Opinion
Argued May 14, 1986
October 21, 1986.
Utilities — Scope of appellate review — Rate base — Used and useful — Excess capacity — Buy-back — Burden of proof.
1. In a utilities case, the scope of review of the Commonwealth Court of Pennsylvania is limited to a determination of whether constitutional rights have been violated or an error of law committed or whether the findings, determinations or order of the Pennsylvania Public Utility Commission are supported by substantial evidence. [373-4]
2. A generating plant may properly be excluded from a utility's rate base if the investment in that plant is found to be a result of managerial imprudence occurring at the time the decision to invest was made; it does not necessarily follow, however, that recovery of costs prudently incurred will always be allowed. [375-6]
3. The determination of whether a prudently constructed generating plant should be included in a utility's rate base is based on whether, during the test year involved, the plant will be used and useful in rendering service to the public. [376]
4. The interpretation given by the Pennsylvania Public Utility Commission to the phrase "used and useful" is entitled to great weight and should be disregarded or overturned only for cogent reasons or if its construction is clearly erroneous. [377-8]
5. When a particular generating plant is the newest addition to a utility's system and when, prior to the commencement of operation of the new plant, the utility's system was not overburdened by excess capacity, it is not an abuse of its discretion for the Pennsylvania Public Utility Commission to conclude that the new plant caused the utility's excess capacity; such a conclusion is not inconsistent with the Commission's system-wide adjustment imposed when the same utility put into service an earlier plant nor with the Commission's prior approval of the newest plant. [378-9-80]
6. In a utility case, when the evidence indicates that a utility's ratepayers receive no present benefit from a buy-back of capacity, it is not an abuse of discretion for the Pennsylvania Public Utility Commission to determine that the entire cost of the buy-back should be borne by the utility's shareholders. [382]
7. The burden of proving that rates set by the Pennsylvania Public Utility Commission are discriminatory is on the customers challenging such rates. [383]
Judge COLINS dissented.
Argued May 14, 1986, before President Judge CRUMLISH, JR., and Judges CRAIG, MacPHAIL, DOYLE, BARRY, COLINS and PALLADINO.
Appeals, Nos. 1345 C.D. 1985, 1360 C.D. 1985, 1361 C.D. 1985 and 1464 C.D. 1985, from the Order of the Pennsylvania Public Utility Commission in the case of Pennsylvania Public Utility Commission v. Pennsylvania Power Light Company, No. R-842651 et al.
Proposed rate increase filed with the Pennsylvania Public Utility Commission. Complaints against increase filed and consolidated. Requested increases modified. Utility and complainants appealed to the Commonwealth Court of Pennsylvania. Held: Affirmed.
Robert H. Young, with him, David B. MacGregor and Donald F. Clarke, Morgan, Lewis Bockius, and G. D. Caliendo and Paul E. Russell, for petitioner, Pennsylvania Power Light Company.
Otto F. Hofmann, with him, David Scholl, for petitioners, Joyce Buehrle and Bernard King. J. Jackson Eaton, III, with him, Thomas C. Sadler, Jr., Butz, Hudders, Tallman, Stevens Johnson, for petitioner, Eastern Penn Energy Association.
Frank B. Wilmarth, Assistant Counsel, with him, John M. Quain, Assistant Counsel, Albert W. Johnson, III, Deputy Chief Counsel, and Charles F. Hoffman, Chief Counsel, for respondent, Pennsylvania Public Utility Commission.
Daniel Clearfield, Assistant Consumer Advocate, with him, Debra M. Kriete, Assistant Consumer Advocate, and David M. Barasch, Consumer Advocate, for intervenor, Consumer Advocate.
Henry R. MacNicholas, McNees, Wallace Nurick, for intervenor, Lehigh Valley Power Committee.
Oscar B. Brumback, for Amicus Curiae, American Society of Utility Investors.
On July 27, 1984, Pennsylvania Power Light Company (PPL) filed Supplement No. 14 to Tariff Electric — Pa. P.U.C. No. 199, which was designed to increase PPL's rate levels to yield additional revenues of approximately $330 million per year, based upon a test year ending March 31, 1985. The Pennsylvania Public Utility Commission (Commission) suspended operation of the proposed rate increases and ordered that hearings be held regarding their lawfulness.
