History of the Proceeding .us



PENNSYLVANIAPUBLIC UTILITY COMMISSIONHarrisburg, PA 17105-3265Public Meeting held August 21, 2014Commissioners Present:Robert F. Powelson, ChairmanJohn F. Coleman, Jr., Vice ChairmanJames H. Cawley Pamela A. WitmerGladys M. BrownPetition of Peoples Natural Gas Company, LLC for P-2013-2344596Approval of a Distribution System Improvement ChargeOffice of Consumer Advocate v. C-2013-2348847Peoples Natural Gas Company, LLCOPINION AND ORDERBY THE COMMISSION:Before the Pennsylvania Public Utility Commission (Commission) for consideration and disposition are the Exceptions of Peoples Natural Gas Company, LLC (Peoples or the Company) and the Office of Consumer Advocate (OCA) filed on April 23, 2014, to the Recommended Decision (R.D.) of Administrative Law Judges (ALJs) Mary D. Long and Jeffrey A. Watson, issued on April 3, 2014, relative to the above-captioned proceeding. Replies to Exceptions were filed by Peoples and the OCA on May 5, 2014. For the reasons set forth herein, we shall deny the Exceptions filed by Peoples and the OCA and adopt the Recommended Decision.History of the ProceedingOn January 31, 2013, Peoples filed a Petition for Approval of a Distribution System Improvement Charge (DSIC), which included a proposed Supplement No. 11 to Tariff Gas – Pa. P.U.C. No. 45, to introduce a DSIC Rider into the Company’s Tariff. Peoples’ DSIC Petition was filed at Docket No. P20132344596. Peoples also filed a Petition for Approval of its Long Term Infrastructure Improvement Plan (LTIIP) on January 23, 2013, which was also filed at Docket No. P2013-2344596.On February 19, 2013, the Pennsylvania Independent Oil and Gas Association (PIOGA) filed a Petition to intervene. The Office of Small Business Advocate (OSBA) filed a Notice of Intervention and Answer to the Petition on February 20, 2013. Also on that date, the OCA filed an Answer to the Petition, a Notice of Intervention and a Formal Complaint. The OCA’s Complaint was docketed at C-2013-2348847. On April 20, 2013, a Petition to Intervene was filed by the United States Steel Corporation (USSC). By Opinion and Order entered May 23, 2013 (May 2013 Order), the Commission approved the Company’s LTIIP. The Commission also approved the Company’s DSIC Petition subject to refund and recoupment following hearings and a Recommended Decision by an ALJ. In the May 2013 Order, the Commission assigned the following issues for hearing and preparation of a Recommended Decision:DSIC-recovery of costs related to customer owned service lines, reliability improvements, special meter technology, information technology support, and vehicles, tools and equipment;Impact of accumulated deferred income taxes associated with DSIC investments; andCalculation of state income tax component of the DSIC revenue requirement.An initial prehearing conference was held on June 21, 2013 and a litigation scheduled was established. Additionally, the OCA and the OSBA requested consideration of additional issues related to the DSIC which were described in their respective prehearing memoranda. Peoples and PIOGA objected, arguing that only the three issues explicitly ordered by the Commission should be considered by the Presiding ALJs. In view of the limited nature of the additional matters to be addressed and in the interests of judicial economy, the ALJs granted the requests of the OCA and the OSBA.Peoples, the OCA and the OSBA served written testimony in support of their contentions raised in this matter. The Parties also engaged in settlement negotiations and notified the ALJs that they had reached an accord on all but two issues related to the calculation of the DSIC. The evidentiary hearing was convened as scheduled on November 12, 2013, for the purpose of admitting the Parties’ written testimonies into the record. All Parties waived cross-examination of witnesses. On December 12, 2013, a Proposed Stipulation of Certain Issues (Partial Settlement) was filed by the Parties. PIOGA indicated that it does not oppose the Partial Settlement. Peoples and the OCA also filed Main Briefs and Reply Briefs on the two issues reserved for litigation, the treatment of accumulated deferred income taxes and the Company’s inclusion of a gross-up for state taxes. By Interim Order issued on January 13, 2014, the ALJs closed the record in this matter. In their Recommended Decision, the ALJs approved the Company’s DSIC, as modified by the Partial Settlement. As previously noted, Exceptions were filed by Peoples and the OCA on April 23, 2014. On May 5, 2014, Peoples and the OCA filed Replies to Exceptions. II.Discussion of the Partial SettlementA.Terms and Conditions of the Partial SettlementThe Settling Parties agreed to the Partial Settlement covering all issues, except for two issues related to the calculation of the DSIC charge, specifically, the impact of accumulated deferred income taxes (ADIT) and the calculation of state income taxes.The Partial Settlement consists of the Proposed Stipulation of Certain Issues containing the terms and conditions of the Partial Settlement, and four appendices. Appendix A through C to the Partial Settlement are the Statements in Support of the Partial Settlement submitted by Peoples, the OCA and the OSBA, respectively. Appendix D to the Settlement is a Letter submitted by PIOGA stating that it does not oppose the Partial Settlement. The essential terms and conditions of the Partial Settlement are set forth in Section III. Partial Settlement ?? 13-17 at 4-5. The Settling Parties agreed to the following terms and conditions: 13.The Company agrees to modify the language in its DSIC surcharge tariff related to the application of the DSIC to competitive customers as follows:All Customer Classes. The DSIC shall be applied equally to all customer classes, except that the Company may reduce or eliminate the Rider K to any customers with competitive alternatives who are paying flexed or discounted rates and customers having negotiated contracts with the Company, if it is reasonably necessary to do so.The Parties acknowledge that the DSIC may be waived or reduced if a customer is paying flexed or discounted rates, or has a negotiated contract, because the customer has an economically viable competitive option, even if such option is not physically installed. The Company further acknowledges its intention to apply the DSIC to current competitive customers if contractually eligible, and to negotiate with competitive customers to attempt to include the DSIC in the future, when flexed or negotiated rate contracts come up for renewal.14.The Company agrees to withdraw its proposal to include in the DSIC information technology hardware and software that support Special Metering Technology (AMR). The Company reserves the right to present a future claim to include AMR technology support costs at such time when the Company actually installs AMR support technology. The Company shall clearly identify such claim in a future filing if made. Other Parties reserve their right to oppose such a claim if made.15.The Parties agree that the Company may include in its DSIC investment in barcoding hardware, software, and reading devices. Investment in barcodes affixed to DSIC-eligible plant also shall be included in the DSIC. Investment in barcodes affixed to plant that is not DSIC-eligible shall not be reflected in the DSIC.16.Investments in the replacement of customer-owned service lines will be reflected in the Company’s DSIC.17.The Parties agree that gathering system improvements may be reflected in the Company’s DSIC. Peoples agrees to exclude from the DSIC such investments in gathering system improvements that are placed into service between December?1, 2012 and November 30, 2015, and that are part of the annual $3.8 million commitment contained in the settlement of People’s 2012 rate case to invest as incremental annual expenditures to reduce lost and unaccounted for gas on Peoples’ gathering facilities or for gathering system upgrades used to deliver local gas to Peoples and its expenditures (Gathering Expenditures). Peoples’ agreement in this proceeding shall not be cited as precedent for determining the ratemaking treatment of investments in gathering system improvements in future rate proceedings.In addition to the specific terms to which the Settling Parties have agreed, the Partial Settlement contains certain general, miscellaneous terms. The Partial Settlement is conditioned upon the Commission’s approval of the terms and conditions without modification. The Partial Settlement establishes the procedure by which any of the Settling Parties may withdraw from the Partial Settlement and proceed to litigate this case, if the Commission should act to modify the Partial Settlement. Partial Settlement ??20 at 6. In addition, the Partial Settlement does not constitute an admission against, or prejudice to any position which any of the Settling Parties might adopt during subsequent litigation of this case, or in any other proceeding, in the event the Partial Settlement is rejected by the Commission. Partial Settlement ? 21 at 6.Further, the Partial Settlement provides that approval of the Partial Settlement does not preclude the Settling Parties from filing Briefs, Reply Briefs, Exceptions and Replies to Exceptions with respect to the issues reserved for litigation. Partial Settlement ? 25 at 7.The Settling Parties requested that the ALJs and the Commission approve the Proposed Stipulation of Certain Issues, without modification. The Settling Parties further requested that the Commission enter an Order consistent with this Partial Settlement and which incorporates the Commission’s determination regarding the two litigated issues. Partial Settlement at 7.B.Legal StandardsThe policy of the Commission is to encourage settlements, and the Commission has stated that settlement rates are often preferable to those achieved at the conclusion of a fully litigated proceeding. 