Court Opinion

ID: 9382472
Source: CourtListenerOpinion
Date Created: 2023-03-27 19:02:55.403797+00
Date Added: 2024-06-11T17:17:39.720221
License: Public Domain

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE

THE DELAWARE DIVISION OF    )
THE PUBLIC ADVOCATE,        )
                            )
                 Appellant, )
                            )
         v.                 )              C.A. No.: K22A-02-005 RLG
                            )
THE DELAWARE PUBLIC         )
SERVICE COMMISSION and      )
DELMARVA POWER & LIGHT      )
COMPANY,                    )
                            )
                 Appellees. )

                 MEMORANDUM OPINION AND ORDER

                        Submitted: November 4, 2022
                          Decided: March 24, 2023

              Upon Appellant’s Appeal from a Decision of the
   Delaware Public Service Commission – REVERSED AND REMANDED.

Regina A. Iorii, Esquire, Department of Justice, Wilmington, Delaware, Attorney
for Appellant.

James McC. Geddes, Esquire, Ashby & Geddes, Wilmington, Delaware, Attorney
for Appellee The Delaware Public Service Commission.

Jessica M. Jones, Esquire & Marisa R. De Feo, Esquire, Saul Ewing Arnstein &
Lehr LLP, Wilmington, Delaware, Attorney for Appellee Delmarva Power & Light
Company.

GREEN-STREETT, J.
                                      Introduction

         The instant appeal stems from The Delaware Public Service Commission’s

(“Commission”) decision to grant Delmarva Power & Light Company’s

(“Delmarva”) request to include its Prepaid Pension Asset (“PPA”) and liability for

Other Post-Retirement Employment Benefits (“OPEB”) within its rate base. Citing

precedent, the Commission found that the PPA and OPEB liability balances should

be included in Delmarva’s rate base. The Delaware Division of the Public Advocate

(“DPA”), an entity created by the General Assembly to advocate on behalf of

residential and small commercial utility customers,1 contends that the Commission’s

finding is not supported by substantial evidence and constitutes legal error. For the

reasons set forth below, the Commission’s decision is reversed and remanded.

                                      Background

         This case involves the inimitable and complicated intersection of utility law

and accounting. While largely undisputed, the complexity of some of the underlying

concepts and principles of this case compels the Court to provide an overview of the

relevant facts, terminology, and procedural history.       All accounting principles

referenced conform to Generally Accepted Accounting Principles (“GAAP”) and

Financial Accounting Standards (“FAS”).

1
    29 Del. C. §§ 8716(e)(1) & (2).
                                           2
A. Delaware’s Utility Regulatory Scheme

          Delmarva is a Delaware public utility2 company regulated by the

Commission. Under the Delaware Public Utilities Act3 (the “Act”), the Delaware

General Assembly delegated to the Commission the exclusive authority to regulate

Delaware public utilities.4            This Court has held that the Delaware legislature

specifically created the Commission for “the purpose of balancing the interests of

the consuming public with those of regulated companies.”5 Delaware public utilities

are prohibited from imposing any “unjust or unreasonable or unduly deferential or

unjustly discriminatory individual or joint rate.”6 These utilities must notify the

2
  26 Del. C. § 102(2) (A public utility is defined as every individual, partnership, association,
corporation, joint stock company, agency or department of the State or any association of
individuals engaged in the prosecution in common of a productive enterprise (commonly called a
“cooperative”), their lessees, trustees or receivers appointed by any court whatsoever, that now
operates or hereafter may operate for public use within this state, (however, elective cooperatives
shall not be permitted directly or through an affiliate to engage in the production, sale or
distribution or propane gas or heating oil), any natural gas, electric (excluding electric suppliers as
defined in § 1001 of this title), water, wastewater (which shall include sanitary sewer charge),
telecommunications, (excluding telephone services provided by cellular technology or by
domestic public land mobile radio service) service, system, plant or equipment.)
3
    See, e.g., 26 Del. C. §§ 102, 201, 304-305.
4
    26 Del. C. § 201.
5
 Chesapeake Util. Corp. v. Delaware Pub. Serv. Comm’n, 2017 WL 2480804, at *3 (Del. Super.
June 7, 2017) (citing E. Shore Nat. Gas Co. v. Del. Pub. Serv. Comm’n, 635 A.2d 1273, 1277 (Del.
Super. Feb. 19, 1993)) (additional citations omitted).
6
    Id. at *3 (citing 26 Del. C. § 303).

