Equitable Gas Co. v. Pennsylvania Public Utility Com'n

• Decision Date: 20 May 1987
• Citation: 106 Pa.Cmwlth. 240,526 A.2d 823
• Parties: EQUITABLE GAS COMPANY, Petitioner, v. PENNSYLVANIA PUBLIC UTILITY COMMISSION, Respondent. 2626 C.D. 1985
• Court: Pennsylvania Commonwealth Court

Page 823

526 A.2d 823

106 Pa.Cmwlth. 240

EQUITABLE GAS COMPANY, Petitioner, v. PENNSYLVANIA PUBLIC UTILITY COMMISSION, Respondent.

2626 C.D. 1985

Commonwealth Court of Pennsylvania.

Argued Sept. 10, 1986.

Decided May 20, 1987.

Charles E. Thomas, Jr., Carroll F. Purdy, Thomas and Thomas, Harrisburg, for petitioner.

David Kleppinger, McNees Wallace & Nurick, Harrisburg, for Equitable Industrial, notice of intervention.

H. Kay Dailey, and Robert P. Haynes, III, Craig R. Burgraff, Office of Consumer Advocate, Harrisburg, for Office of Consumer Advocate.

Alphonso Arnold, John E. Povilaitis, Deputy Chief Counsel, Charles F. Hoffman, Harrisburg, for respondent.

Michael A. Finio, Harrisburg, for Office of Atty. General, notice of intervention.

Before CRUMLISH, Jr., President Judge, and CRAIG, MacPHAIL, DOYLE, BARRY, COLINS and PALLADINO, JJ.

PALLADINO, Judge.

Equitable Gas Company (Equitable) petitions for review of an order of the Pennsylvania Public Utility Commission (PUC) which adopted, with modification, the recommended decision of an Administrative Law Judge (ALJ) which found Equitable's Computation of Annual Purchased Gas Adjustment to be unjust and unreasonable.

On March 1, 1985, Equitable filed a Computation of Annual Purchased Gas Adjustment (Section 1307(f) Filing) with the PUC pursuant to Section 1307(f) of the Public Utility Code (Code). ¹ The Section 1307(f) Filing proposed increases in rates effective September 1, 1985 which reflected Equitable's projected natural gas costs for twelve months ending August 31, 1986. In addition, pursuant to 52 Pa.Code § 53.64, Equitable included a reconciliation plan for the treatment of $14.3 million in alleged undercollected natural gas costs. On March 11, 1985, the PUC instituted an investigation to determine the lawfulness, justness and reasonableness of the proposed rates in Equitable's Section 1307(f) Filing. A Complaint against the Section 1307(f) Filing was filed by the Office of Consumer Advocate (OCA). The complaints were consolidated with the PUC's investigation. On March 15, 1985, at a pre-hearing conference, the investigation was consolidated with the PUC's investigation into Supplement No. 50 to Tariff Gas--Pa.P.U.C. No. 20 filed by Equitable on January 4, 1985 to increase base rate revenues by approximately $36,273,000. Throughout April and May of 1985, thirteen evidentiary hearings were held and a consolidated Public Input Hearing was held on May 2, 1985. On June 26, 1985, the ALJ issued his Recommended Decision finding Equitable's Section 1307(f) Filing unjust and unreasonable. Exceptions and Reply Exceptions to the Recommended Decision were filed by Equitable, OCA and by the PUC Trial Staff (Trial Staff) before the full PUC. The Recommended Decision was adopted, in material part, by the PUC in its order on August 29, 1985.

Equitable petitioned for review to this court challenging 1) the constitutionality of Act 74 ² and 2) the PUC's order. In addition, Equitable and Kentucky West Virginia Gas Company instituted a complaint in the United States District Court for the Middle District of Pennsylvania seeking injunctive and declaratory relief against enforcement of the Order and Act 74. By order entered November 6, 1985, the complaint was dismissed by the district court on the basis of the abstention doctrine. ³ This order was appealed to The United States Court of Appeals for The Third Circuit which reversed the district court's order and remanded the case for disposition on the merits. ⁴ On remand, the district court upheld the constitutionality of Act 74 and held that it was not violative of the Commerce Clause, ⁵ the Supremacy Clause, ⁶ the first, fifth and fourteenth amendments, ⁷ the Natural Gas Act, 15 U.S.C. § 717 et seq. and the Natural Gas Policy Act, 15 U.S.C. § 3301et seq. ⁸

As the challenge to the constitutionality of Act 74 has been addressed by the District Court, we will limit ⁹ our review to the question of whether the PUC's order is supported by substantial evidence and in conformity with the law. ¹⁰

BACKGROUND

Equitable is the regulated utility division of Equitable Resources, Inc. Equitable is engaged in the production, purchase, storage, transportation, transmission, distribution and sale of natural gas. Equitable's principal service areas are the greater Pittsburgh area and other portions of Southwestern Pennsylvania.