52 Pa. Code §§ 5.231, 69.401. A full settlement of all the issues in a proceeding eliminates the time, effort and expense that otherwise would have been used in litigating the proceeding, while a partial settlement may significantly reduce the time, effort and expense of litigating a case. A settlement, whether whole or partial, benefits not only the named parties directly, but, indirectly, all customers of the public utility involved in the case. Regulatory proceedings are expensive to litigate, and the reasonable cost of such litigation is an operating expense recovered in the rates approved by the Commission. Partial or full settlements allow the parties to avoid the substantial costs of preparing and serving testimony and the cross-examination of witnesses in lengthy hearings, the preparation and service of briefs, reply briefs, exceptions and replies to exceptions, together with the briefs and reply briefs necessitated by any appeal of the Commission’s decision, yielding significant expense savings for the company’s customers. For this and other sound reasons, settlements are encouraged by long-standing Commission policy.Despite the policy favoring settlements, the Commission does not simply rubber stamp settlements without further inquiry. In order to accept a settlement such as that proposed here, the Commission must determine that the proposed terms and conditions are in the public interest. Pa. PUC v. York Water Co., Docket No. R-00049165 (Order entered October 4, 2004); Pa. PUC v. C. S. Water and Sewer Assoc., 74 Pa. P.U.C. 767 (1991).As the petitioner or moving party, Peoples has the burden of proof in this proceeding to establish that they are entitled to the relief they are seeking. 66 Pa. C.S. § 332(a). Peoples must establish its case by a preponderance of the evidence. Samuel J. Lansberry, Inc. v. Pennsylvania Pub. Util. Comm’n, 578 A.2d 600 (Pa. Cmwlth. 1990), alloc. den., 602 A.2d 863 (Pa. 1992). To meet the burden of proof, the Company must present evidence more convincing, by even the smallest amount, than that presented by any opposing party. Se-Ling Hosiery v. Margulies, 70 A.2d 854 (Pa. 1950). In this case, the Company requests that the Commission approve the filing establishing the proposed DSIC. The Settling Parties have reached an accord on many of the issues and claims that arose in this proceeding and submitted the Partial Settlement. The Settling Parties have the burden to prove that the Partial Settlement is in the public interest. The ALJs found that the proposed Partial Settlement is in the public interest and recommended that it be approved without modification. The proposed Partial Settlement was not opposed by any Party. R.D. at 11-12.C.Disposition of the Partial SettlementAs noted above, a Partial Settlement in principle of all but two issues was reached prior to the date scheduled for evidentiary hearings, thereby negating the need for the scheduled evidentiary hearings on the settled issues. As a result of the settlement in principle, the Parties agreed to waive cross-examination, both with respect to the settled issues and the issues reserved for litigation. A hearing was held on November 12, 2013, to admit testimony and exhibits into the record.According to the ALJs, the primary subject of the stipulation of settlement resolves the Parties’ dispute relating to specific items of eligible property which is included in the Company’s DSIC. The ALJs note that Section 1351 defines eligible property as:Property that is part of a distribution system and eligible for repair, improvement and replacement of infrastructure under this subchapter. Included property shall be as follows:. . .(2) For natural gas distribution companies and city natural gas distribution operations, eligible property shall include:Piping.(ii) Couplings.(iii) Gas services lines and insulated and noninsulated fittings.(iv)Valves.(v) Excess flow valves.(vi)Risers.(vii) Meter bars.(viii) Meters.(ix) Unreimbursed costs related to highway relocation projects where a natural gas distribution company or city natural gas distribution operation must relocate its facilities.(x) Other related capitalized costs.Upon review of the accord reached by the Parties on the specific items of “eligible property”, the ALJs found that the Settlement was consistent with Section 1351 and Section 1353(a) (requiring that costs be related to improvements to ensure safe and adequate service). The ALJs further stated that the compromise of the Parties relating to the tariff language for competitive customers also represented a reasonable compromise. Therefore, the ALJs recommended that the Partial Settlement modifying Peoples’ DSIC be approved. R.D. at 10-12.Based on our review of the Partial Settlement, we find that there are several items within the Partial Settlement that are reasonable and appropriate. We first note that the Partial Settlement reaffirms the Company’s intent to apply the DSIC to all customers, where possible, while recognizing that competition may make it impossible to apply the DSIC in some situations. Next, Peoples agreed to withdraw its original proposal to include Special Metering Technology (AMR) hardware and software support costs in the DSIC, while reserving its right to make such claim in the future. The OCA had opposed the recovery of AMR technology through the DSIC because it opined that this item was not appropriate for cost recovery in a DSIC. Next the Parties agreed that the Company may include investment in barcoding hardware, software and reading devices in the DSIC, with the clarification that the investment in barcoding affixed to plant that is not DSIC-eligible shall not be included. According to Peoples, barcoding would allow for enhanced tracking of pipeline assets. Lastly, the Partial Settlement provides that investments in the replacement of customer-owned service lines and gathering system improvements may be reflected in Peoples’ DSIC. According to the Parties, due to the unique circumstances and the efficiencies gained by replacing customer-owned service lines in coordination with the accelerated mains replacement program, recovery of these costs through the DSIC is appropriate. We find that these beneficial aspects within the Partial Settlement all support a finding that the Partial Stipulation of Certain Issues is in the public interest. The Partial Settlement resolves the majority of the issues within this proceeding and will result in significant savings of time and expenses for all Parties involved by avoiding the necessity of further administrative proceedings, as well as possible appellate court proceedings. For the reasons stated herein and in the Settling Parties’ Statements in Support, we agree with the ALJs’ conclusion that the Partial Settlement is in the public interest. Accordingly, we shall adopt the ALJs’ recommendation to approve the Partial Settlement without modification.III.Discussion of Contested IssuesA.Burden of ProofTypically, in proceedings before the Commission, the public utility has the burden to establish the justness and reasonableness of every element of any proposed or existing rate in any proceeding. The standard of proof which a public utility must meet is set forth in Section 315(a) of the Code, 66 Pa. C.S. § 315(a), which specifies that, “[i]n any proceeding upon the motion of the Commission, involving any proposed or existing rate of any public utility, or in any proceeding upon complaint involving any proposed increase in rates, the burden of proof to show that the rate involved is just and reasonable shall be upon the public utility.” The Commonwealth Court has upheld this standard of proof .In this proceeding, the burden of proof lies squarely with Peoples. Peoples is the public utility seeking permission from the Commission to implement a DSIC. The burden of proof does not shift to a statutory party or individual party (whether an entity or an individual) which challenged the requested DSIC. Instead, the utility’s burden, to establish the justness and reasonableness of every component of its DSIC request, is an affirmative one and remains with the public utility throughout the course of the proceeding. As we proceed in our review of the various positions espoused in this proceeding, we are reminded that we are not required to consider expressly or at great length each and every contention raised by a party to our proceedings. University of Pennsylvania v. Pa. PUC, 485 A.2d 1217, 1222 (Pa. Cmwlth. 