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BEFORE THEPENNSYLVANIA PUBLIC UTILITY COMMISSION
Pennsylvania Public Utility Commission : R-2016-2554150Office 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 DECISION
BeforeMark A. Hoyer
Deputy Chief Administrative Law Judge
TABLE OF CONTENTS
I. INTRODUCTION...............................................................................................................1
II. HISTORY OF THE PROCEEDING...................................................................................2
III. DISCUSSION......................................................................................................................4
A. Description of the Company....................................................................................4
B. Legal Standard.........................................................................................................4
C. Rate Base.................................................................................................................7
1. Plant in Service............................................................................................7
2. Additions to Rate Base.................................................................................8
a. OCA Proposed Adjustments............................................................8
b. City’s Position regarding OCA Proposed Adjustments.................13
c. Conclusion.....................................................................................16
3. Cash Working Capital................................................................................17
4. Deductions from Rate Base.......................................................................18
5. Recommendation of Jurisdictional Rate Base...........................................20
D. Revenues................................................................................................................20
1. Falls Creek Borough..................................................................................20
2. Union Township Contract Sales................................................................22
3. Borough of Sykesville................................................................................26
E. Expenses................................................................................................................28
1. Vacant Home Expenses.............................................................................29
2. Transmission and Distribution Contractual Services.................................29
3. Water Treatment Contractual Services......................................................32
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4. Administrative and General Expenses.......................................................37
a. City Manager’s Salary...................................................................38
b. Administrative Expense.................................................................42
5. City Buildings: Computer Parts/Supplies/Software..................................44
6. Rate Case Expense.....................................................................................46
7. Unaccounted for Water (UFW).................................................................49
8. Overtime Expenses....................................................................................52
9. Payroll/FICA Tax Adjustment...................................................................53
10. Summary of Expense Adjustments............................................................54
F. Taxes......................................................................................................................55
G. Rate of Return........................................................................................................55
1. City’s Proposal...........................................................................................55
2. Legal Standards..........................................................................................55
3. Party Positions...........................................................................................56
4. Capital Structure and Proxy Group............................................................57
5. Cost of Debt...............................................................................................64
6. Return on Common Equity........................................................................64
a. Introduction....................................................................................64
b. DCF Model....................................................................................66
c. CAPM Analysis.............................................................................67
d. Adjustments to Cost of Equity (Risk Adjustment, Size Adjustment, Leverage Adjustment) by City..........................68
e. Tax Rate Adjustment.....................................................................71
f. Debt Service Coverage Ratio.........................................................73
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g. Overall Rate of Return...................................................................74
H. Rate Structure.........................................................................................................74
1. Cost of Service...........................................................................................75
2. Revenue Allocation....................................................................................78
3. Tariff Structure...........................................................................................80
I. Miscellaneous Issues..............................................................................................81
1. Stipulations................................................................................................81
a. Annual PUC Report Format...........................................................82
b. Installation of Water Meters on All Services Lines Connectedto the Municipal Buildings.............................................................82
c. The Submission of Written Monthly Estimates of UnmeteredWater Use from Fire Companies...................................................84
d. Estimation of Water Loss at the Time Repair is Made..................85
e. Metered Locations for Street Sweepers and Fire Companies........85
f. Complaint Logs..............................................................................86
g. Isolation Valves.............................................................................88
2. Sales to Shale Gas Companies...................................................................88
3. Sales of Water to the Borough of Falls Creek...........................................90
IV. CONCLUSIONS OF LAW...............................................................................................91
V. RECOMMENDED ORDER..............................................................................................97
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I. INTRODUCTION
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 $897,776.1 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.
1 Tables setting forth the Rate of Return and summary of Adjustments and Comparison of Present and Proposed Water Rates are attached hereto as Appendix A and made a part of this Recommended Decision.
1
II. HISTORY OF THE PROCEEDING
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.
C-2016-2556376 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.
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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
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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.2
III. DISCUSSION
A. Description of the Company
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
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).
2 The City’s motion to strike portions of the testimony of OCA witness Terry L. Fought made on November 10, 2016 (OCA Statement No. 2S, Tr. at p. 135, beginning on line 6, through p. 137, ending on line 7; OCA Statement No. 2S on page 3, “beginning on line 19, through page 4, ending on line 17.” Tr. at p. 135, lines 6-8), was granted in the Second Interim Order. All other motions to strike made at the hearing on November 10, 2016 were denied.
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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).
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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 Return
I&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.
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C. Rate Base
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
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.
7
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
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.
8
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
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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.
