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BEFORE THEPENNSYLVANIA PUBLIC UTILITY COMMISSIONPennsylvania Public Utility Commission :R2016-2554150Office of Small Business Advocate:C-2016-2556342Office of Consumer Advocate:C-2016-2556376Sandy Township:C-2016-2557459:v.::City of DuBois-Bureau of Water:RECOMMENDED DECISIONBeforeMark A. HoyerDeputy Chief Administrative Law JudgeTABLE OF CONTENTSI.introduction1II.HISTORY OF THE PROCEEDING2III.DISCUSSION4A.Description of the Company4B.Legal Standard4C.Rate Base71.Plant in Service72.Additions to Rate Base8a.OCA Proposed Adjustments8b.City’s Position regarding OCA Proposed Adjustments13c.Conclusion163.Cash Working Capital174.Deductions from Rate Base185.Recommendation of Jurisdictional Rate Base20D.Revenues201.Falls Creek Borough202.Union Township Contract Sales223.Borough of Sykesville26E.Expenses281.Vacant Home Expenses292.Transmission and Distribution Contractual Services293.Water Treatment Contractual Services324.Administrative and General Expenses37a.City Manager’s Salary38b.Administrative Expense425.City Buildings: Computer Parts/Supplies/Software446.Rate Case Expense467.Unaccounted for Water (UFW)498.Overtime Expenses529.Payroll/FICA Tax Adjustment5310.Summary of Expense Adjustments54F.Taxes55G.Rate of Return551.City’s Proposal552.Legal Standards553.Party Positions564.Capital Structure and Proxy Group575.Cost of Debt646.Return on Common Equity64a.Introduction64b.DCF Model66c.CAPM Analysis67d.Adjustments to Cost of Equity (Risk Adjustment, Size Adjustment, Leverage Adjustment) by City68e.Tax Rate Adjustment71f.Debt Service Coverage Ratio73g.Overall Rate of Return74H.Rate Structure741.Cost of Service752.Revenue Allocation783.Tariff Structure80I.Miscellaneous Issues811.Stipulations81a.Annual PUC Report Format82b.Installation of Water Meters on All Services Lines Connectedto the Municipal Buildings82c.The Submission of Written Monthly Estimates of UnmeteredWater Use from Fire Companies84d.Estimation of Water Loss at the Time Repair is Made85e.Metered Locations for Street Sweepers and Fire plaint Logs86g.Isolation Valves882.Sales to Shale Gas Companies883.Sales of Water to the Borough of Falls Creek90IV.CONCLUSIONS OF LAW91V.RECOMMENDED ORDER97I.INTRODUCTION TC "I.INTRODUCTION" \f C \l "1" On June 30, 2016, City of DuBois filed Supplement No. 22 to Tariff Water - Pa. PUC No. 4, with the Public Utility Commission to become effective August 29, 2016 at Docket No. R-2016-2554150. In its original filing, the City proposed an annual increase in base rate revenues of $257,604. This represents an approximate 33.6% increase in the City’s rates to its PUC-jurisdictional ratepayers who reside outside of the City. Subsequently, the City revised its proposed PUC-jurisdictional annual revenue requirement increase to $229,551. This represents a requested increase of approximately 28%. Adjustments to the rate base, expenses and rate of return made in the Recommended Decision yield a maximum revenue increase of $97,534, instead of the requested $229,551, combined with the adjusted pro forma present rates results in allowable annual revenue of $897,776. This represents an approximate 12% increase in the City’s rates. Approval of the City’s proposed increase to the customer charges has been recommended and the reduction in the requested revenues has been achieved by cutting the volumetric rates for the first 100,000 gallons and over 100,000 gallons. See Appendix A. The revised rates are $5.68 or 10.29% over present rates (for the first 100,000 gallons) and $4.30 or 14.06% (over 100,000 gallons), resulting in a revenue increase of approximately $97,341 and total annual revenue of about $897,583. See Appendix A. Because the increases in customer charges are maintained, a reduction in the volumetric rates which is proportional to the reduction in revenue increase results in greater than allowable annual revenue. Therefore, the volumetric rates are adjusted to maintain the percentage of revenues from Outside the City residential, commercial, industrial and Other Water Utilities customers as close to the cost of service as reasonably possible. The filing was suspended until March 29, 2017 by Commission Order. The Commission’s Public Meeting prior to this suspension date is March 16, 2017.II.HISTORY OF THE PROCEEDING TC "II.HISTORY OF THE PROCEEDING" \f C \l "1" On June 30, 2016, City of DuBois filed Supplement No. 22 to Tariff Water - Pa. PUC No. 4, with the Public Utility Commission (PUC or Commission) to become effective August 29, 2016 at Docket No. R-2016-2554150. In its original filing, the City proposed an annual increase in base rate revenues of $257,604. This represents an approximate 33.6% increase in the City’s rates to its PUC-jurisdictional ratepayers who reside outside of the City. In rejoinder, the City revised its proposed PUC-jurisdictional annual revenue requirement increase to $229,551. City Exh. CEH-3RJ. Pursuant to 66 Pa.C.S. § 1308(d), the filing was suspended by operation of law until March 29, 2017. On July 13, 2016, the OSBA filed a formal complaint at Docket No. C-2016-2556342. The Office of Consumer Advocate (OCA) filed a formal complaint at Docket No. C2016-2556376 and notice of appearance on July 14, 2016, and Sandy Township also filed a formal complaint on July 20, 2016, at Docket No. C-2016-2557459. I&E filed a notice of appearance on July 25, 2016. On August 24, 2016, a Cancellation/Reschedule Initial Call-In Telephone Prehearing Conference Notice was issued which scheduled the prehearing conference for Friday, September 9, 2016. A Prehearing Conference Order was issued on August 30, 2016, which directed the litigating parties to file and serve their prehearing memoranda before the scheduled conference. Prehearing memoranda were filed by the following: City of DuBois, I&E, OCA, OSBA, and Sandy Township. The telephonic prehearing conference was held as scheduled on September 9, 2016. The following attended: Adeolu A. Bakare, Esquire, and Alessandra L. Hylander, Esquire, for the City; Christine Maloni Hoover, Esquire and Harrison W. Breitman, Esquire, for the OCA; Phillip C. Kirchner, Esquire for I&E; Steven C. Gray, Esquire, for the OSBA, and Thomas T. Niesen, Esquire, for Sandy Township.On September 14, 2016, a Prehearing Order was issued memorializing the matters decided and agreed upon by the parties attending the telephonic prehearing conference, setting the litigation schedule and consolidating the formal complaints filed by the OSBA, the OCA, and Sandy Township with this rate proceeding. On October 25, 2016, a Protective Order was issued. An evidentiary hearing was held on November 10, 2016. On November 16, 2016, a First Interim Order Setting Requirements for Briefs was issued.On November 28, 2016, Sandy Township filed a Motion to Accept Newspaper Article into the Record. Pursuant to 52 Pa.Code § 5.103(b), responses to the motion were due December 19, 2016. On November 29, 2016, main briefs were filed by the City, I&E, the OCA, the OSBA, and Sandy Township. Sandy Township improperly attached the newspaper article that was the basis for its motion on November 28, 2016 to its main brief as Attachment 1 and made reference to it within its brief at pp. 5-6. On December 12, 2016, reply briefs were filed by the City, I&E, the OCA, the OSBA, and Sandy Township. The City addresses Sandy Township’s motion in its reply brief and filed an answer and motion to strike Attachment 1 and all reference thereto from Sandy Township’s main brief on December 19, 2016. No other parties filed responses to Sandy Township’s motion. On December 21, 2016, a Second Interim Order was issued addressing outstanding motions to strike orally made at the evidentiary hearing, denying Sandy Township’s motion to accept newspaper article into the record, striking Attachment 1 from Sandy Township’s main brief and all references thereto, and closing the hearing record. III.DISCUSSION TC "IV.DISCUSSION" \f C \l "1" A.Description of the Company TC "A.Description of the Company" \f C \l "2" The City operates a small, community-based water system serving customers within its municipal boundaries and in the surrounding Sandy Township. In total, the City provides water distribution service to 4,501 customers, including 3,338 customers inside of its municipal boundaries and 528 in Sandy Township. Furthermore, the City sells water to Sandy Township for resale to additional customers served directly through the Sandy Township's distribution system. The City additionally provides bulk water service to Union Township and Sykesville Township, both through contract sales. B.Legal Standard TC "B.Legal Standard" \f C \l "2" Section 1301 of the Public Utility Code, 66 Pa.C.S. §?1301, provides: “every rate made, demanded, or received by any public utility, or by any two or more public utilities jointly, shall be just and reasonable, and in conformity with regulations or orders of the commission.” In deciding any general rate increase case brought under Section 1308(d) of the Code, 66 Pa.C.S. § 101 et seq., certain general legal standards always apply. The burden of proof to establish the justness and reasonableness of every element of the utility’s rate increase rests solely upon the public utility. 66 Pa.C.S. §?315(a). “It is well-established that the evidence adduced by a utility to meet this burden must be substantial.” Lower Frederick Twp. v. Pa. Pub. Util. Comm’n, 409 A.2d 505, 507 (Pa.Cmwlth. Ct. 1980). While the burden of proof remains with the public utility throughout the rate proceeding, where a party proposes an adjustment to a ratemaking claim of a utility, the proposing party bears the burden of presenting some evidence or analysis tending to demonstrate the reasonableness of the adjustment. Pa. Pub. Util. Comm’n v. Aqua Pennsylvania, Inc., Docket No. R-00072711 (Commission Opinion and Order entered July 17, 2008). As stated in Pa Pub. Util. Comm'n v. Philadelphia Gas Works, Docket No. R-00061931 (Commission Opinion and Order entered September 28, 2007) at 12: “Section 315(a) of the Code, 66 Pa.C.S. §?315(a), applies since this is a proceeding on Commission Motion. However, after the utility establishes a prima facie case, the burden of going forward or the burden of persuasion shifts to the other parties to rebut the prima facie case.”In addition, Section 523 of the Public Utility Code, 66 Pa.C.S. §?523, requires the Commission to “consider . . . the efficiency, effectiveness and adequacy of service of each utility when determining just and reasonable rates. . . .” In exchange for customers paying rates for service, which include the cost of utility plant in service and a rate of return, a public utility is obligated to provide safe, adequate and reasonable service. “[I]n exchange for the utility’s provision of safe, adequate and reasonable service, the ratepayers are obligated to pay rates which cover the cost of service which includes reasonable operation and maintenance expenses, depreciation, taxes and a fair rate of return for the utility’s investors . . . In return for providing safe and adequate service, the utility is entitled to recover, through rates, these enumerated costs.” Pa. Pub. Util. Comm’n v. Pennsylvania Gas & Water Co., 61 Pa. PUC 409, 415-16 (1986); 66 Pa.C.S. § 1501. Accordingly, the General Assembly has given the Commission discretionary authority to deny a proposed rate increase, in whole or in part, if the Commission finds “that the service rendered by the public utility is inadequate.” 66 Pa.C.S. §?526(a).A public utility need not affirmatively defend every claim it has made in its filing, even those which no other party has questioned absent prior notice that such action is to be challenged. Allegheny Center Assocs. v. Pa. Pub. Util. Comm’n, 131 Pa.Cmwlth. 352, 359, 570 A.2d 149, 153 (1990) (citation omitted). See also, Pa. Publ. Util. Comm’n. v. Equitable Gas Co., 73 Pa. PUC 310, 359-360 (1990).When parties have been ordered to file briefs and fail to include all the issues they wish to have reviewed, the issues not briefed have been waived. Jackson v. Kassab, 2002 Pa.Super. 370, 812 A.2d 1233 (2002), appeal denied, Jackson v. Kassab, 573 Pa. 698, 825 A.2d 1261 (2003), Brown v. PA Dep’t of Transportation, 843 A.2d 429 (Pa.Cmwlth. Ct., 2004), appeal denied, 581 Pa. 681, 863 A.2d 1149 (2004).The Commission is not required to consider expressly and at length each contention and authority brought forth by each party to the proceeding. University of Pennsylvania v. Pa. Pub. Util. Comm’n, 86 Pa.Cmwlth. 410, 485 A.2d 1217 (1984). “A voluminous record does not create, by its bulk alone, a multitude of real issues demanding individual attention . . . .” Application of Midwestern Fidelity Corp., 26 Pa.Cmwlth. 211, 230 fn.6, 363 A.2d 892, 902, fn.6 (1976). Further, a Commission decision is adequate where, on each of the issues raised, the Commission was merely presented with a choice of actions, each fully developed in the record, and its choice on each issue amounted to an implicit acceptance of one party's thesis and rejection of the other party's contention. Popowsky, et al. v. Pa. Pub. Util. Comm’n, 550 Pa. 449, 706 A.2d 1197 (1997), 1997 Pa. LEXIS 2756. The standard formula for determining a utility's base rate revenue requirement is:RR = E + D + T + (RB x ROR)RR: Revenue RequirementE:Operating ExpenseD:Depreciation ExpenseT:TaxesRB:Rate BaseROR:Overall Rate of ReturnI&E St. 1, pp. 2-3; I&E M.B., p. 26, fn. 102. The focus of a base rate case is to determine the correct values to insert into the formula above. After determining the correct revenue requirement, the appropriate allocation of that revenue among the rate classes will be determined.C.Rate Base TC "C.Rate base" \f C \l "2" In analyzing a proposed general rate increase, the Commission determines a rate of return to be applied to a rate base measured by the aggregate value of all the utility’s property used and useful in the public service. The Commission determines a proper rate of return by calculating the utility’s capital structure and the cost of the different types of capital during the period in issue. The Commission is granted wide discretion, because of its administrative expertise, in determining the cost of capital. Equitable Gas Co. v. Pa. Pub. Util. Comm’n, 45 Pa.Cmwlth. 610, 405 A.2d 1055 (1979) (determination of cost of capital is basically a matter of judgment which should be left to the regulatory agency and not disturbed absent an abuse of discretion).The rate base is the value of the property of the utility that is used and useful in providing utility service. Pennsylvania Power Company v. Pa. Pub. Util. Comm’n, 561 A.2d 43, 47 (Pa.Cmwlth. Ct. 1989). In the area of adjustment to rate base, the Commission has wide discretion. Pennsylvania Power & Light Company v. Pa. Pub. Util. Comm’n, 516 A.2d 426 (Pa. Cmwlth. Ct. 1985); UGI Corp. v. Pa. Pub. Util. Comm’n, 410 A.2d 923, 929 (Pa.Cmwlth Ct. 1980) (UGI case); Duquesne Light Co. v. Pa. Pub. Util. Comm’n, 174 Pa. Superior Ct. 62, 69-70, 99 A.2d 61, 69 (1953). However, the adjustments must be supported by sound reasons. Philadelphia Suburban Water Co. v. Pa. Pub. Util. Comm’n, 394 A.2d 1063 (Pa.Cmwlth. Ct.?1978). 1.Plant in Service TC "1.Plant in service" \f C \l "3" In its original filing, the City claimed a rate base of $15,622,314. City Exh. CEH-1 at 13. Of this initial total rate base, $4,493,848 was attributable to jurisdictional customers. City Exh. CEH-1 at 12. In rejoinder testimony, the City made an adjustment to rate base of $642,060, which results in a revised total rate base claim of $14,980,254. City Exh. CEH-3RJ. The City’s rate base exclusive of cash working capital is $14,727,865. The City’s updated jurisdictional rate base claim is $4,317,704. City Exh. CEH-3RJ; see also Table I, attached to OCA M.B. as Appendix A; OCA R.B., p. 3. None of the parties dispute the City's calculation of Plant in Service. In its main brief, the OCA's calculation of the City's claimed total rate base ($14,980,254) is a slightly higher figure than that calculated by both the City and I&E ($14,727,868). The reason why the OCA’s rate base claim is slightly higher is because the OCA included cash working capital in its calculation of the City's rate base claim, while I&E's and the City's restatement of its rate base claim was exclusive of cash working capital. As clarified above, OCA, I&E, and the City agree on the City's rate base claim. City R.B., p. 3. 2.Additions to Rate Base a.OCA Proposed Adjustments TC "2.OCA's proposed adjustment based on proposed adjustments to incentive compensation expense" \f C \l "3" The OCA recommends five specific adjustments to the City’s claims for additions to rate base that the OCA asserts are neither going to be in service, nor used and useful, by December 31, 2016, the end of the future test year. The recommended adjustments are to the following additions proposed by the City: Heating and Air Conditioning; High Street Mains Additions Project; Fire Hydrants, specifically High Street Fire Hydrants Project; Billing, Payroll, and Accounting Software; and Phone System expenses. No other parties proposed specific adjustments to rate base. The City claimed a rate base addition of $75,000 total for a new heating and air conditioning system in its initial filing. City Exh. JJS-2; OCA St. 1 at 4; I&E-RB-7 (attached to OCA St. 1). OCA witness, Ashley E. Everette found that the City has neither started the project, nor spent any money on the project. OCA St. 1 at 4; I&E-RB-7 (attached to OCA St. 1); OCA-V-3 (attached to OCA St. 1). When the City was asked what time frame would be required from project start date to the system being in-service, the City answered only that it “expects to have this completed by the end of 2016.” OCA St. 1 at 4. While the City was asked to provide all of the information concerning this project, City witness John J. Spanos stated that requiring information which would establish that the plant additions would be in service by the end of the future test year is “an unreasonable expectation.” City St. 3R at 3; OCA M.B., p. 9. According to the OCA, when a City is not able to establish that an expense is “known and measurable”, it is not appropriate to include the expense in rates. Pa. Pub. Util. Comm’n v. City of Lancaster - Sewer Fund, 2005 Pa. PUC LEXIS 44, *102-103. (Lancaster Sewer). The OCA submits that only costs that are known and measurable should be included in rates and only projects that are used and useful within the chosen test year should be reflected in the calculation of revenue requirement. OCA St. 1 at 4. The City has not provided a start date and an estimated time frame for the project’s completion. Moreover, the City has not selected a vendor to complete this project. Despite City witness Spanos’ assertions that the projects will take less than three months to complete, City Manager and witness Suplizio provided no further updates or documentation when asked for “the estimated time from the start date until the in-service date.” OCA St. 1S at 4; OCA-V-1 (attached to OCA St. 1). Ms. Everette made a rate base adjustment of $17,352 which has a jurisdictional component of $5,204. Table II; OCA Exh. AEE-1S at line 2. The associated depreciation expense adjustment of $309 with a $93 jurisdictional component has also been reflected by Ms. Everette. Table II; OCA St. 1S at 4; OCA Exh. AEE-1 at line 17. The City’s initial filing also included a rate base addition of $807,500 of Mains additions and replacements in 2016. OCA St. 1 at 5. In a later response to interrogatories dated September 28, 2016, the City updated the list of projected projects for 2016 to include $288,630 of additions to Mains and Accessories rather than the previously claimed $807,500. OCA St. 1 at 5; I&E-RB-8 (attached to OCA St. 1). Therefore, as Ms. Everette testified, it appeared that the City was no longer planning to install the remaining $518,870 of additions within the test year. OCA St. 1 at 5. An adjustment to remove the $518,870 of Mains and Accessories, with a jurisdictional component of $134,585 was made by Ms. Everette. OCA St. 1 at 5. The associated depreciation expense adjustment of $1,287 with a jurisdictional component of $386 was also made by Ms. Everette. OCA St. 1 at 5-6; OCA M.B., p. 10.City witness Spanos subsequently made updates to planned capital improvements relating to additions to rate base to reflect the removal of the Mains additions of $518,870 ($134,854 jurisdictional). OCA St. 1S at 1-2; City Exh. JJS-1 R. As a result of the updates, OCA witness Everette removed the adjustments that she made in her direct testimony to Mains and Fire Hydrants. OCA St. 1S at 2; OCA Exh. AEE-1S. The associated depreciation expense adjustments were also removed because the amounts were removed in the City’s updated claim. OCA St. 1S at 2. Ms. Everette further explained as follows: It should be noted that I have only removed the cost of the Mains and Accessories project which the City has not begun. While I have not made an adjustment to remove partially-completed projects from the revenue requirement, proper ratemaking principles dictate that those projects should be completed before the end of the FTY in order to be properly included in rates.OCA St. 1 at 6; OCA M.B., pp. 10-11. The High Street Mains and Accessories project was not specifically included in the City’s original filing. In a response to an interrogatory, however, the City specified that the High Street mains project would be $55,911. I&E-RB-8 (attached to OCA St. 1). The City claimed that it planned to complete the project during the future test year. OCA St. 1S at 2. Subsequently, the City claimed that the project would be delayed until 2017. OCA St. 1S at 2. The City changed its position a third time, claiming that the project will be in service in 2016. OCA St. 1S at 2; OCA-V-2. In rebuttal, City witness Spanos stated “[t]his project will be completed in November.” City St. 3R at 3-4; OCA M.B., p. 11. While testifying that the project would be completed in November, the City has not provided a start date for the project, an answer as to the amount of time the project will take before it is placed into service, the percentage of the project that has been completed, or that any amount for the project has been expended to date. OCA St. 1S at 2-3. No support for this November completion month was provided and there have been no further updates to interrogatories or data requests that address the High Street project and its anticipated completion. OCA St. 1S at 2; OCA M.B., p. 11. The City has not yet begun work on its High Street project and the OCA contends that this project should not be reflected in rate base in this proceeding. As the City has not supported these proposed rate base additions, OCA witness Everette recommended that an adjustment be made to remove the $55,911 of Mains and Accessories for this project, with a jurisdictional component of $14,531. Table II; OCA St. 1S at 3; OCA Exh. AEE-1S at line 4. The associated depreciation expense of $475, with a jurisdictional component of $124, has also been removed by Ms. Everette. Table II; OCA St. 1S at 3; OCA Exh. AEE-1S at line 19; OCA M.B., p. 12. The City’s initial filing included a rate base addition of $120,000 for Fire Hydrant additions and replacements in 2016. OCA St. 1 at 7. In updated responses, the City stated that it “does not have an exact anticipated start date for these projects” and provided an updated list of projected projects for 2016 which included $56,421 of additions to Fire Hydrants rather than $120,000 of additions to Fire Hydrants. OCA St. 1 at 7. Since the City is no longer planning to install the other $63,579 of additions within the test year, they should not be included for ratemaking purposes and an adjustment should be made to remove the $63,579 of Mains and Accessories with a jurisdictional component of $11,800. OCA St. 1 at 7. The associated $903 adjustment to depreciation expense, and the jurisdictional portion of $168 has also been adjusted by Ms. Everette. OCA St. 1 at 7; OCA M.B., p. 12. City witness Spanos subsequently made updates to planned capital improvements relating to additions to rate base to reflect the removal of the $63,579 of Fire Hydrants additions. OCA St. 1S at 1-2; City Exh. JJS-1 R. The OCA, however, does not accept that the revised amount of $56,421 of additions to the fire hydrant expense is supported. OCA M.B., p. 12. The High Street mains project, discussed above, also includes the proposed installation of fire hydrants. As discussed above, work on the High Street mains project has not begun and costs for the project were removed by OCA witness Everette. In rebuttal, City witness Spanos stated the High Street mains project will be completed in November. City St. 2R at 3-4. However, the OCA asserts