Appendix — Duquesne Light Co. v. Barasch

Supreme Court brief1989

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DuqQueEsnE LIGHT COMPANY

AND

PENNSYLVANIA PowER COMPANY

Appellants,

Vv.

Davip M. Barascu,

CONSUMER ADVOCATE, ET AL.

Appellees.

On Appeal from the Supreme Court of Pennsylvania

APPELLANTS’ APPENDIX TO

JURISDICTIONAL STATEMENT

Aan L. REED

WituiaM E. Zeirer*

Joun F. Stitimun, Ill

Moreoan, Lewis & Bocxius

2000 One Logan Square

Philadelphia, PA 19103

(215) 963-5367

CHRISTINE A. HANSEN James R. Epcerty

Ricuarp S. CuristNER StTerHen L. Fetp

Larry R. CRAYNE PENNSYLVANIA Power CoMPANy

Duquesne Licgnut Company 1 East Washington Street

1 Oxford Centre New Castle, PA 16103-0891

301 Grant Street

Pittsburgh, PA 15279

Attorneys for Duquesne Light Company

and Pennsylvania Power Company

*Counsel of Record

TABLE OF CONTENTS

Appendix A—Opinion of the Pennsylvania Su-

I oe ook Wid’neaty.s os-0-0

Appendix B—Opinion of the Pennsylvania

Commonwealth Court ..........

Appendix C—Order of the Pennsylvania Public

Utility Commission (Duquesne

ERE Ae area

Appendix D—Order of the Pennsylvania Public

Utility Commission Upon Recon-

sideration (Duquesne Light Co.) .

Appendix E—Order of the Pennsylvania Public

Utility Commission (Pennsylva-

TPE ECE ee

Appendix F—Judgment of the Pennsylvania

rer ree ee

Appendix G— Notice of Appeal...............

Appendix H—Excerpts from the CAPCO Inves-

i re as 5

Appendix I—Order of the Pennsylvania Public

Utility Commission Adopting the

CAPCO Investigation ..........

Appendix J—Documents Relating to FERC

Treatment of Involved Costs... .

Appendix K—Jersey Central Power & Light Co. v

Appendix L—Excerpts from the Pennsylvania

Public Utility Code ............

Appendix M— Post Embargo Pennsylvania Rate-

making Legislation.............

Page

+ Pee

David M. BARASCH,

Consumer Advocate,

Vv.

PENNSYLVANIA PUBLIC UTILITY

COMMISSION.

Appeal of EQUITABLE LIFE ASSUR.-

ANCE SOCIETY, Joseph Horne

Company, Kaufmann’s and Gimbels.

David M. BARASCH, Consumer

Advocate, Appellant,

PENNSYLVANIA PUBLIC UTILITY

COMMISSION,

Supreme Court of Pennsylvania,

Argued Mareh 11, 1087,

Decided Oct, 15, 1087,

[Summary by West Publishing Co,

Pennsylvania Office of Consumer Advocate appealed

from final order of the Publie Utility Commission,

which permitted inclusion of costs of construction for

cancelled nuclear plans in electric company's rate base,

The Commonwealth Court, No, 558 C.D, 1988, and No,

1864 C.D, 1084, Barry, J, 90 PacCmwith, 08, 404 A.2d

58, affirmed in part and reversed in part, The Office of

Consumer Advocate petitioned for allowance of appeal,

The Supreme Court, No. 88 W.D. Appeal Docket L086,

No, $4 W.D, Appeal Docket, L086, Nix, Cul, held that:

(1) electric utilities were prohibited from recovering

costs of cancelled nuclear plans from ratepayers, either

by making such costs part of their rate base or by con.

verting them into operating expenses through amortiza:

tion; (2) vaeunt real estate owned by utility, whieh

might not be developed by utility for next ten years

could not be included in its rate base: (3) statute, which

prohibited electric utilities from recovering costs of ean

celled plans from ratepayers, did not result in unconsti-

tutional confiscation of utilities’ property; (4) statute

did not violate constitutional provision, requiring that

bill's subject be clearly expressed in its tithe; and (5) stat.

ute did not violate electric utilities’ right to equal pro-

tection of law,

Reversed and remanded.

OPINION

NIA, Chief Justice,

Before us are two consolidated appeals questioning

the right of a public utility to recover certain costs from

Its ratepayers, We are called upon to decide whether

section 1315 of the Publie Utility Code (“Code”), 66

PaCS, § 1315, bars an electric utility from amortizing

costs ineurred in connection with plant-construction

projects whieh were cancelled prior to completion, and

whether, if the statute must be so read, it violates con

stitutional safeguards, We must also determine whether

vacant land, purportedly held by a utility company “for

future use,” is properly includible in its rate base, |

In 1978 the Central Area Power Coordinating Group

(“CAPCO”), «a group of various electric utility COMpae

nies,’ formulated a plan to construct seven nuclear elec

trie plants. By 1977, despite considerable public opposi-

tion, CAPCO had forged ahead with the construction

projects, In 1070 the Pennsylvania Public Utility

The members of CAPCO were Duquesne Light Company, Pennayh

, ' ’ ' ‘

vania Power ( orpany, Cleveland Bleetric THluminating Company, Ohio

Kdison and Toledo Bdison

Commission (“Commission”), on its own motion, began

an investigation of the CAPCO program because of

delays and other construction problems that were

afflicting the projects, In January of 1980, about six

months after the Commission had begun its investiga:

tion. CAPCO announced that construction would be

cancelled on four of the seven nuclear plants.” The

reasons assigned for that decision included: growing

political and regulatory uncertainties arising from the

nuclear accident at Three Mile Island, serious financial

constraints of various CAPCO members, and a reduced

need for additional future generating capacity,

The Duquesne Light Company (‘Duquesne”) had

joined CAPCO in 1967, and was a substantial pars

ticipant in the group's plant construction venture,

Duquesne's share of the construction costs of the four

cancelled plants was $34,607,389, In 1980, after the ean:

cellation, Duquesne instituted rate proceedings before

the Commission; and thereby sought the right to amor:

tize, over a teneyear period, the construction costs it

had borne with respeet to the four plants, The same

request was made in 1981, However, in each of those

rate proceedings the Commission deferred ruling on the

request until it received a report relative to its ordered

investigation of CAPCO's construction problems,

In April 1982 Duquesne again came before the Come:

mission, This time the company filed a tariff whieh

proposed a change in its rates to increase its annual

electric revenues by more than $165,000,000, Tn conjune-

tion, the utility once more sought to amortize its expen

ditures on the cancelled plant projects, Several parties

appeared in opposition to Duquesne'’s request, including

"The four cancelled projects were: DavieHease Unite 2 and 3) and Brie

Unite | and 2

the Office of the Consumer Advocate and several com-

mereial complainants,’ On October 15, 1982, during the

pendeney of the proceedings last mentioned, an Admin-

istrative Law Judge ALI"), Joseph P. Matuschak, filed

With the Commission the awaited investigation report,

The ALJ's “Report of Investigation” set forth his

findings and recommendations concerning the CAPCO

projects and Duquesne's participation therein, Among

his determinations were the following: (1) that Du-

quesne acted prudently in joining in the ownership of

the nuclear plants; (2) that the decision to delay until

1080 the cancellation of the four plants in question was

prudent, and (3) that the interim decisions regarding

the cancelled plants were prudent, In light of these

findings or conclusions, ALJ Matusehak recommended

that the Commission allow Duquesne to amortize, in

rate proceedings over a period of ten years, its share of

the construction costs of the four cancelled units, That

recommendation, if accepted, would permit Duquesne to

include in its reported operating expenses an additional

88,400,730 for each of the ten years of amortization,

On December 80, 1982, while the Duquesne rate case

was still before the Commission, Aet No, 385, PLL. 1473,

Was enacted into law. That statute amended the Public

Utility Code by adding thereto seetion 1315, In parts

here pertinent, the text of Aet No, 335 is as follows:

AN ACT

Amending Tithe 66 (Publie Utilities) of the Penn.

sylvania Consolidated Statutes, providing @ (mata:

fron on the consideration af certain costs in the rate

base for electric public utilities.

‘Rquitable Life Assurance Sooty, Joseph Horne Company, Kauf.

manns, and Gimbels

The General Assembly of the Commonwealth of

Pennsylvania hereby enacts as follows:

Section 1. Tithe 66, aet of November 25, 1970

(P.L. 707, No. 230), known as the Pennsylvania

Consolidated Statutes, is amended by adding a see-

tion to read:

§ 1315. Limitation on consideration of certain costs

for electric utilities,

Except for such nonrevenue producing, nonexpense

reducing investments as may be reasonably shown

to be aecessary to improve environmental condi

tions at existing facilities or improve safety at

existing facilities or as may be required to convert

facilities to the utilization of coal, the cost af con

struction or expansion af a facility undertaken by a

public utility producing, generating, transmitting,

distributing or furnishing electricity shall not be

made a part of the rate base nor otherwise ineluded in

the rates charged by the electrre utility until such time

as the facility is used and useful in service to the pub-

ie. Except as stated in this section, no electric wtih

ty property shall be deemed used and useful watel

is presently providing actual utility service to the cus.

tomers,

Section 2. This act shall be applicable to all

proceedings pending before the Public Ctitity Commis:

sion and the courts at this ime, Nothing contained in

this act shall be construed to modify or change

existing law with regard to rate making treatment

of investment in facilities of fixed utilities other

than eleetric utilities,

Section 3. This act shall take effect omemediately,

APPROVED—The 80th day of December, A.D,

1OS2,

(Emphasis added.)

On January 28, 1083, almost one full month after the

enactment and effective date of the above statute, the

Commission entered an order which accepted the

recommendation of the ALJ concerning the ten-year

amortization of Duquesne’s portion of the construction

costs of the four cancelled electric plants. The Commis-

sion’s order thus meant that in the rate proceeding then

before it, and for nine additional years, Duquesne could

include in its reported operating expenses a one-tenth

amortization charge of $3,469,739. The Commission’s

order also granted Duquesne leave to increase its elec-

tric operating revenues by approximately $105,850,000.

In response to the Commission’s order of January 28,

1983, the OCA petitioned for reconsideration and

modification, asserting that the order violated the new-

ly-enacted section 1315 of the Code. The Commission

granted reconsideration, but proceeded to affirm its

order after concluding that section 1315 did not prohibit

its treatment of the costs in question. In the Commis-

sion’s view, the statute was not intended to prevent

“the recovery of prudent investment in a plant which is

prematurely retired or one which is cancelled by reason

of a change in economic circumstances.” According to

the Commission, section 1315 of the Code only barred

adding the costs of incomplete construction to an elec-

trie utility’s rate base, and did not disallow passing those

costs on to ratepayers through amortization. Regarding

the express dictate in section 1315 that such costs “shall

not be made part of the rate base nor otherwise included

in the rates charged” (emphasis added), the Commission

opined that the foregoing statutory language was in-

tended solely to prevent the regulatory agency from

giving a utility dual benefits of the costs, ¢.e., including

the costs in the rate base anc’ in some other rate making

process. The Commission further concluded that the

proscription in section 1315 was but a mirror of the

agency's historic regulatory approach to the costs of

construction work in progress

On May 18, 1983, in response to the Commission's

denial of the request for modification, the OCA pe-

titioned the Commonwealth Court to review the

Duquesne rate order. A petition for review was also filed,

jointly, by the several commercial complainants. The

sole issue raised in both appeals was the validity of the

Commission’s decision to allow Duquesne to recover, in

its rates, its share of the costs of the cancelled plants.

In July of 1983 another CAPCO member, Pennsyl-

vania Power Company (“Penn Power’), filed a tariff

proposing to raise its annual electric revenues by

$19,980,000. In connection with that request Penn

Power sought to amortize over a span of ten years the

sum of $9,569,665, which represented its share of the

costs of the four terminated construction projects. As a

further matter, Penn Power sought to add $824,074 to

its rate base because of certain investments denominat-

ed “land held for future use.” This latter item referred

to interests in unimproved land held by the utility pur-

portedly for future use as the sites electric substations

and transmission wires. According to the utility’s

projections, the land would be devoted to such uses

within the next ten years. Another request made by

Penn Power was that it be allowed to normalize the in-

come-tax consequences of a change in depreciation

methodology. Each of the foregoing requests was op-

posed by the OCA.

By an order dated April 11, 1984, the Commission

granted Penn Power a rate increase of $15,364,000.

Relying on its decision in the Duquesne rate case, the

regulatory agency accorded Penn Power the same ten-

year amortization right.‘ As for the land investments,

‘Penn Power received the same favorable treatment in the ALJ’s inves-

tigation report that Duquesne had been given.

the utility was permitted to include their cost in its rate

base. To justify that part of its decision, the Commis-

sion pointed to what was described as its traditional

policy of allowing such investments to be included in a

utility’s rate base if the property is held pursuant to a

definite plan for its use within a “reasonable time.” The

agency determined that the land interests in question,

though conceivably to remain unused for up to ten

years, met that requirement. In this regard, the Com-

mission observed that “historically” land or facilities

held by a utility for future use in the public service

have been a subject “separate and distinct from that of

construction work in progress.” In the agency’s percep-

tion, the legislature did not intend to abrogate that

policy in enacting section 1315 of the Code. Penn Power

also prevailed on its tax normalization claim.

The Commission’s order in favor of Penn Power

caused the OCA to file another petition for review with

the Commonwealth Court. As in the Duquesne case the

challenge was made that the order of the regulatory

agency, in its treatment of certain costs incurred by the

utility, violated section 1315 of the Code. The OCA also

sought reversal of the ruling on the tax normalization

issue.

For purposes of argument and disposition the Com-

monwealth Court consolidated the appeals in the

Duquesne and Penn Power cases. Then, by a four to

three decision, that court held that the Commission had

correctly construed section 1315. Cohen v. Pennsylvania

Public Utility Commission, 90 Pa.Cmwlth. 98, 494 A.2d

58 (1985). Opining that section 1315 is ambiguous, the

Commonwealth Court majority looked first to the title

of Act No. 335 as a construction aid. The title declares

that the Act provides ‘a limitation on the consideration

of certain costs in the rate base for electric public utili-

ties.” (Emphasis added.) Of the preceding quoted

phrase, the court said that it relates exclusively to the

rate base “and not a legislative intent to exclude the

costs of cancelled facilities from the revenue or expense

factors of ratemaking.” /d. at 105, 494 A.2d at 61.

The Commonwealth Court thus concluded that the

legislature intended the prohibition in section 1315 to ap-

ply only to rate base considerations, and not at all to ex-

pense allowances. As further support of that conclusion

the majority opinion cited other, pre-existent provisions

of the Code, namely sections 1307 and 1310, 66 Pa.C.s.

§§ 1307, 1310. Those two sections, according to the

court’s reading of their significance to ratemaking, evince

a long-standing legislative intention to restrict only the

elements of a utility’s rate base, not the items that can

be allowed as operating expenses. As for the part of sec-

tion 1315 upon which the OCA relied, 7.e., the disjunc-

tive phrase “nor otherwise included in the rates charged,”

the Commonwealth Court agreed with the Commission’s

view that the phrase was meant only to prevent a utility

from gaining dual benefits from the challenged costs.

Having equipped itself with the reasoning described

above, the Commonwealth Court affirmed the Commis-

sion’s orders allowing Duquesne and Penn Power to

amortize their respective shares of the costs of the can-

celled nuclear plants. The court also affirmed the

agency’s decision to allow Penn Power to include in its

rate base the cost of its investments in the unimproved

land, concluding that the property was “used and

useful” in the public service. However, the court

reversed the Commission as to its grant of Penn

Power's tax normalization request.

*There was no cross-appeal taken from this part of the court’s decision.

10a

The OCA petitioned this Court for an allowance of

appeal. Another such petition was filed by the commer-

cial complainants who had joined as parties-appellant

before the Commonwealth Court. We granted both peti-

tions, in light of the public significance of the issues pre-

sented and implicated. After permitting Dequesne and

Penn Power to intervene as appellees, we consolidated

the cases for argument and decision.

Urging us to reverse the Commonwealth Court’s deci-

sion relating to the cancelled plant costs and the land

investments, the appellants repeat their arguments

based on section 1315 of the Code. The Commission,

unsurprisingly asserting that the court below correctly

decided both questions, re-expounds the reasoning the

agency pursued in making its final adjudications. Giving

its reasoning a somewhat different emphasis, the Com-

mission here argues that section 1315 was intended to

prevent a utility from earning a rate of return on such

costs, but not to disallow their recovery if the expenditures

were prudently made. Contending that its reasoning

reflects the legislative intent underlying section 1315, the

agency directs our attention to section 520 of the Code,

66 Pa.C.S. § 520, a provision which became effective on

October 10, 1985, almost three years after the enact-

ment of section 1315. Section 520(c) provides as follows:

ing any other provisions of this title, for a generat-

ing unit canceled after the effective date of this section

either voluntarily or by commission order, an elec-

tric utility may be permitted to recover a return of, but

not a return on, prudently incurred costs on any par-

tally completed facility when cancellation is found by

the commission to be in the public interest. The burden

of proof to show that any costs claimed were

prudently incurred shall be on the public utility.

lla

(Emphasis added.) 66 Pa.C.S. § 520(c).

In the Commission’s view, the 1985 provision for the

recovery of cancelled plant costs indicates that the

legislature had the same intent when it enacted section

1315 in December of 1982. The Commission further

maintains that, with respect to the cancelled plant costs

of Duquesne and Penn Power, its decision to permit

recovery through amortization was a discharge of its

duty to balance the interests of consumers and utility

investors when determining what are “just and reason-

able” rates.