1984). Moreover, any exception or argument that is not specifically addressed herein shall be deemed to have been duly considered and denied without further discussion.B.Statutory Interpretation of Act 111.Positions of the PartiesThe positions of the opposing Parties in this proceeding are based upon competing views regarding the standards to which the DSIC must adhere. The position advocated by the OCA is that each and every element of the DSIC must be “just and reasonable” as required by Section 1301 of the Public Utility Code (Code). The OCA maintained that if the treatment of ADIT and the state tax gross-up are not just and reasonable, the DSIC is not consistent with the Code and the Company’s position must be rejected.The OCA is of the opinion that ADIT must be included in the DSIC formula and that the state tax gross-up claimed by the Company in its DSIC should not be permitted in order to ensure that rates are just and reasonable. According to the OCA, under standard ratemaking procedure, as practiced in Pennsylvania and every other state and federal regulatory jurisdiction in the country, the balance of deferred federal taxes is treated as a reduction in the utility’s rate base or included in capital structure with a zero cost, so that customers do not pay a return on non-investor supplied capital. The OCA, in support of its argument cited a leading utility treatise:Most regulatory commissions have treated accumulated income tax deferrals as a cost-free source of funds. It must be kept in mind that, for cost-of-service purposes, current and deferred federal income taxes are treated as part of the revenue requirements calculation. However, the accumulated deferred income taxes are then used to reduce rate base, to produce a cost-free source of funds to the utility ratepayer.Robert L. Hahne, Gregory E. Aliff, Accounting for Public Utilities, § 3.02 (2) (1983. The OCA further explained that this principle is stated even more clearly in Bonbright’s Principle of Utility Rates at 288 (1988). See also, Martin T. Farris and Roy J. Sampson, Public Utilities: Regulation, Management, and Ownership at 114 (1973) (“This tax deferral is, in effect, an interest free loan to the utility, since all depreciation allowances are normally reinvested in the firm”). OCA M.B. at 12-13. In terms of the gross-up state taxes, the OCA stated that reflecting actual state income taxes paid in the DSIC is consistent with Act 11, which limits recovery to costs “incurred” by the Company. 66 Pa. C.S. §§ 1351, 1353 (a). OCA M.B. at App. 4(20).In contrast, the Company draws the distinction between the Commission’s review of a DSIC and the fuller review that is required in a base rate proceeding. Peoples emphasized the intent of the General Assembly to keep the DSIC mechanism simple and not treat it as a traditional base rate filing citing Popowsky v. Pa P.U.C., 13 A.3d 583, 591 (Pa. Cmwlth. Ct. 2011) (Purchased Water Surcharge); Popowski v. Pa. P.U.C., 869 A.2d 1157, 1160 (Pa. Cmwlth Ct. 2005) (Wastewater DSIC); Pennsylvania Industrial Energy Coalition v. Pa P.U.C., 653 A. 2d 1336, 1349 (Pa. Cmwlth Ct. 1995) (PIEC). Peoples further highlighted that the Commission’s Final Implementation Order also addressed the need to keep the DSIC calculation simple and straightforward. Peoples M.B. at 13-14.According to Peoples, the law requires that the DSIC as a whole is just and reasonable even if certain elements of the calculation depart from traditional ratemaking techniques. Peoples M.B. at 5-6.2.ALJs’ RecommendationThe ALJs concluded that the Commission’s focus in this proceeding should be the overall effect of the calculated DSIC rate and whether, as a whole, the DSIC is just and reasonable. The ALJs discussed the varying levels of review between general rate increases pursuant to Section 1308(d) of the Code and Section 1307(a) surcharge requests, nothing that Section 13.07(a) Surcharge requests do not mandate the same level of scrutiny by the Commission as a request for a general rate increase. The ALJs note that the opposing Parties rely heavily on competing views of the “intent” of the General Assembly in passing Act 11. However, the ALJs state that, when read as a whole, Act 11 of February 14, 2012, grants the Commission significant discretion in the manner in which it chooses to implement the Act and in the calculation of various elements of the DSIC. Also, the ALJs point out that, in passing Act 11, the General Assembly has required protections for ratepayers in a DSIC in the form of a reset of the DSIC surcharge and the cap on earnings. According to the ALJs, the origin of these protections is a recognition that, by creating a simplified framework for the more timely recovery of infrastructure improvement costs, the application of certain ratemaking principles that are appropriate for the in-depth investigation and review of a base rate are not necessary in the context of a DSIC. R. D. at 13-15.The ALJs stated that Peoples argued that the OCA’s contention that a rate can be declared unjust or unreasonable by looking, in isolation, at one or two base rate components that are not included in the calculation is contrary to the OCA’s successful position in Duquesne Light Co. v. Barasch, 488 U.S. 299 1989)(Barasch). According to the ALJs, in Barasch, the United States Supreme Court noted that in determining just and reasonable rates, “the economic judgments required in rate proceedings are often hopelessly complex and do not admit of a single correct result.” The ALJs stated that the Supreme Court in Barasch, acknowledged that there are many ways to achieve rates that are just and reasonable. The Supreme Court went on to find that the disallowance of a single element is not the appropriate standard for determining whether rates are just and reasonable. The Court explained that this is due, in part, to the fact that “errors to the detriment of one party may well be canceled out by countervailing errors or allowances in another part of the rate proceeding.” The ALJs found that the courts in Pennsylvania have similarly concluded that there is no single way to arrive at just and reasonable rates and that the Commission is “vested with discretion to decide what factors it will consider in setting or evaluating a utility’s rates.” Id. at 15-16.3.Exceptions and Replies to ExceptionsIn its Exceptions, Peoples states that the ALJs erred in not concluding that the General Assembly specifically adopted the Commission’s successfully designed water utility DSIC mechanism. Peoples avers that the Commission should modify this portion of the Recommended Decision, and conclude that the General Assembly recognized that the Commission’s original water DSIC calculation was successful and produced just and reasonable rates. Peoples further avers that the Commission should conclude that the General Assembly intended that this calculation should continue unchanged, and that the General Assembly ensured such treatment by codifying the Commission’s calculation. Peoples Exc. at 2-3.Peoples agrees with the Recommended Decision that the DSIC mechanism assures just and reasonable rates without adding the complexity and accuracies of OCA’s ADIT and state tax depreciation adjustments. Peoples states that, in developing the original water DSIC, the Commission determined that the primary goal of the mechanism was to be a simple and straightforward mechanism that was easy to reconcile. According to Peoples, in order to accomplish this goal, the original water DSIC excluded adjustments for ADIT, but included a state income tax gross-up. However, Peoples notes that the Commission also included an earnings cap that limits a utility from recovering under a DSIC if the utility was exceeding its Commission-approved rate of return on equity. According to Peoples, the earnings cap captured the actual effect of ADIT and state income tax deductions in the calculation of return, and thereby ensured that rates were just and reasonable. Peoples Exc. at 1-3. In response, the OCA states that it disagrees with the ALJ’s ultimate recommendation to approve Peoples’ proposed DSIC formula. However, the OCA opines that the Commission should adopt the ALJs’ conclusion that the plain language of the statute does not show intent for the Commission’s existing DSIC rules and procedures for the water companies to automatically apply to other utilities. The OCA avers that it is clear from the plain language of the statute that the General Assembly did not dictate that the model water tariff be applied to all utilities, without change nor did it prevent the Commission from applying appropriate ratemaking standards. Instead, the OCA opines that the General Assembly expressly provided that existing orders and practices can stand for water utilities only, but it also gave the Commission authority to amend or revoke any of its orders and other actions related to a DSIC granted under Section 1307(g). 66 Pa. C.S. § 1358(a)(2). The OCA further noted that the General Assembly also specified that the “unless provided otherwise, the statutory provisions regarding the computation of the DSIC and customer protection provisions shall not be construed as limiting the existing ratemaking authority of the commission.” 