that City witness Spanos did not provide any support that the project will be completed in November. OCA St. 1S at 2. While the City updated its claims to reflect $56,421 of fire hydrant additions, City Exh. JJS-1R p. 2, the OCA argues this updated amount is not supported for ratemaking purposes because it includes projects at various stages, including some projects that have not even been started. OCA St. 1 at 8. Specifically, the OCA contends that an adjustment should be made to remove the $5,769 of fire hydrants additions related to the High Street mains project, with a jurisdictional component of $1,071. Table II; OCA St. 1S at 3; OCA Exh. AEE-1S at line 6. The associated $82 adjustment to depreciation expense with a jurisdictional portion of $15 has also been removed by Ms. Everette. Table II; OCA St. 1 at 8; OCA Exh. AEE-1S at line 21. The OCA notes that this adjustment only removes costs of the Fire Hydrant projects which the City has not begun. OCA St. 1 at 8. While adjustments were not made to remove partially-completed projects from the revenue requirement, the OCA points out that proper ratemaking principles dictate that those projects should be completed before the end of the future test year (December 31, 2016) in order to be properly included in rates. OCA St. 1 at 8; OCA M.B., p. 13. The City’s filing included a rate base addition of $13,341 for Office Furniture and Equipment for new billing, payroll, and accounting software. OCA St. 1S at 4; OCA. Exh. AEE-1S at line 7. The City has not yet confirmed a provider for this purchase. OCA St. 1 at 9. Moreover, the City has spent nothing on the project and the project has not been started. OCA St. 1 at 9; OCA M.B., pp. 13-14. In rebuttal, the City provided no evidence that the project would be completed by the end of the future test year (FTY). Instead, City witness Spanos claimed that requiring information that would establish that the plant addition will be in service by the end of FTY is “an unreasonable expectation.” City St. 2R at 3. The City has the burden of proof to establish that additions to rate base are made within the FTY. See, Section I.B, supra of OCA M.B. The City has not provided any milestones which would show that the additions will be completed by the FTY and the FTY has almost reached a conclusion. OCA M.B., p. 14. Since the City has not demonstrated that this project will be completed within the FTY, the OCA contends the $13,341 claim should be excluded from rate base. OCA St. 1S at 4. A rate base adjustment of $13,341, with a jurisdictional component of $1,426, has been recommended by Ms. Everette since the City has not demonstrated that this software will be installed prior to the end of the future test year. Table II; OCA St. 1S at 4; OCA Exh. AEE-1S at line 7. The associated depreciation expense adjustment of $890, with a jurisdictional component of $254, has also been removed by Ms. Everette. Table II; OCA St. 1S at 4; OCA Exh. AEE-1S at line 22; OCA M.B., p. 14. The City’s filing included a rate base addition of $5,833 for Office Furniture and Equipment in regards to a new phone system. OCA St. 1S at 4; OCA Exh. AEE-1S at line 8. The City has spent nothing on the project, and the project has not been started. OCA St. 1S at 3. Moreover, the City has not confirmed a provider for this project. OCA St. 1S at 3. According to the OCA, the $5,833 claim should be excluded from rate base since costs have not yet been incurred and the future test year ends in less than two months. OCA St. 1S at 3-4. OCA submits that an adjustment in the amount of $5,833, with a $1,663 jurisdictional component, should be made to reflect that fact that no costs have been incurred for a phone system. Table II; OCA St. 1S at 4; OCA Exh. AEE-1S at line 8. The associated depreciation expense adjustment of $389, with a jurisdictional component of $111, should also be adopted. Table II; OCA St. 1S at 4; OCA Exh. AEE-1S at line 23; OCA M.B., pp. 14-15. b.City’s Position regarding OCA Proposed AdjustmentsAccording to the City, the Commission should give no consideration or weight to the OCA's overly severe adjustments to its Heating and Air Conditioning; High Street Mains Additions Project; Fire Hydrants; High Street Fire Hydrants Project; Billing, Payroll, and Accounting Software; and Phone System expenses. The City contends it has dutifully updated its claimed rate base to reflect additional developments throughout the FTY. According to the City, each of the remaining projects will be placed in public service prior to completion of the FTY on December 31, 2016, and therefore are properly included in the City's rate base. City R.B., pp. 3-4. The OCA claims the “City has neither started the project, nor spent any money on the project.” OCA M.B., p. 9. The OCA further suggests that when asked about the time frame for completing this project, the City indicated only that it anticipates “to have this completed by the end of 2016.” Id. Furthermore, the OCA claims “the City was asked to provide all of the information concerning this project [and in response] City witness Spanos stated that requiring information which would establish that the plant additions would be in service by the end of the future test year is ‘an unreasonable expectation’.” Id.; City R.B., p. 4. First, according to the City, the OCA's representation misstates Mr. Spanos’ statement. Mr. Spanos actually indicated: These additional reductions by OCA from future test year activity are due to a start or completion date not being established as of the time of the responses to data requests. This is an unreasonable expectation. Many, if not all of these projects will take less than three months to complete and do not require advance planning. City Statement No. 3-R, p. 3, lines 2-5. As evidenced by the above transcript excerpt, Mr.?Spanos opined only upon the unreasonableness of the OCA’s demand for firm documentation at a point well beyond the end of the FTY. Mr. Spanos further clarified the remaining projects are short-term endeavors as opposed to complex capital improvements. See id. As a result, these projects do not require considerable advance planning. Accordingly, the City argues it is unreasonable for the OCA to expect the City to furnish the requested documentation for these smaller projects at the time the discovery response was answered because many months remained in the future test year period. City R.B., pp. 4-5. The OCA also claims the “end of the Future Test Year is less than two months away and the City has not provided a start date and an estimated time-frame for completion.” OCA M.B., p. 9. The OCA further purports that the City cannot establish “known and measurable” expenses meriting inclusion in rate base pursuant to Pa Pub. Util. Comm’n v. City of Lancaster – Sewer Fund, 2005 Pa. PUC LEXIS 44 TA \l "Pa P.U.C. v. City of Lancaster – Sewer Fund, 2005 Pa. P.U.C. LEXIS 44 (Jan. 1, 2005)" \s "Lancaster Sewer" \c 1 (Jan. 1, 2005) (“Lancaster Sewer”). OCA Main Brief, pp. 9-10. According to the City, Lancaster Sewer TA \s "Lancaster Sewer" is a fundamentally different case from the instant proceeding and cannot be considered controlling precedent. In Lancaster Sewer TA \s "Lancaster Sewer" , the FTY ended before evidentiary hearings began. Conversely, here, as noted by the OCA, two months remained in the FTY as of the time of evidentiary hearings. Accordingly, the City contends it is unreasonable for the OCA to remove these projects from the future test year, especially when the City has indicated that this project is a short-term project. City Statement No. 3-R, lines 4-5 and lines 12-15; City R.B., p. 5. Additionally, the City contends that Mr. Spanos demonstrated such projects would be completed in the FTY after removing previously included projects that would not meet the necessary December 31, 2016 completion threshold for inclusion in rate base. City M.B., p.?7. Mr. Spanos testified that the remaining projects do not require advance planning or significant lead time, leading to the expectation for completion by the end of the FTY. Id at 8. While challenging the inclusion of the projects on the basis of furnished documentation, the City points out that the OCA never contested the conclusion that the referenced projects are all relatively short-term operations easily completed within the remaining FTY period. See OCA M.B., pp. 8-17. The City submits that it is unreasonable to accept the OCA's proposed rate base when, according to the City, the OCA's only justification for these additional adjustments is the lack of an established start date and completion date for short-term projects that do not require significant lead time or planning. City Statement No. 3-R, p. 4, lines 5-15; City R.B., pp. 5-6. In addition, the City asserts that the Commission should consider its precedent indicating allowing for inclusion in rate base of expenditures incurred even after the FTY. According to the City, the Commission has previously found that “[s]ubstantial expenditures for projects to be completed shortly after the end of the test year will be allowed if they do not affect the level of operations at year end – i.e., they are nonrevenue producing and nonexpense reducing – and they improve the environment and/or reliability and safety of service.” Pa. Pub. Util. Comm'n v. The Bell Telephone Co. of Pa., 51 Pa. P.U.C. 570 (Dec. 15, 1997) TA \l "Pa. Pub. Util. Comm'n. v. The Bell Telephone Co. of Pa., 51 Pa. P.U.C. 570 (Dec. 15, 1997) " \s "Bell Telephone" \c 1 , at 576; see also Pa. Pub. Util. Comm’n v. Phila. Suburban Water Co., 50 Pa. P.U.C. 407 (Dec. 9, 1976) TA \l "Pa. Pub. Util. Comm'n. v. Phila. Suburban Water Co., 50 Pa. P.U.C. 407 (Dec. 9, 1976)" \s "Phila. Suburban" \c 1 , at 420-421 (indicating that the Commission includes projects in the rate base if they are completed approximately 6-7.5 months after the end of the test year). City R.B., p. 6. Accordingly, the City submits that the inclusion of short-term projects anticipated for completion within the final two months of the FTY is entirely reasonable. Adoption of the OCA’s severe standard would effectively curtail the FTY beyond the permitted 12-month time frame for recognizing expenses. Therefore, the City concludes that the Commission should accept the City's revised rate base, $14,727,868 (excluding cash working capital) without the the OCA's unnecessary and confiscatory modifications. Alternatively, to the extent the Commission denies the City's claimed rate base additions, the City wants to potentially reopen the record to supply additional documentation available following conclusion of the FTY on December 31, 2016. City R.B., p. 6. c.ConclusionThe five adjustments to rate base proposed by the OCA in this proceeding are proper and correct. When a City is not able to establish that an expense is “known and measurable”, it is not appropriate to include the expense in rates. Pa. Pub. Util. Comm’n v. City of Lancaster - Sewer Fund, 2005 Pa. PUC LEXIS 44, *102-103. Only costs that are known and measurable should be included in rates and only projects that are used and useful within the chosen test year should be reflected in the calculation of revenue requirement. In the area of adjustment to rate base, the Commission has wide discretion. Pennsylvania Power & Light Company v. Pa. Pub. Util. Comm’n, 516 A.2d 426 (Pa.Cmwlth. Ct. 1985); UGI Corp. v. Pa. Pub. Util. Comm’n, 410 A.2d 923, 929 (Pa.Cmwlth Ct. 1980)(UGI case); Duquesne Light Co. v. Pa. Pub. Util. Comm’n, 174 Pa. Superior Ct. 62, 69-70, 99 A.2d 61, 69 (1953). However, the adjustments must be supported by sound reasons. Philadelphia Suburban Water Co. v. Pa. Pub. Util. Comm’n, 394 A.2d 1063 (Pa.Cmwlth. Ct.?1978). On November 10, 2016, a hearing was held in this proceeding. That was the time for the City to put in its evidence regarding rate base. No additional evidence regarding the five adjustments proposed by the OCA was offered by the party with the burden of proof in this proceeding – the City. The City contends here that all of these projects are short term projects that will be completed by December 31, 2016, and that Mr. Spanos’ testimony, without any documentation, will suffice to meet its burden of proving these projects belong in rate base. I disagree with the City and agree with the OCA. I recommend acceptance of the adjustments to rate base proposed by the OCA. The City failed to prove these projects will be started, completed or used and useful within the future test year. The following is a summary of the recommended adjustments to rate base:1.Heating and air conditioning-rate base adjustment $17,352 (jurisdictional component $5,204). Depreciation Expense Adjustment $309 with a jurisdictional component of $93.2.Main Additions (originally requested $807,500. City updated to remove $518,870). Agree with the OCA removal of High Street mains addition project. Remove $55,911 of mains and accessories with a jurisdictional component of $14,531. Depreciation Expense Adjustment $475 with a jurisdictional component of $124.3.Fire Hydrants (originally City wanted $120,000 for additions and replacements but no longer planning $63,579. The current addition the City requests is $56,421). Remove $5,769 of High Street hydrants see above (jurisdictional component $1071). Depreciation Expense Adjustment $82 with a jurisdictional component of $15. 4.Billing, Payroll and accounting software. Remove $13,341 from rate base for Office Furniture and equipment with a jurisdictional component of $1,426). Depreciation Expense Adjustment $890 with a jurisdictional component of $254.5.Phone System. Remove $5,833 from Office Furniture and Equipmentwith a jurisdictional component of $1663. Depreciation Expense Adjustment of $389 with a jurisdictional component of $111.3.Cash Working CapitalThe City’s rate base claim includes a Cash Working Capital claim of $252,385. City Exh. CEH-3RJ. The cash working capital claim was calculated using the formula method, or 1/8 of Future Test Year (FTY) expenses. The parties agreed to this formula method. Both I&E and the OCA made jurisdictional adjustments to cash working capital in order to reflect an adjustment equal to 1/8, or 12.5%, of the adjustments each party made to the City’s claimed expenses. In this Recommended Decision, Adjustments were made to certain Expenses Taking the Expense total from Table II ($63,960) and multiply it by 1/8 (0.125) produce the Cash Working Capital in the amount of $7,995 here. See, Appendix A, p. 4 attached. 4.Deductions from Rate Base The OCA was the only party to propose a specific deduction from rate base in this proceeding. The City included in rate base a home owned by the City which was previously used for the Water Treatment Plant Superintendent but is now vacant. OCA St. 1 at 28. The OCA objected to the vacant home’s inclusion. Currently, the vacant home is in rate base with a net book value of $11,116. OCA St. 1S at 13. Ms. Everette removed the rate base claim because the home “is vacant and is not used or useful for the provision of water service.” OCA St. 1S at 29. In rebuttal, City witness Heppenstall stated that she was rejecting OCA witness Everette’s adjustments regarding the vacant home because the home has only recently become vacant due to the death of the City’s Water Treatment Plant Superintendent, that the property is being held for future use, and that “[t]he City is considering the best use of this property going forward.” City St. 2R at 14. On cross examination, however, City witness Suplizio acknowledged that as City Manager his recommendation to City Council was to “go ahead to begin planning for demolition of the caretaker’s house at the City reservoir.” Tr. at 43:23-45:20; OCA M.B., pp. 15-16. In Pa. Pub. Util. Comm’n v. West Penn Power Co., a utility sought to include in rate base plant held for future use which did not have a definite plan for being put into service. 53 Pa. PUC 410, 1979 Pa. PUC LEXIS 37, (Order entered August 23, 1979). The company argued that the Commission in the past included measures of value amounts for plant held for future use when a public utility made expenditures to acquire property when it knows the property will be needed in the future and when the property is of a unique character insofar as the acquisition of such property, in advance of its being put into actual use, is prudent. Id. The Commission determined that “the evidence establishes that the company has frequently revised ‘in-service dates,’ thus failing to meet our requirement that plant held for future use must have a definite plan of use within a specific period of time.” Pa. Pub. Util. Comm’n v. West Penn Power Co., 53 Pa. PUC 410, 1979 Pa. PUC LEXIS 37, (Order entered August 23, 1979) at 38-39. This affirms the principle that “[t]he utility will recover the entire cost of the plant over the life of the plant; the customer will be required to pay only for the plant which serves it.” Id. at 23; See also, Application of Duquesne Light Co., Docket No. R-00974104, 1998 Pa. PUC 167 (Opinion and Order entered August 13, 1998) at 149 (Plant that is used and useful today could become not used or not useful tomorrow). OCA M.B., p. 16. According to the OCA, the vacant home fails to meet the requirement that plant held for future use must have a definite plan of use within a specific time frame because there are no current plans regarding the vacant home and no specific time frame has been offered by the City for the vacant home being put into use to serve ratepayers. OCA St. 1S at 13. Further, the City Manager has recommended that the vacant home be demolished and is waiting for City Council to take action regarding his recommendation. Tr. at 43:23-45:20; OCA M.B., pp. 16-17. The City argues that the OCA's proposed deduction exaggerates the impact of the City Manager's prior recommendation. Although the City Manager suggested demolishing the vacant property back in July 2016, the City Council took no such action and preserved the vacant property for future use. Tr. at p. 45, lines 11-12. City R.B., p. 7. Further, according to the City, the situation here is not analogous to that observed in Pa. Pub. Util. Comm’n v. West Penn Power Co., 53 Pa. PUC 410, 1979 Pa. PUC LEXIS 37, (Order entered August 23, 1979) TA \l "Pa. PUC v. West Penn Power Co., 1979 Pa. PUC LEXIS 37 (Aug. 23, 1979 and Aug. 27, 1979)" \s "West Penn" \c 1 , where the Commission addressed the appropriate treatment of an approximately $14 million expense claim for newly acquired plant that had not yet been placed in service. See West Penn Power Co. TA \s "West Penn" , 53 Pa. PUC 410 at 38 (concerning “items of plant which are purchased in anticipation of a construction project or utility use.”). The circumstances concerning the vacant home property differ significantly as the home was just recently vacated and remains available for use. Therefore, the City argues that deducting this property from the rate base is premature and unfounded at this time. City R.B., p. 7. I agree with the OCA regarding this deduction from rate base. Since this home is vacant, has no specific time frame in which it will be put into use, and is not currently used or useful for the provision of water service, the vacant home should be removed from the City’s rate base. OCA St. 1 at 29; OCA St. 1S at 13. The City Manager testified that his recommendation to City Council was to “go ahead to begin planning for demolition of the caretaker’s house at the City reservoir.” Tr. at 43:23-45:20; OCA M.B., pp. 15-16. The OCA submits that the $11,116 net book value of the home should be removed from rate base. Table II; OCA Exh. AEE-1S at line 9. I agree and recommend that the $11,116 net book value of the home should be removed from rate base. 5.Recommendation of Jurisdictional Rate BaseBased on the foregoing adjustments to rate base and cash working capital, along with the recommended deduction from rate base of the vacant caretaker’s home, the recommended jurisdictional rate base is $4,942,159. See Appendix A attached. D.RevenuesThe City’s proposed outside-city revenues at present rates were adjusted and this adjustment is reflected in the City’s current position. City Exh. CEH-3RJ. The OCA and I&E do not propose any adjustments to outside-city revenues at present rates. Only Sandy Township seeks adjustments to the City's proposed revenues. Sandy Township has proposed to impute revenues from sales to a potential future customer (Falls Creek Borough), and two contract customers, Union Township and the Borough of Sykesville. 1.Falls Creek BoroughSandy Township submits that the City has failed to support a revenue level that excludes recognition of Falls Creek revenue. According to Sandy Township, an appropriate revenue adjustment at existing rates, as presented in Sandy Township Statement No. 1, is $110,000. See also Sandy Township Main Brief, Section IV.A. Whether accomplished as a revenue adjustment or some other way, Sandy Township argues that the Commission should take steps to assure that the City does not benefit from a significant rate increase paid by Sandy Township and its residents as a result of this proceeding (without recognition of water sales to Falls Creek) followed by the connection of a significant new customer – Falls Creek – (and receipt of significant additional revenue from that customer) after the conclusion of the rate proceeding. Sandy Township St. No. 1 at 3-6; Sandy Township R.B, pp. 4-5. The City takes the position that imputing revenue for such potential future developments would contravene longstanding Commission precedent limiting revenue recognized for ratemaking purposes to those reasonably known and measurable. Pa. Pub. Util. Comm’n. v. PPL Gas Utils. Corp. 102 Pa. P.U.C. 325, at 28-30 (2007) TA \l "Pa. Pub. Util. Comm'n. v. PPL Gas Utils. Corp. 102 Pa. P.U.C. 325 (2007)" \s "PPL Gas" \c 1 (“The Company’s claim for expenses associated with the remediation of unknown sites is speculative, and fails the basic?ratemaking?tenet that expenses must be known and measurable?in order to be recoverable.”). Accordingly, the City argues that Sandy Township’s proposal to recognize revenues from potential sales to Falls Creek must be denied.According to Sandy Township, the City’s “known and measurable” argument might be worthy of at least some consideration if this were the usual expectation of customer gains/losses post rate case. This, however, is a very different circumstance. Here, the City controls the signing of the agreement. With the argument it is making, the City has an interest in not moving forward with the Falls Creek project until after the rate case concludes. It can, simply, wait until the case ends and, then, sign the agreement. In deciding what is in the public interest, Sandy Township submits that the Commission should look beyond the City’s claim that it has yet to execute an agreement. Sandy Township R.B, p. 3.According to the OCA, the City initially included a rate base claim for the addition of a waterline intended to be used to serve Falls Creek. OCA St. 1 at 46; I&E-RB-8 (attached to OCA St. 1). In response to a Sandy Township interrogatory, the City stated that it “planned a line extension to serve the Borough of Fall [sic] Creek…However, this extension will not be completed as originally anticipated and the expense will be removed from rate base.” OCA St. 1 at 46. Although the City initially included the cost of this main extension in its filing, the City did not include any revenues from sales to Falls Creek. OCA St. 1 at 46; OCA M.B., p. 73. The OCA asserts that if the extension of sales for resale service to Falls Creek occurs after the end of the FTY, neither costs nor revenue would be included for ratemaking purposes in this case. OCA St. 1S at 47. The OCA submits that service to Falls Creek would potentially create additional revenue. The OCA recommends that the City be required to inform the Commission when it connects Falls Creek and begins service. OCA St. 1S at 47. The OCA recommends that the City be required to provide the following:The date service beganThe annual number of gallons to be sold to Falls CreekThe rate to be charged per thousand gallonsThe expected annual customer charge revenue andA copy of the contract with Falls CreekOCA St. 1 at 47; OCA M.B., p. 74. I recommend that no revenue from potential water sales to Falls Creek be imputed in this proceeding where the future test year ended December 31, 2016. I agree with the OCA’s reporting recommendation outlined above. It will be recommended in the ordering paragraphs to follow that the City be directed to file with the Commission the above-listed information. 