1993 PennVest Order became “prima facie evidence of the facts found and shall remain conclusive upon all parties affected thereby, unless set aside, annulled or modified on judicial review” in accordance with Section 316 of the Code, 66 Pa. C.S. § 316. Columbia submitted that the volumetric rate base/rate of return rate for this plant was never appealed, and thus remains conclusive. CWC R.B. at 8-9. Columbia also argued that the I&E and OCA position is contrary to Generally Accepted Accounting Principles (GAAP) and ratemaking principles, and would conflict with the United States Tax Code. Id. at 14-20. b. ALJ’s Recommendation The ALJ agreed with the Company’s position, stating that the Commission’s 1993 PennVest Order cannot be ignored. The ALJ concluded that Columbia’s inclusion of its remaining used and useful undepreciated PennVest plant in rate base is appropriate. R.D. at 22. c. Exceptions In its first Exception, I&E argues that the ALJ erred by not adopting I&E’s recommendation that the Company’s rate base claim exclude the depreciated value of plant funded entirely from a PennVest loan. I&E argues that this plant was completely funded by ratepayers through an accelerated and adjusted charge that allowed the Company to timely repay the underlying principal and interest pursuant to the PennVest loan repayment schedule. I&E recommends that the Commission reduce the Company’s rate base claim by $3,048,292 to remove the depreciated value of the PennVest-financed plant from Columbia’s rate base. I&E notes that this adjustment would require a corresponding reduction to the Company’s claimed depreciation expense related to the plant. I&E Exc. at 5-6. I&E further notes that the ALJ stated that ‘but for’ the unique regulatory history of Columbia’s PennVest plant, he would have been inclined to accept I&E’s established
additional revenues from ratepayers by placing that very same plant (at its depreciated value) in rate base. I&E speculates that, if the Commission does not adjust Columbia’s rate base, it is likely that other utilities that have repaid PennVest loans with customer-provided funds would attempt to follow suit and include the undepreciated value of their plant in rate base. Id. at 10. I&E states that it appears that the ALJ was aware of the potential adverse precedential effect of his recommendation because he attempted to limit its applicability by stating that “but for” the “unique regulatory history of this PennVest plant,” he would have been “strongly inclined” to accept I&E’s proposed adjustment. Id. at 11, citing R.D. at 39. I&E submits that it is unlikely that the ALJ’s qualification would be recognized by other utilities that become aware that Columbia received full recovery through a surcharge methodology and then received rate base treatment for the same plant. Id. As support for its argument that the Company cannot recover the principal amount of a PennVest loan, plus interest, that is used to finance plant, and then include the undepreciated value of the plant in rate base, I&E refers to the Commission’s PennVest Policy Statement, which states, in relevant part, that: Companies with outstanding PENNVEST loans not currently reflected in rates and companies that will receive PENNVEST loans in the future are encouraged to establish under 66 Pa. C.S. § 1307(a) (relating to sliding scale of rates; adjustments) and subject to Commission approval, an automatic adjustment by means of a sliding scale of rates limited solely to the recovery of PENNVEST principal and interest obligations, instead of seeking recovery of these amounts under 66 Pa. C.S. § 1308 (relating to voluntary changes in rates) base rate filing. 52 Pa. Code § 69.361 (emphasis added). I&E submits that the PennVest Policy Statement demonstrates that a utility may finance plant additions either through rate base inclusion or through a PennVest surcharge on its customers, but not both. Id. at 12-13. In conclusion,
Columbia’s undepreciated PennVest plant in rate base, and the adjustment urged upon us by I&E and the OCA is rejected. 2. Cash Working Capital The Parties agreed on the methodology to be used to calculate cash working capital. Specifically, the Company used the formula method, or one-eighth (12.5%) of operating and maintenance (O&M) expenses. GDS Exh. 1 at 1-17. Using this method, Columbia calculated a claim for cash working capital of $248,967. The claim for cash working capital ultimately will be established based upon the outcome of the Commission’s final ratemaking determinations. R.D. at 19, Table II. No Exceptions on this issue were filed. Therefore, finding it otherwise reasonable, we will adopt the ALJ’s recommendation, subject to an adjustment to reflect the O&M expenses allowed by this Opinion and Order. 3. Materials & Supplies a. Positions of the Parties Columbia claimed Materials and Supplies (M&S) in rate base of $62,314 based on a three-year average of the Company’s M&S inventory. GDS Exh. 1 at 1-17. The OCA argued that the Company’s claim should be adjusted downward by $4,592 based on the Commission’s policy of using a thirteen-month average of M&S. In rebuttal, the Company argued that, if the expense is volatile, an average based on a longer period should be used. CWC St. 2R at 14-15. The Company also contended that it would have to close its books on a monthly basis in order to accurately reflect a thirteen-month average. CWC St. 2R at 14.