66 Pa. C.S. § 1358(c). OCA R. Exc. at 1-3.In its Exceptions, the OCA first states that the constitutional standard for judicial review set forth in Barasch is not the relevant standard for determining the justness and reasonableness of Peoples’ DSIC calculation under the Code, as Barasch involved a constitutional takings claim by the utility. Next, the OCA states that if the reasonableness of rates in a rate proceeding is based solely on the overall return produced by the utility’s total rates or only the end result, every ratemaking adjustment would have no meaning and no ratemaking decision would be reviewable. The OCA opines that this is clearly not the case in Pennsylvania where the Commonwealth Court and the Pennsylvania Supreme Court review individual ratemaking adjustments. OCA Exc. at?3.The OCA states that the ALJs have confused the constitutional takings standard applied in Barasch with the statutory ratemaking standard that applies to this proceeding. According to the OCA, in Barasch the Court addressed the standard for judicial review of the constitutional question of whether the rates were confiscatory, i.e. whether the negative allowances rise to the level of the confiscation of utility property for purposes of the Fifth and Fourteenth Amendments. Barasch at 305-08, 312. In this proceeding, the OCA avers that there is no utility property being taken and no disallowance because this question concerns costs never even incurred by the utility. Moreover, the OCA notes that the present proceeding is about the interpretation of the Code and whether, under Pennsylvania law, a specific rate authorized by statute is just and reasonable if it allows a return on non-investor supplied funds and recovers state income taxes that are not paid by the utility. Id. at 3-4.The OCA further states that the ALJs erred in finding that the Commission has significant discretion to “truncate” or ignore traditional ratemaking requirements in implementing the DSIC. According to the OCA, while the ALJs are correct that the General Assembly vested the Commission with discretion in the manner it calculates various elements of the surcharge, that authority is subject to the overriding requirement that the rates must comply with all provisions of the Code and the Courts’ interpretations, Commission regulations, case precedent and ratemaking principles that bear upon it. The OCA avers also that the ALJs’ conclusion that the purpose of the consumer protections in Act 11 was to allow a simplified framework does not withstand scrutiny. The OCA states that the consumer protections cannot be used as an excuse to allow a utility to recover costs that it never even incurred. According to the OCA, one of the fundamental requirements of Act 11 is that it is limited to costs actually incurred. Id. at 9.In response, Peoples states that the OCA’s argument fails to acknowledge that the General Assembly has the authority to establish just and reasonable rates that are calculated in a way that differs from the Section 1308(d) base rate mechanism, and that it has exercised that authority in establishing the DSIC mechanism. Peoples notes that, in enacting the DSIC mechanism, the General Assembly specifically chose a simple mechanism that was easy to calculate. According to Peoples, the plain language of its statute and the legislative history make it readily apparent that the General Assembly modeled the Act 11 DSIC upon the Commission’s historic water DSIC, including the exact language on how to calculate the DSIC charge. Peoples explains that the Commission’s historic water DSIC did not include the proposals made here by the OCA, and that the historic model was applied successfully to the water industry for sixteen years. Peoples opines that the OCA’s contention that the Commission cannot continue to calculate the DSIC as it has done historically is unfounded, because the General Assembly has codified the Commission’s historic calculation through Act 11. Peoples R. Exc. at 2-4.Next, Peoples states that the DSIC surcharge is not required to include the OCA’s two additional components in order for rates to be just and reasonable. Peoples asserts that the ALJs correctly reached this conclusion based, in part, on the decision rendered by the Supreme Court of the United States in Barasch. According to Peoples, the OCA’s contention is incorrect because it attempts to distinguish the holding in Barasch by arguing that the case was a takings case under the Fifth and Fourteenth Amendments. However, Peoples avers that the OCA overlooks the importance of the Court’s conclusion, which was that a rate cannot be declared unjust or unreasonable by looking in isolation at one or two base rate components that are not directly included in the calculation. Peoples opines that rather than confirming that there is a single mechanism that establishes just and reasonable rates, or even that there are specific components that must be included in all rate making mechanisms, the Supreme Court acknowledged that the true test of just and reasonable rates is whether the end result of the rates is just and reasonable. Thus, Peoples asserts that the Court in Barasch reached a result similar to the result reached by the Commonwealth Court in Equitable, that the legislative body has the authority to develop a ratemaking mechanism that does not incorporate every aspect of a base rate case, so long as the end result is just and reasonable. Id. at 8-9.Lastly, Peoples states that the earnings cap not only ensures that the resulting rates are just and reasonable, it takes into account the very same tax effects that the OCA raises in this proceeding. Peoples explains that it is important that the earnings cap provisions are an integral component of the DSIC rate. According to Peoples, the earnings cap prohibits a utility from utilizing a DSIC unless it is in an under-earning position; that is, its earnings are less than its authorized profit level. Peoples explains that the earnings cap relies on the Company’s quarterly earnings reports, wherein the Company’s calculation of rate base for earnings report purposes includes the current book amount of ADIT, as well as the depreciation deductions allowed for Pennsylvania Corporate Net Income Tax. Thus, Peoples asserts that in order for the Company to get the benefit of a DSIC, it must be in an under-earning position after taking into consideration the very tax matters that the OCA mentions. Peoples opines that the earnings cap provides the DSIC with a mechanism to ensure that rates are just and reasonable, and do not produce a profit above Commission-authorized levels. Id. at 1214.4.DispositionBased on our review of the record in this proceeding and the positions of the Parties, we concur with the ALJs’ conclusion that the Commission was granted significant discretion in implementing Act 11 and the calculation of various elements of the DSIC. We find that Peoples’ assertion that the General Assembly intended for the Commission to automatically adopt the DSIC formula used by water utilities is not mandated by the plain meaning of Act 11 or by the Act’s legislative history.” We arrive at this determination consistent with our recently decided Petition of Columbia Gas of Pennsylvania, Inc. for Approval of a Distribution System Improvement Charge, Docket No. P-2012-2338282 (Order entered May 20, 2014) (Columbia DSIC Opinion and Order). In that proceeding, we denied a similar exception filed by Columbia Gas, stating as follows: In interpreting a statute, the best indication of legislative intent is the plain language of the statute. Commonwealth v. Fithian, 599 Pa. 180, 961 A.2d 66, 74 (2008). The Statutory Construction Act provides that, “[w]hen the words of a statute are clear and free from all ambiguity, the letter of it is not to be disregarded under the pretext of pursuing its spirit.” 1 Pa. C.S. § 1921(b). When the words of a statute are not explicit, a ruling body may consider, among other things, the contemporaneous legislative history. 1 Pa. C.S. § 1921(c)(7). Legislative history may include previous drafts of bills, as well as statements made by legislators during the statute’s enactment. Commonwealth v. Wilson, 529 Pa. 268, 275-276, 602 A.2d 1290, 1294-1295 (1992). While statements made by legislators during the statute’s enactment may be properly considered as part of the contemporaneous legislative history, such statements are not dispositive of legislative intent. Commonwealth v. Alcoa Properties, Inc., 440 Pa. 42, 46 n.1, 269 A.2d 748, 750?n.1 (1970). In this case, the plain language of the statute does not require the Commission to automatically adopt the DSIC formula used by water utilities. Rather, it is clear from the plain language of the statute that the General Assembly intended to authorize the Commission to retain its full ratemaking authority and to establish the technical mechanics of the DSIC calculation. For example, Section 1358(c) of the Code, relating to construction of the statute, expressly provides as follows: Except as otherwise expressly provided under this subchapter, nothing under this subchapter shall be construed as limiting the existing ratemaking authority of the commission, including the authority to permit recovery of operating expenses through an automatic adjustment clause, or as indicating that the existing authority of the commission over rate structure or design is limited. As such, the Commission has the power and authority under the Code to examine, investigate, and audit all aspects of the data, operation, and implementation of the DSIC to the same extent it would have in reviewing a non-DSIC rate issue. See, Final Implementation Order at 44. Additionally, Section 1358(d) of the Code states that the Commission shall establish the specific procedures to be followed for approval of a DSIC. Columbia DSIC Opinion and Order at 16-17.While Peoples has presented evidence that language from the water DSIC model tariff was included in Act 11, there is no evidence that the General Assembly intended that the Commission be required to automatically adopt all aspects of the DSIC formula used by water utilities. Such a conclusion would be contrary to the plain language of the statute, which provides the Commission with authority and discretion in determining the method of calculating the DSIC provisions of Act 11. Rather, the evidence indicates that the General Assembly intended to adopt a mechanism similar to the DSIC formula used by water utilities, while leaving the technicalities of DSIC implementation to the expertise of the Commission.Furthermore, the OCA advocated that each and every element of the DSIC must be “just and reasonable” as required by Section 1301 of the Code. As stated earlier, the ALJs aver that the Supreme Court, in Barasch, acknowledged that there are many ways to achieve rates that are just and reasonable, and went on to find that the disallowance of a single element is not the appropriate standard for determining whether rates are just and reasonable. The OCA’s argument was also addressed in the Columbia DSIC Opinion and Order. In that Order, we reaffirmed the Final