rates be re-designed to
recover the applicable percentage of cost of service. OCA R.B. at 24-25.
The OSBA proposed a proportional scale back based on each class’
increase. The OSBA claimed that the OCA proposed scale back would require a re-run
of the OCA COSS. OSBA M.B. at 11.
2.
ALJ Recommendation
The ALJ recommended that the City’s proposed scale back be approved
and she expressed her agreement with the City that the entire scale back should come
from consumption charges and not the customer charge, for the reasons stated by the
City. The ALJ noted that no Party has objected to the proposed increase in the customer
charge. R.D. at 97.
3.
Exceptions and Replies
In its Exceptions, the OCA submits that a proportional scale back is a
reasonable method to reflect any reduction in the claimed revenue requirement and it
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ensures that all customer classes are provided some relief from the Company’s full
request if it is determined that the City should receive less than its full rate request.
However, unlike the City’s recommendation, the OCA recommends a proportional scale
back to both customer and volumetric charges. The OCA avers that the effect of the ALJ
adopting the City’s as filed customer charges is a 176% increase for customers with 5/8inch meters. The OCA compares this increase to the overall 85% revenue increase as
recommended by the ALJ. The OCA maintains that its recommendation to scale back
both the customer charges and volumetric charges would mitigate the size of the
customer charge increase, while still giving the City an opportunity to recover its
approved revenue requirement through higher volumetric rates. According to the OCA,
its proposal would provide a stronger price signal to customers to conserve water. OCA
Exc. at 16.
In reply, the City avers that the record evidence supports the ALJ’s
recommendation that the entire scale back should come from consumption charges and
the proposed customer charges should be left unchanged. The City avers that it has not
increased its customer charges in over five years and the proposed customer charges are
fair, reasonable and results in a lower customer charge then most water utilities in
Pennsylvania. Lancaster suggests that it could have proposed an even higher customer
charge than what it requested but did not do so in order to mitigate rate shock. The City
states that it is essential that it receive the full amount of the requested customer charge
so that it can continue to provide safe and reliable water service. In response to the
OCA’s water conservation argument, the City opines that its proposed rate increase
provides, by itself, a strong incentive and signal to customers to conserve water.
City R.Exc. at 23-24.
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4.
Disposition
Upon our consideration of the Recommended Decision and the Exceptions
and Reply Exceptions filed by the Parties, we shall reject the recommendation of the ALJ
on this issue. While we conclude that it is entirely appropriate that the City scale back its
proposed increase proportionally based on the Commission allowance within this
Opinion and Order, we are cognizant of the concerns expressed by the OCA and believe
they have merit. We agree with the OCA that a proportional scale back to both customer
and volumetric charges is more appropriate than the City’s proposal. While we
acknowledge the City’s comments that the proposed customer charges are fair as
proposed, and still lower than some other water utilities, they still equate to a significant
increase in the amount of these charges. According to the City’s proposal, customer
charges are being increased 176% while the total overall revenue increase approved by
the Commission is only 72.7%. As a result, we find that the proposed customer charges
should also be scaled back and the City transition these charges to cost based rates over a
more reasonable timeframe.
Based upon the foregoing discussion, we shall grant the Exceptions of the
OCA and we reject the finding and recommendation of the ALJ.
E.
Tariff Structure
1.
Separate rate for Kellogg
a.
Positions of the Parties
Kellogg has proposed that it be placed in a separate rate class regardless of
the COSS used or alternatively, that the industrial class be segmented to reflect
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differences in usage characteristics among the customers in the class. Kellogg St. No. 2
at 3. Kellogg based its position on data which showed unique service characteristics and
a better load factor when compared to other customers in the industrial class. Kellogg St.
No. 2SR at 4-5, 9-10; Kellogg M.B. at 55-57.