We shall adopt the ALJ’s recommendation on this issue, and reject the OCA’s proposed adjustment to M&S inventory. We find that the Company’s use of a three-year average of the Company’s inventory is preferable to the OCA’s proposed thirteen-month average for the reasons advanced by Columbia. Although it may be possible for the Company to produce inventory levels in a monthly basis, we accept the Company’s explanation that its monthly numbers are not audited and are less accurate than the year-end numbers produced by its current accounting system. We are not persuaded by the OCA’s arguments, which would require Columbia to incur the costs of adopting a more sophisticated and expensive accounting system for little discernable benefit. C. Capital Structure 1. Positions of the Parties Columbia proposed a pro forma capital structure consisting of 35.6% debt and 64.4% common equity is based on its projected actual capital structure as of December 31, 2013. The Company argued that circumstances have not changed substantially since the Commission approved a capital structure of 35.8% long-term debt and 64.2% in the Company’s last rate case. CWC M.B. at 45, referencing the Company’s 2009 Rate Case Order at 71. I&E recommended a capital structure of 50% debt and 50% equity. I&E argued that Columbia’s actual capital structure has a disproportionately high percentage of equity, which results in an inflated overall rate of return. I&E argued that Columbia’s capital structure should be rejected because it is not in line with the industry average. The five year average capital structure for the water proxy group selected by I&E Witness Maurer was 50.99% long-term debt, 0.25% preferred stock and 48.77% common equity, which approximates the capital structure recommended by I&E. In addition, I&E argued that the Company’s capital structure as of December 31, 2103, is weighted more heavily toward equity than at any time in the last five years. According to I&E, Columbia’s
that “[i]nstead, the Commission should reward small companies like Columbia for their efforts to provide reasonable and safe service while minimizing financial risk to the extent possible.” CWC Exc. at 6-7. According to Columbia, the circumstances in this proceeding are virtually identical to Columbia’s most recent rate case, where the Commission approved the use of the Company’s pro forma capital structure at December 31, 2008, of 35.80% long-term debt and 64.20% common equity for ratemaking purposes. Columbia states that the Commission, in approving Columbia’s actual capital structure, held: In order to determine Columbia’s overall cost of capital an appropriate capital structure must be used. We agree with the ALJ that Columbia’s capital structure is not disproportionately weighted on the equity side. Columbia’s capital structure is not unreasonable or uneconomical under the rational of the Carnegie decision as discussed earlier. The record evidence does not indicate that Columbia has abused its managerial discretion with regard to the development of its capital structure. Therefore, we will adopt the ALJ’s recommendation to use Columbia’s actual capital structure of 35.8% debt and 64.2% common equity for ratemaking purposes. CWC Exc. at 7-8. Columbia argues that, as set forth in the Carnegie case, a utility’s capital structure is within the management discretion of the utility, and the touchstone for evaluating a utility’s actual capital structure is whether the utility abused its discretion. As the Commission stated in Carnegie: The Commission has the duty to regulate utilities in a manner which provides customers with reliable service at reasonable cost. This is not to say that we may mandate to regulated utilities the proportion of debt and equity contained in their capital structures. Rather, the actual capital structure is a matter within the discretion of corporate management; however, this does not preclude the commission from determining that a particular utility’s capital structure is unreasonable and
determinations to adopt the Company’s actual capital structure, and to authorize the inclusion of the depreciated PennVest plant in the Company’s rate base, we conclude that an acquisition premium is not appropriate in this particular case. We note that the Company itself argued that, given the rejection of the requested premiums by the ALJ, “[a]t the very least, the ALJ should have used his discretion to lean more toward Columbia’s rate of return and capital structure positions due to its history of doing these good things . . .” CWC Exc. at 15. Columbia’s Exceptions recognize that the decision regarding whether or not to award a rate of return premium should be made after considering all of the issues in a given proceeding. On balance, we conclude that an acquisition premium is not appropriate in this particular proceeding. E. Revenues - Merchandising Sales and Jobbing Work 1. Positions of the Parties The OCA recommended adding $15,762 of revenue from Merchandising Sales and Jobbing Work to Columbia’s above-the-line operating revenue. This amount included the sale of billing data to the Lancaster Area Sewer Authority (Authority) and the Borough of Columbia (Borough); payment for assisting the Borough with turn-ons and funds received from the sale of meters (salvage); insurance proceeds for a damaged fence and compressor; and the sale of bulk water. I&E recommended increasing the Company’s operating revenue for ratemaking purposes by $9,932 for the sale of the billing data to the Borough and the Authority. Columbia accepted this adjustment of $9,932 to its operating revenue, but disagreed with the remaining $5,832 adjustment recommended by the OCA. Instead of including this revenue as operating revenue, the Company argued that it should be booked to depreciation reserve. CWC M.B. at 16-17.