Implementation Order and the significance of the statutory earnings cap, as follows:We also do not agree with the OCA that failure to include the ADIT adjustment in the DSIC calculation will result in a DSIC rate that is unjust or unreasonable. As we stated in our Final Implementation Order, consumers will remain protected against over-earnings by the earnings cap provisions under Section 1358(b)(3) of the Code. Final Implementation Order at 39. As Columbia points out, its quarterly earnings reports, which are used to determine the Company’s achieved rate of return for earnings cap purposes, capture both upward and downward impacts of a wide variety of individual adjustments that would be considered in a base rate proceeding, including the current book amount of ADIT. Columbia R. Exc. at 13-14. Thus, we do not agree with the OCA that the earnings cap will fail to protect customers from being charged DSIC rates that are unjust or unreasonable. Additionally, we agree with the ALJs’ reliance on the Duquesne case for the conclusion that the total effect of the rate should be considered in determining whether the DSIC is just and reasonable. See, R.D. at 45-46. While the main issue in that case was whether a Pennsylvania law amounted to a taking of a public utility’s property in violation of the Fifth Amendment, that case also included a discussion of ratemaking principles and the applicable law for determining just and reasonable rates. The United States Supreme Court, in Duquesne, addresses and relies upon the landmark case of FPC v. Hope Natural Gas Company, 320 U.S. 591 (1944), for its statement that there is not any single formula that must be used in determining just and reasonable rates. Duquesne, 488 U.S. at 315, 316. As Columbia indicates, the Court acknowledged that the test for determining whether rates are just and reasonable involves an analysis of whether the end result of the rates is just and reasonable. Columbia DSIC Opinion and Order at 36-37.Additionally, in the Petition of Little Washington Wastewater Company (LWWC) for Approval of a Distribution System Improvement Charge, Docket No. P2013-2366873 (Order entered July 24, 2014) (LWWC DSIC Opinion and Order), we emphasized that the “earnings cap” is one of the customer protections legislated by the General Assembly as part of Act 11. We also recognized the significance of the “earnings cap” in the Final Implementation Order when we considered, and rejected, the OCA’s proposed ADIT adjustment, as follows:[C]onsumers remain protected against over earnings by the earnings cap under Section 1358(b)(3) which “captures the revenue impact of all other adjustments and insure[s] that the DSIC does not result in unreasonable rates.”Final Implementation Order at 38-39, LWWC DSIC Opinion and Order at 11-12.As such, we cannot conclude, based on the evidence in this proceeding, that the General Assembly intended that the Commission automatically adopt the DSIC formula historically used by water utilities. Further, we shall adopt the ALJs’ conclusion that the Commission was granted significant discretion in implementing Act 11 and in the calculations of the various elements of the DSIC. The Commission’s focus in this proceeding should be the overall effect of the calculated DSIC rate and whether, as a whole, the DSIC is just and reasonable. For these reasons, we shall deny the Exceptions filed by Peoples and the OCA on this issue. C.Accumulated Deferred Income Taxes1.Positions of the PartiesThe OCA contended that Peoples should be required to include an adjustment for deferred income taxes in calculating its DSIC. The OCA referenced past rate cases in which the Commission supported the deduction of ADIT from rate base. see Pa. PUC v. West Penn Power Co., 32 PUR4th 245, 264-265, 53 Pa PUC 410, 430-431 (1979) and PECO Salem Nuclear Plant. Pa. PUC v. Philadelphia Electric Co., 31 PUR4th 15 at 44-45, 52 Pa PUC 772 at 802-03. The OCA further claimed that several other states have adopted a similar treatment of ADIT in rate base and DSIC-type mechanisms. see Western Resources, Inc. v. State Corp. Comm’n of Kan., 30 Kan. App. 2d 348, 365, 42 P. 3d 162, 174 (Kan. Ct. of App. 2002) and Florida Progress Corp. v. Commissioner of Internal Revenue, 114 T.C. 587, 589-90, 2000 U.S. Tax Ct. LEXIS 42 (June 30, 200); aff’d by, Florida Progress Corp. v. Commissioner of Internal Revenue, 2003 U.S. App. LEXIS 21294 (11th Cir. 2003). OCA M.B. at 12-16.Peoples takes the position that ADIT should be treated the same way in its DSIC calculation as it has historically been treated in water company DSIC calculations. Peoples argued that no language was added in the adoption of Act 11 to incorporate the ADIT adjustments as proposed by the OCA. According to Peoples, the adoption by the General Assembly of the historical water DSIC mechanism, as a specific defined exception to the traditional base rate mechanism under Section 1308(d), demonstrates that the OCA’s proposal to include new adjustments should be rejected. Wastewater DSIC, 869 A.2d 1157. Peoples further indicated that the tax adjustments proposed by the OCA were omitted from the plain language of Act 11. Peoples stated that such omissions have been deemed intentional and have been upheld by the Pennsylvania Supreme Court in the past in determining legislative intent. See Mt. Village v. Bd of Supervisors, 582 Pa. 605, 874 A.2d 1, 22 (Pa. 2005) and Kusza v. Maximonis, 363 Pa. 479, 70 A.2d 329, 331 (Pa.1950). Peoples M.B. at 6-9.In response to the OCA’s claim of the application of ADIT in other states, Peoples countered that such references does not comport with proper statutory interpretation. According to Peoples, the Statutory Construction Act does not generally provide for consideration of an issue by another jurisdiction as a basis for determining legislative intent. Peoples averred that in Elder v. Orlock, 511 Pa. 402, 515 A.2d 517, 522 (1986), the Court noted that it was not appropriate to consider another jurisdiction’s statute where there was no indication that the General Assembly based Pennsylvania legislation on legislation adopted in other jurisdictions. Peoples further explained that none of the states cited by the OCA as having a similar treatment of ADIT in their DSIC-like mechanisms have an earnings cap which is a consumer protection mechanism put in place by the Commission. Peoples also indicated that these states account for a variety of other adjustments as part of their calculation, including uncollectible accounts, real property, other taxes, operation and maintenance savings, and purchased gas costs, which are not included in the Pennsylvania DSIC. Peoples M.B. at 11, 22-23.The OCA also indicated that the impact of ADIT on rates can be potentially significant and that rates must be calculated correctly whether they are through surcharges or base rates. Also, in response to Peoples’ argument that reflecting ADIT in the DSIC calculation will result in complexity and be a source of controversy, the OCA opined that inclusion of ADIT is not overly complex but rather is a necessary correction and a common practice for the calculation of rates that recover infrastructure costs. The OCA further disputes Peoples’ argument that its proposed DSIC includes an earnings cap that prevents the DSIC from being overstated. The OCA posits that the earnings reports are not subjected to the same type of review and scrutiny that occurs in a rate case and as such nothing would prevent utilities from overstating the surcharge revenue requirement and improperly charging ratepayers a return on funds that were not supplied by investors. OCA M.B. at 16-22.The OCA conceded that Peoples’ treatment of ADIT is consistent with how this matter has been historically treated by water companies. However, the OCA pointed out that Act 11 does not bind the Commission to past practice. R.D. at 16.2.ALJs’ RecommendationThe ALJs found that Peoples’ treatment of ADIT is consistent with the treatment of this item by water companies as well as with the Commission’s Final Implementation Order issued on August 2, 2012, at Docket No. M-2012-2293611, and also that it does not violate any specific language in Act 11. The ALJs stated that the purpose of this proceeding was not to revisit the policy decisions already made by the Commission in its Final Implementation Order. The ALJs noted that while the Final Implementation Order is not binding, its purpose was to provide guidance to utilities to ensure consistency of practice. According to the ALJs, the OCA must put forth some factual basis which would make it inappropriate to apply the policy set forth in the Final Implementation Order to the Company’s DSIC. The ALJs found that the OCA did not offer any compelling reason to treat Peoples differently from the water utilities nor did it offer any specific facts relating specifically to Peoples that mandate departing from Commission policy. Rather, the ALJs concluded that the arguments made by the OCA would require an evaluation of the policy decisions already made by the Commission. R.D. at 16-17.The ALJs explained that their purpose was not to revisit policy decisions already made by the Commission, but to determine whether it was appropriate to depart from that policy due to the facts presented in this case. In regard to the ADIT adjustment, the ALJs found that the OCA made no new arguments that were not made and rejected by the Commission in the Final Implementation Order. Nevertheless, the ALJs noted that the Commission provided the OCA with an additional opportunity to put forth evidence specific to Peoples that may require a different result. According to the ALJs, the OCA had not done so. The ALJs stated