Equitable's gas supply is composed of (1) company produced gas from wells located in Pennsylvania and West Virginia; (2) gas purchased from local producers in Pennsylvania and West Virginia; and (3) gas purchased from three Federal Energy Regulatory Commission (FERC) regulated interstate pipeline suppliers: Kentucky West Virginia Gas Company (Kentucky West), Texas Eastern Transmission Corporation (TETCO) and Tennessee Gas Pipeline Company (Tennessee). Kentucky West is a wholly-owned subsidiary of Equitable Resources, Inc.

Prior to the enactment of Act 74 gas utilities in Pennsylvania were permitted to recover the cost of gas acquired to supply retail demand through a proceeding known as a Gas Cost Rate (GCR) proceeding.

The Gas Cost Rate mechanism for the automatic adjustment of gas cost charges is authorized by Code Section 1307, 66 Pa. C.S. § 1307 entitled "Sliding scale of rates; adjustments" and by the Commission's Order of May 21, 1978, Docket No. M-78050055, reported at 52 Pa.P.U.C. 217-220. Such mechanisms are common and are denominated variously "fuel adjustment clauses," "purchased gas adjustment clauses," "escalator clauses," and "pass-through procedures." With differences in the details of operation, each mechanism allows the regulated gas utility to reflect in customer charges changes in the price paid by the utility for the gas it distributes without the necessity of preparation or approval of a revised tariff. That is, these mechanisms by means of a formula like the one set forth at 52 Pa.P.U.C. page 219, pass through to customers changes in the utility's cost of gas. The constitutional validity of a similar automatic adjustment mechanism, the Energy Cost Rate applicable to electric utilities, was recently upheld in Allegheny Ludlum Steel Corporation v. Pennsylvania Public Utility Commission, 501 Pa. 71, 459 A.2d 1218 (1983).

The GCR here at issue is a "levelized" adjustment mechanism which means that the cost of gas passed through to the customer remains constant for a specified period--here one year--with an opportunity during subsequent annual periods for the utility to reconcile past over-collections or under-collections by charging increased or decreased rates to the extent that its predictions as to the cost of its purchased gas fell short of or were greater than the utility's actual experience [, i.e. Reconciliation.]

National Fuel Gas Distribution Corporation v. Pennsylvania Public Utility Commission, 76 Pa. Commonwealth Ct. 102, 113, 464 A.2d 546, 552 (1983) (NFG 1 ). The relevant period of inquiry for over/under collections would be the June preceeding the September implementation date of the new rate.

In 1984, the Pennsylvania Legislature implemented amendments to the Code commonly referred to as Act 74. ¹¹ These amendments put into place a new mechanism for the recovery of natural gas costs.

Section 1307 of the Code provides for automatic adjustment of a utility's rates to reflect changes in fuel costs. Specifically, Section 1307(f)(1) allows a natural gas distributor with gross intrastate annual operating revenues in excess of $40,000,000 to file an annual tariff reflecting increases or decreases in its natural gas cost. Before such tariffs can become effective, the PUC in accordance with Section 1318 ¹² must find that a utility is pursuing a least cost fuel procurement policy consistent with the utility's obligation to provide safe, adequate, and reliable service.

At issue in the case at bar is Equitable's first Section 1307(f) Filing under the procedures established by Act 74 and PUC regulations. ¹³ The Section 1307(f) Filing proposed an increase in rates effective September 1, 1985 reflecting 1) Equitable's projected natural gas costs from September 1, 1985 through the twelve months ending August 31, 1986, and 2) a reconciliation plan for the treatment of over/under collections during the transition period from the current gas cost rate mechanism (GCR) to the Section 1307(f) Filing procedure. The reconciliation plan was pursuant to PUC regulations which state in pertinent part:

(2) During the period of transition from the current gas cost rate mechanism to the procedure under 66 Pa.C.S. § 1307(f) ... utilities shall file a reconciliation plan subject to commission approval for the treatment of over/under collections during the period. The plan shall be filed concurrently with the utility's tariff under 66 Pa.C.S. § 1307(f) and must include a minimum of 6 months actual over/under collection data.

52 Pa.Code § 53.64(h)(2). The reconciliation plan provided for a recovery, through a rate increase of $14,300,000 in undercollected gas costs for the period July, 1983 through December, 1984.

Equitable had, after an initial projection of $4.05030 per MCF, ¹⁴ proposed a gas cost rate of $3.9704 per MCF. The PUC rejected Equitable's Section 1307(f) Filing and made adjustments to Equitable's proposed gas cost expense.

The ALJ in his recommended decision proposed that Equitable be permitted a gas cost rate of $3.6084 per MCF. The PUC adopted the ALJ's recommended decision in most respects, but determined that Equitable should be permitted a gas cost rate of $3.6886 per MCF for recovery of its purchased gas expense.

The PUC's adjustments to the gas cost rate reflected their rejection of Equitable's reconciliation plan and projected gas cost purchase expense. The PUC determined that during the time period of the reconciliation plan--July, 1983 to June 30, 1984 and July, 1984 to December, 1984--Equitable had available to it, but did not use, low cost Pennsylvania and...