The two intervenors, Duquesne and Penn Power, add

arguments of a different dimension. The utilities argue

that section 1315, if given the construction propounded

by the appellants, would violate both the federal and

state constitutions. They assert that if not allowed to

recover from ratepayers prudently incurred costs of can-

celled plant projects, such a ban will amount to a confis-

eation or “taking” of their property without just com-

pensation. The intervenors also contend that, since sec-

tion 1315 of the Code applies only to electric utilities, it

violates the equal protection clause of the United States

Constitution, and the prohibition against special legisla-

tion set forth in Article III, Section 32 of the Pennsyl-

vania Constitution. The utilities advance two other con-

stitutional arguments: that section 1315 denies them due

process of law because the legislature made it retroac-

tive; and that Act No. 335, which added section 1315 to

the Code, violates the state constitution because the title

of the Act does not suggest that the legislation encom-

passes anything other than rate base considerations.”

*By “title” the intervenors refer to the first five quoted lines of Act No.

335 following the words “An Act.” Although the Commission calls that

group of words a “preamble,” we consider “title” to be the more accurate

designation and will refer to it as such. See generally Sutherland, Statutory

Construction, §§ 20:03, 20:10, and 22:08 (4th ed. 1985) (difference between

preamble and title).

l2a

Statutory Interpretation

We will consider first the competing assertions con-

cerning the proper interpretation of section 1315. As

previously noted, the OCA and the other appellants

rely on the section’s express statement that construction

costs “shall not be made part of the rate base nor other-

wise included in the rates charged by the electric utility

until such time as the facility is used and useful in ser-

vice to the public.” To the appellants the crucial

element in that proscription, relative to the instant

case, Is the phrase ‘‘nor otherwise included in the rates

charged.” Because of that phrase, the appellants main-

tain that section 1315 is a clear statement of a legisla-

tive intent to bar electric utilities from recovering the

costs of cancelled plants through rates charged to con-

sumers. The Commission asserts that section 1315

suffers from an ambiguity: perceived by the agency as

arising from the title of Act No. 335, which describes

the legislation as “providing a limitation on the con-

sideration of certain costs in the rate base of public

utilities.” To the Commission, it is significant that the

preceding language mentions only “the rate base,” and

does not include the more encompassing phrase “nor

otherwise included in the rates charged.” With that percep-

tion of an ambiguity the Commission argues that sec-

tion 1315 requires interpretation; and further argues,

along lines we have already mentioned, that the legisla-

ture’s actual intent is reflected by the more limited

terms of the title of Act No. 335.

It is well settled that the object of all interpretation

and construction of statutes is to ascertain and effec-

tuate the intention of the legislature as expressed by the

words employed. 1 Pa.C.S. § 1921(a); Commonwealth v.

Fisher, 485 Pa. 8, 400 A.2d 1284 (1979): Pennsylvania

Human Relations Commission v. Alto-Reste Park Cemetery

lita

Ass'n. 458 Pa, 124, 806 A.2d S81 (1978), Clearerew Bowl

ing Center, Ine. 0. Hanover Borough, 480 Pa, 579, 244 A.2d

20 (1908),

It ia fundamental that in ascertaining the legislature's

intent, the plain words of its laws may not be ignored,

Steqmaier Betate, 424 Pa. 4, 225 A.2d 566 (1007), A court

may not alter, under the guise of interpretation, the

express language and intent of the legislature, Common

wealth vo. Pope, 455 Pa, 884, S17 AQd S87 C1YT4), see

Zimmerman v. O'Bannon, 497 Pa, 551, 442 A2d 674

(1982). ‘Thus, where the words of a statute are clear and

free from ambiguity, a court may go no further to de.

termine the legislative intent, Arite Mytate, S87 Pa, 228,

127 A.2d 720 (1056); Rich ve. Meadville Park Theatre Corp,

860 Pa. 888, 62 A.2d 1 (1948); Commonwealth ex red Smith

». Clark, 381 Pa, 405, 200 A, 4b (1988); see LF Pas. §

1921(b), (e), [tis only when the words of the statute are

not explicit that the intention of the lewislature may be

ascertained by considering other means of statutory

interpretation or construction, Danis eo Suleowe, 416 Pa,

138, 205 A.2d 80 (1064); Commonwealth vo Chester County

Light and Power Co,, 8389 Pa. 07, 1A A 2d 814 C1ON0),

Language is “ambiguous” when it conveys two or

more reasonable meanings; or when it is otherwise

vague, uncertain or indefinite, See WEBS | bk 8

THIRD NEW INTERNATIONAL DICTIONARY,

Of the two statutory phrases respectively championed

by the opposing parties, as expressing the legislative ine

tent underlying section 1815, neither of those two word:

vets is of itself facially ambiguous, On its face, there is

nothing vague or uncertain about the language of the

title, The phrase “limitation on the consideration of cers

tain costs in the rate base’ clearly deseribes a specific

subject of concern: the impact of certain costs on an

Ida

electric utility's rate base, If this phrase is read as the

controlling expression of legislative intent, it could only

mean that the legislature's sole purpose in enacting sec-

tion 1315 was to exclude the costs of uncompleted con-

struction projects from the utility's rate base, It would

then follow that the statute itself was not intended to

bar a utility from charging those costs to ratepayers as

operating expenses, On the other hand, there is nothing

facially vague, uncertain or indefinite about the sub-

stantive proseription in section 1315 itself, That pro-

scription clearly conveys but one meaning: that the cost

of uncompleted projects shall not only be excluded from

the rate base, but shall not, in any way whatsoever, be

included in the rates charged.

Thus, the interpretational problem that confronts us

here is one arising from an inconsistency of legislative

articulation in the same enactment, To solve that prob-

lem we need look no further than the rule of statue

tory interpretation set forth in section 1934 of the Stat-

utory Construction Act of 1972, 1 Pa.C.8. § 1984. This

rule mandates that: “[e]xcept as provided in section

1933 of this title (relating to particular controls gener:

al), whenever, in the same statute, several clauses are ir-

reconctlable, the clause last in order of date or position shall

prevail.” (Emphasis added.) Since, in our view, the dis.

junctive proscription in section 1315 is of itself unam-

biguous, and since it is positioned after the title of the

statute by which it was enacted, the terms of that pro:

scription must prevail over the language of the title as

being the expression of legislative intention, Moreover,

it is an established principle of our jurisprudence that,

where the enacting clause of a statute is clear and

unambiguous, the title will not be permitted to contra:

dict it, Commonweulth v. Magwood, 503 Pa. 169, 460 A.Qd

LDa

115 (1983); American Surety Company's Case, 319 Pa, 549,

IS} A. 364 (1985); Commonwealth ex rel, The Alliance Pe-

troleum and Coal Co. ». Slifer, 53 Pa, 71 (1866), The same

is true with respect to preambles, American Surety

Company's Case, Although titles and preambles are es

cepted aids in resolving ambiguity in an enacting

clause, they may not be used to create ambiguity where

none exists in the clause,

We therefore hold that section 1315 of the Code must

be read as prohibiting an electric utility from recover:

ing the costs of cancelled plants from ratepayers, either

by making such costs part of its rate base or by con-

verting them into operating expenses through amortiza-

tion. For us to reach any other conclusion, we would

have to treat as surplusage that part of section 1315's

proscription whieh says: . . nor otherwise ineluded in

the rates charged by the electric utility” Tt is well settled

that the legislature cannot be deemed to intend that its

language be superfluous and without import, Ay,

Colodonato v. Consolidated Rail Corp, 504 Pa, 80, 470

A.2d 475 (1983); Consumers Education and Protective

Ass'n. Nolan, 470 Pa. 872, 8368 Ad 675 (1977); Daly v.

Hemphill, ALL Pa. 268, 191 Ad 835 (1963); Common:

wealth » Mack Bros. Motor Car Co, 350 Pa, 6386, 50 Ad

H28 (1048),

The appellate courts of several other jurisdictions

have interpreted their state law as preventing an elec:

trie utility from treating as “operating expenses,” and

thus recovering from ratepayers, the costs of cancelled

nuclear projects, One such case is Offiee af Consumers’

Counsel v Public Ctlities Commission af Ohio, 67 Ohio

St2d 158, 428 N Ed 820 (1981), appeal dismissed sub

nom, Cleveland Bieetric Mluminating Co. ». Offiee af Con

sumers’ Counsel, 455 U8, O14, 102 S.Ct, 1267, 71 L.Bd.2d

16a

455 (1982), In that case, the state regulatory body

granted an electric utility a rate increase of approx

imately 870,000,000, and, in conjunction, allowed the

utility to amortize over a ten-year period its $56,000,000

investment in four cancelled nuclear power plants, The

Supreme Court of Ohio reversed the agency's order as

to the amortization, holding that to allow the utility to

amortize its investment in the terminated projects, ‘and

thus permit its recovery from ratepayers as operating

expenses, Violated state law, The court concluded that

under Ohio's rate statute a utility's recoverable costs

were limited to those which are ordinary and recurrent

in the rendition of service to the public, and that the

sunk costs of uncompleted capital projects did not come

Within that category, In the words of the opinion sup-

porting the court's decision, “what the company sought

and what the Commission granted was the amortization

ax service-related costs of an investment that never

provided any service whatsoever to the utility's cus

tomers,” 67 Ohio St2d at 164, 423 N.E.2d at 827 (em-

phasis added), The opinion further stated that, in the

absence of explicit statutory authorization, the regula

tory ageney could not benefit a utility's investors by

guaranteeing the full return of lost capital at the ex-

pense of the ratepayers, /d. at 167, 423 N.E.2d at 829, I

is worth noting that the utility in the foregoing case,

Cleveland Electric Illuminating Company, was a

member of CAPCO, and that the four cancelled projects

there in issue are the same ones which are involved in

the appeals now before us,

The Supreme Court of Wyoming, in Pacific Power &

Light Co, 0 Public Service Commission af Wyoming, 677

Pld 790 (Wyo.1084), rejected an electric utility's at-

tempt to compel its customers to bear the cost, through

17a

rates, of its expenditures and gbligations in connection

with cancelled nuclear power construction projects, The

electric company, while recognizing that the terminated

projects did not constitute “used and useful” property

within the meaning of Wyoming's utility statute,

nevertheless asserted that the implicated costs were in-

cludible in its rate base as prudently incurred operating

expenses, The Supreme Court of Wyoming rejected that

argument for several reasons, not the least of which was

its conclusion that such capital costs did not qualify as

“operating expenses,” prudent or otherwise, A compa:

rable result was reached by the Court of Appeals of In-

diana in the case of Citizens Action Coalition v, Northern

Indiana Public Service Co, 472 N.B.2d 9388 (Ind.Ct.App.

1984). That court expressly embraced the decisions in

Office of Consumers’ Counsel, supra, and Pacific Power &

Light Co., supra, as being consonant with Indiana law,

Also deserving of mention is the 1984 decision of the

Supreme Court of New Hampshire in Appeal of Public

Service Co. of New Hampshire, 125 N.H. 46, 480 A.2d 20

(1984). That case, too, involved an attempt by an elec-

tric utility to recover from its ratepayers the cost of its

financial participation in a subsequently aborted project

to build a nuclear generating plant. The utility had

become part owner of the project in 1972; and, by 1981,

when the project was cancelled, the company’s invest-

ment in the uncompleted construction was nearly

$16,000,000, The New Hampshire court held that, by

force of a statute enacted in 1979, such costs could

neither be included in the utility's rate base nor amor-

tived as an operating expense, The statutory provision

relied on by the court stated that: “At no time shall any

rates or charges be based upon any costs associated

with construction work if said construction work is not

ISa

completed.” RSA 878: 80-a (Supp.1981). The same stat-

ute continued with the following mandate:

All costs of construction work in progress, includ-

ing, but not limited to, any costs associated with

constructing, owning, maintaining, or financing

construction work in progress, shall not be included

in a utility's rate base nor be allowed as an expense

Jor rate making purposes until, and not before, said

construction project is actually providing service to

consumers, (Emphasis added.)

In our view, the substantive terms of the New Hamp-

shire statute bear a striking resemblance to section 1315

of our Public Utility Code.’

The Commission's reference to section 520(¢) of the

Code is unavailing. It is true that, as a result of the

enactment of section 520, electric utilities are new per-

mitted to reeover cancelled plant costs under certain

circumstances and conditions, However, as we have al-

ready pointed out, section 520 was enacted in 1985—

almost three years after section 1315 was added to the

Code, The perceptions and purposes of the legislature in

1985 did not necessarily mirror those which existed

in 1YS82, when section 1315 became law, We have not

been presented with any persuasive reason for conclud-

ing that they were the same, We are concerned with the

legislative intent underlying the 1982 statute, section

1315; for that is the one which applies to the instant

matters. We are not here concerned with the legis-

‘Other appellate courts have held that an electric utility does have the

right to amortiae the costs of cancelled nuclear projects. Bg, Attorney Gen-

erate Department af Peble Otlites, 300 Mass. 208, 455 N_E.Qd 414 (1083);

Prople’s Organization for Washington Bnergy Resources » Washington Utitites

and Transportation Commrsston, 104 Wash 2d 708, 711 P.dd 310 (1085). Such

decisions, however, rested on conclusions about the governing statute, 1 ¢.

that it did not deprive the regulatery bedy of authority to allow amortiza-

thon

19a

lature’s intent, during a later session, in enacting a

statute which does not apply to the case before us,

Furthermore, any attempt to impute relevance to sec-

tion 520 cannot ignore the fact that it was made to

operate prospectively only: Such is an indication that the

legislature, in belatedly conferring upon electric utilities

a conditional right to recover cancelled plant costs, did

not intend for the utilities to have that right prior to

the effective date of the 1985 statute.

We turn next to the question of whether the Commis-

sion was correct in deciding that Penn Power's rate

base could be increased by the amount of its invest-

ments in the vacant land, As mentioned, the Commis-

sion based its decision on a finding that Penn Power

had a definite plan earmarking the unimproved land for

use, “within a reasonable time,” as sites of transmission

lines and substations, The OCA, in disputing the validi-

ty of the above ruling, starts with a premise that

property owned by a utility may not be included in its

rate base unless it is used and useful in the public ser-

vice, In connection with that proposition, the OCA then

focusses on the last sentence of section 1315, which in

part here pertinent, states: “[nJo electric utility proper-

ty shall be deemed used and useful until it is presently

providing actual utility service to the customers.” (Empha-

sis added.) In the view of the OCA, Penn Power's

planned, future use of the vacant land did not render

it “used and useful” under the standard dictated by

the above statutory language. This contention was, as

noted, rejected by the court below,

The threshold premise of the OCA’s argument con-

cerning the vacant land is legally accurate, One of the

cardinal principles of this state's public utility law is

that, in the setting of rates for services to the public, a

20a

utility company is entitled to a return only on such of

its property as is “used and useful” in the public ser-

vice. #.g., Pennsylvania Electric Co. v. Pennsylvania Public

Utility Commission, 509 Pa. 324, 502 A.2d 130 (1985);

Scranton v. Scranton Steam Heat Co., 405 Pa. 397, 176

A.2d 86 (1961); Erie City v. Public Service Commission,

278 Pa. 512, 529, 123 A. 471, 478 (1924); City of Pitts-

burgh v. Pennsylvania Public Utility Commission, 171

Pa.Super. 187, 90 A.2d 607 (1952), Newport Home Water

Co. v. Public Service Commission, 76 Pa.Super. 386 (1921);

CGI Corp. v. Pennsylvania Public Utiiity Commission, 49

Pa.Cmwlth. 69, 410 A.2d 923 (1980); see 66 Pa.C.S. §

1310(d). The faet that a utility owns a property does

not of itself justify its inclusion in the rate base; and the

burden is on the utility to show that the property is

“used and useful” in the public service. City of Pitts-

burgh, supra.

Based on the standard set forth by the final sentence

of section 1315 of the Code, as to when the property of

an electric utility may be deemed “used and useful,” we

must conclude that the vacant land here in issue does

not meet that test. Utility real estate that is vacant and,

according to the utility’s own plans, might remain so

for as long as ten years, cannot reasonably be charac-

terized as property “presently providing actual utility ser-

rice to the customers.” We thus hold that the addition of

the land investments to Penn Power's rate base violated

the terms of section 1315 of the Code.

~ "Penn Power's reliance on our decision in Barasch vr Pennsylvania Public

Utility Commission, 07 Pa. 430, 490 A.2d 806 (1985) is misplaced. In that

case we held that a utility could properly include in its rate base the cost

of nuclear fuel purchased for use in an uncompleted nuclear plant. How-

ever, an important fact in the case was that the fuel could also have been

used in other facilities that were currently on service. Utilities have tradh-

tionally been allowed to recover the cost of usable supplies and materials

See Boston Edison Co. v Dep't of Public Utilities, 375 Mass. 1, 375 N.E.2d

305 (1978) (pointing out that utilty was free to sell land at a profit, which

would benefit stockholders. not ratepayers)

2la

Constitutional Challenges

According to the intervenors, a statute which disal-

lows inclusion of the cancelled plant costs in the rate

base, and also bars as an alternative their being treated

as operating expenses, works a confiscation of utility

property without just compensation, in violation of the

federal and state constitutions.

It is of course true that the property of a public utili-

ty, though devoted to the public service and conve-

nience, is still private property; and neither the corpus

of that property nor the use thereof can be constitution-

ally taken for a compulsory price which falls below the

measure of just compensation. F.g., United Railways and

Electric Co. of Baltimore v. West, 280 U.S. 234, 50 8.Ct.