The City and the OCA disputed Kellogg’s claims that it had justified a
separate rate class. The City noted that Kellogg’s load factor was 1.27 and 1.42 in 2009
and 2010, respectively, while the other large industrial customers’ composite load factor
was 1.40 and 1.52 in 2009 and 2010, respectively. Kellogg’s load factor was therefore
somewhat lower but not significantly lower and certainly not significant enough to
warrant a separate class, according to the City. The City further observed that Kunzler,
which is part of the industrial group, has a lower load factor than Kellogg. City St. No. 3OR (redacted) at 5; City M.B. at 78-79. The OCA also stated that Kellogg had not shown
that the characteristics of Kellogg are significantly different from characteristics of other
large customers who would remain in the general, industrial, and resale classes. OCA St.
No. 4R at 2; OCA M.B. at 57-58.
b.
ALJ Recommendation
According to the ALJ, the City has justified its continued classification of
Kellogg in the industrial class due to similarities of usage and the lack of compelling
unique service characteristics. Accordingly, she recommended that Kellogg’s request to
be placed in a separate customer class be denied. The ALJ also observed that Kellogg’s
alternative request, that the industrial class rate structure be modified to reflect
differences in usage, was an issue which was not sufficiently addressed of record.
However, the ALJ recommended that OSBA’s request for an investigation by the City of
separate rate schedules for its rate classes in the next base rate case be approved. The
ALJ believed this will address Kellogg’s alternative request. R.D. at 98.
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c.
Exceptions and Replies
In its Exceptions, Kellogg notes that while it supports the ALJ’s proposal
that in its next rate proceeding, the City should investigate separate rate schedules, the
evidence showing Kellogg’s unique load characteristics relative to the rest of the
industrial class is available currently and justifies the establishment of a separate rate
class for Kellogg. Kellogg avers that its 1.27 maximum month ratio is the lowest of the
five largest industrial customers by a significant margin, with the next lowest customer
having a maximum month ratio of 1.43. Furthermore, Kellogg avers that it is more than
twice as large as any other customer and while that may not be a sufficient reason for its
own rate class, it should be a significant consideration. Kellogg Exc. at 32.
In reply, the City states that the maximum month-to-average month data for
Kellogg shows that in 2009 the ratio was 1.27, and in 2010, the ratio was 1.42.
According to the City, this compares to the other large customers in the class that have a
composite ratio of 1.40 in 2009 and 1.52 in 2010. Lancaster opines that Kellogg’s ratios
are somewhat lower than the group, but not significantly, and certainly not enough to
warrant a separate class. City R. Exc. at 22-23.
In its Reply Exceptions, the OCA submits that Kellogg has not provided a
reasonable basis for treating it differently from other customers using millions of gallons
per month. OCA R. Exc. at 19.
d.
Disposition
Upon our consideration of the Recommended Decision and the Exceptions
and Reply Exceptions filed by the Parties, we shall adopt the recommendation of the ALJ
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on this issue. We are unconvinced by the record evidence that Kellogg’s characteristics
are that unique or significant to require a separate rate class. We are in agreement with
the City and the OCA that Kellogg has failed to provide sufficient basis in this
proceeding to warrant granting its request.
Based upon the foregoing discussion, we shall deny the Exceptions of
Kellogg and adopt the finding and recommendation of the ALJ.
2.
Evaluation of GMS Rate Structure
a.
Positions of the Parties
The OSBA raised concerns regarding the outside-City General Metered
Service (GMS) rate structure, which contains a three-step declining block consumption
charge applicable to all residential, commercial and industrial customers. The OSBA
observed that the City had not explained why its existing GMS rate structure continued to
be appropriate. Specifically, the OSBA noted that the City had not (1) provided evidence
in support of the number of GMS rate blocks; (2) explained why the rate blocks were
sized appropriately; or (3) explained why its existing GMS rate structure was preferable
to establishing separate rate schedules for its outside-City residential, commercial and
industrial customers. The OSBA asserted that changes to the rate structure would create
intra-class rate impacts which should be examined. Therefore, the OSBA recommended
that the Commission direct the City to investigate the propriety of the City’s existing
GMS rate structure in its next base rate proceeding, and to sponsor changes to that rate
structure, if indicated. OSBA St. No. 1 at 7-8.