10
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
11
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
12
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 Adjustments
According 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.3 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.
3 Regarding Cash Working Capital, both OCA and the City concur that Cash Working Capital should be adjusted consistent with the rule of thumb method of calculating Cash Working Capital is based on 12.5% of approved O&M expense. Id. Accordingly, the City opposes OCA's jurisdictional adjustment to Cash Working Capital of $9,264, but concurs with the methodology.
13
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 (Jan. 1, 2005) (“Lancaster Sewer”). OCA
Main Brief, pp. 9-10. According to the City, Lancaster Sewer is a fundamentally different case
from the instant proceeding and cannot be considered controlling precedent. In Lancaster Sewer,
14
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), at 576; see
also Pa. Pub. Util. Comm’n v. Phila. Suburban Water Co., 50 Pa. P.U.C. 407 (Dec. 9, 1976), 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.
15
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. Conclusion
The 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
16
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 Capital
The 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
17
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
18
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), 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., 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.4 Therefore, the City argues that deducting this property from the
rate base is premature and unfounded at this time. City R.B., p. 7.
4 OCA also references Application of Duquesne Light Co., Docket No. R-00974104, 1998 Pa. PUC 167 (Opinion and Order entered August 13, 1998), for the proposition that “[p]lant that is used and useful today could become not used and not useful tomorrow.” The referenced citation addresses arguments related to billing mechanisms and does not correspond to, or in any way support, OCA’s averment as to rate base. See id. Accordingly, this statement must be disregarded.
19
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 Base
Based 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. Revenues
The 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 Borough
Sandy 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
20
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) (“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
21
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:
1. The date service began2. The annual number of gallons to be sold to Falls Creek3. The rate to be charged per thousand gallons4. The expected annual customer charge revenue and5. A copy of the contract with Falls Creek
OCA 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 Sales
The 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
22
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 $21,241.5 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, 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
5 The City projects 2016 sales of 11,065,000 gallons to Union Township with total annual revenue of $22,130, assuming a rate of $2.00 per thousand gallons. Sandy Township St. No. 1, Attachment 7. The charge to Union Township at existing rates would be $43,371 (i.e., (100,000 gallons per month multiplied by $5.15 per thousand gallons multiplied by 12 months) plus (9,865,000 gallons multiplied by $3.77 per thousand gallons)). The difference between the below tariff charge of $22,130 and full tariff charge of $43,371 is $21,241.
23
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.
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, 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-
24
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. 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
25
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 Sykesville
Sandy 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,
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,6 beyond its
corporate limits.” 66 Pa.C.S. § 1301; see also 66 Pa.C.S. § 1102 (delineating acts requiring a
certificate of public convenience) and 66 Pa.C.S. § 1501 (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.
6 The Public Utility Code defines “municipal corporations” broadly, and the term includes “cities . . . of this Commonwealth . . . for the purpose of rendering any service similar to that of a public utility.” 66 Pa.C.S. § 102.
26
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); see also
Lehigh Valley Coop. Farmers v. City of Allentown, 54 Pa. PUC 495, 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, at 6 (Oct. 21,
1986) (“Springdale”) (citing Re Chestnut Knoll Assocs., 1984 Pa. PUC LEXIS 55 (Apr. 6,
1984); 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, 54
Pa. PUC at 499 (citing Borough of Brookhaven v. City of Chester, 39 Pa. PUC 472, 479 (1962));
see also Springdale, 63 Pa. PUC at 6; City R.B., p. 15.
In 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
27
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 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. Expenses
Both I&E and the OCA proposed adjustments to expenses claimed by the City.
Each proposed adjustment will be addressed below.
1. Vacant Home Expenses
The 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
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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 Services
The 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: $132,771
OCA 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
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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.
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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.
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3. Water Treatment Contractual Services
The 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 annually
OCA 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 annually
OCA 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.
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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: $22,323
OCA 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
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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.
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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:
2013 2014 2015 2016January - - - -February - - - -March - - 4,427 1,044April - - - 1,181May - 865 3,074 1,311June - - - 2,075July - - - 7,052August - - - 5,313September 1,825 - - 1,591October - - 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 $29,6887 rather than the City’s claim of $43,673.8 The
7 The OCA reached this final calculation by taking the previously recommended total expense of $37,153 and subtracting $7,465 to which the City agreed to. See, OCA St. 1S at 16; Tr. at 62.
8 The City subtracted $7,465 from its claim of $51,138. See, City Exh. CEH-1R; City Exh. CEH-1RJ.
35
resulting adjustment is $13,985 with a jurisdictional component of $4,194.9 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.10 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.11 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”12 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.13 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
9 This adjustment was calculated by taking the City’s claim of $51,138 and subtracting the annual expense of $37,153, which is calculated above.
