Court Opinion

ID: 4954218
Source: CourtListenerOpinion
Date Created: 2021-09-24 13:29:04.315095+00
Date Added: 2024-06-11T08:15:31.369977
License: Public Domain

PELLEGRINI, Judge,
dissenting.
The majority opinion upsets the “rate bargain” between Pennsylvania Power & Light Company (PP & L) and its ratepayers by making the ratepayers pay for something that they already paid for and giving PP & L a 31 million dollar windfall. Not only does it breach the rate bargain, the majority throws ratemaking into a complete turmoil. For example, as PP & L’s counsel admits, if interest rates go down resulting in a higher than anticipated rate of return to the utility, ratepayers can seek recovery of excess rates of return in future rate cases. Under the majority’s analysis, nothing is ever settled, making the ratemaking system unworkable.
Under the present system, when the Pennsylvania Public Utility Commission (PUC) issues a rate tariff, the presumption is that .the rates set for that utility are fair and reasonable and will cover all expenses and costs that the utility incurs during the time the tariff remains in effect. If a utility feels that rates paid by its ratepayers fail to give it a sufficient rate of return, it is free to file a rate case proposing to raise rates. Even if rates are excessive, for example, where the rate of return becomes too high due to declining interest rates, the ratepayer is obligated to pay the tariff rate unless it or someone on its behalf files a successful challenge to the rates.
What the majority countenances in this case is for a utility to take past costs and expenses incurred under an existing tariff and carry them forward, requiring the ratepayers to pay for an expense even though they are presumed to have paid for it when it came due, impermissibly increasing the adjudicated rate of return for the utility. By allowing such an outcome, the PUC and the majority directly contravene the doctrine against retroactive ratemaking and upset the “bargain” between the utility and its ratepayers as envisioned by the Public Utility Code.
The bargain established in the prior rate case was challenged when PP & L filed a general rate case requesting an increase in rates to produce more than $261 million annually. One of the bases for the proposed increase was the cost of complying with an accounting change relating to post-retirement obligations other than pensions (called OPEBs). In December of 1990, the Financial Accounting Standards Board issued Statement of Accounting Standards (SFAS) 106 which was made effective January 1, 1993. SFAS 106 had been under consideration for nearly a decade. In November of 1982, the Financial Accounting Standards Board released a statement of preliminary views proposing that the accrual method be imposed. In September of 1989, a proposed draft of SFAS 106 was released. Additionally, SFAS 106 did not become effective for more than two years from the date it was issued.
In Popowsky v. Pennsylvania Public Utility Commission, 164 Pa.Cmwlth. 338, 642 A.2d 648, 649 (1994), petition for allowance of appeal denied, 543 Pa. 733, 673 A.2d 338 (1996) (PP & L I), we explained the effect of SFAS 106 as follows:
SFAS 106 requires companies to move from the pay-as-you-go or cash basis for OPEBs to an accrual method of accounting based on the belief that OPEBs are a form of deferred compensation and the present cost should represent costs of obligations presently incurred. The change from the pay-as-you-go method to the accrual method creates transitional obligations, that is, the accumulated liability for OPEB expenses for both present employee and current retirees during the period up to the date of conversion to an accrual method which had been deferred for future periods under the pay-as-you-go basis.
The accrual method, simply put, requires employers, including utilities, to record as a liability the post-retirement benefits its employees earn during, the course of the actual employment.
The PUC responded to a request from several utility companies, including PP & L, on how to handle the effects of SFAS 106, *457stating that because there is a wide disparity in post-retirement benefits provided by utility companies, the appropriate amount of the transitional obligation and a change from the pay-as-you-go to the accrual method for rate-making purposes should be decided on a case-by-case basis.1