In response to the OSBA’s proposal, the City claimed that its existing rate
structure was proper, and indicated that no changes to that structure were warranted. The
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City indicated that it was not receptive to the OSBA’s recommended investigation. City
St. No. 3R at 3. Furthermore, the City asserted that if it believes there is a reason to reexamine the revenue allocation and any adjustment to rate blocks in the next rate case, it
should be the entity to recommend it. City R.B. at 49.
b.
ALJ Recommendation
The ALJ found that the OSBA proposed rate structure investigation had
considerable merit and that the need for this investigation had not been rebutted by the
City. She recommended that it be required in the next base rate case. According to the
ALJ, the City completely failed to respond to any of the questions posed by the OSBA,
despite the opportunity to do so. The ALJ recommended that all of these questions will
be included as part of the investigation recommended herein. R.D. at 100.
b. Disposition
No Party excepts to the ALJ’s recommendation to require the City to
perform a rate structure investigation within its next base rate case. Finding the ALJ’s
recommendation to be reasonable, appropriate and in accordance with the record
evidence, it is adopted. The City is so directed.
3.
Minor Tariff Changes
a.
Positions of the Parties
During the course of this proceeding, the OCA identified three wording
changes that should be made to the City’s proposed tariff in Sections 7.8 (meter testing)
and 12.4 (termination). OCA St. No. 4 at 13. The City recommended certain
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modifications and the OCA agreed to these recommendations by the City. OCA St. No.
at 13. The OCA requested that these modifications be adopted by the Commission and
included in the compliance tariffs in this case, and the City had not opposed this request.
OCA M.B. at 58; City R.B. at 49.
b.
ALJ Recommendation
The ALJ reviewed the OCA requested changes, and noted an inconsistency
which was requested to be clarified. According to the ALJ, the inconsistency concerned
the City’s proposed increase in its Restoration – Reconnection Charge in Section 8.4 of
its tariff, from $63 to $90, which was unopposed by any Party. City Ex. No. 4-B. The
ALJ explained that Section 8.4 and Section 12.4 now conflicted over the proper amount
of the charge as Section 12.4 contained a $10 charge that should be changed to $90.
R.D. at 101.
When she requested clarification of the above-mentioned inconsistency, the
ALJ was informed by the City that Sections 8.4 and 12.4 were to contain the same
restoration fee, but that the restoration fee was $83, not $90. According to the ALJ, the
City indicated that the original $90 proposed restoration charge had been updated to $83
in a subsequent discovery response, and it provided a copy of that response (response to
OTS-RS-20-D), which included a cost calculation. The ALJ noted that the OCA agreed
with the City that the restoration charge should be corrected to $83 instead of $90.
R.D. at 102.
The ALJ concluded that the proposed restoration fee of record should be
corrected to be consistent with the intent of the Parties and the supporting cost
calculation. The ALJ further explained that while she supplied a copy of the discovery
response and associated tariff language change to the Secretary’s Bureau for inclusion in
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the case file, the document was not yet a part of the evidentiary record. To remedy this
oversight, she recommended that the record be reopened for the limited purpose of
admitting this discovery response and associated tariff language change into the record,
so that the record contains the correct information. The ALJ directed that this document
be marked for identification as City of Lancaster Exhibit No. 8, and she directed the City
to supply the requisite number of copies of this document to the Secretary’s Bureau with
a request that it be included in the evidentiary record. R.D. at 102.
Accordingly, the ALJ recommended that the proposed tariff changes in the
OCA Main Brief, as corrected herein, be approved.
According to the ALJ, the revised Section 7.8 is to read as follows:
The meter will be tested upon the written request of the
Customer and refund made if a meter is found to be fast at
any test in accordance with the Rules set forth in the Water
Regulations of the Pennsylvania Public Utility Commission.