Thirty-four formal complaints were filed against the proposed rate increases. These complaints were consolidated by the Commission. Two pre-hearing conferences, nineteen days of evidentiary hearings, and six public comment hearings were conducted by an Administrative Law Judge (ALJ), who thereafter issued a Recommended Decision in which he found that PPL was entitled to $236.2 million in additional revenues.
On April 26, 1985, the Commission entered an order approving rates calculated to produce additional annual revenues of only $120.8 million. In reaching its decision, the Commission imposed two "excesss capacity" adjustments on PPL's rate proposal. One adjustment disallowed all costs associated with a temporary "buy-back" by PPL of a 10% portion of Susquehanna Steam Electric Station Unit 1 (Susquehanna 1) and Unit 2 (Susquehanna 2), which PPL had sold to Allegheny Electric Cooperative (Cooperative). The other adjustment disallowed all return on PPL's common equity investment in Susquehanna 2.
On May 17, 1985, PPL filed a petition for review with this Court from the Commission's order, contending that the Commission erred by imposing the two excess capacity adjustments on the utility's rate proposal. Cross-petitions were filed by Joyce Buehrle and Bernard King, who are customers of PPL, and by the Eastern Penn Energy Association (Association). Cross-petitioners Buehrle and King appeal from the Commission's order to the extent that it does not exclude from PPL's rate proposal all costs associated with Susquehanna 2. The Association appeals from that part of the Commission's order which addresses rate allocation; the Association contends that the method of allocation improperly favors PPL's residential customers at the expense of commercial and industrial customers.
Additionally, the Pennsylvania Office of Consumer Advocate (OCA) and the Lehigh Valley Power Committee are parties to this case, having intervened in all of the appeals.
Our scope of review is limited to a determination of whether constitutional rights have been violated, an error of law committed or whether the findings, determinations or order of the Commission are supported by substantial evidence. Cohen v. Pennsylvania Public Utility Commission, 90 Pa. Commw. 98, 494 A.2d 58 (1985).
A. Excess Capacity Adjustment Specific To Susquehanna 2
PPL contends that the Commission improperly applied an excess capacity adjustment which is specific to Susquehanna 2 and which disallows all return on PPL's common equity investment in Susquehanna 2. In determining that there was such excess capacity on PPL's system, the Commission accepted the computation of excess capacity offered into evidence by its Trial Staff witness, who testified that PPL's peak demand of 5,284 megawatts (MW) plus a 22% reserve margin of 1,174 MW was 1,033 MW less than PPL's net installed capacity of 7,491 MW. In recognition of the last PPL rate proceeding concerning Susquehanna 1 (wherein the Commission also found that PPL had 945 MW of excess capacity), and because of "the obvious causal connection between the system excess and the introduction of [Susquehanna 2]", the witness conservatively estimated the actual excess capacity to be 945 MW. (Commission's Opinion at p. 17).
On the basis of this evidence, the Commission determined that the appropriate adjustment for the excess capacity should be specific to Susquehanna 2, in acknowledgment of the fact that "the cause of the excess capacity on PPL's system is the addition of [Susquehanna 2]." (Commission's Order at p. 21). Accordingly, the Commission ordered an adjustment to PPL's rate proposal which denied PPL all return on common equity investment in Susquehanna 2, until such time as PPL can show (1) that the net benefits from Susquehanna 2 will exceed the net costs of the unit to PPL's ratepayers, or (2) that the capacity from Susquehanna 2 is necessary for system reliability. The Commission did, however, allow PPL to recover all reasonable operating, maintenance, and depreciation expenses of Susquehanna 2.
PPL argues that the Commission erred in finding excess capacity on PPL's system, because the formula employed by the Commission does not take into account a variety of factors which impinge upon PPL's ability to provide reliable and economic service to its customers. Moreover, PPL contends that the Commission's formula is inappropriate as applied to new base-load generating plants, because an excess capacity adjustment would necessarily occur whenever a utility brings a new base-load plant into service, unless the utility's existing capacity was grossly inadequate. In the alternative, PPL argues that, assuming there is excess capacity on its system, the adjustment for such excess should not be directed specifically to Susquehanna 2 because of the following reasons: (1) Susquehanna 2 is used and useful property, upon which PPL is entitled to a fair return on investment; (2) an adjustment specific to Susquehanna 2 is inconsistent with the Commission's system-wide excess capacity adjustment imposed when Susquehanna 1 was put into service; (3) the adjustment is inconsistent with the Commission's prior approval of Susquehanna 2; and (4) the adjustment fails to balance properly the interest of PPL's shareholders against that of PPL's customers.