PP & L then filed a petition for a declaratory order requesting to defer for accounting purposes and recover in future rates its current incremental costs, that is, the additional amount above and beyond the pay-as-you-go costs which are already reflected in current rates, which are booked under the accrual method pursuant to SFAS 106 until the next rate case. The PUC granted PP & L permission to record as a regulatory asset the incremental costs incurred between the date of the adoption of SFAS 106 and the date of new rates, including the amortization of the transitional obligation costs. In effect, in that ease, the PUC allowed what is at issue here; it altered the bargain between the utility and the ratepayers by requiring the ratepayers to pay more than the prospective costs for power in the new rate case.
On an appeal by the Office of Consumer Advocate (OCA), this court held in PP & LI that the recovery of such deferred incremental costs in a subsequent rate case would be prohibited by the rule against retroactive ratemaking. Reversing the PUC’s order, we stated:
In this ease, the additional incremental costs would be added to the burden of the future ratepayers even though the accounting method was changed in 1993_ Because the incremental costs recovered in some future rate ease would relate to 1993 and the years up until the next rate case, what PP & L requested and the PUC ordered is retroactive ratemaking.
Because the incremental costs were, in fact, anticipated before the request for de-claratoxy order was filed and because the costs are recurring and could otherwise be recoverable in rates, the exception for “extraordinary” expenses does not apply. Therefore, the incremental costs would be prohibited by the rule against retroactive ratemaking and the PUC’s order improperly assures future recovery.
Id. 642 A.2d at 662-53.
On December 30, 1994, PP & L filed this rate case with the PUC, which, among other things, included a claim for $31.1 million dollars in deferred costs, to be amortized over 17.3 years, the same cost we rejected in PP & LI. This item represents that portion of the transitional obligation which was incurred by PP & L under its existing tariff and recorded on its books under the accrual method from the time SFAS 106 became effective on January 1, 1993, until the effective date of the rates proposed in its present rate case (assumed to be September 30, 1995). The recovery of this $31.1 million dollars in incremental costs over 17.3 years would result in a $1.5 million dollar increase in annual rates over the period of amortization. The PUC permitted these costs, although changing the amortization period to ten years, resulting in an even higher annual increase in rates for ratepayers.2
The majority opinion affirms the PUC’s result requiring the payment of an additional $31.1 million dollars in incremental costs, even though those costs were deferred from a prior period and is the exact recovery of costs determined to be retroactive ratemak-ing in PP & L I. Relying on Popowsky v. Pennsylvania Public Utility Commission, *458164 Pa.Cmwlth. 600, 643 A.2d 1146 (1994), petition for allowance of appeal denied, 543 Pa. 733, 673 A.2d 338 (1996) {PAWC,)3 the majority holds that the rule against retroactive ratemaking does not apply because the utility acted expeditiously to request recov-eiy of these costs in rates and because the exception to the rule for extraordinary costs applies. PAWC simply does not apply.
In PAWC, the water company filed a rate case in July of 1992 requesting an increase in rates. The water company included a claim for the incremental accrued OPEB costs for the period from January 1,1993, when SFAS 106 became effective, until April 22,1993, the proposed effective date of the new tariff. Because this portion of the transitional obligation was incurred during the automatic suspension of the tariff under the Code, we held that the recovery of those costs, in addition to the transitional obligation on a going-forward basis, was not retroactive rate-making. PAWC, 643 A.2d at 1150. See Section 1308(d) of the Public Utility Code, 66 Pa.C.S. § 1308(d) (the PUC may consider changes occurring during the period of suspension). As such, the PUC’s and the majority’s reliance on PAWC is misplaced; the decision in PAWC does not stand for the proposition that costs incurred in a past period are recoverable because the only incremental costs incurred in that case were incurred after the rate case was filed.4