123, 74 L.Ed. 390 (1930). This deeply-rooted principle of

constitutional law had been articulated in more ab-

breviated form in the landmark case of Smyth v. Ames,

169 U.S. 466, 18 S.Ct. 418, 42 L.Ed. 819 (1898), in which

the Supreme Court of the United States declared that a

public utility “may not be required to use its property

for the benefit of the public without receiving just com-

pensation for the services rendered by it.” /d. at 546, 18

S.Ct. at 433. An even earlier formulation of the same

precept is to be found in Rarlroad Commission Cases, 116

U.S. 307, 6 8.Ct. 1191, 29 L.Ed. 636 (1886).

The “just compensation” safeguarded to a utility by

the fourteenth amendment of the federal constitution is

a reasonable return on the fair value of its property at

the time it is being used for public service. Denver (onion

Stock Yard Co. v. United States, 304 US. 470, 58 S.Ct.

990, S82 L.Ed. 1469 (1938); Los Angeles Gas Co. v.

Railroad Commission, 289 US. 287, 53 8.Ct. 637, 77 L.Ed.

1180 (1933); MeCardle v. Indianapolis Water Co., 272 US.

22a

400, 47 S.Ct. 144, 71 L.Ed. 316 (1926); Board of Commis-

sioners v. New York Bell Telephone Co., 271 U.S. 23, 46

S.Ct. 363, 70 L.Ed. 808 (1926); Willcoz v.

Consolidated Gas Co., 212 U.S. 19, 29 S.Ct. 192, 53 L.Ed.

382 (1909); Pennsylvania Electric Co. v. Pennsylvania Pub-

hie Utilities Commission, supra. Thus, the return which a

utility is constitutionally entitled to earn relates only to

its property that is employed in the public service.

Bluefield Water Works Co. v. Public Service Commission,

262 U.S. 679, 43 S.Ct. 675, 67 L.Ed. 1176 (1923); Smyth

v. Ames, supra; Railroad Commission Cases, supra. In that

regard, the Supreme Court has held that it is only when

a utility’s property is “used and useful” in the public ser-

vice does the federal constitution require its inclusion in

the rate base, upon which the return is calculated.

Federal Pow.r Commission v. Natural Gas Pipeline Co., 315

U.S. 575, 62 S.Ct. 736, 86 L.Ed. 1037 (1942); Denver

Union Stock Yard Co. v. United States, supra. A refined

version of the same principle can be found in Columbus

Gas & Fuel Co. v. Public Utilities Commission, 292 U.S.

398, 54 S.Ct. 763, 78 L.Ed. 1327 (1934). There, the Su-

preme Court held that a utility’s rate base need not in-

clude assets not presently in use, “unless the time for us-

ing them is so near that they may be said, at least by

analogy, to have the quality of working capital.” Id. at 406.

In addressing the confiscation argument, we must

recognize that a public utility’s constitutiona! right to

“just compensation” encompasses not only rate base

considerations, but also includes the utility’s right to

recover from ratepayers the expenses and costs of oper-

ation. West Ohio Gas Co. v. Public Utilities Commission,

294 U.S. 63, 55 S.Ct. 316, 79 L.Ed. 761 (1935); United

Railways and Electric Co. of Baltimore v. West, supra;

Smyth v. Ames, supra; Covington & Lexington Turnpike

23a

Road Co. v. Sandford, 164 U.S. 578, 17 S.Ct. 198, 41 L.Ed.

560 (1896). Indeed, a utility’s earned return on its rate

base is to be measured only after its operating expenses

have been deducted from gross revenues; and prescribed

rates which are not sufficient to allow recovery of oper-

ating expenses, in addition to providing a fair return on

the rate base, are confiscatory. E.g., United Railways and

Electric Co. of Baltimore v. West, supra. However, just as a

utility has no constitutional right to have ineluded in

its rate base assets which are not “used and useful” in

the public service, so too may it be restricted as to what

items it can properly claim as operating expenses.

In Lindheimer v. Illinois Bell Telephone Co., 292 US.

151, 54 S.Ct. 658, 78 L.Ed. 1182 (1934), the Supreme

Court described the “operating expenses” of a public

utility as “the cost of producing the service.” Id. at 167, 54

S.Ct. at 665 (emphasis added). The Court, observing

that “[c]harges to operating expenses may be as impor-

tant as valuations of property,” pointed out that an im-

proper inflation of operating expenses would produce

the same result as an increase of the allowed rate of re-

turn on the rate base. /d. at 164, 54 8.Ct. at 663. The

Court, in Lindheimer, went on to hold that the ratemak-

ing authority could properly exclude from a_ utility's

claimed operating expense the amount of excessive de-

preciation charges. The depreciation charges there in-

volved were deemed excessive because they went far

beyond any realistic measure of the degree to which the

utility’s plant was being consumed by use in the public

service. In the case of Dayton Power & Light Co. v. Public

Utelities Commission, 292 U.S. 290, 54 S.Ct. 647, 78 L.Ed.

1267 (1934), the Supreme Court held that a state, in

fixing rates for a utility, may exelude from reported

operating expenses unreasonable amounts which the

24a

utility paid to an affiliated company for supplies. See

also Columbus Gas & Fuel Co. v. Public Utilities Commis-

sion, supra. It is thus clear that the federal constitution

does not confer upon a public utility the right to claim,

for ratemaking purposes, whatever it sees fit to include

in the category of “operating expenses.” In that regard,

the significance of the Lindheimer and Dayton Power &

Light Co. cases may be stated thus: principles of “just

compensation” under the federal constitution do not en-

dow a public utility with the right to burden ratepayers

with what the utility calls an “operating expense” un-

less such item, in addition to being reasonable in

amount, represents a cost of providing present utility

service.

We have not been presented with any convincing ar-

gument for concluding that the “just compensation”

provision of our state constitution compels a broader

conception of the nature of an ‘‘operating expense.” The

judicial decisions of this state are not wanting in expres-

sions concerning the type of outlays or cost items which

a utility may properly charge to ratepayers as operating

expenses. For example, in Shirk v. Lancaster City, 313

Pa. 158, 169 A. 557 (1933), this Court generally defined

a utility’s “operating cost” as including “all charges and

expenses involved in the production, supply and distribu-

tron of the commodity.” Id. at 171, 169 A. at 563 (empha-

sis added). Later, in Barasch v. Pennsylvania Public

Utility Commission, 507 Pa. 561, 493 A.2d 653 (1985), we

indicated that “proper operating expenses’ are ones

which relate to the cost of service. We have also observed,

regarding a utility's right to recover expenses, that the

“As examples of such expenses, the Court included such items as sala-

ries, telephone, insurance, taxes and stationery.

25a

policy in this state has been for current ratepayers to

bear “only the actual expenses of providing current utility

service’ and that such policy was reaffirmed in the

enactment of section 1315 of the Public Utility Code.

Barasch v. Pennsylvania Public Utility Commission, 507

Pa. 496, 516-17, 491 A.2d 94, 104 (1985) (emphasis

added); see also Pennsylvania Electric Co. v. Pennsylvania

Public Utility Commission, supra. These expressions ba-

sically coincide with the mentioned federal view of what

kinds of costs a utility is constitutionally entitled to

pass to ratepayers under the classification of “operating

expenses.” Therefore, without the benefit of a valid and

otherwise applicable statute conferring a broader right,

the only expenses which a public utility in this state

may recover from ratepayers, through rates, are those

expenses which represent the actual cost of providing

present utility service. That is so regardless of whatever

convenient accounting label the utility might employ to

characterize a nonqualifying outlay.

It is absolutely clear that the four uncompleted nu-

clear plants here involved have no capacity to produce

any present utility service to the customers of the two

intervenors. Those aborted projects are of no use what-

soever to the public. It should be recalled that in Penn-

sylvania Electric 0. v. Pennsylvania Public Utility Com-

mission, supra, we held that a nuclear reactor at Three

Mile Island was properly excluded from the utility’s

rate base because it had been so damaged by a near

melt-down as to be useless in the public service. Cer-

tainly, no reasonable argument can be made that the

four uncompleted plants have any higher degree of

usefulness. Given that the terminated plants are so use-

less as to preclude their being an element of a utility’s

rate base, we cannot imagine by what magic the-inter-

26a

venors’ investments in the useless projects can be con-

sidered a cost of providing present utility service as to

qualify as “operating expenses.” We therefore hold that

interpreting section 1315 of the Code as barring the

amortization of cancelled plant costs does not work an

unconstitutional confiscation of utility property.

As a further constitutional challenge, intervenor

Duquesne argues that section 1315 is violative of due

process standards because it was made to operate ret-

roactively. We reject this argument as being without

merit. Neither the federal constitution nor our state

constitution invalidates a non-penal statute merely

because it is retroactive, unless such legislation impairs

contractual or other vested rights. U'sery v. Turner Elk-

horn Mining Co., 428 U.S. 1, 96 S.Ct. 2882, 49 L.Ed.2d

752 (1976); Chase Securities Corp. v. Donaldson, 325 US.

304, 65 S.Ct. 1137, 89 L.Ed. 1628 (1945); Kentucky Union

Co. v. Kentucky, 219 U.S. 140, 31 S.Ct. 171, 55 L.Ed. 137

(1911); League v. Texas, 184 US. 156, 22 S.Ct. 475, 46

L.Ed. 478 (1902); Campbell v. Holt, 115 U.S. 620, 6 S.Ct.

209, 29 L.Ed. 483 (1885); Arenzelak v. Krenzelak, 503 Pa.

373, 469 A.2d 987 (1983); Smith v. Fenner, 399 Pa. 633,

161 A.2d 150 (1960). It cannot be said that either

Duquesne or Penn Power had a contractual or other

vested right to recover from ratepayers the cost of in-

vestments which do not provide utility service.

Duquesne also contends that because the title of Act

No. 335 does not mention the retroactivity of section

1315 the legislation is invalid. As support for that asser-

tion, the company relies on Article II], seetion 3 of the

Pennsylvania Constitution, which in part states: “No

bill shall be passed containing more than one subject,

which shall be clearly expressed in its title. ... ” This

argument must fail. The preceding constitutional provi-

27a

sion requires merely that the title of a statute put rea

sonably inquiring minds on notice of the legislations

contents, /n re Condemnation by Commonwealth, Depart:

ment af Transportation, SLL Pa, 620, 515 A.2d 800 (1086);

LJ W. Realty Corp, v. City af Philadelphia, 300 Pa, 197,

134 A.2d 878 (1057); /n re Gumpert’s state, 343 Pa. 405,

28 Ald 470 (1042). All that is required is that the title

shall contain words sufficient to cause one having a rea-

sonably inquiring state of mind to examine the statute

to determine whether he may be affected by it, Boyer:

town Burial Casket Co, », Commonwealth, 366 Pa, 574, 79

A2d 440 (1951), Although Aet No, 335 does not in its

title mention the retroactivity of section 1315, such is

expressly set forth in the next-to-last part of the Act,

We cannot believe that a statute's tithe which an-

nounces that the legislation is an amendment of the

Publie Utility Code, and which also mentions “promding

a limitation on the consideration of certain costs in the rate

hase Jor electric public utilities,” would not induce an elec-

trieeutility company to examine and study the entire

enactinent,

Duquesne and Penn Power join in making the addi-

tional assertions that Aet No, 335 denies them the equal

protection of the laws as guaranteed by the Fourteenth

Amendment of the United States Constitution, and that

the Act also violates the prohibition against “special

legislation” set forth in Article IIL, section 82 of the

Pennsylvania Constitution, These arguments are predi-

cated on the fact that Aet No, 885, by its terms, applies

only to electric-utility companies, and not to other type

public service companies such as gas and water utilities,

The intervenors contend that, if the public interest is

served by protecting utility ratepayers from being bur-

dened with the costs of unproductive construction

ZNu

projects, a statute which targets only electric utilities in

that regard is an unreasonable, and thus uneonstitu-

tional, classification,

The equal protection clause of the United States Con:

stitution requires that “Call persons similarly eireume

staneed shall be treated alike’ Plyler e. Doe, 457 U8.

202, LO2 8.01, 2882, 72 Ld 2d 786 C1082); BUS. Royster

Guane Coe Virginia, 258 US. 42, 415, 40 S.Ct 560,

O62, OF Ld O80) (120) Among its various applica.

tions, the equal protection clause of the federal constitu:

tion forbids a state legislature from imposing on a

person, natural or artificial, or on a class, burdens

Which are not cast upon others similarly situated, Aiy.,

Mehison, Topeka and Santa Pe RAR». Matthews, 174 U8,

YH, TO SOL GOO AS Ld, G00 L890). The equal protec:

tion of the laws, it has been said, means that the rights

of all persons must rest upon the same rule under

similar circumstances, Hartford Steam Boiler Inspection

and Insurance Co. eo. Harrison, 8301 US, 450, 461, AT S.C,

S3S, NSH ST Ld. 1228 C1087): Lowiseille Gas & Blectric

Co. 0 Coleman, 277 US. 82, 87, 48 S.Ct. 428, 425. 72

Lod. 770 (LORS),

The intervenors in the cause at bar, in asserting that

Act No, 885 denies them the equal protection of the

laws, assume that, beeawuse the legishition applies exclu:

sively to eleetric utilities, it will have the effeet of

requiring only public utilities of that class to bear the

burden of aborted construction projects but will permit

other type utilities to pass such costs on to their rates

pavers. Phis assumption is palpably erroneous, Given

What we have already seid about the fundamental prin

Miples of this state's publieutility. jurisprudence, it

should be clear that no utility of any type is permitted,

Without express and validd logishitive authorization, to

200

charge ratepayers for property which is not used and

useful in the production of current utility service, In

our view, Act No, 335 was mainly an attempt by the

1OS82 legislature to make clear, by codification, that the

above mentioned general principle of utility law should

govern the then-ongoing efforts of some electric utilities

to recover cancelled plant costs from their customers.

There is nothing in Act No, 385 to indicate that the

legislature which enacted it, after going to such lengths

to make it absolutely clear that the Commission had no

authority to allow the electric utilities to recover the

costs of uncompleted projects, also intended to abrogate

pre-existent legal principles which would compel the

same result with respect to other type public utilities,

Indeed, the very last sentence in section 2 of the Act ex.

pressly states: “Nothing contained in this act shall be

construed to modify or change existing daw with regard

to the rate making treatment of investment in facilities

Of fined utilities other than electric utilities.” (Emphasis

added.) We read this proviso to mean that, although the

Act focusses on electric utilities, such does not mean

that other type utilities are relieved of the proseriptions®

of preexisting law concerning the recovery of costs,

Thus, Aet No, 385 has no disparate impact on electric

utilities; and, for that reason, we conclude that the stat.

ute does not deny the intervenors the equal protection

of the laws, See Califano ». Boles, 448 US. 282, 90 S.C,

2707, OL L. Bd 2d S4b C1970): National Crnion of Marine

Cooks & Stewards » Arneld, 348 US. 87, TH SCL 82, 00

Lhd, 46 (104), In determining whether the equal pro:

lection guaranteed by the federal constitution has been

afforded, consideration must be given to the entire body

of law operating upon the subjeet matter in issue, Seer

Interstate Busses Corp. e Blodgett, 270 US. 245, AS

S0a

230, 72 L.Ed. 551 (1928); Farmers and Mechanies Savings

Bank vo. Minnesota, 282 U.S. 516, 384 S.Ct. 854, 58 Ld,

706 (1914); see also Loniseille Gas & Blectrie Co. ».

Coleman, supra, at 50 (Brandeis, J., dissenting).

Regarding the bar against “special legislation” con-

tained in Article IIL, section 82 of the Pennsylvania

Constitution, this Court has held that the provision, in

its meaning and purpose, is sufficiently similar to the

equal protection clause of the United States Constitu-

tion as to warrant like application, Landenberger ». Port

Authority af Allegheny County, 496 Pa, 52, 67 no 18, 436

Ad 147, 155 n. 18 C1O81); Baltimore & Ohio RR. o Com

monwealth, Department af Labor & Industry, 461 Pa. 68,

834 Ald 686 (1975), Therefore, the same considerations

that invalidate the intervenors’ reliance on the federal

guarantee also defeat their resort to the analogous

provision in our state constitution,

We hold that the Public Utility Commission exceeded

its lawful authority in allowing Duquesne and Penn

Power to amortize the costs of the cancelled construc.

tion projects, We also conclude that the Commission

erred likewise in permitting Penn Power to add to its

rate base the cost of its investments in the vacant land

here involved, [tis clear, beyond any need for citation,

that the function of ratemaking for public utilities is

legislative in nature, The Commission is but an ine

strumentality of the state legislature for the perfor:

mance of that funetion; and the ageney has only such

powers as are expressly conferred upon it by statute or

exist by necessary implication, Ay, City af Philadelphia v.

Philadelphia Kleetrre Co, HOA Ba. 812, 473 Ad O97 (1084),

By entering the decisions here reviewed, the Commis:

sion not only failed to apply long-established principles

Sla

of public utility law, but also failed to heed the legisla-

ture's statutory re-confirmation of them with respect to

the costs at issue in these cases,

For the reasons set forth herein, the orders of the

Commonwealth Court are reversed, These causes are

hereby remanded to the Commission for proceedings

consistent with this opinion,

APPENDIX B

Opinion of the Pennsylvania Commonwealth Court

Walter W. COHEN, Consumer

Advocate, Petitioner,

PENNSYLVANIA PUBLIC UTILITY

COMMISSION, Respondent.