                                                  3
Commission if any rate change is sought.7 The Commission is then statutorily

authorized to conduct hearings.8

B. Legal Principles Governing Rate Cases

           The primary purpose of ratemaking is to fix rates sufficient to give the utility

a fair return upon the present value of property dedicated to the public use.9 When

the Commission considers the lawfulness of any rate change, it must review a

utility’s rate base and how that rate base is calculated. “Ratemaking is commonly

considered an art, not a science.”10

           1. Rate Base

           Rate base is “the dollar value of the utility’s plant employed in providing its

service to the public and upon which the utility and its investors are entitled to earn

a fair return.”11 The rate base is, in effect, the investment upon which the investors’

return is earned.12 The Act outlines the components of a Delaware-regulated utility’s

rate base, which includes:

7
    26 Del. C. § 304(a).
8
    26 Del. C. § 305.
9
 Chesapeake Util. Corp. v. Del. Pub. Serv. Comm’n, 705 A.2d 1059, 1065 (Del. Super. Mar. 31,
1997).
10
     Id.
11
     Id. at 1066.
12
     Id.
                                               4
a. The original cost of all used and useful utility plan

   and intangible assets either to the first person who

   committed said plant or assets to public use or, at

   the option of the Commission, the first recorded

   book cost of said plant or assets; less

b. Related      accumulated       depreciation      and

   amortization; less

c. The actual amount received and unrefunded as

   customer advances or contributions in aid of

   construction of utility plant, and less

d. Any accumulated deferred and unamortized

   income tax liabilities and investment credits,

   adjusted to reflect any accumulated deferred

   income tax assets including, but not limited to,

   those arising from the payment of alternative

   minimum tax, related to plant included in

   paragraph a. above, plus

e. Accumulated depreciation of customer advances

   and contributions in aid of construction related to

   plant included in paragraph a. above, and plus

                              5
                 f. Materials and supplies necessary to the conduct of

                     the business and investor supplied cash working

                     capital, and plus

                 g. Any other element of property which, in the

                     judgment of the Commission, is necessary to the

                     effective operation of the utility.13

A utility’s rate base, in essence, is determined by adding the utility’s investment in

physical properties to its working capital.

           2. Working Capital

           Working capital constitutes the operating funds essential to pay for the current

obligations of a utility.14 Stated another way, working capital is the money – fronted

by the utility – necessary to finance the services provided until the utility is

compensated by its customers.15 As expertly outlined by the New Mexico Supreme

Court:

                 In the context of utility regulation, working capital
                 does not include the total liquid funds with which the
                 business is conducted. It is not the property which
                 the business has; that is, it is not the excess of current
                 assets over current liabilities. Working capital, rather
                 is an allowance for the sum which the company needs
13
     26 Del. C. § 102(3).
14
     N.M. Atty Gen. v. N.M. Pub. Regul. Comm’n, 359 P.3d 133, 138 (N.M. 2015).
15
     Id.

                                                6
                 to supply from its own funds for the purpose of
                 enabling it to meet its current obligations as they arise
                 and to operate economically and efficiently.16

When a utility cannot timely use the money it receives from approved rates to pay

for its operating expenses, a type of “deficit” exists that requires “cash working

capital” (“CWC”).17 The utility must find an alternate way to obtain money to pay

its operating expense needs.18

           3. PPA & OPEB Liability Balances

           The Employment Retirement Income Security Act of 1974 (“ERISA”) and

Pension Protection Act of 2006 (the “Pension Act”) establish funding requirements

to provide benefit security for retirees by protecting pension plan assets.19

Employers must maintain plan funding at a certain level to meet their federal

obligations.20 Employers fund their plans with cash contributions or investments.21

All contributions to pension plans are placed into separate trust accounts, to which

16
     Id.
17
     Commission’s Answering Br., 1-2.
18
     Id. at 2.

 In the Matter of Public Utility Commission of Oregon’s Investigation into Treatment of Pension
19

Costs in Utility Rates, Docket No. UM 1633, Order No. 15-226, 2 (Aug. 3, 2015).
20   Id.
21
     Id.