We note that, after the Susquehanna 1 rate proceeding, in which the Commission found that PPL had 945 MW of excess capacity on a system-wide basis, PPL sold a 945 MW portion of its capacity to Jersey Central Power Light Company. Accordingly, any excess capacity attributable to Susquehanna 1 is not at issue in the instant case.
The law concerning adjustments made to a utility's rate base is well settled. A unit may be properly excluded from a utility's rate base if the investment in that unit is found to be a result of managerial imprudence occurring at the time the decision to invest was made. Philadelphia Electric Company v. Pennsylvania Public Utility Commission, 61 Pa. Commw. 325, 433 A.2d 620 (1981). It does not necessarily follow, however, that recovery of costs prudently incurred will always be allowed. Duquesne Light v. Pennsylvania Public Utility Commission, 96 Pa. Commw. 398, 507 A.2d 1274 (1986). Rather, the "touchstone for determining whether or not a prudently constructed unit should be included in a utility's rate base is whether or not, during the test year involved, the unit will be used and useful in rendering service to the public." Philadelphia Electric Company, 61 Pa. Commw. at 329, 433 A.2d at 623 (emphasis added).
Our cases have held that:
[w]hat constitutes used and useful property is committed to the discretion of the Commission. If the Commission reasonably finds that a particular class of property is not used or useful in serving the public, it may exclude the value of the property from the rate base and thus disallow the utility's return on that property.
Cohen, 90 Pa. Commw. at 105, 494 A.2d at 61, quoting Bell Telephone Company v. Pennsylvania Public Utility Commission, 47 Pa. Commw. 614, 629, 408 A.2d 917, 925 (1979). Furthermore, we have noted that, "[i]n the area of adjustments to rate base, the Commission has wide discretion." UGI Corp. v. Pennsylvania Public Utility Commission, 49 Pa. Commw. 69, 79, 410 A.2d 923, 929 (1980). Applying the above-mentioned principles to the case at bar, we conclude that the adjustment imposed by the Commission was well within the ambit of its discretion and must be upheld.
Appellants Buehrle and King contested the Commission's order on the ground that the Commission should have imposed an adjustment which denied all costs associated with Susquehanna 2, rather than the denial merely of PPL's return on common equity investment. Because we determine that Commission's determination was a proper exercise of the Commission's discretion, our discussion as it relates to PPL's contentions is equally dispositive of the arguments made by Buehrle and King.
As the Commission noted, the prudence of constructing Susquehanna 2 was not formally challenged by any party before the Commission and therefore is not at issue in the case at bar. The parties have vigorously contested, however, the question of whether Susquehanna 2 is used and useful in rendering service to the public.
Addressing PPL's contention that the Commission's formula fails to consider all of the factors pertinent to the determination of whether a generating plant is used and useful, we begin by noting that the term "used and useful," as applied to a utility's return on its investment, is codified in Section 1310(d) of the Public Utility Code, which provides that a utility is entitled to "a fair return upon the fair value of the property of such public utility, used and useful in its public service." In the instant case, the Commission has interpreted the word 'useful' as requiring that:
the plant and its associated capacity contribute no more than necessary to system reliability in the accepted, technical sense. In other words, the question is whether the Company's total capacity, including the plant in question, is commensurate with the requirements for peak demand plus a reasonable reserve margin relative to the Company's own system and to its PJM obligation.
(Commission's Opinion at p. 17).
The interpretation given a statute by the agency charged with its execution and application is entitled to great weight and should be disregarded or overturned only for cogent reasons or if such construction is clearly erroneous. Chappell v. Pennsylvania Public Utility Commission, 57 Pa. Commw. 17, 425 A.2d 873 (1981). Accordingly, because we determine that the Commission's interpretation of the phrase "used and useful" is a reasonable one, we will not overturn it.
Admittedly, the Commission's method of calculating excess capacity does not expressly consider the factors which PPL contends are relevant in determining whether a utility has sufficient reserve capacity to insure system reliability. We have never imposed upon the Commission, however, the burden of making its calculations in the most mathematically precise manner possible, as long as the Commission's methods reach a result that is otherwise just and reasonable. As applied to the facts presented in the case at bar, the Commission's formula does reasonably compare PPL's generating capacity to its projected demand requirements for the next five years, as supported by expert witnesses for the Commission's Trial Staff and the OCA. Under the circumstances, therefore, the Commission's formula adequately calculates PPL's excess capacity, and no more is required.