The Customer shall pay a deposit in advance for testing of the
meter in accordance with fees established by the Commission
in 52 Pa. Code §65.8(h). If the meter tested upon such
request shall be found to be accurate within the limits
specified by the Commission, the fee shall be retained by the
City; but if not so found, then the cost thereof shall be borne
by the City and the fee deposited by the Customer shall be
refunded.
The ALJ recommended that Section 12.4 of the tariff ($10 reconnection
fee) be revised in order to be consistent with Section 8.4 (which is to contain an $83
reconnection fee).
According to the ALJ, Section 12.4 is to state as follows:
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If any monthly or quarterly bill for water service is not paid
within thirty (30) days after the date on which the bill is
rendered, a penalty of one and one-quarter percent (1 – ¼%)
of the amount of said bill shall be imposed thereon, and
further, the water shall be shut off after giving the customer
ten (10) days written notice of the utility’s intention to do so.
Upon payment by the customer of an additional charge of
eighty-three dollars ($83.00) as the charge for restoring
service, the customer will be returned to service.
R.D. at 102-103.
c.
Disposition
No Party filed Exceptions to the ALJ’s recommendations in these matters.
Finding the ALJ’s recommendation to be reasonable, we adopt these minor tariff changes
as clarified by the ALJ.
IX.
Public Input Sessions
ALJ Mellilo conducted two public input hearings on December 2, 2010, in
the service territory of the City. The ALJ highlighted the substance of the nine
testimonies received that day, as follows:
A.
Manheim Township Public Library
1.
Rosemary Wilson
Rosemary Wilson, a Formal Complainant in this proceeding at Docket No.
C-2010-2204407, testified that she was not totally against any rate increase. However,
she did object to the size and timing of the within proposed increase, and indicated
116
particular concern about the economic impact of the proposed rate increase on local
businesses and industry.
2.
William Laudien
William Laudien testified as the township manager of Lancaster Township,
which is within the service territory of the City outside of Lancaster’s corporate limits.
Mr. Laudien stressed the need for an equitable distribution of the rate increase between
inside and outside customers. He emphasized that any rate increase granted to the City
with respect to its outside customers should not provide revenue to the general operating
fund of the City of Lancaster.
3.
Katherine Swisher
Katherine Swisher, a Formal Complainant at Docket No. C-2010-2200324,
testified as a customer who, like Ms. Wilson, was concerned about the impact of the rate
increase on small businesses. She indicated that the magnitude of the rate increase
showed a lack of City planning and contended that the City should have provided for
replacement of treatment facilities through plant depreciation.
4.
Robert S. Krimmel
Robert S. Krimmel testified as the township manager of East Hempfield
Township, which is within the service territory of the City but outside of Lancaster’s
corporate limits. Like Mr. Laudien, Mr. Krimmel stressed the need for an equitable
distribution of the rate increase between inside and outside customers. He made a
comparison between the water rates of an Authority which serves in the Township, and
the City’s rates, and found that the Authority’s rates were much less. He urged the
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Commission to consider the normal ratemaking issues in this case including: (1) were the
expenses prudently incurred? (2) was there removal of plant from rate base that was no
longer used and useful? (3) was there excess capacity? (4) were customer advances and
CIAC removed from rate base? (5) was the allocation of the rate increase just, reasonable
and nondiscriminatory? (6) was the allowed rate of return fair? (7) was the rate design
and structure appropriate? and (8) was the cost of service study accurate and
appropriate?
5.
Lawrence Downing
Lawrence Downing testified as a township commissioner in Manheim
Township. He requested consideration of a phase-in based upon the magnitude of the
requested increase.
6.
Herbert B. Watson, Sr.
Herbert B. Watson, Sr., a senior citizen, testified on behalf of himself and
other seniors with regard to the economic impact of the increase on fixed income
consumers. He indicated that seniors had already been informed they would be receiving
no cost of living (COLA) increase in Social Security benefits.
B.
Millersville VFW
1.
Thomas Tamski
Mr. Tamski, a retired West Lampeter Township resident and outside-City
customer, expressed concern that outside customers were going to be subsidizing insideCity customers if the rate increase was approved.