                                               7
employers do not have access. Employers cannot use these funds to provide utility

service to their customers.22

           Since 1987, employers have been required to use FAS Number 87 (“FAS 87”)

for financial reporting of pension costs.23 Because FAS 87 requires employers to

recognize their pension plan costs on an actuarial accrual, pension costs are

recognized over the working years of the employees that will receive the benefits.24

Actuaries determine the amounts to contribute to the plans, designed to meet

specific, federally-driven targets.25

           Annual pension fund expenses can be positive or negative.26 When a fund’s

annual investment gains exceed the annual actuarial costs, the FAS 87 annual

expense becomes negative.27 When the fund’s annual actuarial costs are greater than

the annual expected return on assets, the FAS 87 annual expense turns positive.28

Cash contributions and negative expenses – the result of investment gains greater

22   Id.
23
     Id.
24
     Id.
25
     Id. at 3.
26
     Id.
27
     Id.
28
     Id.

                                           8
than actuarial costs – increase the fund’s balance, while positive expenses decrease

the fund’s balance.29

           ERISA and the Pension Act’s funding obligations require employers to make

plan contributions that are different than their recorded FAS 87 expense in a given

year.30 If cumulative contributions exceed cumulative FAS 87 expenses, which may

be negative due to investment gains, the difference is recorded as PPA.31 Thus, PPA

arises when accumulated investor-supplied contributions in pension plan assets

exceed the accumulated costs associated with pension obligations – which are used

to determine pension costs included in consumers’ rates.32 Because there can be no

withdrawal from a PPA balance for any operational needs, an employer must fund

its other actual cash expenses with investor-supplied capital.33 In sum, pension

contributions in excess of pension costs – PPA – represent a CWC.

           OPEB liability reflects the accumulated costs associated with OPEB

obligations – e.g., retiree medical benefits – exceeding the associated accumulated

investor-supplied contributions.34 OPEB liability functions similarly to PPA

29
     Id.
30
     Id.
31
     Id.
32
     Delmarva’s Answering Br., 5.

33
     Id.
34
     Id.
                                           9
liability. Both PPA and OPEB liability create a time-lagged deficit that requires a

utility to seek additional money to meet its operating expenses.

C. Procedural Posture

      On March 6, 2020, Delmarva filed an application (the “Application”) with the

Commission requesting an overall rate increase of $24.3 million. The Application

represented Delmarva’s first application for an electric rate base increase in three

years – and its first contested application since 2013. DPA filed a Statutory Notice

of Intervention related to the Application on March 9, 2020, and thereafter

participated as a party in interest.

      The Commission assigned a Hearing Examiner to conduct evidentiary

hearings and present proposed findings of fact and conclusions of law to the

Commission. Evidentiary hearings were held before the Hearing Examiner in

February 2021. On June 25, 2021, the Hearing Examiner issued his proposed

findings and recommendations (the “Recommendation”). For purposes of this

appeal, the Recommendation’s most noteworthy suggestion was to remove the PPA

and OPEB liability balances from Delmarva’s rate base.

      Delmarva filed an exception to the Recommendation on July 10, 2021. Other

exceptions to the Recommendation were filed on issues unrelated to the inclusion of

the PPA and OPEB liability balances. The Commission heard oral argument on all

exceptions on August 4, 2021. The Commission rejected the Recommendation that

                                         10
the PPA and OPEB liability balances be excluded from Delmarva’s rate base. On

January 26, 2022, through Order No. 9953 (“Order 9953”), the Commission granted

Delmarva an increase of $16.7 million to its electric base distribution rates. The

PPA and OPEB liability balances were included in the rate base. DPA filed the

instant appeal of Order 9953 in this Court on February 24, 2022.