2.Union Township Contract SalesThe City provides bulk water service to Union Township through contract sales. Sandy Township contests the validity of the contract by asking the Commission to impute sales to Union Township at the full tariff rate for purposes of reviewing the City's proposed rate increase. The City argues that Sandy Township’s proposal is fundamentally unreasonable, contrary to the public interest, and should be denied by the Commission. City M.B., p. 13. No party disputes that Union Township currently pays a rate of $2.00 per 1,000 gallons for its water service. See Sandy Township Statement No. 1, p. 9, lines 13-15. Sandy Township proposes that revenue at the higher tariff rate level be reflected for water sales to Union Township and assumed for the purpose of determining any rate increase that the Commission might allow for the City Water Bureau. Sandy Township Statement No. 1, p. 9, lines 18-24. In other words, Sandy Township’s proposal “would require the City to impute revenue it does not actually receive, meaning the City would not actually receive the revenue deemed necessary to continue providing safe and high quality water service to its customers.” City Statement No. 1-R, p. 7, lines 5-8; City M.B., pp. 13-14. According to Sandy Township, the agreement between the City Water Bureau and Union Township to provide water at below tariff rates is not valid under the Public Utility Code. See 66 Pa.C.S. § 507. With the Commission not having approved the tariff rate, Sandy Township submits that it is appropriate under the circumstances to reflect revenue from Union Township at the full tariff level for ratemaking purposes and to assume the higher revenue level for the purpose of determining any rate increase that the Commission might allow for the City Water Bureau. Sandy Township calculates the revenue adjustment to be $21,241. Sandy Township M.B., p. 8. Sandy Township claims the City failed to abide by Section 507 of the Pennsylvania Public Utility Code, 66 Pa.C.S. § 507 TA \l " 66 Pa. C.S. § 507" \s " 66 Pa. C.S. § 507" \c 2 , by not filing a copy of its agreement with Union Township with the PUC and argues revenue from Union Township should be imputed at the standard tariff rates rather than the contract rate. The City argues that Sandy Township’s request to impute revenue at the standard tariff rates should be denied as inconsistent with the Public Utility Code and contrary to the public interest. City R.B., p. 11. According to the City, Sandy Township's proposal is legally unfounded for numerous reasons. The proposal conflicts with the express language of Section 507 as the provision does not apply to inter-municipal contracts. Second, even assuming Section 507 would apply to the City, the Union Township contract would be exempt because the City filed the contract rate in each of its prior three rate cases, which qualifies the contract as a tariff rate per Section 102 of the Public Utility Code. Finally, if the Commission determines the Union Township contract to be subject to Section 507, the public interest would be served by invoking the Commission’s authority under Sections 507 and 508 to approve the contract retroactively. City R.B., p. 11. The City contends that according to the plain language in the statute and as supported by Commission precedents, Section 507 is inapplicable to the Union Township Contract. Section 507 provides: Except for a contract between a public utility and a municipal corporation to furnish service at the regularly filed and published tariff rates, no contract or agreement between any public utility and any municipal corporation shall be valid unless filed with the commission at least 30 days prior to its effective date. Upon notice to the municipal authorities, and the public utility concerned, the commission may, prior to the effective date of such contract or agreement, institute proceedings to determine the reasonableness, legality or any other matter affecting the validity thereof. Upon the institution of such proceedings, such contract or agreement shall not be effective until the commission grants its approval thereof.66 Pa. C.S. § 507; City R.B., pp. 11-12 TA \s " 66 Pa. C.S. § 507" . As such, the City contends that Section 507 applies to contracts between public utilities and municipal corporations. Id. The City is unaware of a prior instance where Section 507 has been invoked to review a contract between two municipal corporations. Although DuBois is a municipal corporation subject to regulation as to rates under Section 1301 of the Pennsylvania Public Utility Code, 66 Pa.C.S. § 1301 TA \l "66 Pa. C.S. § 1301" \s "66 Pa. C.S. § 1301" \c 2 , the City argues that the Commission's authority to regulate rates charged by the City under Chapter 13 does not extend to the City's inter-municipal contracts. City R.B., p. 12. Alternatively, the City contends that, even if Section 507 is deemed applicable, the Commission has already approved the contract rate. The City has disclosed the contract rates charged to Union Township in each of its prior three rate proceedings. R-00963691; R-2013-2350509; R-2016-2554150, et al. Per the Public Utility Code, a “tariff” includes “all schedules of rates, all rules, regulations, practices, or contracts involving any rate or rates . . . .” 66 Pa.C.S. § 102 TA \l "66 Pa. C.S. § 102" \s "66 Pa. C.S. § 102" \c 2 . Therefore, the City contends that because it has previously filed the contract rates under the Union Township contract with the Commission, both through rate filings and proof of revenue submissions approved at Docket Nos. R-00963691 and R-2013-2350509, it falls under the “tariff rate” exception of Section 507. City R.B., p. 12.According to the City, even assuming the Commission exercises jurisdiction and conducts a Section 507 review of the Union Township contract, Sandy Township’s proposal to impute additional revenues from Union Township should be rejected. The Union Township contract was made part of the record in this proceeding and therefore has been filed with the Commission. City Main Brief, p. 14. As the City has explained the rationale for the contract rate in this proceeding and in prior rate cases, the public interest would not be served by imputing revenue the City did not receive. City Statement No. 2-R, pp. 7-8. The City avers “it is very reasonable for Union Township to pay a rate less than the sale for resale rate charged for Sandy Township’s service because Union Township and Sandy Township are not similarly situated customers.” City Statement No. 1-R, p. 7. Sandy Township “benefits from the City’s treatment and distribution facilities, while Union Township benefits primarily from the City's treatment facilities.” Id. Most importantly, “Union Township constructed and paid for a water main extending from its system to a meter pit at the City’s water treatment plant.” Id. Accordingly, “the water flowing to Union Township never flows through the City’s distribution lines . . . [while] Sandy Township takes bulk water service at twelve (12) separate meter pits located at different points on the City’s distribution system. For these reasons, the City entered into a contract with Union Township allowing the township to take bulk water service under an annual pricing formula excluding costs for infrastructure and services for which it does not benefit.” Id.; City M.B., p. 14. The contract between the City and Union Township was admitted into the record in this proceeding as Attachment 6 to Sandy Township Statement No. 1. The City does not object to filing the contract separately if desired by the Commission. Tr. at 28-29; City M.B., p.?14. I agree with the City that, for purposes of this rate proceeding, revenue should not be imputed at the standard tariff rates rather than the contract rate. I recommend that Sandy Township’s proposed adjustment to Revenue be denied. This revenue has been included in prior base rate proceedings. It is also recommended that the City file the contract at issue separately with the Commission, even though the actual revenue was included in prior rate proceedings and the contract was admitted into evidence here. 3.Borough of SykesvilleSandy Township claims that the City violates Commission precedent by viewing its service to the Borough of Sykesville as jurisdictional because its interconnection with Sykesville is inside of the City’s municipal borders. Sandy Township claims that “the residence of the consumer . . . determines Commission jurisdiction under the Public Utility Code, not the location of the interconnection.” Sandy Township M.B., pp. 13-14; City R.B., p. 14. According to the City, this interpretation is wholly inconsistent with well-established case precedent. Under Section 1301 of the Public Utility Code, 66 Pa.C.S. § 1301 TA \s "66 Pa. C.S. § 1301" , the PUC only has jurisdiction to regulate “public utility service being furnished or rendered by a municipal corporation, or by the operating agencies of any municipal corporation, beyond its corporate limits.” 66 Pa.C.S. § 1301 TA \s "66 Pa. C.S. § 1301" ; see also 66 Pa.C.S. § 1102 TA \l "66 Pa. C.S. § 1102" \s "66 Pa. C.S. § 1102" \c 2 (delineating acts requiring a certificate of public convenience) and 66 Pa.C.S. § 1501 TA \l "66 Pa. C.S. § 1501" \s "66 Pa. C.S. § 1501" \c 2 (indicating that service furnished outside municipal boundaries is PUC-regulated as to service and extensions, with the same force and in like manner as if such service were rendered by a public utility). City R.B., p. 14. The City submits that even where a municipal corporation furnishes service beyond its corporate limits, the Commission must also determine whether the service provider held itself out as “in the business of supplying his product or service to the [indefinite] public.” Borough of Ambridge v. Pa. Pub. Serv. Comm’n, 108 Pa.Super. Ct. 298, 304 (1933) TA \l "Borough of Ambridge v. Pa. Pub. Serv. Comm'n., 108 Pa. Super. Ct. 298 (1933)" \s "Ambridge" \c 1 ; see also Lehigh Valley Coop. Farmers v. City of Allentown, 54 Pa. PUC 495 TA \l "Lehigh Valley Coop. Farmers v. City of Allentown, 54 Pa. P.U.C. 495 (Sept. 18, 1980)" \s "Lehigh" \c 1 , 497-98 (Sept. 18, 1980) (“Lehigh”) (“The test is, therefore, whether or not such person holds himself out, expressly or impliedly, as engaged in the business of supplying his product or service to the public, as a class, or to any limited portion of it, as contradistinguished from holding himself out as serving or ready to serve only particular individuals”). City R.B., pp. 14-15. In addition to determining whether the utility in question serves the indefinite public, the PUC also considers other factors when deciding whether service is outside corporate limits and therefore non-jurisdictional, such as “(1) the source of consumer billing, (2) the authority to set consumer rates, (3) the authority to accept or reject new customer service, (4) the nature of the service rendered by the provider municipality, i.e. bulk/wholesale as opposed to individual/retail service, [and] (5) ownership of and control over extraterritorial facilities. . . .” Petition of the Borough of Springdale for a Declaratory Order, 63 Pa. PUC 3 TA \l "Petition of the Borough of Springdale for a Declaratory Order, 63 Pa. PUC 3 (Oct. 21, 1986)" \s "Springdale" \c 1 , at 6 (Oct. 21, 1986) (“Springdale”) (citing Re Chestnut Knoll Assocs., 1984 Pa. PUC LEXIS 55 (Apr. 6, 1984) TA \l "Re Chestnut Knoll Assocs., 1984 Pa. P.U.C. LEXIS 55 (Apr. 6, 1984)" \s "Chestnut Knoll" \c 1 ; Lehigh TA \s "Lehigh" , 54 Pa. PUC 495 (1980); and Petition of Borough of Middletown, P-830466 (1984)); City R.B., p. 15. The PUC “has traditionally regarded the provision of utility service by one municipality to another, whereby the line of the customer municipality connects to the line of the provider municipality within the latter’s corporate limits, as nonjurisdictional.” See Lehigh TA \s "Lehigh" , 54 Pa. PUC at 499 (citing Borough of Brookhaven v. City of Chester, 39 Pa. PUC 472, 479 (1962) TA \l "Borough of Brookhaven v. City of Chester, 39 Pa. P.U.C. 472 (1962)" \s "Brookhaven" \c 1 ); see also Springdale TA \s "Springdale" , 63 Pa. PUC at 6; City R.B., p. 15. In Lehigh TA \s "Lehigh" , the City of Allentown (“Allentown”) provided bulk/wholesale sewage service to adjacent municipalities and their authorities via agreements. Id. The PUC determined that Allentown was not rendering service beyond its corporate boundaries to the public for compensation because “the adjacent municipalities and their authorities are the direct customers of Allentown, and . . . the individual customers are ultimately served by these adjacent municipalities and their authorities [therefore] there is no basis to support a finding that Allentown is providing extraterritorial sewage service; accordingly, no basis exists for establishing [C]omission jurisdiction.” Id. at 500; City R.B., pp. 15-16. The City provides bulk water service to the Borough of Sykesville via an interconnection located inside City limits. Sandy Township M.B., p. 13. The City argues that, because this interconnection is located within the City, it is not within the PUC’s jurisdiction. Id. at 479; see also, Springdale TA \s "Springdale" 63 Pa. PUC at 6. Sandy Township argues that the City’s view of Commission jurisdiction is incorrect and is contrary to established precedent and the Commission should reject it. Sandy Township contends it is the residence of the consumer that determines Commission jurisdiction under the Public Utility Code, not the location of the interconnection. County of Dauphin v. Pa. Pub. Util. Comm’n, 159 Pa.Cmwlth. 649, 634 A.2d. 281 (1993), citing State College Borough Authority v. Pa. Pub. Util. Comm’n, 152 Pa. Superior Ct. 363, 31 A.2d 557 (1943); Sandy Township R.B., pp. 5-6.I agree with the City. I recommend that Sandy Township’s argument that bulk water sales to the Borough of Sykesville are within the Commission’s jurisdiction be rejected. E.ExpensesBoth I&E and the OCA proposed adjustments to expenses claimed by the City. Each proposed adjustment will be addressed below. 1.Vacant Home ExpensesThe City argues that expenses related to a vacant home, discussed supra, should be charged to the jurisdictional ratepayers. City M.B., pp. 24-25. Expenses related to the vacant home, however, will not be incurred because the home is not being used. Because this home is vacant and is not used or useful for the provision of water service, the OCA argues that the expenses related to this home should be removed from the City’s claim. OCA St. 1 at 29. The OCA submits that a $3,592 adjustment to expenses and $572 adjustment to depreciation expense should be adopted. OCA R.B., p. 11. I agree with the OCA with regard to the adjustment to vacant home expenses associated with property that is neither used nor useful and recommend that proposed adjustment be made. Ratepayers should not be charged this expense. 2.Transmission and Distribution Contractual ServicesThe City claimed a pro forma expense of $132,771 for Transmission and Distribution Contractual Services, which is equal to the historical test year expense. See, City Exh. CEH-1 at 16; OCA St. 1 at 29. OCA witness Everette testified that there has been a significant fluctuation in this expense from 2013 to 2015. Ms. Everette illustrated the fluctuation as follows:2013: $129,5872014: $14,0872015: $132,771OCA St. 1 at 29; OCA M.B., p. 20. Given the significant fluctuation in this expense over the last 3 years, Ms.?Everette recommended a normalization of the expense for ratemaking purposes. OCA St. 1 at 29; OCA M.B., p. 20. According to the OCA, it is axiomatic that “[t]he test year concept is a basic tenet of ratemaking that forms a sound and reasonable basis for establishing a representative level of prospective rates. It allows for a reasonable measure of predictability and semi-permanence in ratemaking.” Pa. Pub. Util. Comm’n v. Philadelphia Gas Works, 2007 Pa. PUC LEXIS 45, at 27. Moreover, “[i]t is well established that rates in Pennsylvania are set using a test year concept. The object of using a test year is to reflect typical conditions.” Id. at 26-27 (internal citations omitted). OCA M.B., p. 20. Ms. Everette testified as follows:Expenses included in the annual revenue requirement should represent the normal, annual level of expense. As demonstrated above, the City does not experience the same level of expense for this account every year. Normalization allows fluctuations in the account to be smoothed so that the expense included in the revenue requirement represents a normal annual level of expense.OCA St. 1 at 30; OCA M.B., p. 20. In rebuttal, City witness Heppenstall testified that the expense should not be normalized because the expenses relate to unaccounted for water (UFW) and “because if the City is expected to lower its percentage of unaccounted for water it must be given the revenue requirement to combat the problem.” City St. 2R at 12. Ms. Everette explained in her testimony that,[F]irst, I would note that OCA witness Fought’s recommendations focused on ways to improve the estimated non-revenue water, which would not require additional revenues. Second, utilities are not “given” revenues in rates to incentivize them to do work that needs to be done in order to comply with Commission policies. Expenses included in the revenue requirement must be known and measurable and based on normal, ongoing levels of expense. The City has not demonstrated that it is reasonable to use the 2015 level of expense as the pro forma level of expense when it is more than nine times the prior year expense. Accordingly, using a normalized level of expense is appropriate.OCA St. 1S at 16; OCA M.B., pp. 20-21. Ms. Everette recommended an adjustment of $40,623 with a jurisdictional portion of $11,216. Table II; OCA St. 1S at 15; OCA St. 1 at 30; OCA Exh. AEE-1S at line 26; OCA M.B., p. 21. I&E also recommended normalizing this expense. I&E recommended a total system allowance of $92,148 for Contractual Expenses related to Transmission and Distribution system in lieu of the City’s claimed $132,771. The City claimed $36,671 for jurisdictional customers. The resulting I&E adjustment to reflect the three year average reduces the City’s jurisdictional claim by $11,220, which results in a recommended allowance of $25,451 for jurisdictional customers. I&E R.B., pp. 20-21. The City disagrees with the normalization adjustments proposed by both the OCA and I&E. According to the City, I&E’s and the OCA’s proposed adjustments to this expense category conflict with the general consensus that the City should not just continue its prior efforts, but also escalate measures to combat Unaccounted for Water (UFW). City M.B., pp. 20-21. The City argues that this expense category is directly correlated to such efforts, as the City records contractual costs related to “water leak detection, water line break repairs, GIS mapping, road work, patching and paving concrete, etc.,” all under the Transmission and Distribution (T&D) Contractual Services expense. City M.B., p. 21. The City contends that it will continue to accrue higher T&D contractual services expenses in the future. City R.B. pp. 21-22.The City submits that, although I&E’s and the OCA’s recommendations may be reasonable for other utilities under different circumstances, firm adherence to a three-year averaging or normalization methodology for this expense would not appropriately capture the City’s projected T&D contractual expenses. The City concludes that its recommended T&D contractual service expense should be approved.I agree with the City that normalization would not appropriately capture the City’s projected T&D contractual expenses. This expense category includes contractual costs related to water leak detection, water line break repairs, GIS mapping, road work, patching and paving concrete, etc. The City will continue to accrue higher T&D contractual services expenses in the future. I therefore recommend that the expense submitted by the City be accepted and the adjustments proposed by I&E and the OCA be rejected. 3.Water Treatment Contractual ServicesThe City incurred $101,288 of Water Treatment Plant Contractual Services expense in 2015 and made a pro forma 2016 expense claim of $51,138. OCA St. 1S at 15; City Exh. CEH-1R at 6, 10. The City identified $70,300 of the 2015 as recurring over a 2 to 5 year period and made the appropriate normalization adjustment. OCA St. 1S at 15. Moreover, in response to an OCA interrogatory, the City identified an additional $8,665 as recurring annually. OCA St. 1S at 15; OCA-I-16; OCA M.B., p. 21. The City’s $51,138 claim can be summarized as follows: 2 year normalization$40,300=$20,150 annuallyNon-recurring expense removed$30,000=$0 annuallyExpense identified as recurring $8,665=$8,665 annuallyOther expenses$22,323=$22,323 $101,288$51,138 annuallyOCA St. 1S at 15; OCA M.B., p. 21. OCA witness Everette recommended that the expense be allowed as follows:2 year normalization$40,300=$20,150 annuallyNon-recurring expense removed$30,000=$0 annuallyExpense identified as recurring $8,665=$8,665 annuallyNormalization of other expenses of$22,323=$8,338 annually $101,288$37,153 annuallyOCA St. 1S at 16. The only component of the City’s claim which is at issue for the OCA is the $22,323 expense, which is the normalization of other expenses. The City uses the 2015 level of expense while the OCA submits that a three-year annualization period is appropriate. OCA M.B., p. 22. According to the OCA, after adjusting the Watershed Inventory Management Plan and Herbicide Application that were identified and normalized, the expense in 2015 was still significantly higher than in previous years and were as follows:2013: $1,8252014: $8652015: $22,323OCA St. 1 at 31; OCA St. 1S at 16; OCA M.B., p. 22.Ms. Everette explains that:Invoices and the general ledger provided in response to OCA-V-15 and I&E-RE-18 (both attached) show that the additional expenses in 2015 were for the programming of a new SCADA computer, pump maintenance, etc., that would not be expected to recur on an annual basis. The two prior years of expenses indicate that the 2015 level of expense was not normal. Accordingly, I recommend that a normalized level of expense be used for ratemaking purposes in order to represent a normal annual level of expense.OCA St. 1 at 31; OCA M.B., p. 22. The City’s original expense claim, based on the 2015 expense level, has been revised to update the $8,665 Watershed Inventory Management Plan and Herbicide Application expense to $1,200. OCA St. 1S at 16; City Exh. CEH-1 at Adjustment E6. This adjustment is reflected in the City’s updated rejoinder testimony. City Exh. CEH-3RJ; OCA M.B., pp. 22-23. Therefore, the expenses which OCA witness Everette normalizes do not include the herbicide application expense and the portion of the Watershed Inventory Management Plan that is an annual expense, which have been appropriately normalized by City witness Heppenestall. OCA St. 1 at 32; OCA M.B., p. 23. The two prior years of expenses indicate that the 2015 level of expense was not normal and for this reason OCA witness Everette recommended that a three-year normalization period be used for ratemaking purposes. OCA St. 1 at 31-32. Due to the extremely large fluctuation for this expense, Ms. Everette recommended that this expense be normalized and used a three-year period from 2013 to 2015 to arrive at her recommended expense level of $8,338, instead of the City’s position of $22,323, which results in an adjustment of $13,985. OCA St. 1 at 32; OCA M.B., p. 23. In rebuttal, City witness Heppenstall disagreed that the expense should be normalized and stated that “the history of expense in this account is not the best indication of future expense” City St. 2R at 11. Instead of using the historical expense trend, Ms.?Heppenstall recommended that the FTY 2016 expenses be annualized in order to demonstrate the ongoing level of expense. City St. 2R at 11. Ms. Heppenstall suggests that the expense as of September 30, 2016 can be annualized by assuming the expenses for the last three months of the year will be the same as the average monthly expense for the first months of the year. OCA St. 1S at 17; OCA M.B., p. 23.OCA witness Everette explained the problem with Ms. Heppenstall’s approach. Ms. Everette testified as follows: There are some circumstances in which annualization can appropriately reflect a whole year of expense, such as when an expense does not vary significantly on a monthly basis. For example, a change in salary can be reflected for the whole year using annualization, or the annual effect of a change in insurance rates that are billed monthly could be reflected by an annualization calculation. However, the Water Treatment Contractual Services expense is not one that is incurred on a level basis throughout the year.OCA St. 1S at 17; OCA M.B., pp. 23-24. One hundred percent of the 2013 expense was recorded in one month, September 2013. OCA St. 