McCloskey v. Pa. Pub. Util. Comm'n

219 A.3d 1216

Tanya J. MCCLOSKEY, Acting Consumer Advocate, Petitioner

v.PENNSYLVANIA PUBLIC UTILITY COMMISSION, Respondent

No. 697 C.D. 2018

Commonwealth Court of Pennsylvania.

Argued June 6, 2019

Decided July 11, 2019

Reargument Denied September 4, 2019

Publication Ordered October 4, 2019

Erin L. Gannon, Sr. Asst., Consumer Advocate, Harrisburg, for Petitioner.

Anthony C. DeCusatis, Philadelphia, for Intervenors Metropolitan Edison Company, Pennsylvania Electric Company, Pennsylvania Power Company and West Penn Power Company.

David E. Screven, Asst. Counsel, Harrisburg, for Respondent.

BEFORE: HONORABLE P. KEVIN BROBSON, Judge, HONORABLE ANNE E. COVEY, Judge, HONORABLE ELLEN CEISLER, Judge

OPINION BY JUDGE COVEY

The Office of Consumer Advocate (OCA) petitions this Court for review of the Pennsylvania Public Utility Commission's (PUC) April 19, 2018 order (April 2018 Order) granting in part and denying in part the exceptions of Metropolitan Edison Company (Met-Ed), Pennsylvania Electric Company (Penelec), Pennsylvania Power Company (Penn Power), and West Penn Power Company (West Penn) (collectively, the Companies);¹ denying the OCA's exceptions, adopting in part and reversing in part the Administrative Law Judge's (ALJ) Recommended Decision (Recommended Decision); and further finding that Act 40 of 2016 (Act 40)² does not apply to Distribution System Improvement Charge (DSIC) calculations. The sole issue before this Court is whether the PUC properly concluded that the language of Act 40 is ambiguous and, based upon its interpretation thereof, the Companies are not required to include accumulated deferred income taxes (ADIT) and state income taxes in their DSIC calculations.³

Background

In order to address [concerns over aging infrastructure], the [PUC] encouraged utilities to plan and implement accelerated replacement of their aging infrastructure. At the same time, however, it was understood by utilities making infrastructure investment that they would be unable to adjust the rates they charged to their customers between traditional ratemaking cases to recover those specific infrastructure investment costs in a timely manner.

Therefore, on February 14, 2012, Act 11 [of 2012, (Act 11), which amended Chapters 3, 13 and 33 of the Public Utility Code (Code), 66 Pa.C.S. § 101 - 3316 ] was signed into law. Among other things, Act 11 repealed the prior statute that permitted only water utilities to charge a DSIC ( 66 Pa.C.S. § 1307(g) ), and authorized natural gas distribution, electric distribution, as well as water and wastewater utilities to charge a DSIC. Now, these utilities have access to an alternative ratemaking mechanism whereby the utilities may recover costs related to repair, improvement and replacement of eligible projects outside of a ratemaking case. See 66 Pa.C.S. §§ 1350 - 1360.

Section 1353(a) of the Code, 66 Pa.C.S. § 1353(a) [,] states[,] in pertinent part [ ]:

[A] utility may petition the [PUC], or the [PUC] after notice and hearing, may approve the establishment of a [DSIC] to provide for the timely recovery of the reasonable and prudent costs incurred to repair, improve or replace eligible property in order to ensure and maintain adequate, efficient, safe, reliable and reasonable service.

66 Pa.C.S. § 1353(a).

Section 1352 of the Code, 66 Pa.C.S. § 1352, states that, as a prerequisite to the implementation of a DSIC, a utility must file a long-term infrastructure improvement plan (LTIIP).

McCloskey v. Pa. Pub. Util. Comm'n (McCloskey I) , 127 A.3d 860, 863 (Pa. Cmwlth. 2015) (footnotes omitted). On August 2, 2012, the PUC entered its Order in Implementation of Act 11 of 2012, Docket No. M-2012-2293611 (Final Implementation Order), which established procedures and guidelines to implement Act 11.

By separate orders dated February 11, 2016, the PUC approved the Companies' LTIIP petitions and, on February 16, 2016, the Companies filed separate DSIC petitions with attached draft tariff supplements to add DSIC Riders in their respective tariffs with proposed effective dates of July 1, 2016. On February 26, 2016, the OCA filed Formal Complaints, Public Statements and Answers to the DSIC petitions. Several other parties filed formal complaints or intervention petitions.