                                      Standard of Review

          Under 26 Del. C. § 510, final orders of the Commission are appealable to the

Superior Court.         Although the subject of great debate amongst the parties, the

standard of review to be employed by this Court is settled. On appeal from an

administrative agency, this Court must determine whether the agency ruling is

supported by substantial evidence and free from legal error.35 Substantial evidence

is defined as “such relevant evidence as a reasonable mind might accept as adequate

to support a conclusion.”36 Thus, “[this] Court does not independently weigh the

evidence, determine questions of credibility[,] or make its own factual findings.”37

35
     Pub. Water Supply Co. v. DiPasquale, 735 A.2d 378, 381 (Del. 1999).
36
   Lorah v. Home Helpers, Inc., 21 A.3d 596, 2011 WL 2112739, at *2 (Del. May 26, 2011)
(TABLE) (citing Oceanport Indus., Inc. v. Wilmington Stevedores, Inc., 636 A.2d 892, 899 (Del.
1994)); see also Lively v. Dover Wipes Co., 2003 WL 21213415, at *1 (Del. Super. May 16, 2003)
(quoting Onley v. Cooch, 425 A.2d 610, 614 (Del. 1981) (defining “substantial evidence” as “more
than a scintilla but less than a preponderance[.]”)).
37
     Lorah, 2011 WL 2112739, at *2 (citing Johnson v. Chrysler Corp., 213 A.2d 64, 66 (Del. 1965)).

                                                  11
Rather, this Court “merely determines if the evidence is legally adequate to support

the agency’s factual findings and whether errors of law exist.”38

           When the issue for the Court’s consideration is one of statutory construction,

the Court’s review is plenary.39 The Delaware Supreme Court, in DiPasquale,

unequivocally pronounced that “statutory interpretation is ultimately the

responsibility of the courts.”40 “A reviewing court may accord due weight, but not

defer to an agency interpretation of a statute administered by it.”41 In short, questions

of statutory interpretation are legal questions, which this Court reviews de novo.

                                         Discussion

           Although an issue of first impression for this Court, Order 9953 represents the

third time the Commission addressed the issue of whether to include PPA and OPEB

in a regulated utility’s rate base. In 2006 and 2014, the Commission issued Orders

38
  Molinaro v. Unemployment Ins. Appeal Bd., 2004 WL 2828048, at *1 (Del. Super. May 14,
2004) (citing 19 Del. C. § 3323).
39
     DiPasquale, 735 A.2d at 381.
40
     Id. at 382.
41
     Id.

                                              12
693042 and 8589,43 respectively, allowing Delmarva to include PPA in its rate base.

These prior Commission orders establish certain decision-making baselines for the

Commission and must be duly examined.

A. The Commission’s Prior Consideration of PPA and OPEB’s Inclusion in
   Rate Base

       1. Order 6930 (“Docket No. 05-304”)

       From 1995 through 2008, Delmarva investors did not contribute any capital

to the pension plan. The pension fund was sustained by high investment returns.

This non-cash pension cost accrual created a negative pension expense. This

negative pension expense reduced Delmarva’s cost of service revenue requirement,

which necessitated investor contributions of cash payments to fund Delmarva’s

operating expenses.

        During this time, in 2006, while the pension expense was negative, the

Commission was asked to consider inclusion of the PPA and OPEB liability balances

in the rate base. The Commission permitted their inclusion in rate base by Delmarva.