1S at 17. One hundred percent of the 2014 expense was recorded in one month, May 2014. OCA St. 1S at 17. In 2015, seven percent of the expense was recorded in the first five months of the year, 93% of the expenses were recorded in the last three months of the year. OCA St. 1S at 17; OCA M.B., p. 24. OCA witness Everette testified as to the problems with annualization based on this evidence:Annualizing the 2013 or 2014 expense on September 30 of those years would have overstated the annual expenses by one-third. Annualizing the 2015 expense on September 30 of that year would have understated the expense as only 45% of the expense was incurred through September. Annualizing an expense that fluctuates significantly month-to-month can produce an unrealistic picture of the annual level of the expense.OCA St. 1S at 17-18; OCA M.B., p. 24. A review of the monthly expenses for this account were as follows:2013201420152016January - - - - February - - - - March - - 4,427 1,044 April - - - 1,181 May - 865 3,074 1,311 June - - - 2,075 July - - - 7,052 August - - - 5,313 September 1,825 - - 1,591 October - - 5,492 n/aNovember - - 7,263 n/aDecember - - 2,067 n/a 1,825 865 22,322 19,568 OCA St. 1S at 18; OCA M.B., pp. 24-25. The OCA submits that using a normalized level based on the actual expenses over three years is a reasonable approach given the expenditures. OCA St. 1S at 18. OCA witness Everette recommends a total expense of $29,688 rather than the City’s claim of $43,673. The resulting adjustment is $13,985 with a jurisdictional component of $4,194. Table II; OCA St. 1 at 32; OCA St. 1S at 18; OCA Exh. AEE-1S at line 28. I&E also recommends an adjustment to Contractual Services for the Water Treatment Plant based on a three year historic average. I&E and the City agree and that there was a particular set of unusual expenses pertaining to Water Shed Management Plan ($30,000 normalized over?5 years) and Herbicide Applications ($40,300 normalized over 2 years) that are appropriately applied to this expense category. This is also supplemented with an agreed-upon annual monitoring expense of $8,665. I&E and the City differ on the remaining expense amounts, however. I&E maintains that the remaining amounts are most accurately represented by the 3-year historical average. The City claims “the history of expense in this account is not the best indication of future expense” but, according to I&E, provides no other plausible theory to be relied upon. I&E M.B., p. 23. According to I&E, the incorporation of more evidence and historical data through I&E’s historical average allows us to more accurately predict expenses and also to ensure that ratepayers are not forced to pay for expenses that will not actually occur. Accordingly, incorporating the agreed-upon components outlined above, including updates in Rejoinder, and basing the remaining amounts on three-year historical averages, I&E recommends an expense reduction of $5,497 to the City’s claimed $43,673, resulting in a total of $38,176 for contractual services pertaining to the Water Treatment Plant. I&E M.B., p. 23. For its part, the City argues that it dutifully adjusted expenses under this account during the course of this proceeding, and provided actual expenses recorded to this account through September 30, 2016. City M.B., p. 20. The City adds that its actually incurred expenses as of September 30, 2016, while lower than total 2015 expense levels, were reasonably on target to match the 2015 expenses by December 31, 2016. City Statement No. 2, p. 11; OCA R.B. p. 20. I agree with the normalization adjustment proposed by the OCA and agree with its position regarding “normalization of other expenses.” I further agree that annualization is not proper here. Therefore, I recommend an adjustment of $13,985 with a jurisdictional component of $4,194. 4.Administrative and General ExpensesCity witness Heppenstall testified that the City’s Administrative and General (A&G) expense is appropriate because it is comparable to the percentage of A&G to total Operating and Maintenance (O&M) experienced by other Pennsylvania utilities. OCA witness Everette testified as to the overall appropriateness of comparing the level of the City’s A&G expense to the percentage of A&G expense to total O&M expense experienced by other Pennsylvania water utilities as follows:The amount of an expense of one water company has no bearing on the allowable expense of another water company. The Commission does not set rates by comparing one Company’s costs to another. There are numerous factors that may influence both what a company’s A&G costs are and what a company’s O&M costs are. For example, if a company had relatively high O&M costs, its percentage of A&G costs to total O&M could appear relatively small. The reverse could also be true. Comparing one company’s ratio of expenses to another is simply not a useful tool in determining the reasonableness of an expense. Instead, it is necessary to consider each A&G expense to determine what portion, if any, is appropriate to charge to jurisdictional water ratepayers. OCA St. 1S at 19; OCA M.B., pp. 25-26.a.City Manager’s SalaryThe City has claimed that 55.7% of the City Manager’s $124,076 annual salary should be allocated to the Water Fund, which represents a total claim of $69,093. City St. 2R at?16. City witness Heppenstall determined this allocation figure based on interviews with the City Manager and a review of City Council minutes. OCA St. 1 at 34-35; City Exh. CEH-1 at 25; Tr. at 70:21-71:3. Furthermore, the City states that the allocation of the City Manager’s salary is based on the City Manager’s projections of how his time is spent. OCA St. 1 at 34. Indeed, in his rebuttal testimony the City Manager states that the City’s water operations “easily take up at least 60% of my time.” City St. 1R at 9; OCA M.B., pp. 29-30. The OCA submits that because the City Manager oversees financial matters, in addition to numerous other responsibilities, a 24% allocation of the City Manager’s salary, which reflects the verified allocation for treasury and finance employees to the Water Fund is a reasonable allocation based on the limited information provided by the City. OCA St. 1 at 35; OCA M.B., p. 26. I&E does not dispute that some portion of the City Manager’s time and, accordingly, his salary, would be attributable to business pertaining to the Bureau of Water. In the absence of timesheets or further evidence to support the City’s figures, I&E maintains that 25% of the City Manager’s salary should be attributable to the Bureau of Water, which is closely aligned with OCA Witness Everette’s 24% allocation. I&E Statement No. 2-SR, p. 23. This allocation is based upon the supported percentage of the City’s finance personnel salary whose work is relevant to the City as a whole, similar to the City Manager. OCA Statement 1, p. 35. This is the most appropriate available substitute for actual timesheets of the City Manager and produces a fair and reasonable result. I&E Statement No. 2-SR, p. 23. Accordingly, I&E maintains that $28,684 of the City Manager’s salary should be allocated to the Bureau of Water, instead of the $68,842 proposed by the City. I&E Statement No. 2-SR, p. 25. This would translate into $8,178 allocated to jurisdictional ratepayers. I&E M.B., p. 16. The City Manager’s job description is three pages long and notes a wide variety of tasks that the City Manager is responsible to perform. A portion of the City Manager’s duties are as follows:The Manager shall be responsible to direct, supervise and manage the administration of all departments, offices and agencies of the City, except the Volunteer Fire Department who shall report directly to Mayor and City Council.The Manager shall report ALL known information to the Council concerning any action requiring their official decision.He/she shall submit a weekly report to Council on all City activities. The Manager shall establish and maintain an effective system of communication throughout the City; with the public and with the City’s personnel.Shall establish current and long-range objectives, plans and policies subject to the approval of the Council.[P]resents an annual budget and capital program to the Council and oversees the adequacy and soundness of the City’s financial structure. The Manager provides recommendations and guidance to the Council regarding Municipal operations, fiscal policy, and the future needs of the City, as necessary. I&E-RE-30D Part A (emphases in original) (attached to OCA St. 1); OCA M.B., pp. 30-31. City Manager John Suplizio is neither a certified water system operator nor an engineer. Tr. at 36:14-23. Additionally, nowhere in the City Manager’s job description is there a requirement that the City Manager have any skill or knowledge specific to water or public utilities. OCA M.B., p. 31. At multiple points in his rejoinder testimony, City Manager Suplizio stated that water is more intense than sewer. See, Tr. at 24:8-9, 24:25-25:2, 39:10-15. In rebuttal, Mr. Suplizio stated that “[t]he sewer system very much runs itself with comparatively minimal staffing, whereas water operations naturally generate more work.” City St. 1R at 10. Yet, the sewer department has more employees than the water department. Tr. at 76:18-20. City Manager Suplizio does not physically repair the water leaks Tr. at 37:19-23. Additionally, while City Manager Suplizio stated at the evidentiary hearing that he is with the crew that does leak inspections, he is not with them for the entirety of the leak detection. Tr. at 38: 24-25. Mr.?Suplizio stated that the City Engineer prepares DEP reports but that Mr. Suplizio reviews the reports before they are submitted to DEP. Tr. at 39:25-40:11. Yet, while Mr. Suplizio says that he looks over the reports, he was unable to identify what was contained in the Chapter 110 reports. Tr. at 39:25-40:22. OCA M.B., pp. 31-32. The City Manager, according to his job description, does not strictly work in tandem with the Public Works Director, as argued by the City. The Public Works Director does not have any of the above-listed responsibilities, but is instead responsible for the distribution and collection lines. Tr. 41:21-42:3. The allocation of the City Manager’s salary to the Water Fund should not be allocated on the basis of the Public Work Director’s salary since the two jobs are not the same and as there is no verifiable basis to support the City’s assertion that this allocation would be reasonable. OCA M.B., p. 32.In order to support allocation percentages the utility must submit evidence proving the reasonableness of the allocation methodology. The evidence could include formal duty descriptions, written records of actual hours worked and written records of the type of work conducted. Various types of evidence may be submitted so long as it proves that the allocation methodology is reasonable. OCA M.B., p. 29. Regarding municipal allocation issues, the Commission has required sufficient evidence to support the allocation methodology. In Pa. Pub. Util. Comm’n v. Borough of Media Water Works, 72 Pa. PUC 144 (1990), a similar allocation situation was presented to the Commission. Borough of Media Water Works (Media) was a municipally owned water system that provided service to the Borough of Media and several area Townships. Id. at 148. Approximately 83% of its customers were located outside the Borough. Id. The outside Townships intervened in the case. Id. at 147; OCA M.B., p. 28. Media used an allocation factor of 70-80% to allocate the payroll expenses of its administrative and supervisory employees who also perform services for other Borough functions. Id. at 171. Office of Trial Staff (OTS) and the Townships recommended an adjustment be applied that took the allocation factor down to 50% because Media did not present any evidence as to the reasonableness of the 70-80% allocations. Id. at 171-74. Specifically, Township witness Kalbarczyk stated that when looking at the administrative employees’ job descriptions compared to the allocations the two did not match up. Id. at 172. For example, the Accountant’s job description listed several tasks that were performed for the General Fund, but only one task relating to the Water Fund. Id. Yet, the allocation for this position was 80% to the Water Fund and 20% to the Sewer Fund. Id. Therefore, Witness Kalbarczyk concluded that there was no basis for the allocation amounts because without time sheets there is no way to verify the correctness of the allocation. Id.; OCA M.B., pp. 28-29. The Commission agreed with the reasoning set forth above stating that Media did not meet its burden of proof to support the allocation methodology it used. Id. at 174. The Commission stated that formal duty descriptions, written records of actual hours worked, and written records of the type of work conducted would be evidence to support allocation factors. Id. Since Media did not submit any of the above the Commission found its methodology unsupported and adopted the 50%/50% allocation suggested by the Townships and OTS. Id.; OCA M.B., p. 29. The OCA and I&E are correct in their positions with respect to the City Manager’s salary allocation to the Water Fund. I did not find Mr. Suplizio’s testimony that 60% of his time as City Manager is devoted to the Bureau of Water to be credible at all, given all of the other duties and responsibilities his job entails. This was the only evidence the City presented to support the salary allocation used in this case. There were no time records kept or provided by the City. I agree with the OCA’s allocation of 24% of the City Manager’s salary to the Water Fund, which reflects the verified allocation for treasury and finance employees, and recommend this expense adjustment. OCA St. 1 at 35; OCA M.B., p. 26. b.Administrative ExpenseIn Rebuttal, the City discovered that it had not accounted for Unemployment Compensation, FICA, Medicare, or Worker’s Compensation pertaining to its claim for Health Insurance and Other Benefits for Administrative Employees. The total of this expense was $41,170. The City claimed an allocation of 42.5% to the Bureau of Water. This resulted in a total system claim of $17,493 for allocation of additional administrative other benefits to the Bureau of Water. Based on I&E’s recommended 33.37% composite allocation, I&E recommended a total system downward adjustment of $3,755 resulting in an allowance of $13,738. I&E St. No. 2-SR, p. 35. The City’s claim for jurisdictional ratepayers was $4,987. I&E recommended a downward adjustment for jurisdictional ratepayers of $1,071, which resulted in an allowance for jurisdictional ratepayers of $3,916. I&E St. No. 2-SR, p. 36; I&E R.B., pp. 7-8.I&E does not dispute the City’s claims for these expenses but instead recommends that the City’s 42.5% allocation to the Bureau of Water be reduced to 33.37%. As shown on the table below, I&E agreed with many of the City’s proposed allocations assigned to the Bureau of Water; however, it disagreed with the City’s 60% allocation of the City Manager’s salary and instead recommended a 25% allocation of that salary. Due to I&E’s recommended reduction to the City Manager’s allocation factor, it reduced the City’s overall 42.5% allocation to I&E’s recommended composite allocation of 33.37%. I&E St. No. 2-SR, p. 29. In its Main Brief, the City argued that I&E’s recommendation should be rejected because it disagrees with I&E’s recommended 25% allocation of the City Manager’s salary to the Bureau of Water. City MB, p. 29. I&E continues to recommend the City Manager’s salary be allocated 25% to the Bureau of Water. Based on that recommendation, I&E asserts that a corresponding adjustment must be made to this category of expense. The resulting composite allocation factor, the calculation of which is shown in the chart below, is 33.37%. I&E R.B., pp. 8-9.Per book -2015% of Allocation to WaterAllocated amountRevised % of Allocation to waterRevised Allocated amountCity Manager Salary $109,208 60.00 $65,525 25.00 $27,302 Public Works Director Salary $79,251 60.70 $48,105 60.70 $48,105 Finance Salaries (Net of Clerical Salaries) $200,415 24.00 $48,100 24.00 $48,100 Clerical Billing Salaries $30,416 54.00 $16,425 54.00 $16,425 Total $419,290 ? $178,155 ? $139,932 Composite Allocation Factor??42.50%?33.37%According to I&E, this adjustment is proper to ensure jurisdictional ratepayers are not being charged for expenses which are not properly allocated to the Bureau of Water. I&E R.B., p. 9. Consistent with its recommendation to deny I&E's adjustment to the allocation of the City Manager's salary, the City recommends that the Commission adopt its proposed allocation of Health Insurance and Other Benefits for Administrative Employees, as revised by City Statement No. 2-R and its Rejoinder Exhibit, Exhibit (CEH-3RJ). City M.B., p. 29. The OCA disagrees with the allocation method proposed by I&E. OCA M.B., p.?35.I agree with I&E that the allocation percentage of these other administrative expenses used by the City in this proceeding is too high, however, in light of the recommendation made above that 24% of the City Manager’s salary be allocated to the Water Fund and not 25%, as I&E suggested, the revised allocation factor would be slightly lower, 33.11% instead of 33.37%. The downward adjustment results in an allowance for jurisdictional ratepayers of $3,885. 5.City Buildings: Computer Parts/Supplies/SoftwareThe City calculated a total City Buildings expense of $213,227 based on the 2015 expenses for this account and allocated 24%, or $51,174, to the Water Fund. OCA St. 1 at 41. The expenses in 2013, 2014, and 2015 were $186,119, $175,306, and $213,227, respectively. OCA St. 1 at 41. The 2015 expense is 22% higher than the 2014 expense and is 15% higher than the 2013 expense. OCA St. 1 at 41. A breakdown of this expense showed that the primary increase in 2015 was to a computer parts account; the expenses for this specific account are listed below:2013: $17,2692014: $19,5622015: $47,202OCA St. 1 at 41; OCA M.B., pp. 37-38. Ms. Everette testified that “[t]he 2015 expense was 173% more than the 2013 expense and 141% more than the 2014 expense.” OCA St. 1S at 24. The City provided general ledger entries for the computer parts account which showed that the reason for the increase in 2015 was due to the fact that payments to vendor “RAK Computer Associates” increased from $45 in 2013, to $1,127 in 2014, to $23,116 in 2015. OCA St. 1 at 41. As explained by OCA witness Everette, “[c]learly, this is a significant increase, as the 2015 expense is over 20 times as much as the 2014 expense.” OCA St. 1 at 41 (emphasis added). In rebuttal, City witness Heppenstall provided a list of expenses from 2015 which she testified “clearly show that the expense items in this account related to ongoing computer needs of the City.” City St. 2R at 22. However, according to the OCA, City witness Heppenstall does not provide any explanation as to why the expense more than doubled in one year. OCA St. 1S at 24. The OCA asserts that there is no support to indicate that the increased expense in 2015 is an ongoing expense. OCA St. 1S at 24. As such, the OCA submits it is appropriate to normalize the expense as it is significantly higher than a normal year of expense. OCA St. 1 at 41; OCA St. 1S at 24; OCA M.B., p. 38. For these reasons, OCA witness Everette recommended that a three-year normalization period be used, which results in an annual expense for the Computer Parts Supplies Software account of $28,011; a reduction of $19,191. OCA St. 1 at 41-42; OCA St. 1S at 24. Utilizing the City’s 24% allocation factor results in an adjustment of $4,606 to this account with a jurisdictional component of $1,313. Table II; OCA St. 1 at 42; OCA Exh. AEE-1; OCA St. 1S at 24; OCA Exh. AEE-1S at line 36; OCA M.B., pp. 38-39. The City believes it is appropriate to allocate expenses for Computer Parts/Supplies/Software as part of the City Buildings expense in the imputed Administrative Expense based on actual expense incurred in Historical Test Year (HTY) (2015). See City Statement No. 1, Exhibit (CEH-1), p. 25. The City disagrees with OCA's proposal. According to the City, under Schedule 5 for Account 409.316 Computer Parts/Supplies/Software (located in Exhibit (CEH-4R)), most of the expenses in this account are ongoing expenses related to the City’s information technology needs. The City cannot operate without these technologies. See City M.B., p.?30. The City argues that it experienced and supported consistent increases in this type of expense since 2013, and as a result, the OCA’s proposal to normalize these costs is inappropriate. Id. To properly account for the upward trend in this expense category, the PUC should base its expense allowance for Computer Parts/Supplies/Software upon the increased expense level incurred in 2015. Id. As a result, the City contends that the OCA’s adjustment should be rejected. City R.B, pp. 32-33.I agree with the OCA and recommend a jurisdictional adjustment to this expense in the amount of $1,313. It is appropriate to normalize this expense as the 2015 expense is significantly higher than a normal year of the expense.6.Rate Case ExpenseThe City claims $225,505 of rate case expense normalized over a 2.5 year period, for an annual expense of $90,202. OCA St. 1S at 27. The OCA and I&E have not recommended any adjustment to the level of expense claimed, but each recommends an adjustment to the 2.5 year normalization period proposed by the City based upon historical rate case filing frequency. The OCA submits that a 5-year normalization period is appropriate. OCA M.B., p. 40. I&E proposes a 64-month normalization period. I&E M.B., p. 18. City witness Heppenstall stated that the 2.5 year normalization period is based on “the recent history of City filings” and “expectations of the City regarding future filings.” OCA St. 1 at 45. In addition to the current case filed on June 30, 2016, the City has acknowledged that its three previous cases were filed in March 2013, October 2005, and August 1996. OCA St. 1 at 45. In other words, these cases were filed 3, 7, and 9 years apart respectively, which is not indicative of a 2.5 year normalization period. OCA St. 1 at 45. Indeed, even the most recent case does not support a 2.5 year normalization period as the most recent case and the present filing are separated by 3.25 years. OCA St. 1 at 45; OCA M.B., p. 40. OCA witness Everette recommends that a 5-year normalization period be used for rate base expense. OCA St. 1 at 45. The City’s last rate case was in 2013, three years prior to this case. The case before that was in 2005, or seven years prior, and the case before that was filed nine years before, or in 1996. OCA St. 1 at 45. The average time between City of DuBois’s last three rate filings is more than six years. OCA St. 1 at 45. In fact, the City’s average historical filing history in the last three cases is 6.61 years. OCA St. 1 at 45. If the 1996 case is eliminated from the calculation, the average filing frequency is 5.33 years. OCA St. 1 at 45. Thus, Ms. Everette recommended a 5-year normalization period. Id. Using the estimated total rate case expense of $225,505, the annual normalization amount is $45,101. OCA M.B., pp. 40-41. In rebuttal, City witness Heppenstall stated that if OCA witness Everette’s recommended normalization period is accepted, the City “will never be able to recover its rate case expense.” City St. 2R at 12. To demonstrate this contention, City witness Heppenstall calculated the percentage of rate case expense from the last case which the City has “recovered.” OCA St. 1S at 26; City St. 2R at 12. The previous 2013 rate case, however, was a black box settlement in which particular adjustments, including a rate case normalization period, were not agreed upon. 2013 Settlement, Docket No. R-2013-2350509 at Paragraph 7; OCA St. 1S at 26; OCA M.B. p. 41. City witness Heppenstall suggests that a 2.5 year normalization period is appropriate because it is the time between when the last rate increase became effective and the filing of the current case. OCA St. 1S at 26; City St. 2R at 13. City witness Heppenstall does not explain why the 9-month suspension period, while rates are still in effect, is excluded from her calculation. OCA St. 1S at 26. Nevertheless, the rates established in the previous case will be effective for 3.25 years, which is longer than the normalization period proposed by the City in its previous case or in this case. OCA St. 1S at 27; OCA M.B., pp. 41-42. As explained by OCA witness Everette:There are many reasons that the City may alter the timing of its filing of rate cases. For example, prior to the last rate filing, the City was able to delay filing a case for several years due to the receipt of significant water revenues from a shale gas driller. In this case, my direct testimony discussed the possible addition of the Borough of Falls Creek as a customer, which would provide increased sales to the City. Although Ms. Heppenstall’s testimony focused on what percentage of rate case expense the City would recover if it chose to file earlier than the rate case normalization period, it is important to understand that the reverse is also true. If the City waits longer than the normalization period before filing its next rate case, it will continue to collect the annual rate case expense as part of annual revenues.OCA St. 1S at 27; OCA M.B., p. 42. According to the OCA, the City’s rate case expense must be adjusted to reflect a proper normalization period that is consistent with Commission precedent. The Commission has consistently held that rate case expenses are normal operating expenses, and normalization should, therefore, be based on the historical frequency of the utility’s rate filings. Popowsky v. Pa. Pub. Util. Comm’n, 674 A.2d 1149, 1154 (Pa.Cmwlth. 