I agree, as we held in PAWC, that the recovery of the transitional obligation5 on a going-forward basis is not retroactive rate-making. However, that is not the issue in this ease; the issue is whether the recovery of that portion of the transitional costs incurred since the time of the accounting change until the present rate case is retroactive ratemaking. This exact issue was decided unfavorably to the utility in PP & LI, and the PUC erred in refusing to follow that decision. In PP & L I, as discussed, supra, PP & L sought an assurance that it could recover its incremental costs at some future time, from future ratepayers, because it wished to postpone the filing of a rate case. We held that the incremental costs for a period of time after the change to the accrual method but before the rate case was filed could not be permitted in a future rate case under the rule against retroactive ratemak-ing, because those costs, as part of the transitional obligation, were recurring, and PP & L could recover those costs if it filed a rate case before or at the time they were incurred.
The rule against retroactive ratemaking is long-standing and is based on sound principles. See, e.g., Philadelphia Electric Company v. Pennsylvania Public Utility Commission, 93 Pa.Cmwlth. 410, 502 A.2d 722 (1985); Pike County Light & Power Company v. Pennsylvania Public Utility Commission, 87 Pa.Cmwlth. 451, 487 A.2d 118 (1985). As we stated in PP & LI:
The rule against retroactive ratemaking prohibits a public utility commission from setting future rates to allow a utility to recoup past losses or to refund to consumers excess utility profits. Kreiger, The Ghost of Regulation Past: Current Appli*459cations of the Rule Against Retroactive Ratemaking in Public Utility Proceedings, 1991, Univ.Ill.L.Rev. 983, 984. The policy reasons behind this rule are that if retroactive ratemaking is allowed, it makes the “test year” method of ratemaking meaningless and the general principle that those customers who use power should pay for its production rather than requiring future ratepayers to pay for past use.
PP & LI, 642 A.2d at 651.
The $31 million dollar incremental costs allowed by the PUC in this case were incurred by PP & L from January 1, 1993, through September 30, 1995, and were allowed even though the rate case was not filed until December 30, 1994.6 Those costs were deferred from a prior period of time and, as such, were an attempt to set future rates based on past losses, violating the rule against retroactive ratemaking. It was PP & L, adhering to its corporate objective to delay filing a rate base case until 1994-95, that chose when to file its rate case. The Public Utility Code does not proscribe the timing of a utility’s rate case, leaving it to the option of the utility, based on the rate of return it is receiving and the rate it believes it can get in a new rate case. See Section 1308 of the Public Utility Code, 66 Pa.C.S. § 1308.
Because PP & L did not file a new rate casé, we can assume that it was receiving an adequate rate of return or did not think it could get a better rate by filing a rate case, despite the $25 million dollar annual cost of going forward under the accrual method for OPEBs. Obviously, there are other considerations in determining when to file a rate case, but that does not change the simple fact that it was PP & L’s choice when to file. It had no guarantee that the incremental costs for the period from the date they changed to the accrual method until their rate case was filed would ever be recovered,7 especially in light of the long-standing application of the rule against retroactive ratemaking.8
Because PP & L is specifically requesting to recover a cost that relates to a prior period and those costs are not extraordinary,9 such recovery is retroactive ratemak-*460ing and this court should reverse the PUC’s allowance of those costs. Otherwise, nothing is ever settled between the utilities, the PUC, the OCA, and the ratepayers, who will always be trying to revisit the “bargain”. Contract law can’t work that way; neither can public utility regulation.
Accordingly, although agreeing with the remainder of the majority opinion, I would reverse the PUC in that part allowing recovery of $31 million dollars in incremental costs prior to the filing of the rate case which was in defiance of the rule against retroactive ratemaking and this court’s decision in PP & LI.
KELLEY, J., joins in this dissenting opinion.

