McCloskey v. Pa. Pub. Utility Comm'n

255 A.3d 416

Tanya J. MCCLOSKEY, Acting Consumer Advocate

v.PENNSYLVANIA PUBLIC UTILITY COMMISSION

Appeal of: Metropolitan Edison Company, Pennsylvania Electric Company, Pennsylvania Power Company, West Penn Power Company

Tanya J. McCloskey, Acting Consumer Advocate, Appellee

v.Pennsylvania Public Utility Commission, Appellant

Tanya J. McCloskey, Acting Consumer Advocate, Appellee

v.Pennsylvania Public Utility Commission, Appellant

No. 24 MAP 2020

No. 25 MAP 2020

No. 26 MAP 2020

Supreme Court of Pennsylvania.

Argued: October 21, 2020

Decided: July 21, 2021

Donna M. J. Clark, Esq., Terrance J. Fitzpatrick, Esq., Energy Association of Pennsylvania, Michael Warren Hassell, Esq., Harrisburg, David Bruce MacGregor, Esq., Post & Schell PC, Philadelphia, for Energy Association of Pennsylvania, Amicus Curiae.

Michael D. Klein, Esq., Jonathan P. Nase, Esq., David Pascal Zambito, Esq., Cozen O'Connor, Harrisburg, for National Association of Water Companies, Pennsylvania Chapter, Amicus Curiae.

Renardo Lee Hicks, Esq., James Anthony Mullins, Esq., Harrisburg, Scott J. Thomas, Esq., Erin Nicole Tate, Esq., Pennsylvania Public Utility Commission, David E. Screven, Esq., Pennsylvania Public Utility Commission, Law Bureau, for Appellant Pennsylvania Public Utility Commission.

Laura Jane Antinucci, Esq., Harrison William Breitman, Esq. PA, Office of Consumer Advocate, Harrisburg, Phillip David Demanchick Jr., Esq., Pennsylvania Office of Consumer Advocate, Erin Leigh Gannon, Esq., Christine Maloni Hoover, Esq., Pennsylvania Office of the Attorney General, for Appellee Tanya J. McCloskey.

Susan Elizabeth Bruce, Esq., Charis Mincavage, Esq., McNees, Wallace & Nurick, LLC, Harrisburg, for Appellees Penelec Industrial Customer Alliance, West Penn Power Industrial Intervenors, Industrial Users Group.

Anthony C. DeCusatis, Esq., Mark Abraham Lazaroff, Esq., Brooke Erin McGlinn, Esq., Marc J. Sonnenfeld, Esq., Philadelphia, Morgan, Lewis & Bockius LLP, John Lawrence Munsch, Esq., FirstEnergy Service Company, Greensburg, for Appellees Metropolitan Edison Co., PA Electric Co., PA Power Co., West Power Co.

BAER, C.J., SAYLOR, TODD, DONOHUE, DOUGHERTY, WECHT, MUNDY, JJ.

OPINION

CHIEF JUSTICE BAER

This case presents questions of statutory construction involving whether a recent enactment to the Public Utility Code (Code), 66 Pa.C.S. § 1301.1(a), requiring the inclusion of income tax deductions and credits in rate computations, applies to "distribution system improvement charges" ("DSICs").¹ In these consolidated cases, the Commonwealth Court reversed the determinations of the Pennsylvania Public Utility Commission ("PUC") and held that Section 1301.1(a) requires public utilities to revise their DSIC calculations to include income tax deductions and credits to reduce rates charged to consumers. McCloskey v. Pa. Pub. Util. Comm'n., 219 A.3d 1216 (Pa. Cmwlth. 2019) ; McCloskey v. Pa. Pub. Util. Comm'n., 219 A.3d 692 (Pa. Cmwlth. 2019). The PUC and the affected utilities appealed. For the reasons set forth below, we affirm the orders of the Commonwealth Court, although based, in part, upon different reasoning.²

In these consolidated cases, several public utilities sought to add or adjust DSICs to recover expenses related to repairing, improving, or replacing their distribution system infrastructure, and the Office of Consumer Advocate ("OCA"), through Acting Consumer Advocate Tanya J. McCloskey, raised challenges to these DSIC computations seeking to add calculations to account for income tax deductions and credits and thereby reduce the rates charged to consumers. At base, the parties dispute whether and, if so, how the addition of Section 1301.1(a) into Subchapter A of Chapter 13 of the Code, requiring inclusion of "income tax deductions and credits" in rate calculations,³ should apply to the DSIC rate adjustment mechanism of Subchapter B of Chapter 13, 66 Pa.C.S. §§ 1350 - 1360. In broad strokes, the PUC and the public utilities argue (1) that ambiguity exists as to whether the General Assembly intended Section 1301.1 to apply to the DSIC mechanism; and, assuming arguendo that it does apply, (2) that the Commonwealth Court's application of Section 1301.1(a) improperly creates conflicts with the statutory provisions governing the DSIC calculation; and/or (3) that certain existing DSIC statutory provisions can be read to satisfy the requirements of Section 1301.1(a). We address each of these arguments in turn after recounting central aspects of the DSIC mechanism and the procedural history of the consolidated cases before the Court.