1996); Pa. Pub. Util. Comm’n v. Columbia Water Co., 2009 Pa. PUC LEXIS 1423 (2009); Lancaster Sewer, 2005 Pa. PUC LEXIS at 84; Pa. Pub. Util. Comm’n v. National Fuel Gas Distribution Corp., 84 Pa. PUC 134, 175 (1995); Pa. Pub. Util. Comm’n v. Roaring Creek Water Co., 73 Pa. PUC 373, 400 (1990); Pa. Pub. Util. Comm’n v. West Penn Power Co., 119 PUR4th 110, 149 (Pa. PUC 1990). In recent cases the Commission reiterated that the normalization period is determined, “by examining the utility’s actual historical rate filings, not upon the utility’s intentions.” Pa. Pub. Util. Comm’n v. City of Lancaster – Bureau of Water, 2011 Pa. PUC LEXIS 1685, at 56-57 (Lancaster 2011); Pa. Pub. Util. Comm’n v. Metropolitan Edison Co., 2007 Pa. PUC LEXIS 5 (2007); Lancaster Sewer, 2005 Pa. PUC LEXIS at 84. I&E essentially agrees with the OCA’s rate case normalization. The only difference is that I&E does not round down the time period over which recovery will occur. If the 1996 case is eliminated from the calculation, the average filing frequency is 5.33 years. I&E’s rate case normalization period of 64 months is even more accurate than the OCA’s proposal (5 years) and it is also consistent with Commission precedent. I&E’s recommended normalization period accurately takes into account the City’s historical filing frequency. The Commission has consistently held that rate case expenses are normal operating expenses, and normalization should be based on the historical frequency of the City’s rate filings. I recommend that I&E’s rate case expense adjustment be adopted here. 7.Unaccounted for Water (UFW)UFW is the difference between total system output and the metered quantity of water billed plus an estimate for the amount used for fire service, testing, main-flushing, and unmetered company use. I&E Statement No. 3, p. 12. In this case, UFW is calculated by taking the total amount of water produced and purchased and subtracting accounted-for water. I&E Statement No. 3, p. 13. Accounted-for water is water sold, billed, metered for use, fire department use, hydrant flushing, backwashing/blow-offs, pool filling, tank cleaning/filling, street cleaning, bulk sales, water bill adjustments, waterline construction, and other usage by city buildings, wastewater treatment plants, garages and firehalls. I&E Statement No. 3, pp. 13-14 referencing I&E Exhibit No. 3, Schedule 4. Typically, UFW can be traced to under registration of meters, leaks in mains, hydrants, theft of service, and natural losses. I&E Statement No. 3, p.?12. The PUC has stated that it considers any Unaccounted for Water above 20% to be excessive; 52 Pa.Code §?65.20(4); I&E M.B., p.?20. Since its prior rate case, the City of DuBois has a steadily-increasing yearly average UFW of 25.78% in 2013, 26.22% in 2014, and 28.07% in 2015. I&E Statement No. 3, p. 13 citing I&E Exhibit 3, Schedule 4. According to I&E, this excessive UFW causes unwarranted pumping, treatment and transportation expense and reduces the amount of water available to customers. I&E Statement No. 3, pp. 12-13. In this case, I&E supports an expense adjustment to ensure that ratepayers are not responsible for the City of DuBois’ excessive UFW. I&E M.B., p. 20. According to I&E witness Cline, the cost of power purchased along with supplies and expenses for treatment and maintenance incurred by the City to produce 1,000 gallons of water was calculated at $0.238. I&E Exhibit No. 3, Schedule 6, Line 6. The City was determined to have a three-year average of 195,562,237 gallons of unaccounted-for water in total. I&E Exhibit No. 3, Schedule 6, Line 5. Pursuant to Commission policy, I&E’s witness calculates that the implicitly ‘acceptable’ level of UFW would be 146,278,067 gallons of water. I&E Exhibit No. 3, Schedule 6, Line 7, Column B. By subtracting the latter from the former, the total excessive UFW is 49,284,171 gallons of water. I&E Exhibit No. 3, Schedule 6, Line 7, Column C. By multiplying this excessive UFW volumes by the per thousand gallon rate listed above, I&E witness Cline deduced the amount of expense the City incurs producing the excessive portion of its UFW, which is $11,754 on a total city basis or $3,615 jurisdictionally. I&E M.B., pp. 20-21. Based on those numbers, I&E is advocating a downward expense adjustment for the City in the amount of $3,615 jurisdictionally to ensure that ratepayers are not made to reimburse the City for this excessive UFW, which is particularly concerning since it is on a distinct upward trend. I&E Statement No. 3-SR, p. 8. According to I&E, the Commission has previously made similar adjustments to overall operating expenses to account for excessive UFW and I&E maintains that such an adjustment is merited here. I&E points out that the City can minimize or eliminate the effect of this adjustment entirely by reducing its UFW to non-excessive levels. I&E Statement No. 3, p.?17; I&E M.B., p. 21. The City contends that I&E’s allegation of increasing UFW distorts the relevant data. According to the City, the average UFW for the period 2013 to 2015 (26.69%) is substantially less than the City’s average UFW for the period 2010-2012 (30.2%). City M.B., p.?15. The City submits that, by emphasizing the year-to-year fluctuations rather than the broader trend, I&E misrepresents the City’s progress towards lower UFW rates. Such reduction indicates the City’s substantial progress in and commitment to reducing UFW since its 2013 rate proceeding concluded. Since its last rate filing, the City regularly performed leak testing to reduce its UFW percentage. See Id. at 16. The City also committed to meter all City buildings instead of using estimates, which will generate more accurate data on its UFW percentages. See Id.; City R.B., p. 17. Additionally, through a Stipulation with the OCA, the City adopted numerous operational recommendations from OCA witness Mr.?Fought to further improve its UFW. See City/OCA Stipulation. Consistent with the City/OCA Stipulation, the City commits to performing the following tasks related to UFW:1.In future rate cases, the City will provide Unaccounted-For-Water (“UFW”) calculations in the format shown on Exhibit TLF-1 that is used by water utilities in submission of their Annual PUC Reports.2.Within six months of a final order in this case, the City will install water meters on all water service lines connected to the Public Works Garage, City Municipal Building, Waste Water Treatment Plant, Public Library, City Pool, and the five Fire Halls. The Water Treatment Plant may not need metering if the water is withdrawn prior to the metering of the flow into the distribution system.3.Within two months of the final order in this case, the City will require each of the Fire Companies to submit a monthly written estimate of the unmetered water used and what it was used for.4.Upon entry of a final order in this case, the City will estimate (at the time the repair is made) the water loss of each waterline/service line leak or break that was repaired.5.Upon entry of a final order in this case, the City will provide metered location(s) for use by the street sweeper and fire companies for their non-firefighting uses.City/OCA Stipulation, ?? 1-8; City R.B., pp. 17-18. As set forth above, the City argues it has made progress toward reducing its UFW and has further adopted even more aggressive measures to ensure continued progress towards reducing its UFW, which the Commission has previously held to mitigate against downward adjustments to UFW expense claims. Pa. Pub. Util. Comm’n, et al. v. City of Bethlehem (Water), 1995 Pa. PUC LEXIS 38, 58 (Mar. 16, 1995) TA \l "Pennsylvania Public Utility Commission, et al. v. City of Bethlehem (Water), 1995 Pa. PUC LEXIS 38 (Mar. 16, 1995)" \s "Bethlehem" \c 1 . Therefore, in recognition of the recent improvements and the City’s additional commitments to further reduce UFW, the City contends that I&E’s proposed adjustment should be denied. In light of the stipulation and commitment by the City to reduce UFW, I agree with the City and recommend that I&E’s proposed expense adjustment be denied. The City’s expense is justified to insure the provision of water service to jurisdictional customers in accordance with the Public Utility Code. 8.Overtime ExpensesThe City claimed overtime expenses in two separate categories, which are Water Treatment Plant (WTP - Ledger Item 448.183) and Transmission and Distribution Systems (T&D – Ledger Item 450.183). Overtime pertaining to WTP was claimed at $43,534 and Overtime pertaining to T&D was claimed at $34,397, based solely on expenses from the Historic Test Year. I&E Statement No. 2, p. 12. I&E noted that the HTY happens to have the largest expenses in these categories since the previous rate case. I&E witness Patel recommends that this expense be modified based upon a three-year historical average, which, according to I&E, is a generally accepted practice used to even out fluctuations in historical data and produce a more accurate estimation of future expenses. I&E Statement No. 2-SR, p. 10; I&E M.B., pp.?20-21.YearWTPT&D2013$35,840$22,6942014$40,005$16,8562015$43,534$34,397Average$39,793$24,649This averaging results in I&E’s recommended downward adjustment to the City’s claim in the amounts of $3,741 for WTP overtime and an adjustment downward in the amount of $9,748 for T&D overtime. According to I&E, the incorporation of more evidence and historical data through this historical average more accurately predicts expenses and also ensures that ratepayers do not pay for overtime that will not actually occur. Accordingly, I&E requests that the overtime expenses claimed by the City be modified to the more accurate and substantiated version purported by I&E witness Patel. I&E M.B., p. 21. According to the City, I&E’s proposal ignores the clear upward trend of these expenses since 2013. City M.B., p. 18. Overtime expenses for Account 448.183 increased by $7,694 (these expenses rose from $35,840 in 2013 to $43,534 in 2015). Id. at 22. Likewise, Overtime expenses under Account 450.183 rose by $11,703 (these expenses totaled $22,694 in 2013 and amounted to $34,397 by 2015). Id. The Commission has previously supported use of recent cost data over historical averages where the historical data demonstrates an upward trend rather than fluctuations. Pa. Pub. Util. Comm’n v. Philadelphia Electric Company, 1985 Pa. PUC LEXIS 67, at 59, 58 Pa. PUC 743, 767 (Jan. 24, 1995) TA \l "Pennsylvania Public Utility Commission v Philadelphia Electric Company, 1985 Pa. PUC LEXIS 67, 58 Pa. PUC 743 (Jan. 24, 1995)" \s "Philadelphia Electric" \c 1 . Therefore, as a result of the historical upward trend of these expenses, I&E’s recommendation to average overtime costs over three years should be denied and the Commission should adopt the City’s claim without modification. I agree with the City and recommend that the proposed adjustment to Overtime expense be denied. The City’s expense is justified to insure the provision of water service to jurisdictional customers in accordance with the Public Utility Code. 9.Payroll/FICA Tax AdjustmentIn conjunction with the foregoing overtime adjustment, I&E submits that there must be a corresponding adjustment to the City’s claim for Payroll & FICA taxes, which is based off of percentages of employees’ gross wages plus overtime and vacation pay less certain healthcare expenses. I&E Statement No. 2, p. 13. I&E’s modifications to Overtime expenses outlined above would necessitate a downward adjustment of $1,031 in total, as outlined in I&E witness Patel’s Surrebuttal. I&E Statement No. 2-SR, p. 13. I recommend that I&E’s proposed adjustment to Payroll/FICA Tax expense be denied consistent with the denial of I&E’s suggested Ovetime expense adjustment above. The City’s expense is justified to insure the provision of water service to jurisdictional customers in accordance with the Public Utility Code. 10.Summary of Expense AdjustmentsNormalization Period of Rate Case Expense – The overall rate case expense of $225,505 will be used with a 64 month normalization period. That period was based on historical filing frequency of the Company. The City of DuBois proposed a 30-month normalization period. That period was determined since that was the time between the previous rate case filing and the current one. A jurisdictional adjustment of $42,282 will be used.Contractual Services Water Treatment Plant – The total expense amount of $29,688 will be used which represents a normalized level based on the actual expenses over three years, given the expenditures. The final calculation amount of $37,153, subtracting the $7,465 which the City agreed to, would yield $29,688. A jurisdictional adjustment of $4,194 will be used.City Manager Salary – The City Manager earns $124,076 per year. The City states that the manager spends 60% of his time on water issues. There are no documents, such as timesheets to back-up the City’s 60% claim. The City Manager’s job description is three pages long and notes a wide variety of tasks that the City Manager’s is responsible to perform. With the City Manager’s other duties, a 24% allocation to the water fund will be used. A jurisdictional adjustment of $11,209 will be used.Vacant Home – The City claims $3,592 in expenses associated with the vacant house. Only plant that is used and useful is entitled to be included in rate base. Since the home is vacant and is not used and useful for the provision of water service, the expenses related to this home should be removed. A jurisdictional adjustment of $1,077 will be used.City Building/Computer Parts/Supplies/Software – The City claims the City Buildings, Computer Parts, Supplies, and Software expenses account and allocate 24% or $51,174, to the Water Fund. Since the 2015 expenses are 22% higher than the 2014 expenses and 15% higher than the 2013 expenses there will be a three-year normalization period. A jurisdictional adjustment of $1,313 will be used.Allocation of Administration Benefits Expenses – The City used $41,170 in administration expense and then allocates this amount using a composite allocation factor of 42.5%, which amounts to $17,493 for total adjustment. The $17,493 would be multiplied by the Jurisdictional Allocation Ratio of 0.2850 for a total of $4,985. I&E recommends that the City’s allocation to the Bureau of Water be reduced to 33.37% based, in part, on a 25% allocation of the City Manager’s salary. Using a 24% allocation factor for the City Manager’s salary further reduces the composite allocation to 33.11%. Applying the adjusted composite allocation factor to Administration Benefits Expenses results in a jurisdictional component of about $3,885.F.TaxesThe City does not claim any taxes for ratemaking purposes.G.Rate of Return TC "F.Rate of Return" \f C \l "2" 1.City’s Proposal TC "pany proposal" \f C \l "3" The City recommends that the Commission approve rates designed to provide the Bureau of Water with an opportunity to earn an overall rate of return of 6.76%, based upon a hypothetical capital structure reflecting a common equity ratio of 50%. See City Statement No. 4, pp. 2, 16. City witness Harold Walker III’s overall recommended rate of return incorporates a proposed 10.50% cost of equity and a debt cost rate of 3.02%. See Id. at 2, Schedule 1. City M.B., p. 33. The City’s cost of capital and rate of return claim is premised on a hypothetical capital structure. OCA M.B., p. 45. 2.Legal Standards The rate of return is a rate determined by the Commission to allow the shareholders the opportunity to earn a reasonable return, or profit, on their rate base investment, in view of the level of risk involved. Pennsylvania Power Company v. Pa. Pub. Util. Comm’n, 561 A.2d 43, 47 (Pa.Cmwlth. Ct. 1989), 1989 LEXIS 434. As a general matter, cost of capital is the basis for determining a fair rate of return. Pa. Pub. Util. Comm’n v. Philadelphia Suburban Water Co., 71 Pa. PUC 593, 623 (1989) (PSWC 1989). OCA M.B., p. 46. The United States Supreme Court has outlined the principal benchmarks for a fair rate of return. In Bluefield Water Works & Improvement Company v. P.S.C. of West Virginia, 262 U.S. 679 (1923) TA \l "Bluefield Water Works & Improvement Company v. P.S.C. of West Virginia, 262 U.S. 679 (1923)" \s "Bluefield" \c 1 (“Bluefield”), the Court defined a fair rate of return as follows:A public utility is entitled to such?rates as will permit it to earn a return on the value of the property which it employs for the convenience of the public equal to that generally being made at the same time and in the same general part of the country on investments in other business undertakings which are attended by corresponding ?risks and uncertainties; but it has no constitutional right to profits such as are realized or anticipated in highly profitable enterprises or speculative ventures. The return should be reasonably sufficient to assure confidence in the financial soundness of the utility and should be adequate, under efficient and economical management, to maintain and support its credit and enable it to raise the money necessary for the proper discharge of its public duties.Bluefield TA \s "Bluefield" , at 679. As summarized by City witness Harold Walker, Bluefield TA \s "Bluefield" , established three tenets defining a fair rate of return. Under Bluefield TA \s "Bluefield" , a fair rate of return must be: (1) equal to the return on investments in other business undertakings with the same level of risks (comparable earnings standard); (2) sufficient to assure confidence in the financial soundness of a utility; (financial integrity standard); and (3) adequate to permit a public utility to maintain and support its credit, enabling the utility to raise or attract additional capital necessary to provide reliable service (the capital attraction standard). See City Statement No. 4, pp. 4-5; City M.B., p. 34. In developing a rate of return for any regulated public utility, the Commission must ensure all public utilities have an opportunity to earn a rate of return sufficient to meet the enumerated criteria. City M.B., p. 34. TC "2.Legal Standards Regarding Fair Rate of Return" \f C \l "3" 3.Party PositionsThe OCA recommends an overall rate of return of 4.09% and a return on common equity of 8.25% (before application of a proposed 20% income tax adjustment). See OCA Statement No. 1S, p. 22. I&E recommends an overall rate of return of 4.23% and return on common equity of 8.62% (before application of a proposed 18% income tax adjustment). See I&E Statement No. 1-SR, p. 27. Neither OCA nor I&E contests the Bureau of Water’s proposed debt cost rate of 3.02%, but both OCA and I&E oppose the Bureau of Water’s proposed capital structure and instead base their recommendations on a capital structure of 70% debt and 30% equity. Typeof CapitalRatio (%)Cost Rate (%)Weighted CostRate (%)Tax Factor Adjustment (%)Weighted Cost (%)OCAI&ECityOCAI&ECityOCAI&ECityOCAI&ECityOCAI&ECityLong-term Debt7070503.023.023.022.112.111.512.112.111.51Common Equity3030508.258.6210.502.482.595.252018.2291.982.124.78TOTAL1001001006.764.094.236.29OCA M.B., p. 45.4.Capital Structure and Proxy GroupCapital structure is the type and percentages of capital supplied by investors.There are two basic types of capital used by utilities: debt and equity. OCA M.B., p. 49. The City proposes a capital structure of 50% debt, 50% equity. Both I&E and the OCA propose a capital structure of 70% debt, 30% equity. All three parties base their capital structure recommendations on substantially similar comparable groups of utility companies with actively traded stock. The City used a comparable group consisting of American Sales Water Co., American Water Works Co., Inc. Aqua America, Inc., California Water Service, Middlesex Water, SJW Corp. and York Water Co. (“Water Group”). See City Statement No. 4, p. 10. I&Eused the same comparable group as the City, while the OCA added one additional company (Artesian Resources). See City Statement No. 4-R, p. 18; City M.B., p. 35. City witness Walker recommends that a hypothetical capital structure of 50% debt/50% equity be used because he claims that the City’s per books capital structure is 0% debt/100% equity. City St. 4 at 14. The OCA and I&E recommend a capital structure of 70% debt/30% equity which reflects the financing used by the City for its future test year level of rate base. OCA St. 1 at 15; OCA M.B., p. 49; I&E M.B., pp. 27-28. The City’s actual capital structure is 99.5% debt/0.5% equity. OCA M.B. at 49; OCA St. 1S at 6. Given that the actual capital structure is almost entirely debt, an alternative capital structure must be carefully chosen because any capital structure will contain more equity than the actual capital structure and equity costs are higher than debt costs. OCA M.B. p. 50; OCA St. 1 at 14; OCA R.B., p. 28. I agree that the City’s arguments for a hypothetical capital structure of 50% debt/50% equity are flawed. The hypothetical capital structure proposed by the City, if adopted would unreasonably increase costs to ratepayers. OCA M.B. pp. 46-48. Generally, the use of a hypothetical capital structure should not increase costs to ratepayers. The City’s proposed hypothetical capital structure improperly places too much additional cost on ratepayers and does not properly balance the interests of ratepayers and shareholders. See Emporium Water v. Pa. Pub. Util. Comm’n, 955 A.2d 456 (Pa.Cmwlth. 2008) appeal denied 599 Pa. 702, 961 A.2d 860 (2008); OCA R.B., p. 29. The City argues that the capital structure recommended by the OCA is not “typical” of the comparison group. City M.B. at 36, 38-41. That argument misses the point. The Bureau of Water is not traded as a separate entity, therefore it does not need to meet public market norms for capital structure ratios. See City of Lancaster-Bureau of Water v. Pa. Pub. Util. Comm’n, Docket No. R-2010-2179103 (Order entered July 14, 2011) (Lancaster 2011); OCA M.B., p. 56. OCA witness Everette looked at the funding for the City’s rate base as well as the debt and equity figures contained in the City’s audited financial statements. OCA M.B., p. 55; OCA St. 1 at 15; OCA St. 1S at 6. It is reasonable to use a capital structure that is closer to the actual capital structure for rate making purposes. None of the City-specific information would lead to the use of a 50% debt/50% equity capital structure as the City has proposed. OCA R.B., p. 29. The Commission has consistently used the actual capital structure of regulated municipal utilities in determining the appropriate rate of return. In Pa. Pub. Util. Comm’n v. Emporium Water Co., 95 Pa. PUC 191 (2001) (Emporium 2001), the Commission determined the use of Emporium’s actual capital structure was appropriate because if the proposed hypothetical capital structure was used, Emporium’s ratepayers would be forced to pay a much higher return on rate base that had been financed by PennVest debt at a rate of only 1%. Id., at 198-199. In Pa Pub. Util. Comm’n v. Emporium Water Co., Docket No. R-00061297 (Order entered Dec. 28, 2006) (Emporium 2006), the Commission laid out a series of factors that supported the use of Emporium’s actual capital structure. The Commission determined the following: (1) it would be consistent with Commission precedent in Pa. Pub. Util. Comm’n v. Western Utilities, Inc., 88 Pa. PUC 124 (1998), Emporium 2001 and Pa. Pub. Util. Comm’n v. City of Lancaster – Sewer Fund, 2006 WL 8411478, (2) it would recognize the interest of ratepayers in not paying a high return on PennVest debt that only cost 1%; (3) a cost of equity adjustment could be used to make up the difference between the principal due and the depreciation expense related to the PennVest-funded plant recognizing the City’s need and securing timely repayment of the loan; and, (4) it would be consistent with Commission decision’s in Lower Paxton Township v. Pa. Pub. Util. Comm’n, 317 A.2d 917 (Pa.Cmwlth. 