PPL argues that the factors to be considered in determining sufficient reserve capacity should include: the effects of expansion and recession in the areas economy; increased peak demand in colder than normal winter weather; and the desirability of having diversity in the types of generating plants maintained by the utility.
As for PPL's contention that application of the Commission's excess capacity formula to new generating plants is unfair and amounts to an abuse of discretion, we determine that, as applied to the facts of the instant case, this argument must be rejected. The Commission found that PPL presently possesses an extremely large amount of excess capacity which will not be needed by PPL for its demand requirements until well into the next decade, if at all. Our review of the record proves that this finding is supported by substantial evidence. Accordingly, this is not a case where the mere introduction of a new base-load system has resulted in temporary excess capacity, but is rather an anomalous situation wherein, as the Commission noted, "the sheer magnitude of the present excess capacity and the number of years which it will persist render meaningless the Company's arguments about the temporary effect of adding large base load plants." (Commission's Opinion at p. 19).
We note that, in the proper case, it may be possible that a new generating plant is "used and useful" despite the fact that its capacity is not immediately needed to insure that a utility has an adequate reserve capacity. The case at bar, however, is not such a case because, under any standard, the capacity PPL possesses beyond that necessary for its reserve requirements is not used and useful.
Addressing PPL's argument that the adjustment for any excess capacity should not be directed specifically at Susquehanna 2, we conclude that, despite PPL's assertions to the contrary, the Commission in its opinion adequately made out a finding that Susquehanna 2 was not "used and useful", in that the Commission found the excess capacity on PPL's system to be directly attributable to Susquehanna 2. Because Susquehanna 2 was the newest addition to PPL's system, and because, prior to the commencement of Susquehanna 2's operation, PPL's system was not burdened by excess capacity, the Commission did not abuse its discretion by concluding that Susquehanna 2 was the cause of PPL's excess capacity. Although there were other methods available of allocating excess capacity, such as factoring the excess over a system-wide slice of PPL's generating units, we cannot find that the Commission erred by using the method it did. See Philadelphia Electric Company, 61 Pa. Commw. at 330, 433 A.2d at 623.
Indeed, our conclusion is buttressed by the fact that we consider the Commission's allocation of excess capacity in this case to be an appropriate discharge of its duty to balance the interests of PPEs customers against those of its investors. Pennsylvania Electric Company v. Pennsylvania Public Utility Commission, 509 Pa. 324, 502 A.2d 130 (1985). As our Supreme Court noted in Pennsylvania Electric Company, the "focus of inquiry is properly upon the 'total effect' of the rate order, rather than upon the rate-setting method employed." Id. at 329, 502 A.2d at 133. In the case at bar, the Commission's order allows PPL to recover from its ratepayers the expenses of operating and maintaining Susquehanna 2, which PPL was properly entitled to recover. UGI Corp.; see also Cohen and Philadelphia Electric Company. The Commission denied, however, a return on PPL's common equity investment in Susquehanna 2 until such time as PPL can show that the capacity produced by Susquehanna 2 is used and useful. Despite PPL's contention that such allocation of the excess capacity burden falls unfairly on its investors, the Commission determined that such a balancing of competing interests was fair, in that the risk of excess capacity is properly laid more heavily on PPL's shareholders, who voluntarily assumed that risk in the first instance by investing in Susquehanna 2. Because this determination was made within the broad boundaries of the Commission's discretion and is supported by substantial evidence of record, this Court may not indulge in the process of reweighing the evidence and must uphold the Commission's decision on this matter. Philadelphia Electric Company.
As regards PPL's contention that an adjustment specific to Susquehanna 2 is inconsistent with the Commission's system-wide adjustment imposed when Susquehanna 1 was put into service, we conclude that this argument is without merit. In both instances, the Commission acted to set "just and reasonable" rates: that is to say, rates which strike an "appropriate balance between prices charged to utility customers and returns on capital to utility investors." Pennsylvania Electric Company, 509 Pa. at 329, 502 A.2d at 133. Admittedly, the specific adjustment imposed on Susquehanna 2 places a greater share of the burden on PPI's investors than did the system-wide adjustment for Susquehanna 1. We determine, however, that the Commission did not abuse its discretion in allocating the burden as it did, especially in light of the fact that the circumstances concerning each of the adjustments are not identical.