Apart from the pending DSIC petitions, on April 28, 2016, the Companies filed separate requests under Section 1308 of the Code, 66 Pa.C.S. § 1308, requesting increases to their base rates. The Companies' base rate requests were consolidated (Base Rate Proceedings) and, on May 3, 2016, the OCA filed formal complaints challenging the proposed rates. On June 9, 2016, the PUC entered an order in the Base Rate Proceedings initiating an investigation to determine the lawfulness, justness and reasonableness of the Companies' existing and proposed base rates.

Also on June 9, 2016, the PUC entered separate orders granting the Companies' four DSIC petitions (June 2016 DSIC Orders), therein concluding that the DSIC petitions complied with the requirements of Act 11 and the Final Implementation Order. The PUC ruled that the petitions were consistent with applicable law and PUC policy, but referred certain issues pertaining to customer exemptions and DSIC calculation to the ALJ for hearing. Thus, the PUC allowed the tariffs to go into effect on July 1, 2016, subject to refund and recoupment, pending the PUC's final resolution of the matters referred to the ALJ. The DSIC matters were consolidated (DSIC Proceedings).

Thereafter, on June 12, 2016, Act 40 was signed into law and became effective on August 11, 2016. Act 40 added Section 1301.1 to the Code which requires:

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

(b) Revenue use. -- If a differential accrues to a public utility resulting from applying the ratemaking methods employed by the [PUC] prior to the effective date of subsection (a) for ratemaking purposes, the differential shall be used as follows:

(1) Fifty percent to support reliability or infrastructure related to the rate base eligible capital investment as determined by the [PUC]; and

(2) Fifty percent for general corporate purposes.

(c) Application. - The following shall apply:

(1) Subsection (b) shall no longer apply after December 31, 2025.

(2) This section shall apply to all cases where the final order is entered after the effective date of this section.

66 Pa.C.S. § 1301.1.

On June 20, 2016, the Companies submitted tariff supplements reflecting the approved DSIC mechanism, which supplements were included in the Base Rate Proceedings investigations.

On January 19, 2017, the PUC approved partial settlements among the parties in the Base Rate Proceedings. The only issue that was not resolved in the partial settlements was the inclusion of ADIT in the DSIC calculation. Accordingly, the PUC referred that issue to the DSIC Proceedings before the ALJ and transferred relevant parts of the record thereto.

On August 31, 2017, the ALJ issued the Recommended Decision concluding, in relevant part, that Act 40 requires the Companies to include federal and state income tax deductions and credits in their DSIC calculations, and recommending that the Companies be directed to account for such in their DSIC rates. The parties filed exceptions and reply exceptions.

On April 19, 2018, the PUC issued the April 2018 Order. Therein, it explained, "there is one contested issue before us in this proceeding – whether Act 40 requires the Companies to include federal and state income tax deductions generated by the DSIC investment in their DSIC calculation." April 2018 Order at 15. The PUC concluded:

[W]e disagree with the ALJ's conclusion that Section 1301.1 [of the Code] requires the Companies' DSICs to include federal and state income tax deductions and credits generated by DSIC investment. We find that the language in Section 1301.1 [of the Code] is ambiguous regarding whether Act 40 applies to the DSIC. Statutory language is considered ambiguous when a pertinent provision is susceptible to more than one reasonable interpretation or when the language is vague, uncertain, or indefinite. In this case, based on the [p]arties' positions and our reading of Section 1301.1 [of the Code], the statutory language is susceptible to more than one reasonable interpretation. The OCA argues that the language in the first sentence of Section 1301.1(a) [of the Code] clearly provides that Act 40 applies to the DSIC because Act 40 applies to rates as broadly defined in Section 102 of the Code, [ 66 Pa.C.S. § 102,] and the DSIC is a rate that recovers utility investment and income tax expense related to that investment.

However, the OCA's position does not account for the language in the third sentence of Section 1301.1(a) [of the Code], which provides as follows:

The deferred income taxes used to determine the rate base of a public utility for ratemaking purposes shall be based solely on the tax deductions and credits received by the public utility and shall not include any deductions or credits generated by the expenses or investments of a public utility's parent or any

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