that as OCA thoroughly explained in its briefs, that ADIT should be recognized when developing base rates pursuant to Section 1308(d). However, the ALJs also concluded that a DSIC surcharge is not a base rate and that different principles apply. The ALJs stated that including ADIT in the DSIC calculation would defeat the goal of implementing a straightforward mechanism which was easy to calculate. In addition, the ALJs found that, based upon a review of the record, the arguments advanced by Peoples are consistent with the position taken by the Commission as expressed in the Final Implementation Order. The ALJs concluded that no persuasive evidence had been presented in this matter so as to justify the inclusion of ADIT in the DSIC calculation. They further concluded that the OCA had not convincingly argued that Act 11 does not grant the Commission sufficient discretion to exclude ADIT from the DSIC calculation. Id. at 17-18. Next, the ALJs stated that the Commission recognized, in its Final Implementation Order, that the impact of ADIT is already factored into the DSIC through the calculation of the earnings cap, which prohibits Peoples from exceeding its allowable rate of return. The ALJs noted that the Company’s DSIC will be reset to zero if the data included in the most recent Annual or Quarterly Earnings report filed with the Commission shows that Peoples would earn a rate of return exceeding the allowable rate of return used to calculate its fixed costs under the DSIC, as described in the pre-tax return section. According to the ALJs, since earnings are reviewed quarterly, the earnings cap adequately addresses the concern associated with ADIT for plant additions under the DSIC, without the complication of reviewing these issues in each quarterly DSIC filing. They noted that the Commission, in the Final Implementation Order, explained that consumers remain protected against over earnings by the earnings cap under Section 1358(b)(3), which captures the revenue impact of all other adjustments and insures that the DSIC does not result in unreasonable rates. Id. at 20-21.The ALJs noted that the OCA contended that calculating ADIT is not overly complicated, and that other jurisdictions include the ADIT adjustment in their surcharge mechanisms. The ALJs found that the practices of other jurisdictions may bear some examination by the Commission in the future. However, the fact that this is possible to make the ADIT adjustment does not negate the fact that the Commission has determined that it is counter to the stated goal of Act 11 to provide a simplified method of cost recovery for infrastructure improvements. The ALJs concluded that the OCA had not demonstrated a compelling reason why the customer protections of Act 11 are inadequate. Therefore, the ALJs recommended that the OCA’s proposal on this issue should be rejected. Id. at 21.Lastly, the ALJs noted that the OCA argued that changed circumstances exist which make the inclusion of ADIT, outside of the earnings cap, appropriate at this time. The ALJs found that the Commission has been granted the discretion to consider those changes, but has chosen, as a policy, to continue to exclude ADIT from the DSIC calculation. According to the ALJs, there is nothing in Act 11 which requires the Commission to do otherwise. Therefore, the ALJs concluded that the OCA had not demonstrated it is necessary to depart from prior practice on this issue, or that the factual record demonstrates that Peoples’ DSIC calculation, as a whole, results in a rate that is not just and reasonable. Id. at 21. 3.Exceptions and Replies to Exceptions The OCA contends that the ALJs erred by not requiring Peoples to include ADIT in the DSIC calculation. The OCA asserts that ADIT is simply the cumulative balance of the deferred taxes generated over time and represents a source of zero cost capital because the utility has paid less in taxes to the federal government than it has collected in rates. The OCA explains that, under the standard ratemaking practice, the balance of ADIT is recognized as either a source of zero cost capital, as it is in Pennsylvania and most other states, or included in capital structure with a zero cost. The OCA avers that the DSIC rate must be calculated so that ratepayers do not pay costs that the utility does not incur. The OCA opines that the DSIC formula proposed by the Company can overstate its investment balance by including zero cost capital generated by ADIT. As a result, the OCA submits that Peoples must change its tariff to reflect ADIT as an offset to the DSIC rate base. According to the OCA, the evidence supports its position that recognition of ADIT is necessary to correctly calculate surcharge rate base and that ADIT can, in fact, be readily calculated for surcharge purposes. OCA Exc. at 10-13.The OCA disagrees with the ALJs’ conclusion that including an ADIT adjustment in the DSIC calculation is too complex for a surcharge mechanism and should only be calculated in the context of a full base rate proceeding. The OCA points out that this calculation is made in other states. According to the OCA, Peoples overstates the difficulty of calculating ADIT. In response to Peoples’ position that the ADIT is too complex because it is impacted by the Company’s tax position, which will not be known until after the end of the tax year, the OCA avers that this is not reason to ignore the ADIT. The OCA maintains that the DSIC formula established in this proceeding should correctly calculate the investment on which Peoples is entitled to earn a return. The OCA avers that when Peoples is no longer in a loss carry forward position, the tariff will provide for the appropriate adjustment to DSIC rate base and revenue requirement. Id. at 13-14. The OCA maintains that failure to recognize ADIT will overstate the investment balance and allow Peoples to earn a return on funds that were not supplied by investors. According to the OCA, this obvious flaw explains why utilities in every state that was examined on the record and in briefs in this case deduct ADIT from the surcharge rate base either by statute, regulation or simply as a matter of routine course. The OCA believes that the fact that utilities in at least eleven other states include ADIT in an infrastructure surcharge calculation is also relevant to the issue. Id. at 16-17. Lastly, the OCA asserts that the earnings cap alone does not prevent the DSIC rate from being overstated. The OCA states that earnings reports are not subject to the type of review and scrutiny that occur in a rate case, and that the question of whether or not a utility is “overearning” may be a product of many factors unrelated to the DSIC. According to the OCA, the only way to ensure that the surcharge does not include a return on zero cost capital is to directly adjust the DSIC rate base calculation for ADIT. The OCA further notes that the applicable regulations in New Jersey impose an earnings cap and still require utilities to reflect the offset for deferred taxes in the infrastructure surcharge calculation. Id. at 17-18.In reply, Peoples states that inclusion of ADIT would complicate the DSIC unnecessarily. Peoples explains that ADIT is a dynamic element that is constantly shifting based on available tax deductions, the mix of plant in service and the Company’s current tax position. According to the Company, these dynamic changes cannot be accurately captured in the simple formula used to compute the DSIC charge, and are not reflected in the OCA’s proposed adjustment. Peoples further asserts that the OCA’s arguments that the annual reconciliation process will overcome the difficulties in providing accurate projections of incremental ADIT cuts directly against the OCA’s argument that ADIT is not overly complicated. Peoples opines that the reconciliation provided for in the statute is intended to be simple and straightforward, and not include the likelihood of significant changes in the charge to customers due to changes in the Company’s tax position. Peoples R. Exc. at 16-17.In reply to the OCA’s argument that the practice of utilities in other states is to include ADIT in the DSIC calculation, Peoples states that the practices of other states are irrelevant to a determination of how a Pennsylvania statute should be construed. According to Peoples, the jurisdictions the OCA relied upon in this proceeding have mechanisms that are dissimilar from the Pennsylvania’s mechanism in a number of critical ways. See Peoples M.B. at 22-23, Peoples R.B. at 20-21. Peoples opines that there is no meaningful application to be drawn from the OCA’s reliance on other jurisdictions. Id. at 18.4.DispositionBased on our review of the record in this proceeding and the positions of the Parties, we concur with the ALJs’ conclusion that Peoples’ treatment of ADIT is consistent with the treatment of this item by water companies as well as the Commission’s Final Implementation Order, supra, and does not violate any specific language in Act 11. We arrive at this determination consistent with our recently decided Petition of Columbia Gas of Pennsylvania, Inc. for Approval of a Distribution System Improvement Charge, Docket No. P-2012-2338282 (Order entered May 20, 2014) (Columbia DSIC Opinion and Order), as well as our decision in the LWWC DSIC Opinion and Order.The purpose of this proceeding was not to revisit the policy decisions already made by the Commission in its Final Implementation Order, supra. While the Final Implementation Order is not binding, its purpose was to provide guidance to utilities to ensure consistency of practice. The Commission initially declined to adopt the OCA’s proposed adjustment for ADIT in its Final