The Commission explained this inclusion as follows:

              [t]he prepaid pension asset is appropriately included
              in rate base because it is caused by a negative pension

42
  In the Matter of the Application of Delmarva Power & Light Company for Approval of a Change
in Electric Distribution Base Rates and Miscellaneous Tariff Changes, PSC Docket No. 05-304,
Order No. 6930 (June 6, 2006)(hereinafter “Order No. 6930”).
43
  In the Matter of the Application of Delmarva Power & Light Company for an Increase in Electric
Distribution Rates and Miscellaneous Tariff Changes, PSC Docket No. 13-115, Order No. 8589
(Aug. 5, 2014)(hereinafter “Order No. 8589”).
                                               13
                 expense, which both reduces base rates, resulting in
                 rates that are lower than they otherwise might be,
                 and[,] at the same time[,] creates a cash working
                 capital requirement.       We also recognize that
                 [Delmarva] has no access to this asset to use for other
                 operating expenses; it is precluded by federal tax law
                 from using any of the money it has collected for
                 pensions for any other purpose.44

The Commission found that Delmarva had a CWC requirement because of the

negative pension expense.            The Commission’s decision centered around rate

reduction and creation of a CWC requirement.

      2. Order 8589 (“Docket No. 13-115”)

          Due to an economic downturn, the pension fund could not continue to be

sustained solely by its investment returns. Unlike the preceding fourteen years, the

PPA balance arose from both returns on plans investments and contributions from

Delmarva’s shareholders from 2009 through 2019. Specifically, during this ten-year

period, Delmarva shareholders contributed $167 million to the pension plan.45

Despite these contributions, the value of the plan assets decreased by slightly over

44
     Order No. 6930, ¶ 58 (June 6, 2006).
45
  In the Matter of the Application of Delmarva Power & Light Company for Application for an
Increase in Electric Base Rate, PSC Docket No. 20-0149, Direct Testimony of Glenn A. Watkins,
40 (Sept. 9, 2020).

                                              14
ten million dollars.46 Because the plan’s annual returns were lower than its actuarial

costs, Delmarva began incurring positive pension expense.

          Again, in 2014, this time while the pension expense was positive, the

Commission was asked to consider inclusion of the PPA and OPEB liability balances

in Delmarva’s rate base. With very little analysis or explanation of its decision, the

Commission determined that it was proper to include these balances in Delmarva’s

rate base. In Order 8589, the Commission simply provided:

                  . . . [t]his issue is not as fully developed on this record
                  as we would like. It is a complicated issue, and we
                  appreciate that the parties have tried to enlighten us
                  on the nuances of the arguments that underlie their
                  various positions but we note that we have allowed
                  this adjustment in at least one of the prior Delmarva
                  cases when it was objected to, and although we could
                  remand this back to the Hearing Examiner to develop
                  the record further, as one Commissioner suggested,
                  we have decided not to do that and to include these
                  two items in rate base.47

The Commission proffered no explanation as to how the now positive pension

expense affected its decision. The Commission tendered no explanation as to how

rate reduction factored into its decision. The Commission provided no discussion –

or mention – of any consideration of CWC.

46
     Id. at 42.
47
     Order No. 8589, ¶ 99. (Aug. 5, 2014).

                                                 15
B. The Commission’s Decision Is Not Supported by Substantial Evidence

       This Court considers Order 9953 consistent with the limited scope of this

Court’s standard of review and in the context of the Commission’s prior Orders on

this issue. In permitting the inclusion of PPA and OPEB liability balances in

Delmarva’s rate base in Order 9953, the Commission simply states:

              We have addressed this issue in two previous
              Delmarva cases, Docket Nos. 05-304 and 13-115,
              and[,] in each instance[,] we found it was
              appropriate that the PPA and OPEB liability
              balances be included in rate base. In this case, we
              believe that precedent should be followed, and[,]
              therefore[,] reject the Hearing Examiner’s
              recommendation.48

The Commission does not outline the rationale for its rejection of the Hearing

Examiner’s recommendation. The Commission does not articulate any basis for its

decision. The Commission offers no findings of fact and makes no conclusions of

law.