1974); Pa. Pub. Util. Comm’n v. Carnegie Nat. Gas Co., 54 Pa. PUC 381 (1980) and Riverton Consolidated Water Company v. Pa. Pub. Util. Comm’n, 140 A.2d 114 (Pa. Super. 1958) (Riverton), that emphasize the fact that the Commission must use discretion in balancing the interest of the utility and its ratepayers. Id., at 52-53; I&E R.B., p. 22. In the Pa. Pub. Util. Comm’n v. City of Lancaster, Docket No. R-2010-2179103 (Order entered July 14, 2011), the Commission discussed the use of an actual capital structure for a municipal utility under the Commission’s jurisdiction. The Commission stated the following: We conclude that based upon the unique circumstances in this proceeding that the actual capital structure must be used for ratemaking purposes to achieve a fair balance between consumers and the City. The OTS, the OCA as well as Kellogg have correctly argued that the use of a hypothetical capital structure will produce an inflated overall rate of return that would adversely affect consumers. Id., at 51. The Commission further stated: Additionally, we note that the capital structure represents the City’s decision, in which it has full discretion, on how to capitalize the Water bureau’s rate base. This actual capitalization forms the basis upon which the Water Bureau and the City attract capital. The Commission went on to state:We find that the ALJ’s reliance on the comparison of the City’s capital structure to the comparison groups’ capital structures inappropriate in this instance. The utilities in the comparison group are publicly traded companies that need to meet market norms for capital structure ratios. As the City is not traded as a separate entity and does not need to meet these same requirements the use of a hypothetical capital structure is misplaced. We find that using the City’s hypothetical capital structure would impose excessive costs on customers because it requires customers to pay equity returns of over 10 percent on debt that costs, on average 4.66 percent. On the other hand, use of the actual capital structure…does not result in excessive costs to customers. Id. at 55. I&E R.B., pp. 22-23. In the current case, the City is similarly situated to the City of Lancaster. The City provides the capital financing to the Bureau of Water. The City has discretion to capitalize the Bureau of Water in any manner it sees fit. As noted by I&E witness Maurer, “[t]he Bureau of Water has maintained a debt-heavy capital structure and has demonstrated through the issuance of low-cost debt…that it is able to maintain a debt-heavy capital structure.” I&E St. No. 1-SR, p. 14; I&E R.B., p. 23. The City cites to the Pa. Pub. Util. Comm’n v. Borough of Media, 77 Pa. PUC 481 (1992) (Media), case as support for the utilization of a hypothetical capital structure. City M.B., pp. 39-40. While it is true that the Commission used a hypothetical capital structure in Borough of Media, in City of Lancaster the Order stated:Clearly, the Commission has discretion in whether to use a hypothetical capital structure. However, the Commission must always balance the interest of the utility and the customers when considering a hypothetical capital structure…Thus, there are no magic numbers for the proper percentage of debt and equity. City of Lancaster, Docket No. R-2010-2179103, p. 53 (Order entered July 14, 2011).I&E R.B, p. 24. The instant case is much like Pa Pub. Util. Comm’n v. Emporium Water Co., Docket No. R-00061297 (Order entered Dec. 28, 2006), Pa. Pub. Util. Comm’n v. Emporium Water Co., 95 Pa. PUC 191, 208 PUR4th 502 (2001), and Pa. Pub. Util. Comm’n v. Western Utilities, Inc., 88 Pa. PUC 454 (1998). In those cases, the Commission was concerned about shifting low cost debt into higher cost equity. Even under a hypothetical capital structure, there would still be a substantial portion of low cost debt that would have to be shifted to higher cost equity should the Commission impose this hypothetical capital structure. This low debt cost rate reflects the City’s ability to tax its residents. There can be no doubt that the City’s taxing power lowers the Bureau of Water’s financial risk given that it is a municipal-owned utility. Since the Bureau of Water’s status as a municipally-owned utility provides it with the opportunity to obtain debt at this low cost rate as a result of the City’s ability to tax, this low cost debt should not be shifted to higher cost equity at the expense of the ratepayers. For this reason, the City does not have to be treated like an investor owned utility for ratemaking purposes and, therefore, a hypothetical capital structure does not need to be imposed. As noted by I&E witness Maurer, “[w]hile the Bureau of Water’s capital structure is atypical of the investor-owned water utility industry, the low cost of debt that the Bureau of Water is able to obtain through the City of DuBois is also atypical of the invest-owned water utility industry.” I&E St. No. 1-SR, p. 12; I&E R.B., pp. 24-25. The OCA submits that the Commission’s concerns about ratepayers paying equity rates on low cost debt are also present in this case. Specifically, the City is asking the PUC-jurisdictional customers to pay an equity return of 10.5% on debt that has a weighted cost of 3.02%. OCA R.B., pp. 29-30. I conclude it would be “fair and reasonable to both the utility and the ratepayers” to adopt the capital structure recommended by the OCA and I&E rather than the City’s capital structure, thus complying with the principles most recently enunciated by the Commission in Lancaster 2011. In its Main Brief, the City relies on Pa. Pub. Util. Comm’n v. Borough of Media, 77 Pa. PUC 446, 481 (1992) (Media). City M.B. at 39. In Media, the Commission adopted the hypothetical capital structure proposed by the Borough of Media. The City’s reliance on Media ignores the numerous subsequent cases that have used the actual capital structure as explained in the OCA’s Main Brief. OCA M.B. pp. 51-54; OCA R.B., pp. 29-30. The City also argues that the OCA’s debt ratio is too high because the debt ratio will change in the 2018-2021 timeframe. City M.B. p. 38. The City’s argument is not relevant to the capital structure that is appropriate for ratemaking purposes in the future test year chosen by the City. At December 31, 2016, the outstanding debt attributable to the Bureau of Water will be $10,738,268. OCA M.B. p. 49; OCA St. 1 at 14; City Exh. HW-1, Sch. 3. The fund equity shown on the most recent audited financial statement is $46,488 which means that the actual capital structure is 99.5% debt/0.5% equity. Id.; OCA St. 1 at 14-15. OCA witness Everette also looked at the rate base as of 12/31/16 and subtracted the total debt at 12/31/16, the result was a 71.7% debt/28.3 equity ratio. OCA M.B. pp. 49-50; OCA St. 1S at 6. In reviewing the City data as of the end of the future test year, it is clear that the capital structure recommended by both the OCA and I&E is reasonable and more closely tracks the actual capital structure of the test year. Debt ratios change over time, however, the relevant time period in this rate case is the future test year, ending 12/31/16. The debt ratio in 2018-2021, in addition to being speculative, is not relevant to the test year in this proceeding. The City’s argument also presumes that debt will be paid off and no new debt will be issued which is unlikely. See OCA St. 1S at 8; OCA R.B., pp. 30-31. The City also argues that the OCA recommended rate case normalization period of five years leads to even greater overstatement of the debt ratio. City M.B. at 38. This argument is without merit. As explained by Ms. Everette:[T]he appropriate rate case expense normalization period is based on the City’s actual historical filing frequency in order to properly reflect the normal amount of rate case expense in rates. The rate case expense normalization period is not prescriptive and does not ban the City from filing a rate case sooner if it determines it is necessary. OCA St. 1S at 8; OCA R.B., p. 31. In its Main Brief, the City also argues that the OCA’s recommended capital structure overstates the debt ratio because it includes debt issuance discounts and expenses. City M.B. at 37. As explained by Ms. Everette, “These costs are part of the cost of constructing the asset and are therefore reasonable to include when determining the portion of rate base funded by debt.” OCA St. 1S at 7. Moreover, even if these costs were excluded, City witness Walker’s recalculation results in a capital structure of 67% debt/33% equity (City M.B., p. 37) which is essentially identical to the capital structure of 70% debt/30% equity recommended by both the OCA and I&E and far different than City witness Walker’s recommendation. OCA R.B., p. 31. I conclude and recommend that the proposed capital structure of both I&E and the OCA (70% debt/30% equity), the actual capital structure, is appropriate for ratemaking purposes and should be adopted here. It reflects the basis upon which the financing has been done for the City’s rate base. Thus, for the City, it is reasonable for ratemaking purposes. 5.Cost of DebtLong term debt is based upon a company’s contractual obligations to acquire capital to finance its rate base. I&E agrees with the City’s claimed cost rate of long term debt at 3.02% as that is the actual cost and is below the implied cost rates for the mutually agreed-upon proxy group. I&E Statement No. 1, p. 15; I&E M.B., p. 29. The OCA accepted the City’s 3.02% cost of debt. OCA St. 1 at 12; OCA M.B., p. 58. I recommend that the agreed upon cost of debt be utilized here. TC "5.Cost of Long-Term Debt" \f C \l "3" 6.Return on Common Equity TC "6.Return on Common Equity" \f C \l "3" a.Introduction TC "a.Introduction" \f C \l "4" The City’s proposed cost of common equity reflects the results of three models. The City conducted Discounted Cash Flow, (“DCF”), Capital Asset Pricing Model (“CAPM”), and Risk Premium (“RP”) analysis to develop its recommended equity cost rate of 10.50%. To the extent the Commission deems it necessary to adjust the proposed cost of common equity to reflect the maximum income tax status of investors, the City recommends a common equity cost rate of 9.50%, reflecting a 9% maximum income tax adjustment. City M.B., pp. 44-45. I&E bases its recommended common equity cost rate on its DCF analysis and references a CAPM analysis solely as a check, while OCA similarly bases its recommendation solely on a DCF analysis. City M.B., p. 45. The OCA’s recommended cost of equity is 8.25%, which is the midpoint of the range of 7.5-9% developed by Ms. Everette. OCA M.B., pp. 58-65. The OCA then adjusted the 8.25% cost of equity by a 22% tax factor to reflect the tax exempt status of the City which it contends is consistent with PUC and Commonwealth Court holdings. OCA M.B., pp. 62-63; OCA R.B., p. 32. The total cost of capital recommended by the OCA, including the pro forma capital structure is as follows:TABLE 4City of DuBois – Bureau of WaterOCA Total Cost of CapitalItemPercentCostWeighted CostLong Term Debt70.00%3.02%2.11%Equity30.00%6.60%1.98%Total100.00%--4.09%OCA St. 1 at 27; OCA M.B., p. 63. I&E recommends a 4.70% overall rate of return derived from the use of the mutually agreeable debt cost rate of 3.02%, Exhibit HW-1, Schedule 1, the I&E and OCA supported estimated actual 70% debt and 30% equity capital structure, I&E Statement No.1, p. 13 & OCA Statement 1, p. 15, and the I&E-recommended 8.62% return on common equity based upon the DCF model, which is compared to the CAPM and debt service coverage ratio as per Commission accepted procedure. I&E Statement No. 1, p. 23 & Pa. Pub. Util. Comm’n v. PPL Electric Utilities Corporation, R-2012-2290597 adopting rationale from Lower Paxton Township v. Pa. Pub. Util. Comm’n, 317 A.2d 917, 920-921 (Pa.Cmwlth. 1974); I&E M.B., p.?31. I&E then adjusted this cost of equity to account for the fact that interest paid to municipal bond holders is exempt from taxation, unlike interest paid to corporate bond holders. This exemption effectively results in more cash in hand for municipal bond holders when all other factors are equal. I&E Statement No. 1, p. 31. I&E recommends a tax rate adjustment of 18.22%, which reduces the common equity recommendation from 8.62% to 7.05%. I&E Statement No. 1, p. 31. I&E calculates that when this adjustment is reflected, the appropriate overall rate of return for the City is 4.23%, which produces results that are fair and reasonable to the City and to its ratepayers. I&E Statement No. 1, p. 59; I&E M.B., p. 44.This Recommended Decision adopts I&E’s cost of equity. See Appendix A, Table I(A). The undersigned concludes I&E’s cost of equity is the most accurate and it is therefore recommended. b.DCF ModelI&E utilizes the DCF method to determine recommended cost rate of common equity and verified the reasonableness of the cost of equity with the CAPM method and the reasonableness of the overall return by analyzing the Debt Service Coverage. I&E Statement No. 1, pp. 17-18. The fundamental concept behind the DCF is that the receipt of dividends in addition to expected appreciation is the total return requirement determined by the market. I&E Statement No. 1, p. 18. I&E’s DCF analysis utilizes a forecasted growth rate and expected dividend yield, which allows the time-value of money to be considered and causes the results to be forward-looking. The use of a growth rate and dividend yield allows the DCF, unlike alternative methodologies, to measure the cost of equity directly which makes it the superior method for determining rate of return. I&E Statement No. 1, p. 18. This market-based DCF methodology has traditionally been endorsed by the Commission. Inter alia Pa. Pub. Util. Comm’n v. PPL Electric Utilities Corp., Docket No. R-2012-2290597, p. 80. (Dec. 28, 2012); Pa. Pub. Util. Comm’n v. Consumers Pennsylvania Water Company - Roaring Creek Division, 87 Pa. PUC 826 (1997); Pa. Pub. Util. Comm’n v. Roaring Creek Water Company, 81 Pa. PUC 285, 323, 150 PUR 4th 449, 483-488 (1994); Pa. Pub. Util. Comm’n v. York Water Co., 75 Pa. PUC 134, 153-167 (1991); Pa. Pub. Util. Comm’n v. Equitable Gas Company, 73 Pa. PUC 345-346 (1990); Pa. Pub. Util. Comm’n v. Philadelphia Suburban Water Company, 71 Pa. PUC 593, 623-632 (1989). I&E employed the standard DCF model, k = D1/P0 + g, where D1 is the dividend expected during the year, P0 is the current price of the stock, and g is the expected growth rate of dividends. I&E Statement No. 1, pp. 23-23. Through the methodologies outlined in the testimony of I&E witness Rachel Maurer, I&E calculated that the DCF methodology produces a cost of common equity of 8.62% prior to the tax rate adjustment used for municipal utilities. I&E Statement No. 1, pp. 23-26; I&E M.B., pp. 31-32. c.CAPM AnalysisI&E witness Maurer’s Direct Testimony also includes a CAPM analysis as a result of previous Commission Orders expressing an increased interest in confirming DCF results in base rate cases through the use of the CAPM. I&E Statement No. 1, pp. 17-18. For her analysis, she employed the standard CAPM model as portrayed in the following formula:k = R + (Rm – Rf)Where:k=Cost of equityRf=Risk-free rate of returnRm =Expected rate of return on the overall stock market=Beta measures the systematic risk of an assetUsing the calculations outlined in testimony, I&E derives CAPM results as follows:Forecasted7.76%Historic8.97%I&E Statement No. 1, pp. 26-30. These numbers confirm the validity of I&E’s DCF analysis which resulted in 8.62% Cost of Equity.d.Adjustments to Cost of Equity (Risk Adjustment, Size Adjustment, and Leverage Adjustment) by City According to I&E, City witness Walker further inflates his cost of equity numbers by injecting 110 basis points, City Exhibit HW-1, Schedule 20, p. 1, into his CAPM results for a unsupported size effect and inflates his DCF, CAPM, and RP numbers with a 60 basis point leverage adjustment, City Statement No. 4, p. 50, and an additional 25 basis points due to an alleged “investment risk.” City Statement No. 4, p. 60; I&E M.B., p. 35. I&E points out such adjustments have been explicitly rejected by the Commission before. Pa. Pub. Util. Comm’n v. City of Lancaster – Bureau of Water, Docket No. R-2010-2179103, p. 79. The Commission noted, “any adjustment to the results of the market based DCF as we have previously adopted are unnecessary and will harm ratepayers.” Id. I&E maintains that these adjustments should be categorically denied. That being noted, I&E maintains these adjustments individually are unreasonable and unsupported. I&E M.B., p. 35. Mr. Walker supports his size effect adjustment by noting that certain small businesses may have more trouble weathering difficulties such as the loss of a large customer, regional economics, or regulatory changes. In an attempt to underscore the small size of the City, Mr. Walker compares it to the large, publicly traded, investor-owned utilities from the proxy group. I&E does not dispute that the City is smaller than those Utilities enumerated in the proxy group. Rather, I&E maintains that the absolute difference in size is not a proper reference point. In fact, the Standard and Poor’s article Mr. Walker relies upon to support his hypothesis explicitly acknowledges this fact. This article states “Small companies also can enjoy the competitive advantages that accompany a dominant market position… in this sense, sheer mass is not important, demonstrable market advantage is.” I&E Statement No. 1, p. 47 citing Standard & Poors, Corporate Ratings Criteria, Utilities: Key Credit Factors: Business and Financial Risks in The Investor-Owned Utilities Industry, Nov. 26, 2008. Furthermore, as attested to by I&E witness Maurer, the technical literature supporting such adjustments relating to the size of a company is not specific to the utility industry let alone the municipal utility industry. I&E Statement No. 1, p. 48. Witness Maurer noted, there is substantial evidence in support of the hypothesis contrary to Mr. Walker’s claim. As quoted in Ms. Maurer’s testimony, “although the size phenomenon has been strongly documented for the industrials, the findings suggest that there is no need to adjust for the firm size in utility rate regulation.” I&E Statement No. 4, p. 48 citing Utility Stocks and the Size Effect: An Empirical Analysis by Annie Wong. Journal of Midwest Finance Association (1993). I&E M.B., pp. 35-36. In his rebuttal, Mr. Walker attempted to dispute the findings of this empirical study by citing a 2002 article by Dr. T.M. Zepp. City Statement No. 4-R, p. 35. This referenced article, however, simply speculates on other possible reasons for the results and refers to two other studies. The first study is not included and therefore unable to be evaluated. The second study utilized an unacceptably small sample size of two large water utilities being compared to two small water utilities. I&E Statement No. 1-SR, p. 24. Such a study can hardly be argued as representative of the entirety of the market. Mr.?Walker also refers to an article by M. Annin in support of his position, but neglects to mention that Annin’s article is not specific to the utility world and does not refute I&E’s position. I&E Statement No. 1-SR, p. 25; I&E M.B., p. 37. In his analysis, Mr. Walker also considers capital intensity, which is the amount of plant, property, equipment, inventory or other assets required to generate a unit of revenue. I&E Statement No. 1, p. 43. Typically this is analyzed by dividing total assets by sales revenue or by dividing annual capital expenditures by annual revenues. I&E Statement No. 1, p. 44. Mr.?Walker, however, chooses to divide the total of gross plant, property, and equipment by net annual sales revenue. If Mr.?Walker were to perform this same analysis after removing depreciation from his plant, property, and equipment, his capital intensity would be lower. I&E Statement No. 1, p. 45. Also, Mr. Walker fails to consider that large capital expenditures in a given time frame may skew the capital intensity higher without being reflected in revenue. I&E Statement No. 1, p. 45. Additionally, the application of this consideration to municipal utilities is disputed in academic literature put forward by the Water Research Foundation. I&E Statement No. 1, p. 40 citing Olstein, Myron A., Jennings, Jason D., Geist, Robert; Improving Water Utility Capital Efficiency. Water Research Foundation 9/13. Mr. Walker’s adjustment also fails to consider that capital intensity is founded upon the City’s own decisions and management in regards to its capital. I&E Statement No. 1, p. 46. Accordingly, I&E submits that the City’s size adjustment is unfounded and should be rejected. I&E M.B., pp. 37-38. I agree. The City attempts to insert a 70 basis point leverage adjustment into its calculations. Leverage, generally, is the use of debt capital to supplement equity capital. I&E Statement No. 1, p. 35. What Mr. Walker terms a “leverage” adjustment, is actually an adjustment to account for applying the market value cost rate of equity to the book value of the utility’s equity, which is more accurately termed a “market-to-book” adjustment. I&E Statement No. 1, p. 35. The basis for Mr. Walker’s adjustment is a comparison of the average proxy group (again, large investor-owned utilities) market-to-book average. I&E Statement No. 1, p. 36. This is done to address the concern that DCF methodology will understate common equity cost rate since the DCF utilizes book value rate base while investor returns are measured relative to stock price levels. I&E M.B., p. 38. I&E is not aware of any academic or empirical studies that support Mr. Walker’s leverage adjustment and believes this adjustment tampers unnecessarily with cost of equity calculations to the detriment of ratepayers, as the Commission has noted before. Pa. Pub. Util. Comm’n v. City of Lancaster – Bureau of Water, Docket No. R-2010-2179103, p. 79. (Order entered July 14, 2011). Beyond being rejected by the Commission in previous cases, I&E maintains that this specific adjustment is improper and invalid because of the way that rating agencies characterize financial risk, the lack of support in academic literature, and the fact that such investment information is readily available to the public therefore an unwarranted adjustment. I&E Statement No.1, p. 37. Accordingly, I&E submits that it should be rejected to protect the public interest in this matter. I&E M.B., pp. 38-39. I agree with I&E.The final adjustment Mr. Walker interjects into his analysis is an investment risk adjustment with no precedent to support it. This claim by the City stems from the difference in long-term debt cost rates of the yield spread between A and BBB rated debt. City Statement No.?4, pp. 59-60. As applied to the City, not only are the interest rates lower for public utility bonds than for municipal bonds by rating, but the interest rates for each of the City notes are lower than the average public utility bond. The City notes are also lower than the average municipal bond and even lower than the implied interest rate for the proxy group. I&E Statement No. 1, p. 58. See also I&E Exhibit No. 1, Schedule 1. I&E submits that this adjustment is not only unprecedented, but also invalid. I agree. I&E M.B., p. 39. In conclusion, based upon the Commission precedent and upon the individual invalidity of each of these three adjustments, the City’s Risk Adjustment, Size Adjustment, and Leverage Adjustment all unfairly harm ratepayers, are unnecessary, and are contrary to the public interest that the PUC is charged with protecting. Accordingly, these adjustments are rejected. e.Tax Rate AdjustmentThe implied tax rate adjustment is a consideration applied by the City, I&E and the OCA. The OCA’s methodology for calculating its implied tax adjustment of 20% is set forth in its Main Brief on p. 62. The methodologies utilized in calculating this adjustment, however, are different.? (The overarching concept behind this adjustment is that interest paid to municipal bond holders is exempt from taxation, while interest paid to corporate bond holders is not exempt.)