David M. BARASCH, Consumer

Advocate, Petitioner,

PENNSYLVANIA PUBLIC UTILITY

COMMISSION, Respondent.

Commonwealth Court of Pennsylvania.

Argued April 10, 1985.

Decided June 13, 1985.

As Amended June 14, 1985.

BARRY, Judge.

553 C.D. 1983

The Office of Consumer Advocate (OCA) appeals a

final order of the Pennsylvania Publie Utility Commis-

sion (PUC) which permitted inclusion in its rate base of

the cost of construction of four cancelled nuclear plants

by Duquesne Light Company (Duquesne).

In 1967, Duquesne became a member of the Central

Area Power Coordination Group (CAPCO)' which

developed a plan to construct seven nuclear power

plants. In January, 1980, CAPCO, however, cancelled

plans to construct four nuclear plants. At that

time Duquesne’s share of the expended cost was

$34,697,389.00. In April, 1982, Duquesne requested an

‘The other members of CAPCO are Pennsylvania Power Company

(Penn Power), Cleveland Electric Illuminating Company, Ohio Edison and

Toledo Edison.

annual base rate increase of $155,000,000.00 effective

June 29, 1982.

In January, 1983, the PUC issued a final order which

granted Duquesne $105,850,000.00 on its rate request

and allowed an annual revenue of $3,469,739.00 repre-

senting the amortization for the first year of a ten year

period of the costs of $34,697,389.00 for the four can-

celled nuclear plants. Thereafter, the OCA filed for

reconsideration and modification based on a newly

enacted statute added Section 1315 of the Public Utility

Code (Code), 66 Pa.C.S. § 1315, which allegedly disal-

lowed recovery of these plant cancellation costs in rates.

The PUC denied this petition reasoning that Section

1315 was inapplicable to such costs. It held that Section

1315 prohibits the inclusion of the costs of plants not

used and useful to the public in rate bases but does not

prohibit the inclusion of reasonable costs of these plants

in revenues as an expense.

The seminal issue involves whether costs of cancelled

nuclear power plants can be included in Duquesne’s

rates. The resolution of this question depends upon

whether Section 1315 prohibits amortization of the can-

cellation costs. Act 335, adding Section 1315, states as

follows:

AN ACT

Amending Title 66 (Public Utilities) of the Penn-

sylvania Consolidated Statutes, providing a limita-

tion on the consideration of certain costs in the rate

base for electric public utilities.

‘Act of Assembly No. 335, approved December 30, 1982.

The General Assembly of the Commonwealth of

Pennsylvania hereby enacts as follows:

Section 1. Title 66, act of November 25, 1970

(P.L. 707, No. 230), known as the Pennsylvania

Consolidated Statutes, is amended by adding a sec-

tion to read: § 1315. Limitation on consideration of

certain costs for electric utilities.

Except for such nonrevenue producing, nonex-

pense reducing investments as may be reasonably

shown to be necessary to improve environmental

conditions at existing facilities or improve safety at

existing facilities or as may be required to convert

facilities to the utilization of coal, the cost of con-

struction or expansion of a facility undertaken by a

public utility producing, generating, transmitting,

distributing or furnishing electricity shall not be

made a part of the rate base nor otherwise included

in the rates charged by the electric utility until

such time as the facility is used and useful in ser-

vice to the public. Except as stated in this section,

no electric utility property shall be deemed used

and useful until it is presently providing actual

utility service to the customers.

Section 2. This act shall be applicable to all

proceedings pending before the Publie Utility Com-

mission and the courts at this time. Nothing con-

tained in this act shall be construed to modify or

change existing law with regard to rate making

treatment of investment in facilities of fixed utili-

ties other than electric utilities.

Section 3. This act shall take effect immediately.

Our scope of review is limited to a determination of

whether constitutional rights have been violated, an er-

ror of law committed or whether the findings, determi-

nations or order of the PUC are supported by substan-

tial evidence. U.S. Steel Corp. v. Pennsylvania Public

Utility Commission, 37 Pa. Commonwealth Ct. 195, 390

A.2d 849 (1978). 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 construc-

tion is clearly erroneous. Chappell v. Pennsylvania Public

Utihty Commission, 57 Pa. Commonwealth Ct. 17, 425

A.2d 873 (1981).

The OCA contends that the PUC erred when it con-

strued Section 1315 to allow amortization of the cancel-

lation costs. It asserts that, under this provision, the

cost of construction of an electric generating facility

cannot be included in the rates charged until it is, by its

definition, used and useful, that is, providing actual

utility service. It thus maintains that Duquesne cannot

amortize cancellation costs since the four plants. will

never provide service.

By contras., it is the position of the PUC that, under

Section 1315, Duquesne should be permitted to amortize

its share of the cancelled plant costs over a ten year

period because this provision does not prohibit the

amortization of prudently incurred cancelled plant costs

in customer rates. The PUC alleges it allowed

Duquesne a recovery of its investment in the cancelled

plants but that Duquesne received no return on its in-

vestment nor any portion of the cancelled plant costs.

Section 1315, it asserts, merely codified the long stand-

ing practice of disallowing the inclusion of construction

work in progress (CWIP) in the rate base.

In Bell Telephone Co. v. Pennsylvania Public Utility

Commission, 47 Pa. Commonwealth Ct. 614, 408 A.2d

917 (1979), we stated that the Code

authorizes utilities to seek a just and reasonable re-

turn on the fair value of property used and useful

in the public service. What constitutes used and

useful utility property is committed to the discre-

tion of the Commission. If the Commission reason-

ably finds that a particular class of property is not

used or useful in serving the public, it may exclude

the value of that property from the rate base and

thus disallow the utility’s return on that property.

(Emphasis added.)

47 Pa. Commonwealth Ct. at 629, 408 A.2d at 924.

Furthermore, “[i]n the area of adjustments to rate base,

the [PUC] has wide discretion.” UGI Corp. v. Pennsyl-

vania Public Utility Commission, 49 Pa. Commonwealth

Ct. 69, 79, 410 A.2d 923, 929 (1980). In our view, the

PUC has correctly applied Section 1315 and, therefore,

we agree with its interpretation and analysis of this

provision.

According to the rules of statutory construction, the

title and preamble of a statute may be considered in the

construction of that statute. Section 1924 of the Statu-

tory Construction Act, | Pa.C.S8. § 1924. The limiting

title and preamble of Act 335, adding Section 1315,

described itself as one “providing a limitation on the

consideration of costs in the rate base for electric public

utilities.” (Emphasis added.) This phrase relates exclu-

sively to a consideration of rate base and not a legisla-

tive intent to exclude the costs of cancelled facilities

from the revenue or expense factors of ratemaking.

This interpretation, moreover, may be inferred from the

provisions of the Code where “used and useful’ relates

only to rate base inclusions and not at all to expense

allowances. For instance, Section 1307 of the Code, 66

Pa.C.S. § 1307, provides that a public utility should es-

tablish rates which provide a just and reasonable return

on the fair value of its property “used and useful” in

the public service; and, Section 1310 of the Code, 66

Pa.C.8. § 1310, authorizes the PUC to investigate rates

which produce a possible return “in excess of a fair re-

turn... upon property used and useful in its public ser-

vice.” The Code nowhere employs this phrase regarding

the allowance of items of expense. Case law also in-

dicates that the “used and useful” concept is uniformly

employed in considering only rate base questions. See,

for erample, Philadelphia Electric Co. v. Pennsylvania Pub-

lie Utility Commission, 61 Pa. Commonwealth Ct. 325,

433 A.2d 620 (1981); Bell Telephone Co.; Keystone Water

Co., White Deer District v. Pennsylvania Public Utility

Commission, 477 Pa. 594, 385 A.2d 946 (1978).

Properly interpreted, the key language upon which

OCA relies, that is, “nor otherwise included in the rates

charged”, serves to prohibit the inclusion of CWIP in

rate base and safeguard against alternative ratemaking

methods which seek to accomplish the same or a similar

result. We believe that when the legislature added Sec-

tion 1315, it codified the already existing PUC policy

regarding the exclusion of CWIP in the rate base. We,

in fact, have held that CWIP is not used and useful

property and thus not entitled to a return until actually

in service. Bell Telephone Co.

Act 335, adding Section 1315, was adopted following

a controversy which involved the cost of constructing

Philadelphia Electric Company’s nuclear generating

system on the Schuylkill River. It had requested the in-

clusion of $500,000,000.00 of the construction costs of

the plant in rate base and proposed the removal of all

restraints associated with the PUC policy of limited in-

clusion of CWIP in rate base. The PUC, however,

rejected this claim and proposal as a matter of policy

and affirmed its statutory authority to permit these

costs in rate base. Pennsylvania Public Utility Commis-

sion v. Philadelphia Electric Company, R-811626, May 21,

1982, 56 Pa. PUC (1982). In March, 1982 the Pennsy!-

vania Senate passed a resolution expressing a viewpoint

that the Code did not permit the inclusion of CWIP in

rate base.’ Act 335, adding Section 1315, was adopted on

December 30, 1982, effective immediately, and was ob-

viously meant to settle the issue regarding CWIP in

accordance with the resolution.

In our view, the words and meaning of Section 1315

are not entirely clear. Under Section 1921(c) of the

Statutory Construction Act, where the meaning of a

statute is not explicit, the intention of the legislature

may be ascertained by considering:

(1) The occasion and necessity for the statute.

(2) The circumstances under which it was enacted.

(3) The mischief to be remedied.

(4) The object to be attained.

(5) The former law, if any, including other statutes

upon the same or similar subjects.

(6) The consequences of a particular interpretation.

(7) The contemporaneous legislative history.

(8) Legislative and administrative interpretations

of the same statute.

1 Pa.C.S. § 1921(c). The legislature enacted the Act

specifically to counter Philadelphia Electric Company's

controversial request to include CWIP in rate base

before the facilities actually served the public. By doing

so, the legislature endorsed the longstanding PUC

policy regarding treatment accorded CWIP rate base

claims thereby codifying the exclusion of rate base in

‘The resolution was implemented by the introduction of Senate Bill No

1366, Session of 1982.

the cost of a facility before it has been completed or has

begun providing service to the public.

We believe the PUC properly permitted the inclusion

of the cost of the cancelled nuclear plants and, there-

fore, affirm its order.

1364 C.D. 1984

The OCA appeals an order of the PUC which permit-

ted inclusion of the costs of four cancelled nuclear units

and allowance of land held for future use in rate base

by Penn Power. The PUC order also permitted normal-

ization of tax benefits for state income tax purposes.

In July, 1983, Penn Power filed tariff revisions in

order to increase annual revenues by $19,890,200.00.

This request included additional return revenues result-

ing from inclusion of $842,074.00 in rate base of land

held for future use, the amortization over ten years of

Penn Power’s $9,569,665 investment in four cancelled

nuclear plants, and normalization of tax benefits as-

sociated with effects of depreciation in application to

state income taxes. On April 11, 1984, the PUC adopted

Penn Power's proposals for ratemaking purposes and

this appeal followed.

Because we have resolved the issue regarding the

amortization of Penn Power's investment in the nuclear

plants, we need not further address it.

The OCA asserts that the PUC violated Section 1315

when it permitted an allowance of land held for future

use in rate base because it provided a return thereon to

Penn Power. This claim, the OCA maintains, involved

electric utility facilities none of which could be deemed

“used and useful” as contemplated by Section 1315. We

disagree.

We reiterate that Section 1315 contemplates disallow-

ing the inclusion of CWIP in rate base and further that

the Code and decisional law uniformly apply “used and

useful” only to rate base questions.

The OCA next contends that normalization of the tax

benefits associated with state income taxes violates the

“actual taxes paid” doctrine. The case of Barasch, Con-

sumer Advocate of Pennsylvania v. Pennsylvania Public

Utility Commission and Pennsylvania Power Company,

Pa. —, 491 A.2d 94 (1985), supports the OCA and we,

therefore, reverse on the normalization issue.

PALLADINO, J., dissents.

No. 553 C.D. 1983

ORDER

Now, June 13, 1985, the order of the Pennsylvania

Publie Utility Commission, entered January 28, 1983,

and April 18, 1983, at No. R-821945, is affirmed.

No. 1364 C.D. 1984

ORDER

NOW, June 13, 1985, the order of the Pennsylvania

Public Utility Commission, entered April 11, 1984, at

No. R-832409, regarding the inclusion of costs of can-

celled nuclear plants and land held for future use in

rate base, is affirmed and the order regarding nor-

malization of actual state income tax expenses is

reversed,

CRUMLISH., Jr., President Judge, concurring.

| agree with the able and articulate reasoning of the

majority, but include an additional comment.

If we had concluded that Section 1315 extended

bevond rate base and encompassed all components of

rate structure, I would still have held it inapplicable to

10b

the costs of these cancelled nuclear plants. This statute

is only intended to prevent the inclusion in rates of con-

struction work in progress. When construction is can-

celled, a fortiori it does not progress. Section 1315's pro-

scriptive effect attaches “until such time as the facility is

used and useful... .” (Emphasis added.) The General

Assembly's language unmistakably connotes a concept

of delayed recoupment, not of total forfeiture, as would

result if this provision barred recovery of costs associat-

ed with plants never to be completed.

Serious constitutional problems would be raised by

precluding a utility from ever regaining monies

prudently invested for the public benefit. Also, as allud-

ed to by the majority, Section 1315 was enacted in re-

sponse to a specific instance where a utility sought to

charge rates for the costs of ongoing construction on a

facility scheduled for future completion.’ | would therefore

construe Section 1315 as a provision concerned solely

with construction work in progress.

COLINS, Judge, dissenting.

| I must disagree with the conclusion by the majority

in Cohen v. Pennsylvania Public Utility Commission. -

Pa. Commonwealth Ct. —, 494 A.2d 58 (1985). that

losses incurred by Duquesne as a result of expenditures

on now-abandoned nuclear power plants should be

borne by the consumer. Section 1315 of the Publie Utili-

ty Code’ clearly disallows the inclusion of the costs of

construction of a facility in the rate base until it is used

and useful, a practice already followed by the Public

Utility Commission (PUC). But Section 1315 did not

merely reiterate an existing PUC practice, but rather

‘See majority opinion, at 62

‘66 Pa.CS. § 1315.

llb

went on to state that these costs shall not be “otherwise

included” in the rates charged until the facility is used

and useful. Obviously, the legislature intended that the

costs of CWIP’s should not be included anywhere in the

rates charged until the facility is being used.

Section 1921(a) of the Statutory Construction Act’

states that “[e]very statute shall be construed, if pos-

sible, to give effect to all its provisions.” Section 1921(b)’

directs that “[w]hen the words of a statute are clear and

free from all ambiguity, the letter of it is not to be dis-

regarded under the pretext of pursuing its spirit.” The

interpretation given Section 1315 by the majority ig-

nores a directive in the statute that “the cost of con-

struction ... of a facility undertaken by a public utility

producing, generating, transmitting, distributing or fur-

nishing electricity shall not be made a part of the rate

base nor otherwise included in the rates charged by the elec-

iric utility until such times as the facility is used and

useful in service to the public.” (Emphasis added.)

The majority has misinterpreted the statute by ignor-

ing the key phrase “nor otherwise included in the rates

charged.” The entire statute as it stands is not am-

biguous. Any costs incurred in constructing a new facili-

ty by a public utility furnishing electricity cannot be

included anywhere in its rates until that facility is

actually providing utility service to its customers. If the

legislature merely wished to codify a practice already

utilized by the PUC in its rate computation, it would

have simply disallowed the inclusion of these costs in

the rate base. The legislature clearly intended that the

costs of facilities which are not actually providing

1 PaCS. § 1921(a).

‘1 PaCS. § 1921(b).

12b

service should not be borne by consumers anywhere in

the rates paid until they are producing electricity.

Therefore, the decision of the PUC should be

reversed.

MacPHAIL and PALLADINO, JJ., join.

APPENDIX C

Order of the Pennsylvania Public Utility

Commission (Duquesne Light Co.)

Pennsylvania Public Utility Commission

Duquesne Light Company

Intervenors: United States Steel Corporation, Office of

Consumer Advocate, Pennsylvania Alliance for Jobs and

Energy, Equitable Life Assurance Society of the United

States, Joseph Horne Company, Kaufmann’s, Gimbels,

Gulf and Western Manufacturing Company, Armco,

Inc., and Hospital Council of Western Pennsylvania

R-821945 et al.

January 27, 1983

APPLICATION for authority to increase electric rates; grant-

ed as modi fied; income tax allowance reduced by hypothetical

interest associated with accumulated deferred tax credits.

By the Commission:

Opinion and Order

I. Introduction

On April 30, 1982, Duquesne Light Company (respon-

dent or Duquesne) filed, with the commission, Tariff

Electric-Pa. PUC No. 15. The proposed tariff contained

changes in rates, rules, and regulations designed to

produce an increase in annual Pennsylvania jurisdic-

tional electric revenues of approximately $165,013,000

based upon a future test-year level of operations for the

twelve months ending December 31, 1982.

This proposed tariff was suspended by operation of

law until January 29, 1983. By order entered June 4,

1982, we instituted this investigation at R-821945. Nine

formal complaints were filed against the proposed rate

increase and these were consolidated with our investiga-

tion for purposes of hearing, briefing, and disposition.’

‘Four of the complaints were filed by commercial customers which are

owners of buildings in downtown Pittsburgh, and are referred to herein as

“commercial complainants.”’ These are the Equitable Life Assurance Society

of the United States, Joseph Horne Company, Kaufmann’s and Gimbels.

The Hospital Council of Western Pennsylvania was

granted intervenor status.

