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

219 A.3d 692

Tanya J. MCCLOSKEY, Acting Consumer Advocate, Petitioner

v.PENNSYLVANIA PUBLIC UTILITY COMMISSION, Respondent

No. 1183 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.

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 26, 2018 order (April 2018 Order) holding that Act 40 of 2016 (Act 40)¹ does not apply to Distribution System Improvement Charge (DSIC) calculations. There are two issues before this Court: (1) whether the OCA's appeal was timely; and (2) whether the PUC correctly held that Act 40 is ambiguous and, based upon its interpretation thereof, Newtown Artesian Water Company (NAWC) was not required to include accumulated deferred income taxes (ADIT) and state income taxes in its DSIC calculation.²

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 Among other things, Act 11 repealed the prior statute that permitted only water utilities to charge a DSIC ( 66 Pa.C.S. § 1307(g) ), and authorized natural gas distribution, electric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).

In McCloskey I , this Court considered whether the PUC erred when it concluded that a utility was not required to include an ADIT adjustment in its DSIC calculation and permitted the utility to include the state income tax gross-up in its DSIC calculation. In affirming the PUC's order, this Court relied upon Section 1301 of the Code, which provides, in relevant part, that "[e]very rate made, demanded, or received by any public utility, or by any two or more public utilities jointly, shall be just and reasonable, and in conformity with regulations or orders of the [PUC]." 66 Pa.C.S. § 1301. This Court held that "there is no single way to arrive at just and reasonable rates and that the [PUC] is ‘vested with discretion to decide what factors it will consider in setting or evaluating a utility's rates.’ " McCloskey I , 127 A.3d at 868 (quoting Popowsky v. Pa. Pub. Util. Comm'n (Pa. Cable Television Ass'n) , 669 A.2d 1029, 1040 (Pa. Cmwlth. 1995), rev'd on other grounds , 550 Pa. 449, 706 A.2d 1197 (1997) ). "The bottom line is that the appropriate inquiry is whether the total effect of the surcharge results in unjust and unreasonable rates." Id. at 869.

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 September 1, 2017, NAWC filed a supplement to its DSIC tariff seeking to increase NAWC's existing cap from 5% to 7.5%. On September 29, 2017, the OCA filed a formal complaint with the PUC opposing the proposed cap increase (Complaint).³ The OCA also asserted that given the enactment of Act 40, NAWC must comply with Section 1301.1 of the Code by including related federal and state income tax credits and deductions in its DSIC rate calculation. On October 5, 2017, the PUC instituted an investigation into the lawfulness, justness, and reasonableness of NAWC's existing and proposed rates, rules, and regulations. The PUC ordered that NAWC's supplement be suspended by operation of law until May 1, 2018, unless it directed otherwise. The matter was assigned to the Office of Administrative Law Judge (ALJ). On February 9, 2018, the ALJ issued a recommended decision (Recommended Decision) denying NAWC's request to increase its rate cap, and directing NAWC to modify its DSIC to account for all federal and state income tax deductions and credits in its DSIC calculation.

On March 1, 2018, NAWC filed exceptions to the Recommended Decision and OCA filed reply exceptions. By the April 2018 Order, the PUC reversed the ALJ's Recommended Decision, concluding that Section 1301.1(a) of the Code applies to base rate filings but not to DSIC rates. The PUC explained:

[W]e disagree with the ALJ's conclusion that Section 1301.1 [of the Code] requires [NAWC's] DSIC 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. Section 1301.1 [of the Code] 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 affiliated entity.

66 Pa.C.S. § 1301.1(a). This provision explains how the deductions and credits in the first sentence of Section 1301.1(a) [of the Code] should be calculated. It refers back to the first two sentences of Section 1301.1(a) [of the Code] and specifically uses the term ‘rate base’ and not the general term ‘rate.’ The term ‘rate base’ is a technical term that is used in general base rate cases. The use of both the terms ‘rate’ and ‘rate base’ creates an ambiguity in the meaning of Section 1301.1 [of the Code] and supports [NAWC's] position that the language in Section 1301.1 [of the Code] is ambiguous and, therefore, should be analyzed under Section 1921(c) [of the Statutory Construction Act of 1972 (SCA),⁴ ] 1 Pa.C.S. § 1921(c), to ascertain the intention of the General Assembly.

April 2018 Order at 37-39 (citations and footnotes omitted).⁵

The PUC remanded the matter to the ALJ for a determination of whether NAWC exceeded its rate cap and would continue to do so, thereby justifying the rate cap increase. The OCA did not appeal from the April 2018 Order at that time. On June 15, 2018, the ALJ issued a recommended decision on remand (Recommended Decision on Remand) concluding that...