Chesapeake Utilities Corp. v. Delaware Public Service Com'n, 96A-01-002-WTQ

• Citation: 705 A.2d 1059
• Decision Date: 07 March 1997
• Docket Number: No. 96A-01-002-WTQ,96A-01-002-WTQ
• Parties: Util. L. Rep. P 26,680 CHESAPEAKE UTILITIES CORPORATION, a Delaware Corporation, Appellant, v. DELAWARE PUBLIC SERVICE COMMISSION, Appellee. C.A. . Argued:
• Court: Superior Court of Delaware

Page 1059

705 A.2d 1059

Util. L. Rep. P 26,680

CHESAPEAKE UTILITIES CORPORATION, a Delaware Corporation, Appellant, v. DELAWARE PUBLIC SERVICE COMMISSION, Appellee.

C.A. No. 96A-01-002-WTQ.

Superior Court of Delaware,

Kent County.

Argued: March 7, 1997.

Decided: March 31, 1997.

Upon Appeal From a Decision of the Delaware Public Service Commission--AFFIRMED.

William A. Denman, Schmittinger & Rodriguez, P.A., Dover, for Appellant Chesapeake Utility Corporation.

James McC. Geddes, and Regina A. Iorii, Ashby & Geddes, Wilmington, for Appellee Delaware Public Service Commission.

Patricia A. Stowell, Public Advocate, Wilmington, for the Office of the Public Advocate, a Party in Interest pursuant to 29 Del. C. § 8829(c).

QUILLEN, Judge.

I. INTRODUCTION

Must the Delaware Public Service Commission allow a public natural gas utility company to recover, as a consequence of complying with federally-mandated environmental remediation, the entire cost of compliance, specifically including the carrying costs on the unamortized balance of the remediation expenditure recovery? This is the underlying question in issue on this appeal by the Chesapeake Utilities Corporation ("Chesapeake" or "Company") following the findings and order of the Delaware Public Service Commission ("Commission" or "DPSC") below. The question arises in the context of the Commission's power to regulate the rates charged by Chesapeake. 26 Del. C. § 201.

II. FACTUAL BACKGROUND

The Company is a previous owner of a site in Dover (the "Dover Site") upon which a manufactured gas plant ("MGP") once operated. From 1859 to 1948 this site was used by various owners to manufacture gas prior to the availability of propane and the existence of interstate pipelines. The Dover Gas Light Company ("Dover Gas") operated the MGP on the site from 1925 to 1948. In 1947, Chesapeake purchased all of the outstanding shares of common stock of Dover Gas and in the 1960's merged Dover Gas into Chesapeake. In 1949, the State of Delaware purchased the site from Dover Gas. Thus, Chesapeake has had no property interest in the site for almost one-half century, and it had such an interest for only two years in the 1940s.

In 1980, the United States Congress enacted the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), 42 U.S.C. § 9601, et seq., in an effort to clean up property and groundwater contaminated by the disposal of hazardous waste. CERCLA imposes joint and several liability for cleaning up contaminated sites (commonly known as "Superfund" sites) upon current and past owners or operators of the site from which there has been or there is a substantial threat of a release of a hazardous substance into the environment. The accompanying disposal of tars, oils and other byproducts of the gas manufacturing process at the Dover Site resulted in contamination of the soil and the groundwater.

The contamination was first discovered in 1984. The remains of the coal gasification plant were found buried on the site, and oily samples were found containing significant contamination levels. The groundwater on the site and southeast of the site was contaminated with several volatile organic compounds. In 1991, the Environmental Protection Agency ("EPA") designated the Dover Site as a Superfund site. Chesapeake, among others, has been identified as a potentially responsible party ("PRP") for the clean up expenses. ¹

In July of 1990, Chesapeake entered into an Administrative Consent Order with the EPA and the State of Delaware Department of Natural Resources and Environmental Control in which Chesapeake agreed to conduct a remedial investigation and feasibility study ("RI/FS") to determine the nature and extent of the contamination at the Site and to evaluate potential remedial options. The RI/FS was completed in June 1993, and the EPA issued a record of decision ("ROD") in August 1994. The ROD required Chesapeake, inter alia, to remove contaminated soil and other contaminant-source material from the Site, to install a line of recovery wells in the off-site groundwater plume to prevent continued migration of the contaminants, to install other wells within the groundwater plume to extract any concentration of contaminants, and to install wells for monitoring the progress of the groundwater cleanup.