Twenty-four days of hearings were held in Pittsburgh

and Harrisburg before Administrative Law Judge

Joseph J. Klovekorn (ALJ). Duquesne presented twen-

ty-three witnesses. The commission trial staff (staff)

presented four witnesses as did the Office of Consumer

Advocate (OCA). The commercial complainants and

United States Steel Corporation (USS) each presented a

witness in the area of rate structure.

Main briefs have been filed by Duquesne, staff, OCA,

commercial complainants, USS, Armco, Gulf and West-

ern, and the Hospital Council. Reply briefs were filed

by all parties except USS and the Hospital Council.

The ALJ’s recommended decision was issued on

December 10, 1982. Exceptions were filed on or before

December 20, 1982, by Duquesne, staff, OCA, commer-

cial complainants, Armco, and the Pennsylvania Al-

liance for Jobs and Energy (PAJE). Replies to excep-

tions were filed on or before December 27, 1982, by

Duquesne, staff, OCA, commercial complainants, and

USS.

In addition to accomplishing disposition of this

proceeding, this opinion and order completes the dispo-

sition of the respondent's petition regarding normaliza-

tion of federal income taxes under the accelerated cost

recovery system and also grants amortization of the re-

spondent’s cancellation costs arising from cancelled

Central Area Power Coordination Group (CAPCO),

construction which was the subject of investigation in

the proceeding at I-79070315.

II. Rate Base

A. Fair Value

The respondent presented only original cost measures

of value in this proceeding. Consequently, we shall

adopt as the fair value of the respondent’s rate base, the

original cost measure of value as it shall be hereinafter

determined.

B. Electric Plant in Service

Duquesne’s claimed undepreciated original cost for

electric plant in service on a total company basis as of the

end of the future test year or December 31, 1982, is

$2,246,044,570. This is based upon the reclassification of

the plant accounts, effective December 31, 1936, as ap-

proved by the coimmission’s orders of January 7, 1946,

and February 9, 1948, at E.0.C. 10. Beginning January

1, 1938, the methods, procedures, and records for all

property additions and retirements have been main-

tained in a manner compatible with the requirements of

the basic plan approved by the commission. The com-

pany’s continuing property records have also been

maintained since that time in accordance with the ap-

proved CPR system. The Federal Energy Regulatory

Commission (FERC) and the commission staff have

periodically audited Duquesne’s continuing records and

related construction work order system and inspected

its physical plant to ensure compliance.

The company’s original cost measure of value con-

tained in the original filing was predicated on the com-

pany’s 1982 construction budget. During the course of

the proceeding, numerous revisions, consisting of con-

struction additions and deletions, changed in-service

dates, revised construction costs, were made in the con-

struction programs reflected in the company’s 1982 con-

struction budget. Updated exhibits were filed to reflect

these revisions.

Duquesne’s claim is uncontested. We approve the

claim.

C. Depreciation Reserve

Duquesne’s claim for accrued depreciation (calculated

reserve) applicable to its original cost—electric plant in

service is $493,030,725, on a total company basis. In the

last four Duquesne proceedings, we have approved

Duquesne’s estimated average service lives and sur-

vivor curves, and methodologies with respect to accrued

depreciation for the transmission, distribution, and gen-

eral plant accounts. In this proceeding Duquesne again

prepared a life span analysis for all of its production

plant, by unit. For each plant account, these exhibits

set forth the original cost dollars, the probable retire-

ment year of each unit, the estimated interim survivor

curves, and the statistical support for each interim sur-

vivor curve. The depreciation calculations relating to

production for each station are presented by plant ac-

count showing the original cost of the surviving plant

by year of installation, the average life of the plant in-

stalled in each year, the annual accrual amount, the

average remaining life expectancy, and the calculated

reserve related to the original cost of each vintage.

The ALJ concluded that Duquesne’s claim for ac-

crued depreciation was supported by the uncontested

evidence and recommended that it be accepted in this

proceeding. We approve the claim.

D. Additions to Rate Base

1. Property Held for Future Use and Other Items

Duquesne has claimed $552,853, on a total company

basis, for plant held for future use. This property con-

sists of land with estimated in-service dates on or before

1988. No party has contested this claim. We find that

the claim is reasonable and accordingly, it is allowed.

Duquesne has also claimed $61,482 as the undepre-

ciated original cost of the used and useful plant of the

Monongahela Light and Power Company. The asso-

ciated depreciation reserve is $27,405. No party has con-

tested this claim. We find the claim and the associated

accumulated reserve to be reasonable and accordingly it

is approved.

Additionally, Duquesne has claimed $355,000 as the

undepreciated additional cost of the borough of Aspin-

wall plant, with an associated accumulated depreciation

reserve of $275,125. No party has contested the claim

and finding it otherwise reasonable, it is approved.

2. Construction Work in Progress

Duquesne’s claim for electric plant in service reflects

investment in plant which it expects to be in service at

December 31, 1982. Additionally, it has claimed inclu-

sion of construction work in progress (CWIP) with

regard to certain nonrevenue-producing, regulatorily

mandated projects, such as environmental control; and

Nuclear Regulatory Commission (NRC) mandated

projects. Duquesne’s claim of $70,769,052, construction

work in progress, on a total company basis is comprised

of the following:

Construction Work in Progress Caiculated Accrued

(Net of Associated Retirements) Original Cost Depreciation

Environmental Control

Projects $52,479,898 a 5

NRC Mandated 18,289,154 288,204

Claim $70,769,052 $1,050,579

The company states that its claim reflects the esti-

mated expenditures to complete the projects, all of

which are expected to be in service during 1983, the

year in which the rates to be set in this proceeding will

be in effect. This claim, it urges, is consistent with al-

lowances in other proceedings; citing Pennsylvania Pub.

Utility Commission v Pennsylvania Power Co. R.I.D.

243, Jan. 27, 1977; Pennsylvania Pub. Utility Commis-

sion v. Dauphin Consol. Water Co. R-78050616, April 5,

1979; Pennsylvania Pub. Utility Commission v Phila-

delphia Electric Co. R-811626, May 21, 1982. These ex-

penditures, it claims, are necessary for Duquesne to

comply with environmental air and water pollution

standards and NRC mandated requirements, in order

to retain the existing capacity of generating stations al-

ready in service.

While not contesting the accuracy of the company’s

claim, the OCA opposes inclusion in rate base of any

post-test-year expenditures. In support of its position,

OCA cites our opinion and order in Pennsylvania Pub.

Utility Commission v Penn Power, R-811510, Jan. 22,

1982.

The ALJ recommended approval of the respondent’s

claim. The OCA has excepted. We shall allow the claim

based upon our decision in Pennsylvania Pub. Utility

Commission v Philadelphia Electric Co. R-811626, May

21, 1982, wherein we distinguished a factual situation

on almost all fours with the one present here, from that

present in the Penn Power case. The essential feature of

the claim here, which brings to within our policy of per-

mitting the inclusion of pollution control and NRC man-

dated construction work in progress in rate base, is that

the claim is limited to projects which will be in service

within one year after the end of the future test year.

E. Cash Working Capital

Duquesne has submitted a cash working capital claim

of $54,660,529, on a total company basis, as set forth

below:

SUMMARY OF WORKING CAPITAL CLAIM

Operation and Maintenance Expense $14,829,313

Prepayments:

Prepaid Insurance $1,477,277

Prepaid Taxes—Real Estate 180,691

Prepaid Federal Use Taxes on Highway

Motor Vehicles 8,826

Prepaid PUC Assessment 620,143

Prepaid West Virginia Franchise Tax 513

Prepaid Excise Tax 25,467 2,312,917

Deferred Rental under Nuclear Lease 20,596,196

Deferred Quarto Coal Cost 16,922,103

Total Cash Working Capital

Requirement $54,660,529

The staff proposes numerous adjustments to the com-

pany’s claim. The staffs proposed cash working capital

allowance is $13,450,086. The OCA also proposes

numerous adjustments and an allowance of approxima-

tely $10 million. We will address each area of conten-

tion individually.

1. Operation and Maintenance Expense—Lead-lag Study

Duquesne’s cash working capital claim associated

with operation and maintenance expenses is based on a

lead-lag study which uses 38.3 days for the average lag

in the receipt of revenues and 24.5 days for the average

lag in the payment of operating expenses.

The staff witness stated that the company’s 38.3-day

revenue lag includes a two-day allowance for processing

and bank collection after receipt of payment, while, on

the other hand, the 24.5-day expense lag claimed by the

company includes only the period between the date

goods and services are delivered or performed, and the

date of the check or disburseinent voucher, no al-

lowance being made for a disbursement float allegedly

arising from mailing lag and bank processing.

The staff argues that if the lead-lag study is to in-

clude an allowance for disbursement float on the reve-

nue side, it should also include an allowance for

disbursement float on the expense side. The addition of

a two-day expense lag to account for disbursement float

would, according to the staff witness, decrease the cash

working capital claim by $2.7 million.

The OCA would also reduce this claim by $2.7 mil-

lion on the basis that this disbursement float amounts

to the alternative equivalent of a claim for compensat-

ing bank balances.

Duquesne argues that the staff’s adjustment erro-

neously assumed a two-day lag. It also states that the

staff’s proposed adjustment would recognize the same

dollars which Duquesne has recognized by not claiming

a compensating bank balance requirement, as the alter-

native to paying fees for banking services.

According to Duquesne’s treasurer, R. G. Males:

“Checks are dated, entered in the cash book, and

mailed the same day. The value of the checks mailed to

the vendor and not yet presented for payment at the

bank is disbursement float. A recent one-month analysis

of cash disbursement indicates that 62.1 per cent of the

total dollars expended during the month were processed

through the bank account the same day entries were

made to the cash book of the company. This is primari-

ly attributable to sending large payments by bank

wires. Bank wires are charged to the company’s bank

account on the same day the payment is sent and

reduce both the bank ledger balance and collected bank

balance in the bank account. The remainder of the cash

disbursements is disbursement float. For the month

analyzed, January, 1982, $1,918,000 was disbursement

float. Of the total cash disbursements for the month

14.1 per cent of the dollars was one-day disbursement

float, 8.3 per cent was two-day, 9.9 per cent was three-

day, with 5.6 per cent being four-day float or longer.

As stated in the response to interrogatories of the

consumer advocate, Set No. II, Item No. 2.20a last

paragraph, the amount of the disbursement float is ap-

proximately equal to the amount of compensating

balances required by the bank in ‘payment’ for demand

deposit services. The company has made no claim for

these required compensating balances. This is discussed

in Duquesne Exh II, Item II-A-15, p. 2 of 2 and Item

II-A-l6e. The amount of the required compensating

balances for demand deposit services is stated in

Duquesne Exh II-A-16, p. 5, which is a portion of a

copy of a letter from Roger N. Stanier, vice president of

Mellon Bank. Should it be necessary to include the dis-

bursement float in the calculation of the cash working

capital expense lag days, it would then also be appro-

priate to include the amount of the disbursement float

as a compensating balance requirement to be included

in the cash working capital needs of the company.”

It would appear from this record, therefore, that

there is not a two-day lag, rather over 62 per cent of the

total dollars expended during the month are processed

the same day and have no lag. Duquesne states that the

disbursement float which does exist is used to compen-

sate the Mellon Bank for deposit and disbursement ac-

tivity services. Such bank services normally require a

fee or may take the form of a compensating balance

requirement and such a claim has not been made here.

i0c

The record shows that the Mellon Bank would require

some $1,980,000 in compensating balances for the depos-

it and disbursement activity services which it provided

at the 1981 level.

The ALJ recommended that the proposed adjustment

be rejected for two principal reasons: First; there is no

support for the assumption that because there is a two-

day revenue lag for processing and bank collection,

there is a similar lag on the expense side. Second; the

proposed adjustment fails to recognize that the disburse-

ment float that does exist eliminates the need for a com-

pensating balance requirement.

Both the staff and the OCA except. The proposed ad-

justments are rejected and the exceptions are denied.

We have previously recognized that it is appropriate to

offset disbursal float against compensating balance

requirements (Pennsylvania Pub. Utility Commission v

Pennsylvania Power Co. R-815510, Jan. 22, 1982). Here

the waiver of a compensating balance claim constitutes

the same result.

2. Expense Payment Lag for Net Energy Clause Expenses

Office of Consumer Advocate witness, Henkes,

proposed reducing the company’s cash working capital

claim by $1,759,000 to reflect the expense lag associated

with net energy clause energy expenses. The ALJ

recommended that this adjustment be rejected: First, on

the basis that Duquesne includes in its calculation, dol-

lars associated with demand charges which Duquesne is

not permitted to collect through its net energy clause

and, therefore, to the extent those costs are in excess of

the amount in base rates; dollars which it never

recovers from its customers. Second; on the basis that

the purchased power dollars (sales) are a net amount

lle

and reflect sales of power by Duquesne to other com-

panies, which at some subsequent point in time pay

Duquesne for this power either in cash or in equivalent

power. These dollars are reflected in the net energy

clause as a credit to the customer when the power is

delivered, not when they are actually paid. The OCA

has excepted. The exception is denied. We conclude that

the proposed adjustments are inappropriate for the rea-

sons proffered by the ALJ.

3. Prepayments

Duquesne’s claim with respect to prepayments of

$22,312,917 is calculated on the basis of a 13-month

average balance and is detailed in Duquesne Exh No.

Ill, Item No. III-A-14. The claim is uncontested. The

ALJ recommends its allowance. We find the claim rea-

sonable and accordingly it is approved.

4. Deferred Rentals under Nuclear Lease

The company’s claim of $20,596,196 for deferred ren-

tal under its nuclear fuel lease includes (1) $11,691,099

related to fuel presently in the reactor, (11) $5,848,344

associated with the next reload, the fabrication of which

will be completed before the rates in this proceeding

will be in effect, and (iii) $3,056,753 for nuclear fuel still

in process. The ALJ recommended approval of the first

two items and disapproved of the third item.

The staff urges that that portion of deferred rental

under its nuclear lease associated rental under its nu-

clear lease associated with nuclear fuel still in process

(Items ii and iii above) be excluded from cash working

capital allowance. It, therefore, proposed reducing the

company’s claim by $8,905,097. The OCA proposed a

similar adjustment.

12e

The issue of rate base treatment for nuclear fuel in

process was recently considered in our opinion and

order in Pennsylvania Pub. Utility Commission v

Philadelphia Electric Co. R-811626, May 21, 1982.

There we approved a claim for the company’s invest-

ment in nuclear fuel in process. The company relies on

that opinion and order to support its present claim.

There was no opposition to the inclusion in cash

working capital of the $11,691,099 in rentals related to

the fuel currently in the reactor. The ALJ recommend-

ed approval of this portion of the claim. No party ex-

cepted. We find this claim appropriate and accordingly,

it is approved.

The objections to inclusion of the $5,848,344 associat-

ed with the next reload seem minor. Staff notes that this

fuel will not be delivered until February, 1983, “well

beyond the end of the 1982 test year.”” The OCA argues

that there is no assurance that this fuel load will occur

as currently scheduled. We know, however, that Beaver

Valley will require a reload sometime shortly after these

rates go into effect. Further, the delivery date is only a

matter of some weeks past the end of the test year. This

amount shall be allowed. Accordingly, the exceptions of

the staff and OCA are denied.

With respect to the remaining $3,056,753, represent-

ing rentals on fuel in process, the ALJ recommended

disallowance based upon the absence of the special cir-

cumstances which we found present in our opinion and

order in Pennsylvania Pub. Utility Commission v

Philadelphia Electric Co. R-811626, May 21, 1982. We

stated there that:

“Based upon the particular circumstances of this case and

our determination that Limerick Unit No. 1 is in the public

13e

interest and is to be completed in the near future, we are of

the conviction that recovery of the investment in nu-

clear fuel in process, other than that associated with

Limerick Unit No. 2, is in the best interest of both the

ratepayers and the company. We find merit in PECO’s

argument that a guaranteed fuel supply and avoidance

of spot market purchases benefits both current and fu-

ture ratepayers.” (Emphasis added.)

We agree with the ALJ that those special circum-

stances are not present here. We conclude that the com-

pany’s claim for deferred rentals for the remaining

nuclear fuel in process should not be allowed for the

reasons which we stated in our opinion and order in

Pennsylvania Pub. Utility Commission v Pennsylvania

Power Co. R-811510, Jan. 22, 1982, which was that this

expense is most analogous to deferred energy costs, and

that our long-standing policy is to allow a return on

“used and useful” property but not on operating

expenses. The company’s exception is, accordingly, de-

nied. As an alternative to inclusion in rate base, we

shall permit, as suggested by the OCA, the company to

accrue allowance for funds used during construction

(AFUDC) on the disallowed sum of $3,056,753, in the

manner and for the period set forth in the pertinent

ordering pragraph.

5. Accumulated Interest and Preferred Dividends Offset

Although recognizing that in its rate proceeding, at

R-80011069, we offset its cash working capital claim by

an amount equal to its accumulated debt interest and

preferred and preference stock dividends, Duquesne did

not make such an adjustment here. The adjustment

proposed by the staff for these items totals $12,622,000.

The OCA proposed a similar adjustment although

different in amount from the staff ($12.8 million).

l4e

Duquesne states that there is no actual basis for such

an adjustment. It asserts that the basis for a cash work-

ing capital adjustment for accumulated interest expense

and accumulated preferred stock dividends should be

no different than any other aspect of a lead-lag study.

That is, such an offset, is only appropriate where the

recovery of interest and dividends from ratepayers ac-

tually leads the disbursement of such interest and

dividends to the investors.