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2.
Robert E. Fink
Mr. Fink, a retired customer, expressed concern about the rate disparity
between inside and outside-City customers.
3.
George Poulin
Mr. Poulin, a Formal Complainant at Docket No. C-2010-2198619 and the
only pro se Complainant to submit written comments/objections on the Partial Settlement
testified as to impact of the increase on customers like him who are on fixed incomes. He
criticized the City’s requested 11.25% return on equity as excessive, particularly at a time
when consumers are barely earning any interest on a bank savings account. R.D. at 103106.
C.
Response to Public Input Testimony
The City specifically addressed the public input testimony in its Main Brief.
In response to concerns about the amount of the increase, the City indicated
that the increase was being driven primarily by the treatment plant upgrades, and no Party
had claimed they were unnecessary. City M.B. at 84.
In response to testimony about whether customers inside the City were
paying their “fair share,” the City indicated it was planning to increase the rates of inside
customers so as to produce the same rate of return as proposed for outside customers.
The proposed increase to inside customers is in addition to the approximate 30% increase
that became effective in January 2010 for inside-City customers only. City M.B. at 59.
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In response to testimony about customer hardship, the ALJ noted that a
reduction in the proposed increase has been reflected in the Partial Settlement. This
proposal, along with the various other stipulations of the Parties, effectively reduced the
City’s requested increase to less than $8.2 million, according to the City. City M.B. at
86. The impact of the ALJ’s Recommended Decision would further reduce the City’s
allowed increase. Also, the ALJ explained that rates to fund the OPEB Trust Fund would
not go into effect unless and until the City finalizes an Irrevocable Trust Agreement.
R.D. at 107.
In response to Mr. Poulin’s position that the increase be limited to 50% of
the requested amount, the ALJ concluded that this request was not supported by the
evidence of record. According to the ALJ, Mr. Poulin’s specific adjustments, some of
which coincide with the OCA’s prior or current positions, have been considered as noted
throughout her Recommended Decision. R.D. at 107.
X.
Conclusion
We have reviewed the record as developed in this proceeding, including the
ALJ’s Recommended Decision and the Exceptions and Reply Exceptions filed thereto.
The City initially requested an overall revenue increase of $8,608,024, or 99.8%. The
City subsequently revised its requested revenue increase to $8,192,036, as a result of
various agreements and the Partial Settlement. The ALJ found that the City’s proposed
Supplement No. 40 to Tariff Water- Pa. P.U.C. No. 6 should be rejected. According to
the ALJ, the rates contained in the Supplement are not just and reasonable or otherwise in
accordance with the Public Utility Code and applicable regulations. The ALJ
recommended that the Partial Settlement which mitigates the rate increase be approved.
R.D. at 107.
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The ALJ further recommended that the Commission issue an Opinion and
Order directing the City to file a tariff allowing for recovery of no more than $7,393,104
in additional base rate revenue or $16,087,906 in total allowable revenue, if the
Irrevocable Trust Agreement is finalized and proof provided to the Commission by the
end of the suspension of rates. The ALJ recommended that if the Irrevocable Trust
Agreement is not finalized and filed by this time, then the Commission’s Opinion and
Order should direct the City to file a tariff allowing for recovery of no more than
$6,914,657 in additional base rate revenue or $15,609,459 in total allowable revenues,
subject to the remainder being placed into effect when the Irrevocable Trust Agreement is
finalized and filed. The ALJ further recommended that the City should also be required
to supplement the record with cost support for the $83 restoration charge in a document
identified as City Exhibit No. 8 and to either justify or change its existing commodity
block rate structure in its next base rate case. R.D. at 107-108.