? I&E Statement No. 1, p. 31. The OCA’s methodology for calculating its implied tax adjustment of 20% is set forth in its Main Brief on p. 62. This means that bond holders would accept a lower return on a municipal bond than on a corporate bond since it translates to the same cash in hand for them. I&E Statement No. 1, p. 31; I&E M.B., p. 41. I&E utilizes an implied tax rate of 18.22%, which results in a reduction in common equity from 8.62% to 7.05%. I&E Statement No. 1, p. 31. This is derived from I&E’s comparison of Moody’s Monthly Municipal Bond Yields to Moody’s Monthly Public Utility Bond Yields for all bond grades from August 2014 through July 2016. I&E Statement No. 1, p.?32. This ranged from 8.16% to 28.43% with an average of 18.22%, which is the number utilized by I&E. I&E Statement No. 1, p. 32. Notably, this simple and straightforward methodology?has been accepted by the Commission and it has been found to be “reasonable” and “appropriate” in similar circumstances. Pa. Pub. Util. Comm’n v. City of Lancaster – Bureau of Water, Docket No. R-2010-2179103, p. 81; I&E M.B., pp. 41-42. City witness Walker presents a variety of criticisms to the methodology utilized by the Commission in the past but presents no alternative other than choosing the lowest of his yield spread averages for his 9% tax factor. City Exhibit No. HW-1, Schedule 22. Mr. Walker criticizes the bond yield spreads between public utility and GO Bonds and notes that the selection only measures the tax rate of the bond investors who simultaneously hold GO bonds and public utility bonds, meaning, it does not measure the income tax rate of the owners of the Bureau of Water nor the tax rate of other investor owned utility common stockholders so it must be adjusted. City Statement No. 4, p. 61. Mr. Walker then claims that he must consider the types of bonds used, the credit quality of those bonds, and the matching terms/lives of the bonds.? City Statement No. 4, p. 61. Mr. Walker then refers to uncited Bloomberg News Reports referring to Moody’s Municipal Bond Yield Averages as: derived from pricing data on newly issued GO Bonds that are unenhanced, unweighted averages, with composite averages representing unweighted averages of corresponding 20-year observations. City Statement No. 4, p. 61; I&E M.B., p. 42. Even though the City has only utilized GO Bonds (backed with taxing authority) when it has procured funding for the Bureau of Water, Mr. Walker feels that the GO Bond categories he previously selected must be modified since the Bureau of Water’s cost of common equity “should reflect the risk of the underlining assets devoted to providing water service.” City Statement No. 4, p. 62. This means that revenue bonds would be more appropriate in Mr.?Walker’s opinion. City Statement No. 4, p. 62. These are more risky, have an alleged higher yield, and do not have their yields published by Moody’s. City Statement No. 4, p. 62. Although Mr. Walker alleges that the aforementioned bonds must have corrections made so that they are matched in terms of credit quality and term length, he makes no attempt to present a correction or alternative. City Statement No. 4, p. 62-63; I&E M.B., pp. 42-43. After all these obstacles are addressed, Mr. Walker deduces that the appropriate tax adjustment is 9.00%, the lowest of his averaged yield spreads, which is less than half of the amount utilized by I&E and the OCA.? Mr. Walker does not reference any instances of this methodology being used before. In contrast to this unsupported approach, I&E maintains that its straightforward methodology, which has been previously utilized by the Commission is the appropriate way to determine the implied tax adjustment of 18.22% in this proceeding. I&E M.B., p. 43. I agree with I&E’s methodology here and an implied tax adjustment of 18.22%. f.Debt Service Coverage RatioTo further validate and confirm the overall accuracy and reasonableness of its DCF method and cost of capital in total, I&E analyzed the debt service coverage ratio that results from I&E’s recommended overall return. Debt service coverage is the amount of cash flow available to cover outstanding debts. In municipal cases, this has been acknowledged by the Commission to act “as a check against which the rate base/rate of return methodology can be compared.” Pa. Pub. Util. Comm’n v. Borough of Media 77 Pa. PUC 481 (1992), p. 42. In this case, I&E’s overall return produces a debt service coverage ratio of 1.56, which is graded as strong for water and sewer utilities by Standard and Poor’s. I&E Statement No. 1, p. 57; I&E M.B., p.?40. As a point of contrast, City witness Walker does not provide a debt service coverage ratio for his proposed rate of return. Instead, Mr. Walker claims that debt service coverage ratios “up to 4.7” are reasonable and notes that the companies utilized in the proxy group (all of which are large, publicly-traded companies) have higher debt service coverage ratios. City Statement No. 4-R, pp. 22-23. Mr. Walker’s invalid and forced comparison of the City to large investor-owned utilities runs contrary to Commission precedent. Pa. Pub. Util. Comm’n v. City of Lancaster – Bureau of Water, Docket No. R-2010-2179103, p. 81;I&E M.B., p. 40. It is of note that the higher side of Mr. Walker’s “reasonable” debt service coverage ratio is more than triple what Standard and Poor’s qualifies as ‘strong’ for Water and Sewer utilities. To further demonstrate the extreme positions taken by the City’s Witness, it should be noted that the Media case relied upon by Mr.?Walker explicitly accepted a debt service coverage ratio of 1.15 that was deemed “sufficient protection to bondholders.” Pa. Pub. Util. Comm’n v. Borough of Media 77 Pa. PUC 481 (1992), p. 42. I&E submits that the City will similarly be in a financially strong position with the cost of equity methodology recommended. I&E M.B., pp. 40-41. I agree with I&E. g.Overall Rate of ReturnThe appropriate overall rate of return for the City is 4.23%. This overall rate of return produces results that are fair and reasonable to the City and its jurisdictional ratepayers. H.Rate StructureEstablishment of a rate structure is an administrative function peculiarly within the expertise of the Commission. Emporium Water Company v. Pa. Pub. Util. Comm’n, 955 A.2d 456, 461 (Pa.Cmwlth. Ct. 2008); City of Lancaster v. Pa. Pub. Util. Comm’n, 769 A.2d 567, 571-72 (Pa.Cmwlth. Ct. 2001). The question of reasonableness of rates and the difference between rates in their respective classes is an administrative question for the Commission to decide. Pennsylvania Power & Light Co. v. Pa. Pub. Util. Comm’n, 516 A.2d 426 (Pa.Cmwlth. Ct. 1986); Park Towne v. Pa. Pub. Util. Comm’n, 43 A.2d 610 (1981). This is further refined by the Lloyd case.1.Cost of Service TC "1.Cost of service" \f C \l "3" When a utility files for a rate increase, it must file a cost-of-service study (COSS) assigning to each customer class a rate based upon operating costs that it incurred in providing that service. 52 Pa.Code § 53.53 Exhibit C.IV.E. Lloyd v. Pa. Pub. Util. Comm’n, 904 A.2d 1010 (Pa.Cmwlth. 2006) appeal denied 591 Pa. 676, 916 A.2d 1104, fn. 10 (2007) (Lloyd). Rates, here the unbundled distribution rates charged to all customers, are required by statute to be just, reasonable and non-discriminatory. 66 Pa.C.S. §§ 1301, 2804(10). The City filed a class cost of service study (COSS) with its June 30th base rates filing. See City Statement No. 2, at Exhibit CEH-2. The City employed the same COSS methodology in this proceeding as it did in its previous base rates case at Docket No. R2013-2350509. OSBA Statement No. 1, at 4. The City used the Base-Extra Capacity (BEC) methodology in its COSS. OSBA witness Brian Kalcic explained the BEC methodology, as follows:In general, the BEC methodology consists of two major steps.First, the utility’s system-wide revenue requirement is classified into functional cost categories (i.e., base, extra-capacity, customer and fire protection). Extra-capacity costs are further classified as either maximum-day (Max-Day) or maximum-hour (Max-Hour) related.Second, as discussed below, each functional cost category is allocated to rate classes in accordance with a factor that reflects relative cost responsibility.The BEC classification and allocation steps combine to produce a measure of total cost of service, by rate class.By comparing allocated cost responsibility to actual revenue levels, one can determine whether a given rate class is contributing above or below its cost-of-service indications.OSBA Statement No. 1, at 3 (emphasis in original) (formatting added); OSBA M.B., p. 5.Mr. Kalcic continued:The [City’s COSS] allocates functionalized costs to the following (inside- and Outside-City) classes: a) Residential; b) Commercial/Public; c) Industrial; d) Sale for Resale; and e) Public Fire Protection.Id. Mr. Kalcic further explained the factors that the City used in its COSS to allocate costs to the various customer rate classes:The allocation factor varies with each type of classified cost.Base costs are defined as those costs that vary directly with water usage, as well as the costs associated with serving customers under average (as opposed to peak) load conditions. As such, base costs are allocated to classes in proportion to annual class usage levels.Max-Day and Max-Hour costs are defined as the costs incurred (or necessary) to serve load in excess of average load levels.Accordingly, Max-Day costs are allocated to classes in proportion to the excess maximum day demand of each class (i.e., the difference between a class’s maximum day demand and its average daily demand or usage).Similarly, Max-Hour costs are allocated to classes in proportion to the excess maximum hour demand of each class (i.e., the difference between a class’s maximum hour demand and its average hourly usage).Customer costs are defined as those that vary with the number of customers served by the utility, and are allocated to classes based the number of customers and/or the number of equivalent meters or services in each class.Finally, Fire Protection costs (associated with the facilities needed to meet the potential peak demand for fire service) are allocated to inside- and outside-City Public Fire classes on the basis of the number of fire hydrants.OSBA Statement No. 1, at 3-4 (emphasis added) (formatting added); OSBA M.B., pp. 5-6. OSBA and I&E supported the City’s proposed Cost of Service. I&E M.B. p. 45; OSBA M.B. p. 6. The OCA did not take a position regarding the City’s COSS. OCA M.B. p.?77. Sandy Township is the only party that opposes the City’s Cost of Service study. The City opposes Sandy Township’s recommendation to “look carefully at the costs claimed and allocated by the City for its water service to make sure that the City is not double recovering costs in the first instance through its water charges and, in the second instance, through its wastewater charges.” Sandy Township Main Brief, pp. 11-12, 15; City R.B., p. 56. Wastewater charges are not within the purview of this proceeding nor are they subject to the Commission’s jurisdiction. Under Section 1102(a)(5) of the Pennsylvania Consolidated Statutes, the Commission may only regulate municipal corporations that provide public utility services beyond their corporate boundaries. 66 Pa.C.S. § 1102(a)(5) TA \l "66 Pa. C.S. § 1102(a)(5)" \s "66 Pa. C.S. § 1102(a)(5)" \c 2 . The City does not provide wastewater service outside of its corporate boundaries, which therefore limits this rate investigation solely to the City’s water service. Moreover, Sandy Township’s attempts to bring the City’s wastewater service into this proceeding violates Section 5.401 of the Commission’s Regulations, 52 Pa.Code § 5.401 TA \l "52 Pa. Code § 5.401" \s "52 Pa. Code § 5.401" \c 4 , by raising, among other things, irrelevant information that is likely to confuse the issues and waste the Commission and the parties’ resources. City R.B., pp. 56-57. The City’s COSS should be approved and Sandy Township’s Wastewater COSS request should be denied. 2.Revenue Allocation The basic factor in allocating revenue is to have the rates reflect the cost of service. Lloyd v. Pa. Pub. Util. Comm’n, 904 A.2d 1010, 1020 (Pa.Cmwlth. Ct. 2006) (Lloyd); PPLICA MB at 12014. The City’s proposed revenue allocation is based directly on its COSS. OSBA Statement No. 1, at 4-5. Specifically, Mr. Kalcic testified, as follows:DuBois is proposing to (i) set aggregate inside- and outside-City revenues at cost of service and (ii) set individual outside-City class revenue levels at cost of service (within rounding). In other words, DuBois’ proposed revenue allocation is cost based for all outside-City customer classes.OSBA Statement No. 1, at 4-5; OSBA M.B., p. 7.The OSBA supports the City’s proposed revenue allocation since it moves all of DuBois’ outside-City customer classes to their respective cost of service. OSBA Statement No.?1, at 5; OSBA M.B., p. 7. Naturally, the City’s COSS was performed at a revenue requirement level that reflects DuBois’ full requested increase of $257,604. The OSBA does not take a position as to the amount of the revenue increase that should be awarded in this proceeding. OSBA M.B., p. 7. If a revenue increase that is less than the City’s originally requested amount of $257,604 is approved, Mr. Kalcic recommended the following methodology to determine class rate increases: In that event, I would recommend that DuBois’ proposed outside-City class increases . . . be reduced proportionately. For example, if the Commission were to award DuBois a final outside-City increase of $128,800, then all of the City’s proposed outside-City class increases should be reduced by the ratio of $128,800 to $257,600 or 50.0%.OSBA Statement No. 1, at 5. See also, OSBA Statement No. 1, Schedule BK-1; OSBA M.B., p.?7.Specifically, whatever the final revenue increase granted to the City, that dollar figure will be the numerator, and $257,604 will be the denominator, in a calculation of the proportional scaleback ratio. For example, if the City were to be granted a revenue increase of $64,401.00, the proportional scaleback ratio would be calculated as follows:($64,401.00 ÷ $257,600.00) = 0.25OSBA M.B., pp. 7-8.Next, each individual customer rate class, as set forth in OSBA Statement No. 1, Schedule BK-1, would be multiplied by the calculated proportional scaleback ratio of 0.25. For example, the Commercial class would receive the following rate increase:($56,021.00 × 0.25) = $14,005.25OSBA M.B., p. 8.This same calculation would be performed for each of the individual customer rate classes. OSBA M.B., p. 8. The OSBA submits that Mr. Kalcic’s proportional scaleback methodology has the advantages of being simple to understand, simple to execute, and provides a just and reasonable result for all outside-City customer classes. OSBA M.B., p. 8. OCA did not take a position regarding revenue allocation. OCA M.B., p. 77. I&E recommends that any scaleback of rates applicable in this case be applied to the usage proportion of rates. This is agreed to by the City. I&E M.B., p. 45. Sandy Township is the only party to respond to the City’s proposed revenue allocation, but avers only that the City “failed to support an increase in rates that would require allocation.” Sandy Township M.B., p. 15. As Sandy Township proposed no alternative revenue allocation or credible position on the City’s proposed revenue allocation independent of the revenue requirement issues, the statement amounts to a meaningless aversion requiring no response from the City. A scaleback of the rates which is proportional to the reduction in revenues and maintains the increase in customer charges would require the creation of separate volumetric rates for each customer class. ?If separate rates were not established for each customer class, a proportional scaleback of the volumetric rates which maintained the City’s proposed increase in the customer charge would result in greater than allowable revenues. ?I recommend approval of the customer charge increases requested by the City. See?Appendix A. I further recommend that the volumetric rates be scaled back to attain the desired revenue while maintaining the standard volumetric rate structure and the proposed increases to the customer charges. ?To accomplish this the volumetric rate increase was adjusted to $5.68 per thousand gallons for consumption up to 100,000 gallons and $4.30 per thousand gallons for consumption greater than 100,000 gallons.? See Appendix A. The adjustment achieves the desired revenue increase while maintaining the revenue allocation as close to the cost of service as reasonably achievable.3.Tariff StructureSandy Township submits the City did not provide enough support to justify a change in rates or a change to its tariff structure. Sandy Township Main Brief, p. 15. Meanwhile, I&E endorses the City’s proposal to withdraw Tariff Rule 36, OCA does not take any position on the City’s tariff structure, and OSBA does not evidence any opposition or concern with the City’s tariff structure beyond a recommendation that the City pursue certain tariff issues in its next base rate filing. I&E M.B., p. 45; OCA M.B., p. 77; and OSBA M.B. p.?10. City R.B., p. 58. Similar to its position on the City’s proposed revenue allocation, Sandy Township offered no specific or credible positions on the City’s proposed tariff structure independent of the revenue requirement issues. Therefore, Sandy Township’s statement on tariff structure amounts to a meaningless aversion requiring no response from the City. City R.B., p. 58. Regarding OSBA, the tariff structure concerns raised by OSBA pertain to future rate cases and should not be addressed at this time. OSBA requests that the Commission order the City to revise its tariff rate structure if the City finds it is unable to implement a cost-based class revenue allocation in its next base rate case. OSBA M.B., pp. 8-10. I agree with the City that OSBA’s concerns are premature and speculative. Upon receipt of the City’s next base rate filing, OSBA will have the right to review the filing and, if deemed necessary, propose its preferred revenue allocation. I also agree with the City’s withdrawal of Tariff Rule 36 in this proceeding. I.Miscellaneous Issues1.StipulationsAt the evidentiary hearing, stipulations between the City and the OCA were identified for the record and received into evidence. Tr. at 140:8-12. OCA M.B., p. 66. As part of this Recommended Decision, an ordering paragraph will require compliance by the City with the Stipulation it made with the OCA regarding UFW, as described below. UFW was an issue in this case. In fact, I&E proposed several expense adjustments based upon the fact that the City’s UFW has increased most recently and exceeds 20%. Compliance with the Stipulation will certainly be relevant in the next base rate proceeding and evidence related to compliance will be needed to support expenses related to UFW. The following provides a brief discussion of the agreed upon stipulations. a.Annual PUC Report Format TC "1.Annual PUC Report Format" \f C \l "3" City/OCA Stipulation 1 provides: In future rate cases, the City will provide UFW Calculations in the format shown on Exhibit TLF-1 that is used by water utilities in submission of their Annual PUC Reports. Stipulation between the City of DuBois and the Office of Consumer Advocate (City/OCA Stipulation) at ? 1; OCA M.B., p 66. OCA witness Fought recommended that the City provide UFW calculations in the format shown in Exhibit TLF-1 which is used by water utilities in submission of their Annual PUC Reports. OCA St. 2 at 7; OCA St. 2S at 5. The City was not using the PUC procedure in section 500 of the PUC Annual Report forms for public water utilities for calculating UFW. OCA St. 2 at 3. The OCA and the City are in agreement that in future rate cases, the City will provide UFW Calculations in the format shown in Exh. TLF-1 which is used by water utilities in the submission of their Annual PUC Reports. City OCA Stipulation at ? 1. The City/OCA Stipulation 1 addresses this concern. OCA M.B., p. 66. b.Installation of Water Meters on All Services Lines Connected to the Municipal Buildings TC "2.Installation of water meters on all services lines connected to the municipal buildings" \f C \l "3" City/OCA Stipulation 2 provides: Within six months of a final order in this case, the City will install water meters on all water service lines connected to the Public Works Garage, City Municipal Building, Waste Water Treatment Plant, Public Library, City Pool, and the five Fire Halls. The Water Treatment Plant may not need metering if the water is withdrawn prior to the metering of the flow into the distribution system. City/OCA Stipulation at ? 2; OCA M.B., p. 67. Mr. Fought recommended that the City install water meters in the city facilities. OCA St. 2 at 8; OCA St. 2S at 5. In response to an OCA interrogatory, the City stated that the volume of water used for the category “other” was estimated by assuming that each of the eleven municipal buildings used 500 gallons per day. OCA St. 2 at 7; OCA Exh. TLF-9; OCA-IV-7. OCA expert witness Fought raised concerns regarding the City’s estimates. OCA St. 2 at 3-5. During the OCA’s site visit on October 3, 2016, the City Manager and the City Engineer explained that, to the best of their knowledge, there is not any unusual construction problem that would prevent the metering of all of the City buildings. OCA St. 2 at 7. Mr. Fought recommended the following: I recommend that the City meter water service to all of its buildings in according with § 65.7. Metered service. (d)??Universal metering.?A public utility shall provide a meter to each of its water customers except fire protection customers and shall furnish water service, except fire protection service, exclusively on a metered basis; except that flat rate service may continue to be provided pending implementation of a reasonable metering program or under special circumstances as may be permitted by the Commission for good cause. OCA St. 2 at 7; OCA M.B., p. 67. The City/OCA Stipulation 2 addresses this concern. c.The Submission of Written Monthly Estimates of Unmetered Water Use from Fire Companies TC "3.The Submission of Written Monthly Estimates of Unmetered Water Use from Fire Companies" \f C \l "3" City/OCA Stipulation 3 provides: Within two months of the final order in this case, the City should require each of the Fire Companies to submit a monthly written estimate of the unmetered water used and what it was used for. City/OCA Stipulation at ? 3; OCA M.B., p. 68. OCA witness Fought recommended that the Fire companies should submit monthly written estimates to the City in order to properly measure UFW. OCA St. 2 at 8; OCA St. 2S at 5. Mr. Fought raised concerns regarding how the City estimated and accounted for unmetered water use to the nearest 1 million gallons. See, OCA St. 2 at 3-5. Mr. Fought noted as follows regarding the use of estimations:[O]n Exhibit TLF-4, the City has estimated the Accounted For Water (Unmetered) Use to the nearest 1 million gallons per year for ‘Fire Department Use’, ‘Water Line Construction’ and ‘Other’. In some cases, the estimated volumes are the same for more than one year…In my experience such rounding and consistency of using the same numbers for more than one year is unusual in UFW calculations. This indicates that some of the City’s volumes of unmetered uses may be educated guesses instead of reasonably accurate estimates taken at the time the use occurred. OCA St. 2 at 3-4; OCA M.B., p. 68. Additionally, “the City Manager explained that in addition to cleaning their own parking lots, the Fire Department sometimes cleans private parking lots as part of fireman training exercises.” OCA St. 2 at 4. OCA witness Fought was concerned that “[i]t appears that the City does not have information from the fire companies that would provide a reasonable estimate of the unmetered water used by each company.” OCA St. 2 at 5; OCA M.B., p. 68. The City/OCA Stipulation 3 addresses this concern. d.Estimation of Water Loss at the Time Repair is Made TC "4.Estimation of Water Loss at the Time Repair is Made" \f C \l "3" City/OCA Stipulation 4 provides, Upon entry of a final order in this case, the City will estimate (at the time the repair is made) the water loss of each waterline/service line leak or break that was repaired. City/OCA Stipulation at ? 4; OCA M.B., p. 69. OCA witness Fought recommended that the City estimate water loss for line breaks and repairs. OCA St. 2 at 8; OCA St. 1S at 5. This recommendation was based on OCA witness Fought’s concerns regarding the City’s estimation of UFW discussed above and is intended to lead to greater accuracy in measuring the level of UFW. See generally, OCA St. 2 at 2-7. The City/OCA Stipulation 4 addresses OCA’s concerns regarding the calculation of UFW. OCA M.B., p. 69. e.Metered Locations for Street Sweepers and Fire Companies TC "5.Metered Locations for Street Sweepers and Fire Companies" \f C \l "3" City/OCA Stipulation 5 provides:Upon entry of a final order in this case, the City will provide metered location(s) for use by the street sweeper and fire companies for their non-firefighting uses. City/OCA Stipulation at ? 