Duquesne then states that the evidence in this record

shows that, rather than the interest expense and

preferred stock dividends being collected by the

company from ratepayers prior to disbursement to

Duquesne’s investors, interest expense and preferred

stock dividends are, in fact, paid by Duquesne to the

company's investors well in advance of any payments

received from Duquesne’s ratepayers. In other words,

Duquesne claims that receipt of the payments from

ratepayers lag the actual cash payments to company’s

investors, a lag for which, Duquesne says, it has never

sought compensation.

Interestingly, we note that Duquesne’s witness Mr.

Ellenberger acknowledged that in our opinion and order

at R-80011069, we rejected this identical argument.

Nonetheless, Duquesne pursues this matter yet again,

citing a decision of the supreme court of the state of

Rhode Island, which reversed a similar adjustment by

the Rhode Island commission, on the basis that ac-

cumulated interest are investor-supplied funds, urging

us to follow that decision. We are unpersuaded that

such is the law in this commonwealth. This issue has

been litigated by various utilities since an adjustment

was first made by the commission in 1978. To date we

L5e

have made such an adjustment in at least 18 proceed-

ings’ and we have consistently been affirmed by the com-

monwealth court.’ The ALJ recommends the adoption

of an adjustment which was recalculated based upon his

adopted rate base.

The respondent has excepted. The exception is denied

and we will reduce the cash working capital claim, by

$12,674,000, based upon our adopted rate base, which

amount is identical to that calculated by the ALJ.

Because of this identity of result, no commission adjust-

ment to the ALJ’s adopted rate base appears in Table

II [omitted herein].

‘Pennsylvania Pub. Utility Commission v Philadelphia Electric Co.

R-811626, May 21, 1982; Pennsylvania Pub. Utility Commission v Penn-

sylvania Electric Co. R-811510, Jan. 22, 1982; Pennsylvania Pub. Utility

Commission v Philadelphia Electric Co. R-80061225, April 24, 1981; Penn-

sylvania Pub. Utility Commission v Pennsylvania Gas & Water Co.

R-80071235, April 24, 1981; Pennsylvania Pub. Utility Commission v.

Duquesne Light Co. (1981) 54 Pa PUC 695, 43 PUR4th 27; Pennsylvania

Pub. Utility Commission v West Penn Power Co. (1981) 54 Pa PUC 602;

Pennsylvania Pub. Utility Commission v Pennsylvania Power & Light

Co. (1981) 54 Pa PUC 645; Pennsylvania Pub. Utility Commission v Na-

tional Fuel Gas Distribution Corp. (1980) 54 Pa PUC 401, 40 PUR4th 101;

Pennsylvania Pub. Utility Commission v Carnegie Gas Co. R-79100981,

July 25, 1980; Pennsylvania Pub. Utility Commission v_ Philadelphia

Suburban Water Co. R-78040824, Feb. 1, 1980; Pennsylvania Pub. Utility

Commission v West Penn Power Co. (1979) 53 Pa PUC 410, 32 PUR4th

245; Pennsylvania Pub. Utility Commission v Pennsylvania Electric Co.

(1979) 53 Pa PUC 203; Pennsylvania Pub. Utility Commission v Metro-

politan Edison Co. (1979) 53 Pa PUC 225, 28 PUR4th 555; Pennsylvania

Pub. Utility Commission v Pennsylvania Power Co. (1978) 52 Pa PUC

457, 27 PUR4th 426; Pennsylvania Pub. Utility Commission v Philadel-

phia Electric Co. (1978) 52 Pa PUC 772, 31 PUR4th 15; Pennsylvania

Pub. Utility Commission v Peoples Nat. Gas Co. (1978) 52 Pa PUC 616,

28 PUR4th 180; Pennsylvania Pub. Utility Commission v Pennsylvania

Electric Co. (1978) 51 Pa PUC 649; Pennsylvania Pub. Utility Commis-

sion v UGI Corp. (1978) 52 Pa Pue 383.

‘Philadelphia Electric Co. v Pennsylvania Pub. Utility Commission

(1981) 62 Pa Cmwlth 325, 433 A2d 620; UGI Corp. v Pennsylvania Pub.

Utility Commission (1980) 49 Pa Cmwlth 69, 410 A2d 923; Peoples Nat.

Gas Co. v Pennsylvania Pub. Utility Commission (1980) 52 Pa Cmwith

201, 415 A2d 937: Penn Electric Co. v Pennsylvania Pub. Utility Commis-

sion (1980) 53 Pa Cmwlth 186, 417 A2d 819

160

6. Deferred Quarto Coal Costs

A portion of the coal requirements for the Mansfield

units, Which are owned in part, by Duquesne, is supplied

from the Quarto mine. On December 11, 1980, we insti-

tuted an investigation at [-80120343 regarding the

reasonableness of the cost of coal from this mine.

On January 12, 1981, we entered an interim order

providing:

“[t]hat for purposes of calculating the current net

energy clauses of Duquesne Light Company and Penn-

sylvania Power Company, the companies shall limit

pricing of Quarto coal to market prices determined by

the same methodology used prior to removing the mines

from development; such limitation shall commence

upon entry of the order and shall remain in effect until

that instant investigation is concluded, or until other-

wise ordered by the commission.

“That Duquesne Light Company and Pennsylvania

Power Company shall defer collection of the cost of the

Quarto coal that may be uncovered as a result of Order-

ing Par No. 1, pending the termination of the instant

investigation.”

Duquesne’s cash working capital claim includes

$16,922,103 for deferred Quarto coal costs. The com-

pany argues that these coal costs were reasonably in-

curred and its inability during the continuance of the

investigation to pass on to its customers the full costs

incurred by it for such coal does not change this fact.

Duquesne then argues that the carrying costs created

by the deferrals are busines cost incurred by it, no

different than other investor-supplied expenditures.

The staff and the OCA oppose this claim. They argue

that by including those costs in its cash working capital

claim, Duquesne is requesting a current return on costs

17e

that are now under investigation and may be found to

be excessive and unreasonable.

The ALJ recommends disallowance of this claim, at

least pending completion of the investigation.

The respondent has excepted. We adopt the proposed

adjustment and deny Duquesne’s exception. Our in-

terim order of January 12, 1981, effectively questioned

the reasonableness of those costs which were required to

be deferred. It would be inconsistent for us to permit a

return on such deferred costs, by permitting their inclu-

sion in rate base.

7. Customer Deposits

The OCA proposes a $1.7 million deduction to reflect

the elimination of customer deposits from rate base,

and proposes that interest on customer deposits be in-

cluded as an above-the-line expense. Duquesne opposes

the adjustment as a change without substance, and

urges that the adjustment be rejected, as was done in

the proceeding at R-811470. In that proceeding, the ad-

justment proposed by the Pennsylvania Alliance for

Jobs and Energy was rejected, because of a failure to

address the subject of the treatment to be accorded the

associated interest expense. Here the OCA proposes a

concomitant interest expense adjustment. The ALJ

recommends adoption of the proposed adjustment. We

agree that such an adjustment is appropriate, and

Duquesne’s exception is denied. It is well established in-

vestors should not be permitted to earn a return on

funds which they do not supply. Conversely, the in-

terest that Duquesne pays on such amount is a legiti-

mate business expense for which it should be made

whole. We shall, therefore, make the concomitant ad-

justment for interest expense.

LSe

F. Other Working Capital

1. Materials and Supplies

As shown in Duquesne Exh No. 1B, p. F-2,

Duquesne’s total working capital claim includes a

materials and supplies (other than fuel) inventory claim

of $29,123,728 based upon the 13-month average bud-

geted balance of the materials and supplies inventory.

No party has contested this claim.

The company’s materials and supplies working capi-

tal claim is consistent with the commission’s tariff

regulations which specifically request the monthly ma-

terials and supplies book balances for the thirteen

months prior to the end of the test year. (52 Pa Code,

§ 53.53, item I-A-15.)

The ALJ includes [sic] that Duquesne’s materials

and supplies working capital claim of $29,123,728 is rea-

sonable and recommends approval of its claim. We

agree and approve the claim.

2. Fuel inventory

As shown in Duquesne Exh No. 1B, p. F-1, Du-

quesne’s working capital claim includes a fuel on hand

claim of $44,537,267 for coal and oil in inventory. This

figure was based upon adjusted test-year conditions as

to load distribution for assumed Beaver Valley Unit

No. 1 operation under conditions comparable to a 63.6

per cent capacity factor and Shippingport shutdown all

year. No party to the proceeding has submitted

evidence contesting this claim.

The company’s fuel inventory claim is consistent

with the commission’s regulations which specifically

request the monthly fuel on hand balances (quantity

and price) for the thirteen months prior to the end of

19¢

the test year (52 Pa Code, § 53.53, Item I-A-16). In

previous proceedings we have allowed similar claims.

See, e.g., Pennsylvania Pub. Utility Commission v

Pennsylvania Power & Light Co. (1981) 54 Pa PUC

645; Pennsylvania Pub. Utility Commission v Du-

quesne Light Co. (1981) 54 Pa PUC 695, 43 PUR4th 27.

Duquesne’s fuel on hand working capital claim of

$44,537,267 is reasonable and it is approved.

G. Conclusion

Our adopted fair value rate base on a Pennsylvania

jurisdictional basis, is $1,779,313,000.

We should note for the benefit of the reader that no

party contested the company’s proposed rate base

reduction applicable to sales for resale under the juris-

diction of the Federal Energy Regulatory Commission.

We approve that jurisdictional allocation without addi-

tional comment herein.

III. Operating Revenues

Duquesne estimated its test-year total company, oper-

ating revenues at present rates at $693,113,000, which

includes a number of adjustments, most of which were

uncontested. Additionally, the staff proposed one ad-

justment. These shall be addressed seriatim.

A. Uncontested Adjustments

Seven adjustments by Duquesne to its estimated

operating revenues were uncontested by the parties.

These were:

(1) A reduction of $33,310,000 to eliminate the state

tax adjustment Rider 10 revenues;

(2) A reduction of $134,590,000 to. eliminate the

energy cost rate revenues;

20¢

(3) An inerease of $3,796,000 vo reflect the estimated

additional revenues resulting from annualizing the in-

crease in the number of customers during the test year;

(4) An increase of $1,266,000 to reflect the estimated

additional revenues resulting from annualizing the in-

crease in use per customer during the test year;

(5) An increase of $18,000 to reflect the estimated

additional revenues resulting from annualization of late

payment charges to reflect increases in number of

customers and increases in usage per customer;

(6) An increase of $3,000 to reflect the estimated

revenue from the residential conservation program for

the test year. (Although this estimate was reduced to

$1,785 in Duquesne Exh No. 313-4 the claim was not

revised ); and,

(7) An increase in miscellaneous service revenues of

$93,000 to reflect the revenues expected to result from

the proposed returned check and reconnection charges.

These uncontested adjustments and the amount

thereof appearing to be reasonable are accepted.

B. Sales to Crucible Steel

Duquesne reduced test-vear revenues by $18,649,916

to reflect the loss of sales associated with the shutdown

of Crucible Steel’s Midland plant which oecurred during

the future test year but which was unanticipated when

the 1982 budget was prepared. The reduction of

$18,649,916 is a net amount; that is, the annualized bud-

get revenue for the Midland plant of $26,696,696, less

the amount of $8,046,780 expected to be recovered

under the demand ratchet provisions of Duquesne’s

tariff. This adjustment was based upon an estimated

loss of 693,880,000 kilowatt-hours of sales, which in turn

a ee?

ot eee ne Re cae eee Re, ii Rs A TR pees BPM oe 1 heres OB dy Me A we oe

lal Aly + ta tet DR PAA VA at AN eae, em

ok el 6 te Rm

oe lhe,

2le

was based upon annualized sales, predicated upon the

then highest demand months of 1981.

The staff contested the Duquesne proposal with a

proposed alternative adjustment of $15,814,395. The

staff’s proposed downward adjustment of $2,835,521 to

Duquesne’s proposed adjustment is accompanied by a

concomitant adjustment (increase) in operating ex-

penses of $933,739.

The difficulty encountered with regard to an adjust-

ment for the closing of Crucible Steel’s Midland plant,

is that while the 1982 budgeted sales estimates contains

a projected sales estimate of 4,430 million kilowatt-

hours for the seven largest steel producers, it does not

contain an individual figure for Crucible Steel’s Mid-

land plant. While the company’s adjustment was based

upon the highest three-month demand period of June to

August, 1981, the staff’s proposed adjustment was based

upon the demands for ‘he eight-month period of May to

December, 1981.

In rebuttal the company, through its witness Dudt,

attempted to bolster its proposed adjustment by point-

ing out that its 1982 sales estimate of 4,430 million

kilowatt-hours for all seven steel producers, prepared in

late September or October, 1981, is compatible with the

February 12, 1981, estimate prepared by the industrial

service department of 4,400 million kilowatt-hours, of

which Crucible Steel sales at the Midland plant repre-

sented 775 million kilowatt-hours. Therefore, reasons

Mr. Dudt, the 1982 budgeted sales estimate reasonably

could have included as much as 780 million kilowatt-

hours of sales for the Midland plant, as contrasted with

Duquesne’s proposed adjustment based upon 694 mil-

lion kilowatt-hours of sales.

22¢

We are confronted with what is essentially a budget

forecast of sales to the seven largest steel producers of

4,430 million kilowatt-hours, prepared by Data Re-

sources, Inc., based upon “outputs” and peaks that are

developed in the official load forecasts‘ prepared in Sep-

tember or October, 1981, and a similar estimate of 4,400

million kilowatt-hours prepared some months earlier, in

February, 1981, based upon an unknown methodology.

Based upon the similarity of results we are asked to ac-

cept that the ingredients are reasonably the same and

that the 1982 budget estimate of sales includes 775 or

780 million kilowatt-hours of sales for the Crucible Steel

Midland plant. We cannot accept this type of reasoning

and the conclusion urged upon us by Duquesne.

The question posed by staff counsel at Tr. p. 169 was

most pertinent. That question was: “Isn’t the real ques-

tion here, Mr. Maxwell, what was in the budget for

Crucible Steel not what’s a reasonable load for Crucible

Steel?”’ However, it appears that we do not have an ac-

ceptable answer to the first portion of the question and

must be satisfied with an answer to the second portion

of the question. In examining Duquesne’s adjustment

methodology as contrasted with that of the staff, we

find nothing to commend it over the staff’s meth-

odology, insofar as validity is concerned, and therefore,

we conclude that Duquesne has failed to meet its bur-

den of proof with regard to this adjustment.

Duquesne excepted to the ALJ’s recommendation of

the staff’s proposed adjustment. Having concluded that

Duquesne failed in its burden to establish that its ad-

justment was more appropriate, its exception is denied.

“This is an oversimplified description of an estimating process the de-

scription of which is contained in approximately 30 pages of text, tables,

and diagrams in Exh 1, Item 1-B-6-8.

23¢e

C. General Public Util’ Revenues

Duquesne adjusted future test-year revenues down-

ward by $720,000 to eliminate revenues received by the

company pursuant to the CAPCO basic operating

agreement as an indirect participant in capacity and

energy sales from Ontario Hydro to General Public

Utilities (GPU). The company argues that it has no

control over the GPU/Ontario Hydro agreement, which

may be canceled at any time by mutual agreement of

the parties, and therefore, it cannot be certain that it

will actually receive such revenues.

The staff and the OCA oppose this adjustment. Staff

argues that there is no evidence on this record that the

contract with Ontario Hydro has been canceled or is

about to be canceled. Moreover, no evidence exists in

this record to support the view that GPU’s purchased

power requirement would be reduced in the near-term

future. As of the close of this record, that contract is

still in effect and producing revenues for Duquesne.

The ALJ recommended that the staff's position be

adopted and the company’s claimed operating revenues

be increased by $720,000 to account for the Ontario Hy-

dro transaction.

Duquesne has not excepted, and failing to perceive

any factual basis for Duquesne’s proposed adjustment,

it is rejected. Estimated operating revenues will be in-

creased accordingly.

D. St. Joe’s Mineral Corporation Purchases and Sales

Staff proposed an increase of $211,800 in operating

revenues as a result of sales of power purchased from

St. Joe Minerals Corporation, which is eventually sold

to General Public Utilities through the CAPCO system.

24c

Of the revenues of $35,300 per. month projected by

Duquesne approximately one-half are credited through

the energy cost rate, leaving the annualized amount of

$211,800 not presently reflected as revenues. Although

Duquesne did not address this subject in its briefs, the

apparent reason for not including the revenues in its es-

timates is the uncertainty of the continuation of the

arrangement through 1983. The ALJ recommended

adoption of the staff’s proposed adjustment. Duquesne

has not excepted. Finding the staff's proposed adjust-

ment reasonable and appropriate, it is adopted. Reve-

nue estimates will be accordingly adjusted.

E. Deductions from Rate Base

Accumulated Deferred Income Taxes

The respondent has proposed a total company deduc-

tion from rate base of $136,980,140 by reason of ac-

cumulated deferred income taxes. No party has ques-

tioned the appropriateness of this amount. The amount

appearing reasonable, it is adopted as the proper deduc-

tion from rate base by reason of accumulated deferred

income taxes.

IV. Expenses

Duquesne’s estimated operating expenses, as of

December 31, 1982, were adjusted to reflect annualiza-

tion to the level of operations at December 31, 1982.