Based on our review, evaluation and analysis of the record evidence, we
have adopted the ALJ’s recommendations in all areas except capital structure, cost of
equity and the proposed scale back, as discussed above. The resulting revenue increase is
$5,787,910, or about 67.1 percent as the Irrevocable Trust Agreement has not been
finalized as of the date of this Opinion and Order. The total allowable revenue increase,
once the Irrevocable Trust Agreement has been finalized and filed with the Commission,
is $6,265,621, or about 72.7 percent. As such, the Exceptions filed by the various Parties
hereto, are granted or denied, as discussed supra. Accordingly, the ALJ’s Recommended
Decision is adopted as modified by this Opinion and Order.
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XI.
ORDER
THEREFORE;
IT IS ORDERED:
1.
That the Exceptions filed by the City of Lancaster – Bureau of
Water, the Office of Trial Staff, the Office of Consumer Advocate and the Kellogg
Company on or before May 17, 2011, to the Recommended Decision of Administrative
Law Judge Kandace F. Melillo are granted or denied, consistent with this Opinion and
Order.
2.
That the Exceptions filed by Mr. George Poulin on May 16, 2011, to
the Recommended Decision of Administrative Law Judge Kandace F. Melillo are denied.
3.
That the Recommended Decision of Administrative Law Judge
Kandace F. Melillo, issued on April 27, 2011, is adopted, to the extent it is consistent
with this Opinion and Order.
4.
That the City of Lancaster – Bureau of Water shall not place into
effect the rates contained in Supplement No. 40 to Tariff Sewer - Pa. P.U.C. No. 6, which
have been found to be unjust, unreasonable and, therefore, unlawful.
5.
That the Joint Petition in Partial Settlement of Rate Investigation
filed in this matter on February 22, 2011, is hereby approved.
6.
That the City of Lancaster – Bureau of Water is hereby authorized to
file tariffs, tariff supplements, or tariff revisions containing rates, provisions, rules and
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regulations, consistent with the findings herein, to produce revenues not in excess of
$14,960,423 if the Irrevocable Trust Agreement is finalized and proof provided to the
Commission by the end of the rate suspension period.
7.
That if the Irrevocable Trust Agreement is not finalized and filed by
the end of the rate suspension period, then the City of Lancaster – Bureau of Water is
hereby authorized to file tariffs, tariff supplements, or tariff revisions containing rates,
provisions, rules and regulations, consistent with the findings herein, to produce revenues
not in excess of $14,482,712, subject to the remainder being placed into effect when the
Irrevocable Trust Agreement is finalized and filed.
8.
That the City of Lancaster – Bureau of Water’s tariffs, tariff
supplements, or tariff revisions described in Ordering Paragraphs 6 and 7, above, may be
filed upon less than statutory notice, pursuant to the provisions of 52 Pa. Code §§53.31
and 53.101, and may be filed to be effective for service rendered on and after the date of
entry of the instant Opinion and Order.
9.
That the City of Lancaster – Bureau of Water shall file detailed
calculations with its tariff filing, which shall demonstrate to this Commission’s
satisfaction that the filed rates comply with the proof of revenue, in the form and manner
customarily filed in support of compliance tariffs.
10.
That the City of Lancaster – Bureau of Water shall comply with all
directives, conclusions and recommendations contained in the Commission’s Opinion
and Order that are not the subject of individual ordering paragraphs as fully as if they
were the subject of specific ordering paragraphs.
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11.
That the City of Lancaster – Bureau of Water upgrade its plant and
depreciation accounting and records and obtain verification from its auditors that its
accounting procedures and reporting are consistent with Pennsylvania Public Utility
Commission requirements for Class A Water Utilities as well as with GASB
requirements.
12.
That the record of this proceeding be reopened for the limited
purpose of admitting into evidence the interrogatory response (response to OTS-RS20-D), including cost calculation, and associated tariff language change (identified as
City Exhibit No. 8) to support the change in the Restoration – Reconnection Charge in
Sections 8.4 and 12.4 of the tariff, and that the City of Lancaster – Bureau of Water
provide the requisite number of copies to the Secretary’s Bureau, and that the record
thereafter be closed.
13.