. Pennsylvania Public Utility Commission v. Philadelphia Electric Co., et al., P-920588 (P.U.C. November 4, 1992). See 52 Pa.Code § 69.351.

. In making its erroneous decision, the PUC, to achieve an outcome, misread the following statement in PP & L I: “PP & L could have recovered those costs had it filed a rate case rather than a request for declaratory order”, PP & L I, 642 A.2d at 652, interpreting it to mean that the recovery of incremental costs is retroactive rate-making if done outside of a rate case, but is not retroactive ratemaking if done within a rate case. Under that logic, a utility could seek retroactively wage increases that occurred during the previous rate case so long as it did so in a rate case. As the PUC should know, what this statement means is that the transitional obligation on a going-forward basis is not retroactive ratemak-ing, and PP & L could have recovered those costs if it had filed a rate case prior to or at the time it incurred that obligation, but because it chose not to file a rate case, those same costs now relate to a past period and cannot be recovered.

. That case involved a rate case filed by Pennsylvania-American Water Company or PAWC.

. This case is also distinguishable from the decision in Pittsburgh v. Pennsylvania Public Utility Commission, 370 Pa. 305, 88 A.2d 59 (1952) {Bell Telephone ), relied on by the PUC, because in that case, the rule against retroactive rate-making was not addressed. In Bell Telephone, the issue raised was whether the amount required to pay up a pension fund, so that it would be at the level it would have been if full accrual payments had been made from the inception of the fund, was a proper operating expense. The Supreme Court held that the expenses could be charged to ratepayers rather than stockholders, because the utility did not abuse its managerial discretion in failing to pay full accrual payments from the inception of the pension fund and that they anticipated defined steps to pay up the fund. Although the ratepayers challenging the rates argued that future ratepayers should not be responsible for accrual payments related to prior service, rather than addressing the retroactivity of the payments, the Supreme Court stated that the criterion for determining whether ratepayers or investors should bear the cost is not whether past ratepayers should have paid it. Because the decision in Bell Telephone avoided the issue raised in this case, it is inapplicable to our analysis.

. If, as in PAWC, the incremental costs allowed were only for the period from December 30, 1994, when the rate case was filed, through September 30, 1995, when the rates were effective, I would agree that recovery was allowable. See Section 1308(d) of the Public Utility Code, 66 Pa.C.S. § 1308(d) (the PUC may consider changes occurring during the period of suspension).

. Just because the PUC issued a policy statement that allowed each utility to use single-issue petitions for declaratory orders to request recovery of SFAS 106 costs, purportedly so that it would not be overworked, offers no solace. A policy statement is what the PUC believes the law to be, not what it is — it is not unheard of that the PUC is reversed on appeal. A party always acts on a PUC policy statement knowing that it bears the risk that the policy statement is simply wrong. See Shenango Township Board of Supervisors v. Pennsylvania Public Utility Commission, 686 A.2d 910 (Pa.Cmwlth. 1996).

. PP & L argues that it acted expeditiously in order to ensure recovery of these costs. I disagree. PP & L always had the choice whether and when to come in for a rate case. Instead, it chose the manner of proceeding, first in the joint action with numerous other utilities in 1992, and then in the declaratory judgment action addressed in PP &L I.

. An extraordinary expense is an unanticipated, non-recurring, substantial expense to the rate base that would be normalized out if occurring in a test year. PP & L I, 642 A.2d at 652. Although we held in PAWC that the general transitional obligation is extraordinary because it was caused by a non-recurring, one-time event— the change in accounting standards — the incremental costs at issue here are not extraordinary because not only were they caused by the change in accounting principles, they were also caused by the utility's choice not to file a rate case. As noted above, PP & L knew about the change in accounting standards and the creation of the transitional obligation at the latest in 1990. Even with this knowledge of a $25.5 million dollar increase in expenses, PP & L alone determined when to request a change in rates, waiting nearly two years from the change on January 1, 1993, to file its rate case.
In making its choice of when to file its base rate case, PP & L was in a similar position to Columbia Gas in relation to its costs incurred due to orders from the Department of Environmental Resources to investigate the migration of pollutants in Columbia Gas of Pennsylvania, Inc. v. Pennsylvania Public Utility Commission, 149 Pa.CmwIth. 247, 613 A.2d 74 (1992), affd per curiam, 535 Pa. 517, 636 A.2d 627 (1994). In that case, because Columbia Gas unilaterally chose not to request recovery of the costs of complying with the DER order until the full total was established, we considered the on-going expenses anticipated and not recoverable as retroactive. Although in that case, there was an inter*460vening base rate case, the fact remains that it was the utility’s choice of when to request recovery of those costs that determined whether they were anticipated.