Commonwealth Court Affirms PUC's Use of End of Test Year Methodology for Calculation of the Fully Projected Future Test Year and Application of Act 40
On January 15, 2020, in the matter of McCloskey v. Pennsylvania Public Utility Commission, 1549 C.D. 2018, the Commonwealth Court of Pennsylvania affirmed the Pennsylvania Public Utility Commission’s (“PUC”) Order in the UGI Utilities, Inc. – Electric Division base rate proceeding at Docket No. R-2017-2640058 (“UGI Electric Rate Case”). Specifically, the Court affirmed the PUC’s finding that Act 11 allowed a public utility using the Fully Projected Future Test Year (“FPFTY”) to calculate its rate base using an end of test year methodology, as well as the PUC’s determination that UGI Electric had met its burden under Act 40 to show that it was appropriately using funds that previously would have been subject to the Consolidated Tax Adjustment (“CTA”).
On appeal, the Office of Consumer Advocate (“OCA”) argued that the Commission erred in determining that the FPFTY should be calculated using the end of year method, because doing so would result in overearning and would produce unjust and unreasonable rates. Instead, OCA argued that the PUC must use the average test year approach supported by testimony from witnesses for OCA and the Bureau of Investigation and Enforcement. Regarding Act 40, OCA argued that the PUC failed to require UGI Electric to make a specific evidentiary showing as to how the dollars that would have been reflected in the CTA were being used. OCA further argued that the appropriate approach required the PUC to reduce the Company’s rate base by the amount reflected in the CTA calculation, in order to show that the dollars were being used by the Company.
On the calculation of the FPFTY, the Court held that the plain language of Act 11 specified a 12-month period, without reference to averages or partially projected years, and that the “12-month period includes day 1, as well as day 365.” The Court found that the Commission’s use of the end of year method was consistent with both the plain language of Act 11, as well as the intent of the General Assembly to reduce regulatory lag. In reaching its conclusion to affirm the PUC’s Order, the Court specifically deferred to the Commission’s discretion and expertise in the area of ratemaking.
As to Act 40, the Court first found that Act 40 does not expressly impose any particular manner for a utility to show that it was in compliance with Act 40, and that as to the infrastructure and general uses specified in 1301.1(b), Act 40 “does not require an accounting of those funds.” The Court then reiterated the specific testimony of UGI Electric’s witness that (1) the Company was aware of the obligations imposed by Act 40 and (2) that it would use the funds identified as previously subject to the CTA, the amount of which was not disputed by OCA, in the manner specified by Act 40. The Court held that a reasonable mind could accept this testimony as adequate to support the conclusion that the Company would use its funds in accordance with Act 40 and Section 1301.1(b). For these reasons, the Court rejected OCA’s arguments on Act 40 and affirmed the PUC’s decision.
As a result of the Commonwealth Court’s order, a major issue that has been raised in base rate proceedings since the implementation of Act 11 on January 1, 2012, has been resolved, pending the possibility of further appellate review. The effect of the Order should be to reduce a major source of dispute in base rate proceedings on a going forward basis. Similarly, utilities now have more clarity on the evidence necessary to meet their evidentiary burden under Act 40, which is required in base rate filings through the sunset period prescribed in Section 1301.1(c) (i.e., December 31, 2025).