       “Although [this Court’s] standard of review of a decision by [an

administrative agency] is deferential, it is not altogether without teeth.”49 Thus,

48
  In the Matter of the Application of Delmarva Power & Light Company for an Increase in Electric
Base Rates and Other Miscellaneous Tariff Changes, PSC Docket No. 20-0149, Order No. 9953,
¶ 102 (Jan. 26, 2022).
49
   Neece v. Unemployment Ins. Appeal Bd., 2022 WL 130870 at *4 (Del. Super. Jan. 14, 2022)
(citing Murphy & Landon P.A. v. Pernic, 121 A.3d 1215, 1217 (Del. 2015)).

                                              16
although this Court may not make its own factual determinations or weigh the

credibility of witnesses, it cannot defer to a decision by an agency or board that fails

to reflect a rational consideration of the evidence.50 As noted by this Court and the

Delaware Supreme Court, “[an administrative agency] cannot simply ignore

substantial and relevant evidence without an explanation.”51 The record provided to

the Court, and the Commission’s opinion within it, fails to address, without any

explanation, its decision to reject the Hearing Examiner’s recommendation and

include PPA and OPEB in rate base.

           It is outside of this Court’s authority to make its own factual determinations

in the evaluation of a lower court or administrative agency’s appeal.52 Rather, the

Court must base its decision on appeal by examining the record below to determine

whether substantial evidence supports the Commission’s findings. In doing so, the

Court “will not intrude on [the Commission’s] role as trier of fact by disturbing the

[Commission’s] credibility determinations or factual findings.”53 However, the

50
     Id.
51
  Id. (citing Igo v. ACTS Ret. Life Communities, 2021 WL 37461, at *4 (Del. Super. Jan. 5, 2021)
(additional citations omitted)).
52
   Sutton v. Unemployment Ins. Appeal Bd., 2010 WL 1367757, at *2 (Del. Super. Jan 15, 2010)
(remanding when the Board failed to make the necessary factual determinations regarding the
timeliness of Claimant’s appeal)).
53
  Id. (citing Toribio v. Peninsula United Methodist Homes, Inc., 2009 WL 153871, at *1 (Del.
Super. Jan. 23, 2009) (citing Connections Cmty. Support Programs, Inc. v. Bantum, 2001 WL
1628474, at *2 (Del. Super. Mar. 30, 2001)).

                                               17
Commission’s findings must be supported by substantial evidence, which is “such

relevant evidence as a reasonable mind might accept as adequate to support a

conclusion.”54 Based on the record and the plain language of the Commission, it is

difficult for this Court to ascertain how, why, and in what manner the Commission

reached its decision. The Commission proffers no insight into its decision-making

process. Without this critical information, the Court cannot conclude that the

Commission’s determination was reasonably based on any evidence – and certainly

not substantial evidence. The Commission’s findings must clearly appear in the

hearing record before this Court. They do not. Accordingly, the Commission’s

“findings” do not withstand appellate review and must be addressed on remand.

C. The Commission Makes No Findings of Law Subject to This Court’s Review

       As outlined above, the Commission’s inclusion of PPA and OPEB in rate base

cannot stand because no evidentiary basis has been provided to support its inclusion.

Without those findings and the reasoning upon which those findings are based, this

Court cannot execute its statutorily mandated examination.                   Likewise, the

Commission does not perform any legal analysis, interpret any applicable statutory

provision, or reference any cognizable conclusion of law. This Court cannot

54
   Id. (citing Thompkins v. Reynolds Transp., 2021 WL 99729, at *3 (Del. Super. Jan. 11, 2021)
(internal quotation marks omitted) (quoting Toribio, 2009 WL 153871, at *2)).

                                              18
determine that an “error of law” has been made in a decision completely devoid of

any reference to the law.

                                    Conclusion

      The Commission’s findings and reasoning must clearly appear to this Court.

An administrative agency maintains an obligation to explain how its judgment is

rendered. Without this explanation, this Court cannot evaluate the order and logic

behind the deductive process. Accordingly, Order 9953 is reversed and remanded

back to the Commission for further findings of fact and conclusions of law consistent

with this opinion.

      IT IS SO ORDERED.

                                         19