That the City of Lancaster – Bureau of Water evaluate the propriety
of its existing commodity block rate structure and, in its next base rate filing, either
propose separate rates for each customer class, based on cost of service, or provide
justification for maintaining the existing rate structure. The following matters shall be
specifically addressed in any justification for maintaining the existing structure: (a)
support for the number of GMS rate blocks; (b) support for the size of the rate blocks;
and (c) an explanation of why the existing GMS rate structure is preferable to
establishing separate rate schedules for the outside-City residential, commercial and
industrial customers.
14.
That the Formal Complaints filed at Docket Nos. C-2010-2197988;
C-2010-2198077; C-2010-2198619; C-2010-2198821; C-2010-2199946; C-20102200324; C-2010-2200532; C-2010-2200534; C-2010-2200594; C-2010-2201209;
C-2010-2201794; C-2010-2202121; C-2010-2202868; C-2010-2204301; C-2010124
2204311; C-2010-2204407; C-2010-2204410; C-2010-2204414; C-2010-2204415;
C-2010-2204436; C-2010-2204454; C-2010-2206497; C-2010-2206528; C-20102206541; C-2010-2208880; and, C-2010-2213105, against the proposed rate increase at
Docket No. R-2010-2179103, are sustained, in part, and denied, in part, consistent with
this Opinion and Order.
15.
That the Pennsylvania Public Utility Commission’s inquiry and
investigation at Docket Number R-2010-2179103 is terminated and the cases closed in
this and all associated cases at Docket Nos. C-2010-2197988; C-2010-2198077; C-20102198619; C-2010-2198821; C-2010-2199946; C-2010-2200324; C-2010-2200532;
C-2010-2200534; C-2010-2200594; C-2010-2201209; C-2010-2201794; C-20102202121; C-2010-2202868; C_2010-2204301; C-2010-2204311; C-2010-2204407;
C-2010-2204410; C-2010-2204414; C-2010-2204415; C-2010-2204436; C-20102204454; C-2010-2206497; C-2010-2206528; C-2010-2206541; C-2010-2208880; and,
C-2010-2213105.
BY THE COMMISSION,
Rosemary Chiavetta
Secretary
(SEAL)
ORDER ADOPTED: June 30, 2011
ORDER ENTERED: July 14, 2011
125
ANNEX A
Tables – Pre Irrevocable Trust Agreement
TABLE I
City of Lancaster - Bureau of Water
INCOME SUMMARY - Pre Irrevocable Trust Agreement
R-2010-2179103
Operating Revenue
Pro Forma
Test
Pro Forma
Present Rates
Year
Present Rates
12/31/2009 (1)
Adjustments (1)
$
$
8,558,113
Commission
Commission
Total
Commission
Pro Forma
Revenue
Allowable
12/31/2010 (1)
Adjustments
Present Rates
Increase
Revenues
$
$
$
$
$
63,349
8,621,462
73,340
8,694,802
5,787,910
14,482,712
Expenses:
O & M Expense
8,366,918
69,232
8,436,150
(877,797)
7,558,353
0
7,558,353
Depreciation
854,349
1,486,354
2,340,703
(150,500)
2,190,203
0
2,190,203
Taxes, Other
0
0
0
0
0
0
0
State
0
0
0
0
0
0
0
Federal
0
0
0
0
0
0
0
Total Expenses
9,221,267
1,555,586
10,776,853
(1,028,297)
9,748,556
0
9,748,556
Income Available for Return
(663,154)
(1,492,237)
(2,155,391)
1,101,637
(1,053,754)
5,787,910
4,734,156
26,888,268
65,466,229
92,354,497
(1,487,783)
90,866,714
90,866,714
-1.16%
5.21%
Income Taxes:
Rate Base
Rate of Return
-2.47%
-2.33%
(1) Exhibit 3-B, Schedule 1, Page 3 of 3
i
TABLE I(A)
City of Lancaster - Bureau of Water
RATE OF RETURN
R-2010-2179103
Structure
Cost
Weighted
Cost
Total Cost of Debt
83.80%
4.66%
3.91%
Long-term Debt
Short-term Debt
Preferred Stock
Common Equity
83.80%
0.00%
0.00%
16.20%
4.66%
0.00%
0.00%
8.00%
3.91%
0.00%
0.00%
1.30%
100.00%
5.21%
ii
TABLE II
City of Lancaster - Bureau of Water
SUMMARY OF ADJUSTMENTS - Pre Irrevocable Trust Agreement
R-2010-2179103
Adjustments
Rate Base
Revenues
Expenses
Depreciation
Taxes-Other
State
Income Tax
Federal
Income Tax
0
0
0
RATE BASE:
City Post Rejoiner Adj. City Main Brief Sch A-1, p.3
(1,489,468)
Prepayments
(82,641)
Partial Settlement - Accum. Depc.