5; OCA M.B., p. 69. As mentioned above, OCA witness Fought expressed concerns regarding UFW in relation to the City’s Fire Companies. See, OCA St. 2 at 4 (“the Fire Department sometimes cleans private parking lots as part of fireman training exercises”). OCA witness Fought also expressed concern that the City claimed its one street sweeper used 250,000 gallons per year for street cleaning and 200,000 gallons per year for parking lot cleaning. OCA St. 2 at 5. OCA witness Fought stated that “using almost as much water for parking lot cleaning as street cleaning seems unusual because the area covered by the streets is much larger than the area of the parking lots. OCA St. 2 at 5. Moreover, parking lot cleaning was also included in the Fire Department usage. OCA St. 2 at 5. The City/OCA Stipulation 5 addresses OCA’s concerns regarding the calculation of UFW. OCA M.B., pp. 69-70.plaint Logs TC "plaint Logs" \f C \l "3" City/OCA Stipulation 6 provides:The City will prepare a script for customer service complaints made via telephone, requiring the responding City representative to obtain the customer name, customer address, and a description of the service issue. City/OCA Stipulation at ? 6; OCA M.B., p. 70.City/OCA Stipulation 7 provides:The City will preserve a record of customer service complaints received via telephone. The Complaint logs should include the names and addresses of the complainants, the date and character of the complaint, and the final disposition of the complaint. City/OCA Stipulation at ? 7; OCA M.B., p. 70. In his direct testimony, OCA witness Fought expressed concerns regarding the City’s lack of a complaint log. OCA St. 2 at 8. At the time of Mr. Fought’s direct testimony, the City did not keep a record of complaints from jurisdictional customers. OCA St. 2 at 8. Mr.?Fought testified that “[t]herefore, the number of water quality and service complaints received by the City from jurisdictional customers by phone calls or other non-written methods during the years 2013, 2014, 2015 and 2016 to date is unknown.” OCA St. 2 at 8; OCA Exh. TLF-10. OCA witness Fought explained in his direct testimony that ongoing records are important information since they show whether customers have quality of service issues and because they would show what steps the City took to remedy customer complaints and whether the City responded in a timely manner. OCA St. 2 at 8. Mr. Fought had the following recommendations in his direct testimony:First, the City should keep records of complaints as required by the Commission in accordance with 52 Pa.Code § 65.3. The City should maintain a written log of all complaints received from jurisdictional customers. The complaint logs should include the names and address of the complainants, the date and character of the complaint and the final disposition of the complaint. Second, the phone number listed on the City’s bills should be used to log complaints by the jurisdictional customers. OCA St. 2 at 9; OCA M.B., pp. 70-71. Subsequent to the filing of OCA witness Fought’s direct testimony, Mr. Fought was made aware of complaints made to OCA by jurisdictional customers via telephone. The reported existence of complaints being made to the City was in contradiction to what OCA witness Fought was told by City witness Suplizio during OCA witness Fought’s site visit. OCA St. 2 at 3-4; OCA M.B., p. 71. In his rebuttal, City witness Suplizio stated that: [O]f course, some residents at times approach known City employees informally to address minor service inquiries. Such is the nature of life in a small city like DuBois. However, if a resident sent a written Complaint to the City, the City would certainly keep original correspondence with a record of the ensuing investigation. But the City should not be expected to track every phone call or record every instance of a customer flagging down a City employee in public spaces. To the contrary, the City’s customer service record should be referenced as a justification for providing the City with sufficient revenue to continue providing customers with exemplary service and high quality water. City St. 1R at 11; OCA M.B., p. 71. In surrebuttal, OCA witness Fought re-iterated the importance of keeping complaint logs. OCA St. 2 at 4. “The City should not disregard a consumer complaint regarding water quality because the complaint was made in-person or over the telephone as opposed to in a formal writing.” OCA St. 2 at 4. The stipulations require the City to keep complaint logs for all forms of contact with the city. The OCA accepts the City’s stipulations relating to consumer compliant logs being kept for all consumer contact with the City regarding water service issues. OCA M.B., pp. 71-72. g.Isolation Valves TC "7.Isolation Valves" \f C \l "3" City/OCA Stipulation 8 provides:The City will exercise all isolation valves in the jurisdictional area prior to October 2017 and subsequently submit a schedule to the OCA and other parties for repairing or replacing all isolation valves that could not be exercised. City/OCA Stipulation at ? 8; OCA M.B., p. 72. In response to OCA interrogatories, the City indicated that there are 105 isolation valves installed in the jurisdictional areas but that none of the isolation valves have been exercised in the past 5 years. OCA St. 2 at 9. The City does not know if any of these isolation valves need to be repaired or replaced. Id.; OCA Exh. TLF-11. In his direct testimony, OCA witness Fought testified as to the importance of exercising isolation valves to prevent the valves from seizing-up and getting stuck from corrosion or other deposits adjacent to the valves. OCA St. 2 at 9-10. Mr. Fought testified: “An isolation valve that cannot be fully closed will increase the water loss during a water main break and increase the number of customers affected.” Mr.?Fought recommended that isolation valves be exercised in a routine manner as part of a maintenance program. OCA St. 2 at 10; OCA St. 2S at 6; OCA M.B., p. 72.2.Sales to Shale Gas CompaniesIn 2013, a Settlement was entered into between the City and the OCA regarding rate base. In this 2013 Settlement, which was previously the City’s most recent base rate case before the immediate case, the City agreed to “include any and all revenues from water service contracts received from shale gas exploration or drilling companies (and volumes delivered thereto), during a given year, in future annual reports filed with the Commission.” 2013 Settlement, Docket No. R-2013-2350509 at 6; OCA M.B., pp. 72.73. Reporting gas driller sales separately does not impose an additional burden on the City because the City will already be filing its Annual Report with the Commission, and volumes and sales revenues for any such sales in the prior year are available to the City at the time the annual report is filed. OCA St. 1S at 28. The volumes and sales revenues for the driller sales is relevant because the City charges above-tariff rates for these sales. OCA St. 1S at 28; OCA M.B., p. 73. I&E requests that the Commission order the continued reporting of revenue received by the City of DuBois from Marcellus Shale Drillers and that the City be ordered to report if any new developments start taking service from the City. City Manager Suplizio testified that he has no objections to these reporting requirements. I&E M.B., p. 8.At the evidentiary hearing Mr. Suplizio stated that the City will continue to report sales of water to shale gas companies in its annual reports. Tr. at 22-23, 32. The sales information should be available and publicly recorded for review in future rate cases, as was previously agreed upon in the previous settlement. For these reasons, OCA submits that the City should continue to report sales to shale gas companies in its annual reports. OCA M.B., p.?73. I conclude the City should continue to report sales to shale gas companies in its annual reports to the Commission. This information will be useful to the Commission in future rate proceedings.3.Sales of Water to the Borough of Falls CreekThe City initially included a rate base claim for the addition of a waterline intended to be used to serve Falls Creek. OCA St. 1 at 46; I&E-RB-8 (attached to OCA St. 1). In response to a Sandy Township interrogatory, the City stated that it “planned a line extension to serve the Borough of Fall [sic] Creek…However, this extension will not be completed as originally anticipated and the expense will be removed from rate base.” OCA St. 1 at 46. Although the City initially included the cost of this main extension in its filing, the City did not include any revenues from sales to Falls Creek. OCA St. 1 at 46; OCA M.B., p. 73. If the extension of sales for resale service to Falls Creek occurs after the end of the FTY, neither costs nor revenue would be included for ratemaking purposes in this case. OCA St. 1S at 47. As service to Falls Creek would potentially create additional revenue, the OCA recommends that the City be required to inform the Commission when it connects Falls Creek and begins service. OCA St. 1S at 47. The OCA recommends that the City be required to provide the following:The date service beganThe annual number of gallons to be sold to Falls CreekThe rate to be charged per thousand gallonsThe expected annual customer charge revenue andA copy of the contract with Falls CreekOCA St. 1 at 47; OCA M.B., p. 74. At the evidentiary hearing, City Manager Suplizio testified as follows: Q: Do you have any objection to providing notice to the PUC if another development, for example, Falls Creek, were to come on line? A: I have no objection to that.Tr. at 32:13-16. The City argues in its Main Brief that since City Manager Suplizio is not a lawyer, he cannot make such determinations for the City regarding reporting requirements. City M.B. at 10. The City Manager is tasked with the supervision of all departments (excluding the fire department). OCA M.B. at 30; I&E-RE-30D Part A (attached to OCA St. 1). No objections were made to this portion of City witness Suplizio’s testimony and it became part of the record. The OCA contends that the reporting requirements listed above will not create an undue burden to the City. Accordingly, the OCA recommends that the City inform the Commission when it connects to Falls Creek and begins service in the manner listed above. I&E requests that the Commission order the continued reporting of revenue received by the City of DuBois from Marcellus Shale Drillers and that the City be ordered to report if any new developments start taking service from the City. I&E M.B., p. 8.I agree with the OCA that the City should report the above requested information if and when it connects to Falls Creek. These reporting requirements are not onerous and will provide useful information to the Commission. IV.CONCLUSIONS OF LAW TC "V.CONCLUSIONS OF LAW" \f C \l "1" 1.Every rate made, demanded, or received by any public utility, or by any two or more public utilities jointly, shall be just and reasonable, and in conformity with regulations or orders of the commission. 66 Pa.C.S. § 1301.2.The burden of proving the justness and reasonableness of every element of the utility's rate increase rests solely upon the public utility. 66 Pa.C.S. § 315(a); Lower Frederick Twp. v. Pa. Pub. Util. Comm'n, 409 A.2d 505 (Pa.Cmwlth. Ct. 1980).3.While the burden of proof remains with the public utility throughout the rate proceeding, the Commission has stated that where a party proposes an adjustment to a ratemaking claim of a utility, the proposing party bears the burden of presenting some evidence or analysis tending to demonstrate the reasonableness of the adjustment. Pa. Pub. Util. Comm’n?v. Aqua Pennsylvania, Inc., Docket No. R-00072711 (Commission Opinion and Order entered July 17, 2008). 4. The Commission must consider the efficiency, effectiveness and adequacy of service of each utility when determining just and reasonable rates in exchange for customers paying rates for service, which include the cost of utility plant in service and a rate of return. 66 Pa.C.S. §?523.5.In exchange for the utility’s provision of safe, adequate and reasonable service, the ratepayers are obligated to pay rates which cover the cost of service which includes reasonable operation and maintenance expenses, depreciation, taxes and a fair rate of return for the utility’s investors. Pa. Pub. Util. Comm’n v. Pennsylvania Gas & Water Co., 61 Pa. PUC 409, 415-16 (1986); 66 Pa.C.S. § 1501. 6.The Commission has the discretionary authority to deny a proposed rate increase, in whole or in part, if the Commission finds that the service rendered by the public utility is inadequate. 66 Pa.C.S. §?526(a).7.In proving that its proposed rates are just and reasonable, a public utility need not affirmatively defend every claim it has made in its filing, even those which no other party has questioned. Allegheny Center Assocs. v. Pa. Pub. Util. Comm’n, 131 Pa.Cmwlth. 352, 359, 570 A.2d 149, 153 (1990) (citation omitted). See also, Pa. Pub. Util. Comm’n v. Equitable Gas Co., 73 Pa. PUC 310, 359 – 360 (1990).8.The Commission is not required to consider expressly and at length each contention and authority brought forth by each party to the proceeding. University of Pa. v. Pa. Pub. Util. Comm’n, 86 Pa.Cmwlth. 410, 485 A.2d 1217 (1984). “A voluminous record does not create, by its bulk alone, a multitude of real issues demanding individual attention . . . .” Application of Midwestern Fidelity Corp., 26 Pa.Cmwlth. 211, 230 fn.6, 363 A.2d 892, 902, fn.6 (1976). 9.A Commission decision is adequate where, on each of the issues raised, the Commission was merely presented with a choice of actions, each fully developed in the record, and its choice on each issue amounted to an implicit acceptance of one party's thesis and rejection of the other party's contention. Popowsky, et al. v. Pa. Pub. Util. Comm'n, 550 Pa. 449, 706 A.2d 1197 (1997), 1997 Pa. LEXIS 2756. 10.The standard formula for determining a utility's base rate revenue requirement is:RR = E + D + T + (RB x ROR)RR: Revenue RequirementE:Operating ExpenseD:Depreciation ExpenseT:TaxesRB:Rate BaseROR:Overall Rate of ReturnI&E St. 1, pp. 2-3; I&E M.B., p. 26, fn. 102. 11.In analyzing a proposed general rate increase, the Commission determines a rate of return to be applied to a rate base measured by the aggregate value of all the utility’s property used and useful in the public service. The Commission determines a proper rate of return by calculating the utility’s capital structure and the cost of the different types of capital during the period in issue. The Commission is granted wide discretion, because of its administrative expertise, in determining the cost of capital. Equitable Gas Co. v. Pa. Pub. Util. Comm’n, 45 Pa.Cmwlth. 610, 405 A.2d 1055 (1979).12.The rate base is the value of the property of the utility that is used and useful in providing utility service. Pennsylvania Power Company v. Pa. Pub. Util. Comm’n, 561 A.2d 43, 47 (Pa.Cmwlth. Ct. 1989). In the area of adjustment to rate base, the Commission has wide discretion. Pennsylvania Power & Light Company v. Pa. Pub. Util. Comm’n, 516 A.2d 426 (Pa.Cmwlth. Ct. 1985); UGI Corp. v. Pa. Pub. Util. Comm’n, 410 A.2d 923, 929 (Pa.Cmwlth Ct. 1980)(UGI case); Duquesne Light Co. v. Pa. Pub. Util. Comm’n, 174 Pa. Superior Ct. 62, 69-70, 99 A.2d 61, 69 (1953). However, the adjustments must be supported by sound reasons. Philadelphia Suburban Water Co. v. Pa. Pub. Util. Comm’n, 394 A.2d 1063 (Pa.Cmwlth. Ct. 1978). 13.The utility management discretion doctrine holds that as a general matter, utility management is in the hands of the utility, and the Commission may not interfere with lawful management decisions, including decisions related to the necessity and propriety of operating expenses, unless on the basis of record evidence, it finds an abuse of the utility’s managerial discretion. Emporium Water Company v. Pa. Pub. Util. Comm’n, 955 A.2d 456, 465 (Pa.Cmwlth. Ct. 2008); National Fuel Gas Distribution Corp. v. Pa. Pub. Util. Comm’n, 464 A.2d 546, 559 (Pa.Cmwlth. Ct. 1983). 14.The law is clear that a utility is entitled to recover its reasonably incurred expenses. UGI Corp. v. Pa. Pub. Util. Comm’n, 410 A.2d 923 (Pa.Cmwlth. 1980). Expenses include such items as the cost of operations and maintenance (labor, fuel and administrative costs, e.g.), depreciation and taxes. Pennsylvania Power Company v. Pa. Pub. Util. Comm’n, 561 A.2d 43, 47 (Pa.Cmwlth. Ct. 1989). 15.The Commission has no authority to permit, in the rate-making process, the inclusion of hypothetical expenses not actually incurred. When it does so, as it did in this case, it is an error of law subject to reversal on appeal. Barasch v. Pa. Pub. Util. Comm’n, 493 A.2d 653, 655 (Pa. 1985)16. The Commission is charged with the duty of protecting the rights of the public. As a general rule, a public utility, whose facilities and assets have been dedicated to public service, is entitled to no more than a reasonable opportunity to earn a fair rate of return on shareholder investment. It is the function of the commission in fixing a fair rate of return to consider not only the interest of the utility but that of the general public as well. The commission stands between the public and the utility.” City of Pittsburgh v. Pa. Pub. Util. Comm’n, 126 A.2d 777, 785 (Pa.Super. 1956) TA \l "City of Pittsburgh v. Pa. PUC, 126 A.2d 777, 785 (Pa. Super. 1956)" \s "City of Pittsburgh II" \c 1 . 17.The return should be reasonably sufficient to assure confidence in the financial soundness of the utility, and should be adequate, under efficient and economical management…to raise the money necessary for the proper discharge of public duties. Bluefield Waterworks & Improvement Co. v. Public Service Comm’n of West Virginia, 262 U.S. 679 (1923) TA \l "Bluefield Waterworks & Improvement Co. v. Public Service Comm’n of West Virginia, 262 U.S. 679 (1923)" \s "Bluefield" \c 1 .18.Whether a particular rate is unjust or unreasonable will depend to some extent on what is a fair rate of return given the risks under a particular rate setting system, and on the amount of capital upon which the investors are entitled to earn that return.Duquesne Light Co. v. Barasch, 488 U.S. 299, 310 (1989) TA \s "Duquesne Light Co. v. Barasch" . 19.Determination of a fair rate of return for a public utility requires the exercise of informed judgment based upon an evaluation of the particular facts presented in each proceeding. There is no one precise answer to the question as to what constitutes the proper rate of return. The interests of the Company and its investors are to be considered along with those of the customers, all to the end of assuring adequate service to the public at the least cost, while at the same time maintaining the financial integrity of the utility involved. Pa. Pub. Util. Comm’n?v. Pennsylvania Power Co., 55 Pa. PUC 552, 579 (1982) TA \l "Pa. PUC v. Pennsylvania Power Co., 55 Pa. PUC 552, 579 (1982)" \s "Pa. PUC v. Pennsylvania Power Co." \c 2 . See also Pa. Pub. Util. Comm’n?v. National Fuel Gas Dist. Corp., 73 Pa. PUC 552, 603-605 (1990) TA \s "Pa. PUC v. National Fuel Gas Dist. Corp." . 20.If a utility’s actual capital structure is within the range of a similarly situated barometer group of companies, rates are set based on the utility's actual capital structure. Only if the capital structure is atypical (outside of the range of the barometer group), should a hypothetical capital structure be used to set rates for a utility. Pa. Pub. Util. Comm’n v. City of Lancaster – Water, 197 PUR 4th 156, 161-162, Docket No. R-00984567, et al. (Order entered September 22, 1999); Pa. Pub. Util. Comm’n v. City of Bethlehem, 84 Pa PUC 275, 304 (1995); Carnegie Natural Gas Co. v. Pa. Pub. Util. Comm’n, 433 A.2d 938, 940 (Pa.Cmwlth. 1981).21.Establishment of a rate structure is an administrative function peculiarly within the expertise of the Commission. Emporium Water Company v. Pa. Pub. Util. Comm'n, 955 A.2d 456, 461 (Pa.Cmwlth. Ct. 2008); City of Lancaster v. Pa. Publ. Util. Comm'n, 769 A.2d 567, 571-72 (Pa.Cmwlth. Ct. 2001). The question of reasonableness of rates and the difference between rates in their respective classes is an administrative question for the Commission to decide. Pennsylvania Power & Light Co. v. Pa. Pub. Util. Comm'n, 516 A.2d 426 (Pa.Cmwlth. Ct. 1986); Park Towne v. Pa. Pub. Util. Comm'n, 43 A.2d 610 (1981). 22.When a utility files for a rate increase, it must file a cost-of-service study (COSS) assigning to each customer class a rate based upon operating costs that it incurred in providing that service. 52 Pa.Code § 53.53; Lloyd v. Pa. Pub. Util. Comm’n, 904 A.2d 1010 (Pa.Cmwlth. 2006) appeal denied 591 Pa. 676, 916 A.2d 1104, fn. 10 (2007).23. Historically, the Commission has primarily relied on the DCF methodology in determining the proper cost of common equity. See Pa. Pub. Util. Commission?v. Philadelphia Suburban Water Company, 71 Pa. PUC 593, 623-632 (1989); Pa. Pub. Util. Comm’n v. Western Pennsylvania Water Company, 67 Pa. PUC 529, 559-570 (1988); Pa. Pub. Util. Comm’n v. Roaring Creek Water Company, 150 PUR4th 449, 483-488 (1994); Pa. Pub. Util. Comm’n v. York Water Company, 75 Pa. PUC 134, 153-167 (1991); Pa. Pub. Util. Comm’n v. Equitable Gas Company, 73 Pa. PUC 345-346 (1990). 24.The DCF method is the preferred method of analysis to determine a market based common equity cost rate. Pa. Pub. Util. Comm’n v. Pennsylvania American Water Company, 99 Pa. PUC 38, 42 (2004) aff’d on other grounds, Popowsky v. Pa. PUC, 868 A.2d 606 (Pa. Cmwlth. Ct. 2004) TA \l "Popowsky v. Pa. PUC, 868 A.2d 606 (Pa. Commw. Ct. 2004)" \s "Popowsky v. Pa. PUC, 868" \c 1 ; accord Pa. Pub. Util. Comm’n v. Aqua Pa, Inc., 99 Pa. PUC 204, 233 (2004) TA \l "Pa. PUC v. Aqua Pennsylvania, Inc., 99 Pa. PUC 204, 233 (2004)" \s "Pa. PUC v. Aqua" \c 2 . 25.The basic factor in allocating revenue is to have the rates reflect the cost of service. Lloyd v. Pa. Pub. Util. Comm’n, 904 A.2d 1010, 1020 (Pa.Cmwlth. Ct. 2006).V.ORDER TC "VI.ORDER" \f C \l "1" THEREFORE,IT IS RECOMMENDED:1.That City of DuBois – Bureau of Water shall not place into effect the rules, rates and regulations contained in Supplement No. 22 to Tariff Water-Pa. P.U.C. No. 4.2.That City of DuBois – Bureau of Water is authorized to file tariffs, tariff supplements or tariff revisions containing rates, rules and regulations, consistent with the findings herein, to produce annual revenues not in excess of $897,776 or an increase over present revenues of $97,534.3.That City of DuBois – Bureau of Water tariffs, tariff supplements and/or tariff revisions may be filed on at least one-day’s notice to be effective for service rendered on and after March 29, 2017. 4.That City of DuBois – Bureau of Water shall file detailed calculations with its tariff filing, which shall demonstrate to the parties’ satisfaction that the filed tariffs with the adjustments comply with the provisions of the Final Commission Order.5.That City of DuBois – Bureau of Water shall allocate the authorized increase in operating revenue in accordance with the recommendations contained in the Revenue Allocation section of the Recommended Decision and set forth in Appendix A.6.That City of DuBois – Bureau of Water shall file its current contract for water service provided to Union Township with the Commission within 30 days of the entry of the Final Commission Order.7.That City of DuBois – Bureau of Water shall file a report with the Commission when a contract is entered into between the City of DuBois – Bureau of Water and Falls Creek Borough for the provision of water service which includes the date service began, the annual gallons to be sold, the rate to be charged per thousand gallons, the expected annual customer charge revenue and the contract. 8.That City of DuBois – Bureau of Water shall continue to report sales to shale gas drillers in its annual report to the Commission as agreed to in the previous base rate case at Docket No. R-2013-2350509. 9.That City of DuBois – Bureau of Water shall comply fully with the Stipulation between the City of DuBois – Bureau of Water and the Office of Consumer Advocate regarding unaccounted for water and set forth in this Recommended Decision in III. Discussion, I. Miscellaneous, 1. Stipulations. 10.That upon acceptance and approval by the Commission of the tariffs, tariff supplements or tariff revisions filed by the City of DuBois – Bureau of Water, consistent with this Order, this proceeding shall be marked closed. 11.That the complaint of the Office of Small Business Advocate docketed at C-2016-2556342, the complaint of the Office of Consumer Advocate docketed at C-2016-2556376 and the complaint of Sandy Township docketed at C-2016-2557459 are considered satisfied in part and dismissed in part consistent with this Order.Date: January 9, 2017/s/Mark A. HoyerDeputy Chief Administrative Law Judge ................
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