Based upon such pro forma levels of operations,

Duquesne’s operating expense claim (excluding income

taxes) is $472,632,000, which amount reflects the elimi-

nation of $125,361,000 of energy cost rate related ex-

penses. The various individual adjustments are dis-

cussed seriatim.

ee eee

A. Operation and Maintenance

1. Wages, Pensions, and Employee Benefits

Duquesne included in its pro forma level of opera-

tions, additional operations and maintenance expenses

to: (1) annualize the effect of wage increases to various

groups of employees (increases effective October 1, 1982,

pursuant to the International Brotherhood of Electrical

Workers [IBEW] contract and merit increases to non-

union employees effective on the same date); (2) an-

nualize the increase in pension and other employee ben-

efits applicable to the salary and wage increases of Oc-

tober 1, 1982; and (3) to annualize charges by operators

of jointly owned generating stations for increases in

wages and fringe benefits for employees at each station.

After noting that Duquesne is increasing wages by

10.05 per cent in 1982, staff “suggests that some recog-

nition should be given to the current economic climate

with respect to wage increases by moderating the

amount of the claimed wage increases for rate-making

purposes.” The ALJ rejected this suggestion emphasiz-

ing that a speculative wage adjustment was not includ-

ed, but, rather, a known wage increase, effective Oc-

tober 1, 1982, pursuant to the respondent's contract

with the International Brotherhood of Electrical

Workers.

The staff excepted to the ALJ’s conclusion and re-

ferred to a similar adjustment made by the Wisconsin

Public Service Commission in a Wisconsin Electric

Power rate case. Upon examination, we find that the

Wisconsin commission held that the projected 8.20) per

cent wage increase Was unreasonable in light of the

smaller wage settlements being negotiated by unregu-

lated firms (Electric Week, November 29, 1982). Du-

26¢

quesne has replied by contending that this was the

second year of the contract, which Duquesne would be

required to break if the adjustment suggested by staff

were made.

We concur with the ALJ’s disposition of the adjust-

ment proposed by the staff. Its proposed wage expense

adjustment to reflect “current economic conditions” has

not been supported by any record evidence. The staff

has not presented specific evidence which would in-

dicate that the subject wage increase is excessive.

2. Rate Case Expense

Duquesne’s rate case expense claim in this proceeding

is comprised of an amount related to the current

proceeding and amounts related to prior proceedings

before this commission. With respect to the expenses for

the current proceeding, the respondent has claimed a

“normalized” annual level of $600,000.. The respon-

dent’s prior proceeding claim of $151,328 is based on

the unrecovered costs associated with RID 198 and

RID 373 and the unrecovered amount associated with

R-79010740, amortized over five years.

The staff contends that the respondent's claim. is

“grossly inflated” and “inconsistent” with prior com-

mission decisions which establish clear commission

policy in this area. The staff relies upon Pennsylvania

Pub. Utility Commission v Pennsylvania Power Co.

R-811510, pp. 21-23, Jan. 22, 1982, in arguing that the

following commission policy on rate case expense has

been established:

“As Duquesne notes in its main brief, it did not adjust operating and

maintenance expenses in its final income statement to reflect a $100,000 in-

crease from its original estimate of rate case expenses at Duquesne Exh

No. 1B, Note 15, p. 111.

27¢

“First, the unrecovered portion of prior rate case ex-

penses is to be amortized over ten years, after which

that component ceases to be a factor in the rate-making

process. Second, the normalized level of rate case ex-

pense is to be shared equally between ratepayers and

stockholders. Third, the normalized level is determined

on a case-by-case basis, although two years is typically

used to develop the normalized amount.”

Based upon these supposed guidelines, staff proposed

a total rate case allowance for Duquesne amounting to

a maximum of $176,264 calculated as follows:

(a) $26,264 to continue the ten-year amortization of

prior rate case expenses established in Duquesne's

recent rate case at R-80011069 for the unrecovered ex-

penses associated with all prior rate cases; and,

(b) $150,000 based on a $600,000 rate case expense,

normalized over two years and shared equally between

ratepayers and stockholders.

The staff contends further, that the commission con-

cluded in the opinion and order in R-80011069 that

there was no unrecovered rate case expense associated

with the settled rate case at R-7910740. Pennsylvania

Pub. Utility Commission v Duquesne Light Co. (1981)

54 Pa PUC 695, 43 PUR4th at pp. 53, 54.

The OCA recommends a total rate case expense allow-

ance of $271,450. Mr. Henkes, the OCA witness, (1)

referred to the opinion and order at R-80011069 and did

not recognized any amortization for the rate case ex-

pense incurred in the respondent's prior rate proceeding

at R-79010740; (2) advocated a ten-year amortization of

the unamortized rate case expense balances from prior

proceedings; and, (3) reduced the $500,000 normalized

28c

annual level of rate case expenses by $250,000 to reflect

a 50/50 sharing of such expense between ratepayers and

stockholders.

Duquesne contests the disallowance of its claimed un-

recovered rate case expense from the 1979 proceeding

(R-79010740), arguing that it is unfair and inconsistent

with sound rate-making principle to disallow the

claimed unrecovered rate case expenses merely because

the case involved a settlement, especially when the staff

had recommended therein the recovery of $498,853 over

a five-year period. Therefore, Duquesne claims this

amount in the current proceeding, as a portion of the

unamortized rate case expense to be amortized over five

years. Duquesne has claimed the amount of $542,153,

for that proceeding, contending that this was the actual

cost, rather than the cited staff figure, arguing that

none of it will have been recovered as of the end of the

future test year. This translates into a rate case expense

claim of $108,430.60 ($542,153 + 5) for the unrecovered

costs associated with R-79010740.

Although acknowledging that in our opinion and

order at R-80011069, we also directed that the un-

recovered rate case expense balance be amortized over a

ten-year period, the respondent’s claim reflects a five-

year amortization of the unrecovered balance.°

Duquesne argues that this is a more equitable period,

considering the fact that these expenses began to be in-

curred more than five years ago and that the commis-

sion has refused to include the unamortized amounts in

its working capital, rate base claim.

‘As of December 31, 1982, Duquesne claims an unamortized balance of

214,489, for the proceedings at RID 198 and RID 373. Our unamortized

balance is calculated in footnote 7.

29¢

Finally, the respondent contests the 50/50 sharing of

rate case expenses between the ratepayers and the

stockholders. Duquesne submits that these expenses are

a reasonable and legitimate cost of doing business and

not a cost properly to be borne by investors. Duquesne

also asserts that its current rate case claim of some

$600,000 is reasonable and should be allowed.

The ALJ rejected the respondent’s rate case expense

claim of $651,328 and adopted staff's recommendation

of a $176,264 allowance for rate case expenses in this

proceeding. This total rate case expense allowance of

$176,264 consists of $26,264 representing the continued

ten-year amortization of past rate case expenses and

$150,000 to reflect the normalized amount of current

rate case expenses. In arriving at his recommendation,

the ALJ found the arguments raised by Duquesne to be

an insufficient basis upon which to depart from the

treatment accorded to rate case expense in our previous

decisions.

Duquesne excepts to the ALJ’s recommendation. In

its exceptions, the respondent again submits that the

disallowance of any amount of rate case expense in-

curred in the proceeding at R-79010740, is grossly un-

fair and inconsistent with sound ratemaking principles.

Furthermore, they argue that a ten-year amortization

of prior rate case expense is an unreasonably long pe-

riod. With respect to the current rate case expense and

the ALJ’s adoption of a two-year normalization period,

the respondent contends that based upon rate increase

filings in each of the last four years a more reasonable

normalization period is one year. Finally, the respon-

dent submits that Administrative Law Judge Mindlin’s

recommended decision at R-811819 (the Bell Telephone

Company of Pennsylvania), dated August 6, 1982, cor-

30¢

rectly summarizes the fallacy of an equal sharing of

rate case expenses between ratepayers and stockholders

and his reasoning should be followed in this proceeding.

With regard to our conclusion, as expressed in our

opinion and order in the proceeding at R-8001109, that

there was no unamortized rate case expense arising from

the proceedings at R-79010740, Duquesne did not seek

revision of our conclusion in its petition for reconsidera-

tion and clarification filed therein on March 6, 1981.

However, in essence, its claim here seeks reconsidera-

tion of that decision. While we might reject its claim

here for untimeliness, we have considered the merits of

its claim, and conclude again that our decision in our

opinion and order in the proceedings at R-80011069 was

correct, and we affirm our prior decision on this subject.

With regard to the amortization period of ten years,

adopted in the proceeding at R-80011069, in this

proceeding, Duquesne has requested reamortization of

past rate case expense over a five-year period. We have

reconsidered this matter and will grant its request. This

will result in an allowance of $42,460 for amortization

of past rate case expenses.’

With regard to current rate case expense we find the

revised claim of $600,000 to be a reasonable level of ex-

pense. We have closely examined Duquesne’s conten-

tions with regard to the reasonableness of our past

practice of adopting a 50/50 sharing of these costs

between ratepayers and stockholders and being unper-

suaded that it is either unreasonable or unwise we ad-

here to our recent practice of sharing the burden of

these costs. With regard to the period to be adopted to

"Initial balance $262,640 — 23/120 of $262,640 or $50,340 = 212,300 + 5 =

$42,460.

3le

determine a proper normalization allowance, Duquesne

has argued, based upon recent proceedings, that a one-

year period should be adopted. While we note that its

rate increase applications have been filed on an almost

annual basis, based upon recent developments with

regard to inflation rates, the cost of money, and wage

settlements, we conclude that two years is a reasonable

expectation for the life of rates to be established herein.

Consequently, we adopt a two-year period and will al-

low $150,000 as a reasonable normalized expense.

Our total allowance therefore is $192,460 which con-

stitutes a disallowance of $458,868 of the amount

claimed.

3. Shippingport Expenses

The Shippingport atomic power station was removed

from service on October 1, 1982. By opinion and order

adopted October 15, 1982, at P-820388, we approved

Duquesne’s petition to retire Shippingport.

Duquesne made two test-year adjustments to reflect

the removal of Shippingport from service. The first ad-

justment reduced production operations and mainten-

ance expenses by $2,839,000 to reflect the cessation of

operation. No evidence was submitted by other parties

contesting this adjustment and the ALJ adopted the

proposed adjustment. We find the adjustment to be rea-

sonable and adopt the ALJ’s recommendation.

“+e second adjustment provides for the amortization

( \ ten-year period, of the unamortized balance of

investment in Shippingport. The estimated undepreciat-

ed original cost of the unit will be $12,720,855. This

balance, after further adjustments, including credits for

accumulated deferred income taxes, will amount to

32¢

$4,728,160. Duquesne seeks to amortize the $4,728,160

over a ten-year period for an annual recovery of

$472,816.

The staff and the OCA oppose this adjustment in

part. The staff contends that Duquesne has included a

$771,898 claim for the unrecovered depreciation as-

sociated with the periods prior to 1978, with the bulk of

those unrecovered depreciation expenses ($687,000)

relating to the period April, 1967, through June 1970.

The staff argues that current ratepayers should not be

burdened with depreciation expenses that could have

been claimed more than ten years ago.

Duquesne argues that it has booked substantially

greater dollars than it has been reimbursed by rate-

payers, with the difference between book depreciation

and reimbursed depreciation, during the 1969-77 period,

being primarily due to the lapse of time between the

test-year-end and the effective date of increased rates.

According to the respondent, the exclusion from the

amortization of the unrecovered prior period deprecia-

tion will result in Duquesne never recovering the full

cost of the Shippingport station.

The staff asserts that regulation does not guarantee

the recovery of every dollar of expense incurred by a

utility and that it must be recognized that certain costs

may not be recovered and may remain unrecoverable,

as an incident of regulation. This is a risk which stock-

holders bear. The OCA witness, Mr. Henkes, argued

that “sound regulation is prospective in nature and pro-

spective regulation should not serve to make up for

regulatory lag experienced in the past.”

The ALJ agreed with the staff and the OCA reason-

ing, that respondent was never precluded from increas-

33¢

ing its claims for depreciation expense during this

period. Since this expense could and should have been

claimed over ten years ago, the ALJ recommends not

burdening current ratepayers with this depreciation

expense claim. The ALJ effectuated this recommenda-

tion by adjusting the claim, eliminating that portion of

the Shippingport amortization claim which represented

recovery of pre-1978 depreciation, thereby reducing

Duquesne’s claimed test-year operating expenses by

$77,200 ($771,898 per ten years).

The respondent excepted to the ALJ’s recommenda-

tion. Duquesne states that its depreciation expense ad-

justment has already accorded ratepayers the full bene-

fit of the accumulated deferred tax reserve, despite the

fact that the full amount of this deferral was never

funded by ratepayer revenues. Thus, the respondent

contends, the ALJ’s adjustment gives the ratepayers a

double benefit.

We concur with the ALJ’s recommended disallowance

of $77,200 of the Shippingport amortization claim. The

essence of this claim is Duquesne’s contention that the

depreciation expense component contained in the rates

charged to, and revenues received from ratepayers, rep-

resented less dollars of expense than was booked by the

company. Duquesne states that this alleged under-

recovery of depreciation expense was the result of

regulatory lag; that is, the lapse of time between the

end of the particular test year and the date that in-

creased rates became effective. However, examination of

Mr. Heller’s testimony reveals that by far the vast

majority of the claimed deficiency is the result of the

company commencing the booking of depreciation in

1959 and the plant not being recognized in rate base un-

til the fall of 1970. Additionally, there appears to be an

34¢c

error claimed in the company’s claimed depreciation re-

serve in the proceeding at R-811470, which was termin-

ated by an “option order” rate increase filing.

Reduced to its bare essentials, the result which

Duquesne seeks to achieve is to operate a plant for over

ten years, during which time it has booked depreciation,

and then over twenty years from the date it went into

service request recovery of the difference between the

depreciation booked and that depreciation expense sup-

posedly recovered to rates. A necessary premise to

Duquesne’s claim is that until a specific plant is ex-

plicitly recognized in a given set of tariff rates, it does

not recover any depreciation expense applicable to that

plant. In our view this premise is not valid. It is entire-

ly possible that in a period of expanding sales, increased

revenues match and even exceed the increased deprecia-

tion expense applicable to new plants placed in service

to provide the increased kilowatt-hours of sales. Insofar

as the claim relates to an error in the claimed deprecia-

tion reserve in the proceedings at R-811470, we decline

to consider what amounts to an after-the-fact recon-

sideration of that proceeding, especially where the

proceeding terminated in “option order” rates.

In our order in Pennsylvania Pub. Utility Commis-

sion v National Fuel Gas Distribution Corp. ( [1980] 54

Pa PUC 401, 40 PUR4th 101), we were considering a

somewhat analogous claim and said:

“In addition to being unable to accept or even serious-

ly entertain the necessary premises underlying the re-

spondent’s claim, were we to do so would mean the entire

Pandora’s box of past operations would require exami-

nation to consider all the concomitant expense and reve-

nue items, in order to reach a conclusion as to what, if

a ee ent ee

35¢

any, earning deficiency may have suffered as a result of

placing new plant in service from time to time. Even a

momentary consideration of the magnitude of the effort

involved to make such an examination of past opera-

tions, impresses upon us the wisdom of the regulatory

principal [sic] that rate making is to be prospective in

nature only, and that the quagmire of the past is to be

ignored.” Id., 54 Pa PUC at p. 407, 40 PUR4th at p.

107.

The respondent’s claim here, claiming as it does a

failure to earn the amount of depreciation expense

booked for Shippingport, is a part of the quagmire of

the past, and for this reason is the type of ciaim which

we shall not entertain.

4. CAPCO Cancellation Costs

In the instant proceeding, as in its last two rate

proceedings at R-80011069 and R-811470, Duquesne

claimed a ten-year amortization of its investments in

four canceled nuclear units: Davis Besse Unit Nos. 2

and 3 and Erie Unit Nos. 1 and 2. Duquesne’s revised

claim in this proceeding is for $3,469,739 per year for a

ten-year period. In prior rate cases we deferred ruling

on the cancellation charges issue, pending the outcome

of the Central Area Power Coordination Group (CAP-

CO) investigation at I-79070315.

The respondent has noted that on October 25, 1982,

Administrative Law Judge Joseph P. Matuschak issued

his report of investigation at I-79070315. Then, relying

upon the fact that ALJ Matuschak recommended, there-

in, that we permit Duquesne to amortize its portion of

the cancellation costs of these plants, in appropriate

rate cases over a period of ten years, with no return on

the unamortized portion thereof, it argues that the

36¢

record in this proceeding, through its incorporation of

the record in the proceedings at I-79070315, provides a

basis for approval of its claim in this proceeding.

Duquesne also notes that FERC has approved the ten-

year amortization of these cancellation costs for

accounting purposes, beginning with the recovery of

such costs from the Duquesne’s customers. Duquesne

also calls to our attention that on December 31, 1980, it

filed a petition with us, docketed at P-80120255, seeking

permission to amortize for accounting purposes its $34

million investment, in accordance with the accounting

treatment approved by FERC. Duquesne states that

such costs must be charged to income in the year of dis-

allowance, if the commission does not allow such costs

to be recovered from ratepayers.

Duquesne’s proposed adjustment was opposed by the

staff, the OCA, and the commercial complainants. The

staff argued that until the CAPCO investigation was

completed we would be unable to make a fully informed

decision as to the prudence of the original decision to

build these nuclear units, and related issues. In addi-

tion, the OCA pointed out that it intended to file excep-

tions to ALJ Matuschak’s recommended decision and

the commercial complainants argued the merits of the

adjustment, maintaining that no cost should be allowed.

Pennsylvania Alliance for Jobs and Energy and the

commercial complainants also oppose amortization.