150,500
CWC
(66,174)
REVENUES:
City Post Rejoiner Adj. City Main Brief Sch A-1, p.3
Rental Inc. - OTS St. No. 2-SR
(1,176)
74,516
EXPENSES:
City Post Rejoiner Adj. City Main Brief Sch A-1, p.3
OPEB - Pre ITA
Rate Case Expense
(261,578)
(479,088)
(137,131)
DEPRECIATION:
Partial Stlmt - Annual. Depc.
(150,500)
TAXES:
TOTALS
(1,487,783)
73,340
(877,797)
iii
(150,500)
ANNEX B
Tables – Post Irrevocable Trust Agreement
TABLE I
City of Lancaster - Bureau of Water
INCOME SUMMARY - Post Irrevocable Trust Agreement
R-2010-2179103
Commission
Adjustments
$
Commission
Pro Forma
Present Rates
$
Commission
Revenue
Increase
$
Total
Allowable
Revenues
$
8,621,462
73,340
8,694,802
6,265,621
14,960,423
69,232
1,486,354
0
8,436,150
2,340,703
0
(403,177)
(150,500)
0
8,032,973
2,190,203
0
0
0
0
8,032,973
2,190,203
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Total Expenses
9,221,267
1,555,586
10,776,853
(553,677)
10,223,176
0
10,223,176
Income Available for Return
(663,154)
(1,492,237)
(2,155,391)
627,017
(1,528,374)
6,265,621
4,737,247
26,888,268
65,466,229
92,354,497
(1,428,455)
90,926,042
90,926,042
-1.68%
5.21%
Operating Revenue
Expenses:
O & M Expense
Depreciation
Taxes, Other
Income Taxes:
State
Federal
Rate Base
Rate of Return
Pro Forma
Present Rates
12/31/2009 (1)
$
Test
Year
Adjustments (1)
$
Pro Forma
Present Rates
12/31/2010 (1)
$
8,558,113
63,349
8,366,918
854,349
0
-2.47%
-2.33%
(1) Exhibit 3-B, Schedule 1, Page 3 of 3
i
i
ii
TABLE II
City of Lancaster - Bureau of Water
SUMMARY OF ADJUSTMENTS - Post Irrevocable Trust Agreement
R-2010-2179103
Adjustments
Rate Base
$
Revenues
$
Expenses
$
Depreciation
$
Taxes-Other
$
State
Income Tax
$
Federal
Income Tax
$
0
0
0
RATE BASE:
City Post Rejoiner Adj. City Main Brief Sch A-1, p.3
(1,489,468)
Prepayments
(82,641)
Partial Settlement - Accum. Depc.
150,500
CWC
(6,846)
REVENUES:
City Post Rejoiner Adj. City Main Brief Sch A-1, p.3
Rental Inc. - OTS St. No. 2-SR
(1,176)
74,516
EXPENSES:
City Post Rejoiner Adj. City Main Brief Sch A-1, p.3
OPEB - Post ITA
Rate Case Expense
(261,578)
(4,468)
(137,131)
DEPRECIATION:
Partial Stlmt - Annual. Depc.
(150,500)
TAXES:
TOTALS
(1,428,455)
73,340
(403,177)
ii
(150,500)