Implementation Order. Furthermore, in the Columbia DSIC Opinion and Order, we reaffirmed the Final Implementation Order and once again declined to adopt the OCA’s proposed ADIT adjustment, stating as follows:Moreover, we have previously addressed this issue in our Final Implementation Order, in which we declined to adopt the OCA’s proposal to include an adjustment for ADIT in the DSIC calculation. As we indicated in our Final Implementation Order, we believe that the DSIC is intended to be a straightforward mechanism that is easy to calculate and audit, and does not require a full rate case analysis. We concluded that the inclusion of an ADIT adjustment would be inconsistent with that goal and would likely lead to litigation over the DSIC calculation. Final Implementation Order at?39. Thus, we agree with Columbia that, through the enactment of Act 11, the General Assembly intended to establish a surcharge mechanism to produce just and reasonable rates without the need for the type of comprehensive and detailed analysis required in a base rate proceeding under Section 1308(d) of the [Public Utility] Code.Columbia DSIC Opinion and Order at 35-36.Summarizing our view of the OCA’s proposed ADIT adjustment, we held as follows:Accordingly, we find that the inclusion of an ADIT adjustment as proposed by the OCA is not required by Act?11, would add unneeded complexity to the DSIC calculation, and is unnecessary to ensure that the DSIC rates will be just and reasonable. As we stated in our Final Implementation Order, the historic water DSIC, which was used successfully for many years, did not include an adjustment for ADIT. Final Implementation Order at 39. Accordingly, we will deny the OCA’s Exception on this issue. Columbia DSIC Opinion and Order at 37.In the LWWC DSIC Opinion and Order, we again rejected the OCA’s proposed ADIT adjustment and the portion of the Recommended Decision addressing ADIT, consistent with the Final Implementation Order and the Columbia DSIC Opinion and Order. The LWWC DSIC Opinion and Order concluded that the OCA failed to demonstrate why we should reach a different result in that proceeding than the result we reached previously in the Columbia DSIC Opinion and Order. LWWC DSIC Opinion and Order at 9.Accordingly, we conclude that Act 11 does not require the Company to include recognition of ADIT in the calculation of its DSIC. Therefore, we shall deny the Exceptions filed by the OCA on this issue and adopt the ALJs’ recommendation.D.Gross-Up of State Taxes1.Positions of the PartiesPeoples’ DISC tariff included a “gross-up” for state taxes. The OCA contended that Peoples should not be permitted to “gross-up” state income taxes based on the “actual taxes paid” doctrine. The actual taxes paid doctrine requires utilities to flow through state tax benefits to ratepayers. According to OCA:The Company developed its pre-tax rate of return by grossing up the equity component of its overall return to account for both state and federal income taxes at the full statutory rates. DSIC Petition at Tariff Supp. 11 at Original Page No. 74; Peoples St. 1-S, Exh. APW-1S at 4; Peoples St. 3-R at 7-10; OCA St. 1 at 13-14. The amount of state income taxes that Peoples will pay on DSIC revenues, however, will be affected by tax deductions related to the DSIC investment, in particular the accelerated depreciation and, when applicable, bonus depreciation. OCA St. 1 at 13. Because Peoples will not pay state income taxes on the full amount of its equity return, these deductions should be taken into account in determining state taxable income and state income tax expense. The state income tax rate used to calculate DSIC revenue requirement should reflect the state income tax expense actually paid.R.D. at 21-22.The OCA has proposed that Peoples should reflect incremental flow-through tax deductions for accelerated depreciation on DSIC-eligible plant additions and remove the state tax gross-up. According to the OCA, the Pennsylvania Supreme Court rendered the seminal decision regarding the flow-through of income tax benefits in Barasch v. Pa. PUC, in which the Court determined that the Commission could only find rates “just and reasonable” if those rates are based on the actual taxes paid. 507 Pa. 496, 521, 491 A. 2d 94, 107 (1985) (Penn Power). In other words, while the Court recognized that federal “normalization” rules prohibited the immediate flow-through of federal tax benefits, it required the utility to flow through state income tax benefits to ratepayers on a current basis. Penn Power, 507 Pa. at 504-05, 518, 520-22, 491 A. 2d at 98, 101, 105-107. OCA M.B. 28-29.The OCA reiterated that, consistent with Penn Power, this Commission has recognized that flow-through of the benefits associated with utilizing accelerated depreciation in the calculation of state income taxes is “mandated.” Pa. PUC v. Metropolitan Edison Co., 60 Pa P.U.C 349, 398 (1985). In addition, the OCA argued that, consistent with the Commission’s holding in Jackson Sewer, appellate law and Act?11 requires that the DSIC recover only costs incurred, and rates cannot include phantom taxes as stated below by the Commission:[UGI] stands for the proposition that the Commission does not have the authority to permit the inclusion of hypothetical expenses not incurred, and more specifically, establishes the “actual taxes paid” doctrine, prohibiting a utility from collecting “phantom taxes.”OCA M.B. 29-30.Peoples countered that historically, water companies have been permitted to gross-up state taxes and there is no reason why a gas utility should not be permitted to do the same. Peoples also stressed that the actual taxes paid doctrine does not and should not apply to DSIC proceedings. Peoples maintained that the purpose of the state tax gross-up in the DSIC is to simplify the calculation. Peoples explained that the OCA’s incremental deduction proposal should be rejected because it would incorporate inaccurate tax adjustments into the DSIC and would require a much more complicated and extensive calculation than intended by Act 11. Further, Peoples contended that the “actual taxes paid” doctrine is a concept related to base rate proceedings when a utility’s complete tax structure can be analyzed. Peoples M.B. at 24-26, R.D. at 22-23.2.ALJs’ RecommendationThe ALJs found that Peoples’ treatment of the gross-up of state taxes is consistent with the treatment of this item by water companies as well as the Commission’s Final Implementation Order, supra, and does not violate any specific language in Act 11. According to the ALJs, the DSIC calculation does not necessarily adhere to all traditional ratemaking principles. Rather, the ALJs aver that it is meant to be a simplified method for the recovery of specific costs in order to avoid the many complex and controversial elements of a base rate proceeding. The ALJs opined that the flow through of tax deductions and the determination of a utility’s taxable income is often one of the most controversial and contentious aspects of a base rate proceeding. Additionally, the ALJs stated that the customer protections in the statute are for the purpose of off-setting any potential harm to ratepayers caused by the truncated calculation of the surcharge. Specifically, tax depreciation deductions allowed for Pennsylvania net income tax purposes are reflected in the calculation of the Company’s earnings reports. Thus, according to the ALJs, if Peoples is overearning its authorized return as a result of tax depreciation deductions or other benefits, it is not permitted to charge the DSIC. Accordingly, the ALJs concluded that it is the overall effect of the rate which must be just and reasonable. R.D. at 16, 23-24.Exceptions and Replies to ExceptionsIn its Exceptions, the OCA asserts that the ALJs erred by not requiring Peoples to reflect its actual state income taxes in the DSIC calculation. The OCA argues that Pennsylvania law requires that state income tax deductions be reflected in rates on a current basis, consistent with the “actual taxes paid” doctrine. The OCA contends that the Pennsylvania Supreme Court rendered the seminal decision regarding the flow-through of income tax benefits in Penn Power where it determined that the Commission could only find rates just and reasonable if those rates are based on actual taxes paid. The OCA also contends that the Court affirmed this position weeks later in the context of consolidated taxes, finding that, where an expense is not actually incurred, it is improper to include it in the rates charged to ratepayers. OCA Exc. at 19 (citing Barasch v. Pa. PUC, 507 Pa. 561, 493 A.2d 653 (1985)). The OCA also argues that the Commission has recognized that flow-through of the benefits associated with utilizing accelerated depreciation in the calculation of state income taxes is “mandated.” OCA Exc. at 20 (citing Pa. PUC v. Metropolitan Edison Co., 60 Pa. P.U.C. 349, 398 (1985)). In addition, the OCA notes the Commission’s statement that: Barasch, [507 Pa. 561, 493 A.2d 653] stands for the proposition that the Commission does not have the authority to permit the inclusion of hypothetical expenses not incurred, and more specifically, establishes the “actual taxes paid” doctrine, prohibiting a utility from collecting “phantom taxes.”OCA Exc. at 20 (citing Pa. PUC v. Jackson Sewer Corp., Docket No. R-00005997 (Order entered September 28, 2001 at 34).The OCA asserts that the ALJs did not address the “actual taxes paid” doctrine or the requirement in Act 11 that limits DSIC recovery to costs “incurred” by the utility. Rather, the OCA states that the ALJs relied on allegedly flawed arguments set forth by Peoples. The OCA states that it wishes to correct