The ALJ, first, noted that the commission at

R-80011069 determined that any decision on the recover-

ability of these CAPCO cancellation costs should await

the outcome of the pending investigation at 1-7907315

({1982] 50 PUR4th 272). Then, the ALJ stated that the

conclusions reached by ALJ Matuschak are not final

i ree Sale

37¢

and, therefore, concluded that it would be inappropriate

to resolve the matter at that time.

The respondent filed an exception to ALJ’s recom-

mendation, arguing that to further delay an allowance

for recovery of these dollars would be grossly unfair.

Events have overtaken much of what the parties

have said by way of brief. The investigation at

I—79070315 has been concluded. At public meeting of

January 7, 1983 we adopted ALJ Matuschak’s report of

investigation dated October 15, 1982. Through our

adoption of ALJ Matuschak’s report of the investi-

gation, we passed upon the merits of Duquesne’s

request to amortize their cancellation costs relating to

Davis-Bessie Nos. 2 and 3 and Erie Nos. 1 and 2, in ap-

propriate rate cases, in such amounts as therein deter-

mined, over a period of ten years, with no return on the

unamortized balance thereof (exclusion from rate base).

The respondent’s claimed investment in the cancelled

units is $34,697,389 with a claimed ten-year amortiza-

tion of $3,469,739. The dollar amount of the respon-

dent’s claim was not contested by any party. Accord-

ingly, we shall approve the respondent’s claim for

- $3,469,739 in this proceeding.

5. Decommissioning and Spent Fuel

At pp. 38 and 39 of the recommended decision the

ALJ summarized Duquesne’s expense claim for the

decommissioning of Beaver Valley Unit No. 1 facility

and the disposition of spent fuel as follows: .

“Duquesne claims $245,615 as an expense item to

provide for the decommissioning of Beaver Valley No.

1. This claim is consistent with the commission’s earlier

allowance in R-80011069. The methodology used in the

38e

company’s annuity calculation is identical to that

previously accepted by the commission except that the

tax-free interest rate used was updated to 9 per cent.

“The claim is uncontested and should be adopted.

“The company also claimed $2,667,000 for disposition

of spent fuel from the Beaver Valley Unit No. 1 facility.

Duquesne’s spent fuel claim in this proceeding is

based on a program which has been developed by the

federal government and approved heretofore by this

commission. The essential elements of this program are

summarized as follows:

“1. On site storage following discharge from the reac-

tor.

“2 Prior to 1997, shipment of the fuel at utility ex-

pense to a federally operated interim storage facility

(away from reactor) and the payment of $108 per kgu

to the federal government to cover the cost of interim

storage. The dollars associated with interim storage

have previously been disallowed by this commission

and without prejudice have not been claimed in this

proceeding.

“3. Prepayment of a portion of the cost will be

required prior to delivery for disposal.

“4 After 1997, shipment of spent fuel to a federally

operated permanent storage depository.

“The Department of Energy estimates the costs for

the ultimate disposal of spent nuclear fuel of $234 per

kilogram of uranium. It is assumed that Beaver Valley

will be shut down approximately annually for refueling

and that about 52 spent fuel elements, having a total of

23,993 kilograms of uranium, will be discharged at the

time of each refueling. The company’s $2,667,000 claim

39c

is based upon the $234 per kilogram cost times 223,993

kilograms times Duquesne’s 47.5 per cent ownership.

“This claim is consistent with prior treatment of the

issue and no party has contested its appropriateness. It

should be adopted.”

As noted above by the ALJ, the claims are uncontest-

ed and consistent with our prior decisions. Accordingly,

we adopt the ALJ’s recommendation and approve the

respondent’s claim.

6. Edison Electric Institute and Electric Power Research

Institute Dues

Duquesne claims $315,000 for Edison Electric Insti-

tute (EEI) dues. Edison Electric Institute is an associa-

tion of investor-owned electric utility companies.

Duquesne’s witness, Mr. Messner, described the ben-

efits allegedly received by the ratepayers through the

programs and activities of the institute, as follows:

“Helps electric companies generate and distribute

electric energy at the lowest possible price, consistent

with safe and reliable service;

“Advances the art of producing, transmitting, and

distributing electricity including promoting scientific re-

search to meet the need for electric power through envi-

ronmentally acceptable means;

“Gathers and makes available factual information,

data, and statistics of importance to customers and the

industry;

“Serves the public and its government representatives

by keeping them informed of all material matters relat-

ing to the generation and use of electricity in the Unit-

ed States, and speaks out effectively on the public

40¢c

policy issues confronting the industry and electricity

consumers.”

The respondent’s claim consists of $207,000 represent-

ing dues for regular activities and $108,000 which repre-

sents 1982 media communication dues. The claim for

$207,000 relates to normal annual membership dues and

has not been contested. Accordingly, we shall grant the

claim of $207,000 representing dues for regular activi-

ties.

The OCA and the staff contest the expense claim rep-

resenting the 1982 media communication dues. Both

parties consider the programs to be lobbying efforts

which do not directly benefit ratepayers.

The respondent contends that media communication

dues represent expenditures for the purpose of inform-

ing the public regarding energy needs, energy sources,

and the viability of the electric utilities, all to the ul-

timate benefit of ratepayers.

The ALJ considered the record to be replete with

examples of EEI-sponsored media advertising dealing

with such items as energy conservation. Although the

ALJ did acknowledge that the benefit of some adver-

tisements is less clear, he concluded that the record sup-

ports a finding that a substantial portion of this pro-

gram is for media programs beneficial to ratepayers.

The staff and the OCA have filed exceptions arguing

that the EEI’s national media efforts are of a lobbying

nature primarily aimed at increasing revenues.

While Duquesne claims ratepayer benefits, both the

staff and the OCA have pointed out some specific in-

stances where media communications programs did not,

in our view, effectively benefit Duquesne ratepayers. On

4le

balance, we are not satisfied that this expense results in

direct benefits to Duquesne ratepayers. Therefore, we

shall deny respondent’s claim for $107,000 representing

1982 media communication dues.

The respondent has also claimed $2,887,000 for Elec-

tric Power Research Institute (EPRI) dues. Respondent

states that for a number of years, a substantial amount

of Duquesne’s research and development (R & D) expen-

ditures have been for the work of EPRI, which was

founded in 1972 by the nation’s electric utilities to

develop and manage a nationwide co-operative industry

research program for improving electric power produc-

tion, transmission, distribution, and utilization. Respon-

dent further states that the main purpose of EPRI is to

develop improved technologies which can meet the

changing needs of existing power systems and to foster

the development of advanced alternatives for expanding

those systems, while minimizing capital and operating

costs, to the benefit of both the utility and the rate-

payers. Respondent contends that the record in this

proceeding contains numerous examples of ratepayer

benefits from EPRI, both generally and specifically.

The ALJ’s comments regarding the claimed benefits

received by ratepayers through Duquesne’s association

with EPRI is set forth at pp. 42 and 43 of the recom-

mended decision and is as follows:

“According to the company, these R & D findings

have been transferred and utilized by Duquesne.

Duquesne has representatives directly participating on

various committees and receives extensive information

through seminars and conferences sponsored by EPRI.

Duquesne utilizes computer codes and data packages of

EPRI with substantial cost savings. Duquesne depart-

42c¢

ments, particularly the environmental affairs depart-

ment, power stations department, nuclear department,

and system planning, have benefited from EPRI tech-

nical reports with substantial savings in time and ex-

pense. Duquesne has utilized EPRI test facilities for

significant savings. In particular, the Waltz Mill cable

test facility produced a cable with reduced insulation

thickness. This reduced wall cable saved Duquesne

$500,000 on recent underground transmission projects

and is expected to save more in the future. Additionally,

Duquesne has utilized an EPRI program for nuclear

safety relief valve testing which has resulted in an es-

timated savings of $1.5 million. There are other cost

savings to the company that have also resulted from

EPRI research projects contained in the record.”

Duquesne’s claim is opposed by the staff and the

OCA. The staff first states that the claim ($2,887,000)

represents 1983 expense levels for EPRI dues which

creates a mismatch of revenues and expenses and there-

fore distorts the test year. Second, the staff argues the

expense level claimed by Duquesne exceeds, by a sub-

stantial margin, the $885,634 EPRI expense level ap-

proved by the commission in R.I.D. 373. The staff

proposed a reduction of $2,001,566 in the respondent's

claimed operating expense to the $885,634 level

previously allowed. Alternatively, the staff proposes a

limit of a $1 million increase in the previously approved

level of EPRI expenses, to reflect a more gradual

movement toward the level of membership dues

requested by EPRI.

The OCA would reduce the respondent's proposed

test-year expenses by $1,623,000 to reflect “past com-

mission policy.”

The ALJ recommended rejection of the proposed ad-

justments to Duquesne’s claimed operating expense for

43¢

EPRI dues and approval of the respondent’s claim. The

ALJ concluded that both the staff and the OCA had

failed to rebut the extensive record evidence that

payment of these dues are in the public interest or to

justify limiting Duquesne’s expense allowance to the

1974 level.

In Pennsylvania Pub. Utility Commission v Duquesne

Light Co. (1981) 54 Pa PUC 695, 43 PUR4th 27, we

reluctantly approved Duquesne’s claim for EPRI dues

of $885,634 which were actually paid in the test year.

There, we relied primarily upon prior precedent in

approving the claim, being of the opinion that Du-

quesne’s showing that ratepayers benefited from the

activities of EPRI was sorely deficient. In this proceed-

ing, we find that the respondent has substantiated its

claim that ratepayers do benefit from Duquesne’s mem-

bership in EPRI. Therefore, we shall approve the re-

spondent’s entire claim in this proceeding.

7. Emergency Energy Surcharge

Duquesne seeks to include $1,101,116 in its test-year

level of operating expenses, which represents un-

recovered purchase power costs incurred as a result of

the 1977-78 coal strike, not recovered through the then

existing fuel clause.

Duquesne originally filed a petition at R-78010548

requesting permission to establish, for a limited period

of time, an emergency energy surcharge of three mills

per kilowatt-hour. By order entered March 2, 1978, at

R-78010548, we granted Duquesne a surcharge of two

mills per kilowatt-hour and limited collection of the

surcharge to the period ending June 30, 1978. In re-

sponse to Duquesne’s petition for reconsideration, filed

March 17, 1978, we entered an order on March 30, 1982,

44e

which removed the time limitations for collecting the

surcharge and directed that Duquesne file a plan for

equal billing of the surcharge to all customers.

Duquesne filed monthly reports which indicated that

$13,893,434 of excess purchased power costs were in-

curred and $11,691,202 was recovered from February,

1978, through August, 1978. Duquesne’s claim reflects a

two-year amortization of the unrecovered costs of

$2,202,232 or $1,101,116.

The staff and the OCA oppose this claim. Both par-

ties consider these 1977-78 unrecovered costs to be too

remote to be appropriately included in future rates,

based on a 1982 future test year. The staff notes that

these expenses will not be incurred in 1982 or at any

time in the future and if allowed would overstate oper-

ating expenses during the period rates are in effect.

Duquesne contends that this commission granted

West Penn Power Company recovery of its emergency

energy costs by order entered February 5, 1981, at R-

80021082. Duquesne also asserts that the circumstances

that existed in R-80021082 are substantially the same as

in the present proceeding.

The ALJ first notes that since these costs were in-

curred there have been three successive rate applica-

tions filed by Duquesne where recovery could have been

requested. The ALJ then recommended denial of the

claim, concluding that these 1977-78 unrecovered costs

were too remote in time to be included in future rates.

Duquesne excepts to the ALJ’s recommendation, reiter-

ating the matters previously stated.

We approve the claim based upon, and consistent

with, our action in Pennsylvania Pub. Utility Commis-

45¢

sion v West Penn Power Co. (1981) 54 Pa PUC 602

wherein we approved an expense allowance designed to

recover similar costs over a two-year period.

8. Net Negative Salvage

Duquesne’s income statement includes an amount rep-

resenting the amortization of experienced net negative

salvage during a five-year period. This amounts to

$2,806,436. The manner in which the negative net sal-

vage was calculated is consistent with Duquesne claims

approved in prior proceedings. No evidence contesting

this claim was submitted by the other parties and the

ALJ recommended approval.

Sa ;

Duquesne’s claim for net negative salvage is reason-

able and is approved.

9. Management Audit Expenses

Duquesne increased its future test-year operations

and maintenance expenses by $179,342 to reflect the an-

nual amount of a three-year amortization of the man-

agement audit mandated by the commission. Duquesne

asserts that the commission has historically allowed

amortization of public utility commission (PUC) man-

dated management audit expenses.

The OCA opposed this claim arguing that this non-

recurring expense distorts the normal level of operating

expenses for the test period. The staff proposes a five-

year amortization period which reflects the period of

time that the benefits of these extensive audits will be

realized by the respondent in terms of better services.

The ALJ considered a three-year amortization period

more reasonable and recommended approval of the

respondent's claim. In making this recommendation, the

ALJ noted the fact that the respondent's stockholders

460

have already borne one year’s carrying costs for these

expenses. The staff excepted to the ALJ's recommended

approval of a three-year amortization period.

We adopt the ALJ’s recommendation of a three-year

amortization period as being more reasonable than the

five-year period urged by the staff. The staff’s exception

is denied.

10. EEOC Settlement Costs

Duquesne claims $183,333 in annual operating ex-

penses, which reflects a three-year amortization of

Equal Employment Opportunity Commission (EEOC)

settlement costs. Duquesne states that on September 4,

1975, the United States Department of Justice filed a

complaint, in the United States district court for the

western district of Pennsylvania, charging that Du-

quesne’s assignment and preemployment selection cri-

teria violated Executive Order No. 11246, and requested

both injunctive relief and the payment of compensation

to persons allegedly harmed as a consequence of

Duquesne’s wrongful conduct. On March 1, 1976, the

complaint was amended to name the national and local

unions representing Duquesne’s employees as additional

defendants.

On December 29, 1976, the federal Equal Employ-

ment Opportunity Commission filed suit, in the United

States district court for the western district of Pennsyl-

vania, against Duquesne and the national and local

unions representing the Duquesne’s employees, alleging

that the company’s employment practices, including as-

signment and preemployment selection criteria, viokated

Title VII of the Civil Rights Act of 1964, by discrimi-

nating against minorities and females. The complaint

sought both injunctive relief and the payment of

47¢

compensation to persons allegedly harmed as the result

of Duquesne’s alleged wrongful conduct.

By order dated March 7, 1977, the court consolidated

the two cases for trial purposes only. By order dated

March 27, 1980, the court dismissed all claims against

the company concerning acts or practices at its War-

wick mine facilities. Duquesne, through its counsel has

submitted a consent decree to the government in - >

tempt to settle the cases.

Duquesne considers costs of litigation and settlement

to be normal and ordinary costs of doing business and

properly recoverable.

Both the staff and the OCA contest this claim. The

staff considers the cost of defending allegations of un-

lawful management practices costs properly to be borne

by stockholders. The OCA takes the position that the

inclusion of these nonrecurring expenses, in the overall

level of operating expenses, is inappropriate because it

distorts the normal level of operating expenses fer the

test period.

After noting that Duquesne has not been found guilty

of these charges, the ALJ acknowledged the fact that

Duquesne will, if the consent decree is adopted “

required to pay $500,000 in damages to the complain-

ants in the EEOC cases, by reason of alleged discrimi-

natory hiring and employment practices. The ALJ then

concluded that the ratepayers should not have to bear

such expenses.

st excepted to the ALJ’s recommendation

and again urged that litigation costs are an ordinary

cost of doing business and should be allowed as an ordi-

nary expense.

48e

Having considered the evidence and the contentions

of the parties, we find that, while the expense claimed is

one which is incurred in the business world from time to

time, Duquesne has not satisfied its burden of proof

that the claimed expense is a reasonable and necessary

expense incurred to provide utility service. The claim is

rejected and the respondent's exception is denied.

11. Deferred One Oxford Centre Costs

Duquesne seeks to increase operations and mainten-

ance expenses by $38,841 to provide for the five-year

amortization of deferred costs of $194,230, which repre-

sent engineering and consulting costs associated with

the transfer of its corporate headquarters to One Ox-

ford Centre. Duquesne asserts that these costs were In-

curred in order to ensure that the new offices would

meet its needs. Duquesne’s position is that amortization

of such nonrecurring costs is in accordance with prior

commission decisions.

Based upon the long-term nature of benefits derived

from the engineering and consulting services, the staff

argued that it would be more appropriate to amortize

these costs over the life of the lease; 1.e., twenty years.

The ALJ agreed with staff's position and reduced the

respondent’s claimed operating expenses by $29,129 to

reflect a 20-year amortization. The ALJ, noting that

customarily leasehold improvements are to be amor-

tized over the life of the lease, analogized that associat-

ed services should be similarly amortized.

Duquesne has excepted to the ALJ's recommendation,

pointing out that the analogy is improper in that lease-

hold improvements are assets which are includable in

rate base, and that the instant costs will not be accord-

ed rate base inclusion. Moreover, Duquesne argues, the

49¢

ALJ’s adjustment is inconsistent with the fact that

these expenses are the types of costs which will recur

with the subsequent occupancy of new power stations,

office buildings, and other facilities. Finally, Duquesne

argues, these costs are no different than other imple-

mentation costs such as installation of computer equip-

ment which, it states, the commission has traditionally

amortized over five years rather than capitalized and

depreciated over the equipment’s life.

We note that no party took issue with the allowance

of this claim, even though it represents an expansion of

the types of expenses historically granted amortization

treatment by this commissi

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