I. Rate Setting and the DSIC Rate Adjustment Mechanism

At its most simplistic, utility ratemaking is intended to compensate utilities for the reasonable costs incurred to provide the public with the relevant utility service, including gas, electricity, water, and wastewater. See generally 66 Pa.C.S. § 1301 ("Every rate made ... by any public utility ... shall be just and reasonable, and in conformity with regulations or orders of the [PUC]."). As relevant to the categories of public utilities involved in this case, the parties explain that the public utilities obtain approval from the PUC for the "base rates" used to determine the amount customers are charged for the utilities they use. Although this term is not defined by the Code, all parties acknowledge that a base rate is the product of an extensive and complex rate setting process that results in a numerical figure, which is intended to apply for several years.⁴ See 66 Pa.C.S. § 1308. This base rate, however, is subject to interim adjustments to increase or decrease the rate charged to customers between base rate cases.

One rate adjustment mechanism is the DSIC. The DSIC mechanism, adopted via Act of February 14, 2012, P.L. 72, No. 11 ("Act 11"), allows for a surcharge to be added to the base rate charged to consumers to compensate public utilities for infrastructure investments. The DSIC mechanism was intended to incentivize public utilities to engage in the costly endeavor of repairing, improving, and replacing Pennsylvania's aging infrastructure. 66 Pa.C.S. § 1353(a) (stating that a DSIC provides "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"); see also, McCloskey v. Pa. Pub. Util. Comm'n , 127 A.3d 860, 863 (Pa. Cmwlth. 2015) (describing the DSIC process generally) (hereinafter " McCloskey-Columbia Gas " ).⁵

Prior to this enactment, utilities were unable to adjust their rates between base rate cases to recover the costs of these non-revenue producing and non-expense reducing projects, resulting in a regulatory lag of potentially years between the time utilities expended funds for the infrastructure improvements and when they could recoup that amount from customers through increases in the base rates charged. The DSIC rate adjustment process was intended to reduce this regulatory lag and provide a streamlined rate adjustment process between the more complex base rate proceedings.

The General Assembly enacted detailed statutory provisions regarding the DSIC in Sections 1350 - 1360, including aspects of the calculation process. It additionally tasked the PUC with the adoption of a "model tariff" to specify what details public utilities must submit in support of their DSIC petitions. 66 Pa.C.S. § 1353(b)(1). In accordance with this provision, the PUC adopted its Model Tariff and other implementing provisions in its Implementation of Act 11 of 2012, Docket Number M-2012-2293611, 2012 WL 3249678 (Aug. 12, 2012) (hereinafter " Act 11 Final Implementation Order "). The OCA, during the Act 11 implementation process and in at least one prior DSIC proceeding, advocated for modifications to the DSIC calculation to incorporate the tax benefits received by the utilities, through the inclusion of "accumulated deferred income taxes" ("ADIT") and state income tax deductions.⁶ The PUC and the Commonwealth Court rejected these suggested modifications to the DSIC calculation. Id. ; McCloskey-Columbia Gas , 127 A.3d 860. The question raised by the case at bar, where the OCA seeks similar modifications to the DSIC calculation, is whether the 2016 enactment of Section 1301.1(a) changes the analysis previously employed by the PUC and Commonwealth Court.

II. Procedural Histories of the Consolidated Cases

In February 2016, four subsidiaries of FirstEnergy Corporation ("Electric Utilities") filed with the PUC to add DSIC riders to their existing tariffs to recoup infrastructure expenditures. Similarly, in September 2017, Newtown Artesian Water Company ("Newtown") filed a DSIC supplement to increase its existing DSIC.⁷ For the purpose of the issues currently before this Court, these filings generally complied with the requirements adopted by the PUC for DSIC rate adjustments, 66 Pa.C.S. §§ 1350 -60.

The OCA raised several challenges to the DSIC riders sought by the Electric Utilities and the DSIC supplement filed by Newtown.⁸ As relevant to the issues at bar, the OCA faulted the Utilities for failing to account for income tax deductions and credits related to the infrastructure expenses, which the OCA argued is required by Section 1301.1(a), discussed in detail infra .⁹

The OCA proposed specific modifications to the calculations included in the PUC's Model Tariff to account for income tax deductions and credits as required by Section 1301.1, which involved the incorporation of ADIT and state income tax deductions. As noted above, the OCA had advocated for the incorporation of these concepts into the DSIC calculation long before the enactment of Section 1301.1, including prior to the PUC's 2012 implementation of the Model Tariff and in regard to a 2013 DSIC petition filed by Columbia Gas of Pennsylvania, Inc., discussed infra .

In response, the Utilities raised several arguments against the incorporation of the OCA's proposed...