an apparent misunderstanding in the Recommended Decision regarding the OCA’s income tax recommendation. The OCA explains that it is not proposing that the calculation of pre-tax return should always eliminate all state income taxes from the gross-up in the DSIC calculation. Rather, the OCA states that the state income tax rate used to calculate the DSIC revenue requirement should reflect the state income tax expense actually paid. Thus, it is the OCA’s position that, for the DSIC that took effect on July 1, 2013, the gross-up for state income taxes should be zero percent because Peoples’ state income tax benefits exceed the state taxable income that will be generated by the DSIC, and Peoples will pay no state income taxes on DSIC revenues. Id. at 22-23.The OCA concludes that while the Commission has expressed the intent that the DSIC be a straight forward and simple mechanism, that intent can only be exercised in matters over which the Commission has discretion. According to the OCA, the Commission has no discretion to ignore the requirement to flow through state income tax benefits in the DSIC rate because the flow-through of state income tax benefits is a requirement of just and reasonable rates under Pennsylvania law. The OCA maintains that its proposed correction to the gross-up for state income taxes ensures that ratepayers are charged only for state income taxes actually paid, consistent with the language of Act?11 and of Section 1301, as it has been interpreted by the Courts and the Commission. Id. at 27.In its Reply Exceptions, Peoples states that the record in this proceeding shows that the OCA’s proposal regarding the gross-up for state income taxes would result in double-counting of state tax depreciation deductions and is accordingly, fundamentally unfair. Further, the Company asserts that the earnings cap accounts for state income tax depreciation benefits. According to Peoples, the OCA’s proposal would produce inaccurate and unfair results that would complicate the DSIC mechanism, and it is not required to produce just and reasonable rates. The Company maintains that the only way to determine Peoples’ actual taxes paid for state income taxes would be to conduct a full rate case tax analysis which would be contrary to the intent of the General Assembly in adopting a simple surcharge mechanism. Peoples opines that conducting such a tax analysis would subject the DSIC to disputes over the proper calculation of state tax liability. As such, Peoples maintains that the ALJs properly rejected the OCA’s proposal as too complex for the surcharge mechanism adopted by the General Assembly. Peoples R. Exc. at 19-21.In regard to the OCA’s assertion that the ALJs erred in not applying the actual taxes paid doctrine to the DSIC surcharge, Peoples claims that the actual taxes paid doctrine involves a complex set of base rate calculations to determine the tax liability of a utility. Peoples asserts that, in the case of the DSIC, the General Assembly concluded that the Commission’s historic water DSIC mechanism was best suited to deriving just and reasonable rates, and accounted for the complexities of actual taxes through the earnings cap. According to Peoples, this approach is more effective than the OCA’s incremental deductions approach, which double-counts state tax deductions and does not reflect “actual taxes.” The Company maintains that the earnings cap formula captures all of the moving parts associated with the tax deductions, unlike the OCA’s proposal. As a result, Peoples opines that the OCA’s proposal is unnecessary in order to ensure that actual state income tax deductions are considered in determining whether the DSIC rates are just and reasonable. Peoples R. Exc. at 21-22.4.DispositionBased on our consideration of the record in this proceeding and the positions of the Parties on this issue, we adopt the ALJs’ position that Peoples’ treatment of the gross-up of state taxes is consistent with the treatment of this item by water companies as well as the Commission’s Final Implementation Order, supra, and does not violate any specific language in Act 11. We arrive at this determination consistent with our recently decided Columbia DSIC Opinion and Order, as well as our decision in the LWWC DSIC Opinion and Order. We note that the ALJs’ recommendation in the instant proceeding is consistent with the Columbia DSIC Opinion and Order, wherein we rejected the OCA’s proposed state income tax adjustment, as follows:Based on our consideration of the record and the positions of the Parties on this issue, we decline to adopt the OCA’s proposal to eliminate the state tax gross-up included in Columbia’s DSIC calculation. While we agree that Columbia’s rates should reflect the state taxes that the Company actually pays, we are not convinced that eliminating the state tax gross-up included in the DSIC calculation would properly achieve that result. As Columbia points out, its base rates currently reflect deductions for the repairs allowance and accelerated depreciation that may no longer apply, because such deductions have been reduced or eliminated after the test year considered in the Company’s last base rate proceeding. Therefore, to reflect these same types of deductions in relation to DSIC eligible plant in the DSIC calculation may result in overall rates that are further out of alignment with Columbia’s actual tax position. As Columbia argues and the ALJs concluded, the only way to determine Columbia’s actual taxes paid for state income tax purposes would be to conduct a full rate case analysis, which could subject the DSIC calculation to litigation regarding the proper determination of the Company’s state tax liability. Columbia R. Exc. at 14; R.D. at 63. However, as we stated with regard to the ADIT issue, we believe that the DSIC is intended to be a straightforward mechanism that is easy to calculate and audit and does not require a full rate case analysis.In addition, as we stated in our discussion of ADIT, Columbia’s customers will remain protected by the earnings cap provision of Act 11. The Company’s quarterly earnings reports, which are used to determine its achieved rate of return for earnings cap purposes, reflect a wide variety of individual adjustments that would be considered in a base rate proceeding, including Columbia’s state income tax deductions. Accordingly, we believe that the earnings cap will ensure that customers will not be charged DSIC rates that are unjust or unreasonable. For the foregoing reasons, we shall deny the OCA’s second Exception.Columbia DSIC Opinion and Order at 46-47.In the LWWC DSIC Opinion and Order we concluded this issue by stating the following:As such, we reject the OCA’s proposed state income tax adjustment and its proposed elimination of the state income tax gross-up, consistent with the Final Implementation Order and the Columbia DSIC Opinion and Order. We note that the only way to determine the Company’s actual taxes paid for state income tax purposes would be to conduct a full rate case analysis, which could subject the DSIC calculation to litigation regarding the proper determination of the Company’s state tax liability. LWWC Opinion and Order at 20.Accordingly, we shall adopt the ALJs position that Peoples’ treatment of the gross-up of state taxes is consistent with the treatment of this item by the water companies as well as the Commission’s Final Implementation Order, supra, and does not violate any specific language in Act 11. Therefore, we shall deny the Exceptions filed by the OCA on this issue. IV.ConclusionBased upon our review, evaluation and analysis of the record evidence in this proceeding, we shall deny the Exceptions filed by Peoples and the Exceptions filed by the OCA, consistent with the discussion contained in the body of this Opinion and Order. Further, we shall adopt the ALJs’ Recommended Decision to approve the Partial Settlement and reject the OCA’s proposed adjustments to the DSIC calculation.We find that Peoples has met its burden of proof for our approval of its DSIC calculation under Act 11. We conclude that Peoples is not required to include an ADIT adjustment in its DSIC calculation and that it is permitted to include the state income tax gross-up in its DSIC calculation; THEREFORE,IT IS ORDERED:1. That the Exceptions filed by Peoples Natural Gas Company, LLC on April 23, 2014, are denied.2. That the Exceptions filed by the Office of Consumer Advocate on April 23, 2014, are denied.3.That the Recommended Decision of Administrative Law Judges Mary? D.?Long and Jeffrey A. Watson issued on April 3, 2014, is adopted, consistent with this Opinion and Order. 4.That the Formal Complaint filed by the Office of Consumer Advocate at Docket No. C-2013-2348847 is marked satisfied as to the matters agreed upon in the Stipulation of Settlement, but is dismissed in all other respects.5.That the Distribution System Improvement Charge calculation proposed by Peoples Natural Gas Company, LLC is hereby approved effective July 1, 2013, consistent with this Opinion and Order.6.That Peoples Natural Gas Company, LLC shall file a tariff supplement to establish a Distribution System Improvement Charge, on ten days’ notice to be effective July 1, 2013, consistent with this Opinion and Order.7.That, upon acceptance and approval by the Commission of the tariff supplement and supporting data filed by Peoples Natural Gas Company, LLC, as being consistent with this Opinion and Order, this proceeding shall be marked closed. 33883603556000BY THE COMMISSION,Rosemary ChiavettaSecretary(SEAL)ORDER ADOPTED: August 21, 2014ORDER ENTERED: August 21, 2014 ................
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