As PPL emphasizes in its brief, certain benefits inure to ratepayers from a utility's having diverse types of generating plants. When Susquehanna 1 — PPL's first nuclear generating plant — was put on line, therefore, PPL's customers benefited from such diversity and could reasonably be required to bear a concomitant share of the Susquehanna 1 burden. This justification for a system-wide excess capacity adjustment is not present to the same extent in the case of Susquehanna 2, however, because the desired diversity had already been accomplished when Susquehanna 1 was put into service. Accordingly, the Commission could reasonably conclude that the ratepayer's share of the Susquehanna 2 burden should, in fairness, be less than their share of the burden from Susquehanna 1.
Finally, we reject PPL's argument that an adjustment specific to Susquehanna 2 is inconsistent with the Commission's prior approval of Susquehanna 2. To the extent that the Commission's approval of various construction and security applications can be construed as approval of Susquehanna 2 itself, such an argument goes merely to the prudence of constructing Susquehanna 2. As we have already noted, however, the prudence of Susquehanna 2 is not at issue in this case and is therefore irrelevant to both the Commission's and our determination.
B. Excess Capacity Adjustment on PPL's Buy-Back of Capacity From the Cooperative
PPL contends that the Commission abused its discretion by disallowing all costs associated with PPL's temporary buy-back of the capacity it had sold to the Cooperative, because the buy-back was commercially prudent on PPL's part in that it was necessary to induce the Cooperative to invest in the Susquehanna Electric Station. Notwithstanding the fact that PPL's action may have been prudent, the buy-back of capacity from the Cooperative clearly resulted in more excess capacity for PPL because, as the Commission found, the repurchased capacity was not "used and useful" in PPL's system. Therefore, the Commission could and did properly deny PPL any return on its investment related to the buy-back. Philadelphia Electric Company.
Moreover, under the facts of this case, the Commission did not abuse its discretion in denying PPL all costs associated with the buy-back. As mentioned above, it is the duty of the Commission to balance the interests of shareholders and ratepayers in allocating the burden of excess capacity. In the instant situation, the evidence of record indicates that PPL's ratepayers receive no present benefit from the repurchase of capacity from the Cooperative. Accordingly, the Commission acted within its discretion in determining that PPL's shareholders should assume the entire burden of the buy-back.
C. Allocation of Rate Increase Among PPL's Customers
In addressing the Association's appeal on the question of whether the rate allocation method approved by the Commission improperly burdens certain classes of PPL's commercial and industrial customers, we are guided by the following principles: (1) the question of reasonableness of rates and the difference between rates in their respective classes is an administrative question for the Commission to decide, and this Court's scope of review is limited, Park Towne v. Pennsylvania Public Utility Commission, 61 Pa. Commw. 285, 433 A.2d 610 (1981); (2) rate structure is a matter peculiarly within the Commission's flexible limit of judgment, Id.; and (3) the burden of proving that rates set by the Commission are discriminatory is on the customers challenging such rates. Id.
In determining how to allocate PPL's revenue increase among its customers, the Commission adopted a cost of service study incorporating the "12 Coincident Peak" method of allocation, which measures the demand of each respective class of service on the peak day of each of the twelve months in the test period. The Association objects to the use of this method because, according to the Association, the 12 Coincident Peak method does not take into account the fact that PPL experiences its peak demand times in the winter months.
We note, however, that in choosing the 12 Coincident Peak method, the Commission concluded that:
PPL is a winter peaking company; however, the Company's participation in the PJM pool (other members of which are summer peaking companies) allows the Company to maintain a reduced reserve requirement than otherwise would be required. We find PPL's use of the twelve month coincident peak allocation methodology acceptable for cost of service allocation purposes.
Because the Commission's decision on this issue is supported by substantial evidence of record, in the form of testimony by PPL's expert witness, and because the Commission committed no error of law or abuse of discretion in choosing to adopt the 12 Coincident Peak method, the Commission's method of allocating PPL's rate increase must be upheld.
ORDER
AND NOW, October 21, 1986, the order of the Pennsylvania Public Utility Commission at Docket No. R-842651, dated April 26, 1985, is affirmed.
Judge COLINS dissents.