Chesapeake, having already spent $2.7 million for on-site investigation costs, estimates the total present value of its future clean up costs to be $5.1 million: $3.3 million for soil remediation and $1.8 million for groundwater remediation. The costs, however, will not be incurred all at once. Expenditures for soil remediation are expected to be made over a two-year period, while expenditures for groundwater remediation could be made over a period as long as 30 years. On May 17, 1995, the EPA issued an order requiring the Company to implement the remedy established in the ROD. Implementation, however, has not yet begun as the Company and the other PRPs are currently negotiating with the EPA to reduce the level of remediation required. A favorable outcome for Chesapeake could lessen its ultimate total expenditures. But expenses have been and currently are being incurred, so this opinion does have some urgency for the annual cycles of ratemaking.

III. PROCEDURAL BACKGROUND

On April 4, 1995, seeking to recover its costs of complying with the environmental remediation order, Chesapeake filed with the Commission an application for an increase in Chesapeake's rates. The Commission determined on April 25, 1995, that the increase sought should be suspended pending the completion of evidentiary hearings conducted by a Hearing Examiner. On April 26, 1995, the Office of the Public Advocate moved to intervene in this matter pursuant to 29 Del. C. § 8829(c).

On August 31, 1995, during evidentiary hearings, the parties presented to the Hearing Examiner a stipulation and agreement that settled all of the contested issues except for the ratemaking treatment to be afforded certain environmental remediation costs. The Hearing Examiner approved the agreement and recommended acceptance to the Commission. The Commission did so in In re Chesapeake Util. Corp., Docket No. 95-73, Order No. 4104 (Dec. 19, 1995) (hereinafter "Order No. 4104").

The issues litigated at the evidentiary hearing were the propriety of Chesapeake's claimed environmental remediation costs, the amount of such costs to be recovered, and how those costs should be recovered in rates. The costs claimed were those incurred and to be incurred in connection with Chesapeake's remediation activities at the Dover Site. Chesapeake sought to include these expenses over an extended period of time and recover carrying charges on the unamortized balance. ²

The Hearing Examiner recommended to the Commission that the environmental expenses be collected through a rider ³ or surcharge to base rates. The Hearing Examiner also recommended that the Commission allow the Company to amortize its annual actual net environmental remediation expenses incurred in connection with the Dover Site over seven years, but recommended that the Company not recover any carrying costs on the unamortized balance.

The Commission accepted the Hearing Examiner's recommendation and allowed Chesapeake to recover the total annual "net remediation costs" for the Dover Site. Agreeing with the Hearing Examiner, the Commission decided not to permit recovery of the environmental expenses through either operating expenses or the rate base approach, that is, traditional ratemaking.

We agree with the Hearing Commissioner that it would not be appropriate to include in base rates the projected amounts of environmental expenses. This Commission has permitted expenses that will be incurred outside of the test period, or items that will be placed into service outside of the test period, to be included in operating expenses or rate base for the purpose of establishing rates when it is reasonably certain that the expense will be incurred or the item will be placed in service during the effective rate period and where the amounts associated therewith are sufficiently ascertainable.... The record demonstrates that the amounts Chesapeake has projected are not sufficiently known and measurable to be included in current rates, and, moreover, that it is likely that the full amount of those projected costs will not be incurred within the rate effective period.

Order No.4104, pp 99-100 at 44-45. Instead, the Commission decided to use a rider for recovery of the remediation costs.

We further approve the Hearing Commissioner's recommendation that the Company's reasonable, actually-incurred remediation expenses should be recovered through a rider mechanism that is adjusted on an annual basis.... [I]t will advance administrative efficiency to collect these costs through a rider, as this will eliminate the need to adjust base rates when there is a change in the amount of remediation costs.

Order No. 4104, p 103 at 44.

The Commission reduced the amortization period from seven to five years, allowed no rate base treatment of the unamortized balance, and reduced the unamortized balance by the associated deferred income taxes. Each year's expense will be placed in a separate pool and amortized over that five year period. Thus, the rider will change each year to account for the amortization of additional environmental expenses. In addition, the Commission's order also provided for review of the unamortized balance, and "appropriate remedial action" should the balance "threaten the Company's financial integrity." The Commission thus effectively denied the recovery of the carrying costs on the unamortized balance and allocated such expense as an unrecoverable risk of investment to be borne by the Company's stockholders.

The Company's appeal to this Court is limited to the issue of whether the Commission erred in denying recovery through expense treatment of the carrying...