10 I&E Statement No.2-SR, p. 15.
11 I&E Statement No.2-SR, p. 7-13.
12 City of DuBois Statement No. 2-R.
13 I&E Statement No.2-SR., p. 17.
36
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 Expenses
City 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 Salary
37
The 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 $69,093.14 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.
14 The City’s claim for expenses in City Exh. CEH-1 showed the total-City cost of each expense. The jurisdictional portion of the expense is shown in the City’s Cost of Service Study in City Exhibit CEH-2.
38
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.15 See, Tr. at 24:8-9, 24:25-25:2, 39:10-15. In rebuttal, Mr. 15 The City’s sewer operations serve inside-City customers only and are not regulated by the Commission.
39
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.16 The Public Works Director
does not have any of the above-listed responsibilities, but is instead responsible for the
distribution and collection lines.17 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
16 In addition to a Public Works Director, the City employs a Water Treatment Plant Supervisor and a City Engineer, among various other Water Bureau staff. The City allocated 45.6% of the City Engineer’s time to the Water Fund. OCA St. 1 at 39. In other words, according to the City, the City Engineer spends less percent of his time on water than the City Manager.
17 The City states that since the Public Works Director’s timesheets produce an approximately 60% allocation to the Water Fund, that supports the City Manager’s salary allocation as the two work in tandem to oversee general, sewer, and water operations. OCA St. 1 at 34. City witness Heppenstall states that in regards to the time that the City Manager is not spending on finance “it is logical to assume that the balance of his time would be dictated by the same projects/issues that are reflected in the timesheets of the Public Works Director.” City St. 2R at 16. The Public Work Director’s timesheets shows that he spent 60.7% of his time on water, 20.8% of his time on Wastewater, and 18.5% of his time on “street.” OCA St. 1 at 34.
40
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.
41
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 Expense
In 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
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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 Water
Allocated
amount
Revised %
of
Allocation
to water
Revised
Allocated
amount
City Manager Salary
$109
,208 60.00
$65
,525 25.00
$2
7,302
Public Works Director
Salary
$79
,251 60.70
$48
,105 60.70
$4
8,105
Finance Salaries (Net
of Clerical Salaries)
$200
,415 24.00
$48
,100 24.00
$4
8,100
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.
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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/Software
The 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: $47,202
OCA 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
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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.
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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 Expense
The 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.18 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 18 The last three cases were filed on the following dates: 8/27/1996, 10/28/2005, and 3/1/2013. The current case was filed on 6/30/2016.
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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.
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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
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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.
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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
UFW19 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:20
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.
19 Pa. Pub. Util. Comm’n v. Total Environmental Solutions, Inc., 103 Pa. PUC 110 (July 30, 2008). Docket No. R-00072493. Specifically p. 78.
20 The City/OCA Stipulation includes additional commitments unrelated to UFW. See City/OCA Stipulation.
50
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). 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 Expenses
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The 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 $34,397,21 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.
Year WTP T&D2013 $35,840 $22,6942014 $40,005 $16,8562015 $43,534 $34,397
Average $39,793 $24,649
This 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
21 I&E Statement No. 2, p. 12.
52
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). 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 Adjustment
In 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,22 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 Adjustments
Normalization 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.
22 I&E Statement No. 2, p. 13.
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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. Taxes
The City does not claim any taxes for ratemaking purposes.
G. Rate of Return
1. City’s Proposal
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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%23 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) (“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
23 Should the Commission reject Mr. Walker’s primary recommendation to approve a 10.50% cost of equity in order to reflect the income tax status of investors of the Bureau of Water, Mr. Walker would alternatively recommend a cost of equity of 9.56%. See City of DuBois Statement No. 2, p. 2.
55
enable it to raise the money necessary for the proper discharge of its public duties.
Bluefield, at 679. As summarized by City witness Harold Walker, Bluefield, established three
tenets defining a fair rate of return. Under 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.
3. Party Positions
The 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.
Type
of Capital
Ratio (%) Cost Rate (%)
Weighted Cost
Rate (%)
Tax Factor
Adjustment (%) Weighted Cost (%)
OCA I&E City OCA I&E City OCA I&E City OCA I&E City OCA I&E City
Long-
term
Debt 70 70 50 3.02 3.02 3.02 2.11 2.11 1.51 2.11 2.11 1.51
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Common
Equity 30 30 50 8.25 8.62 10.50 2.48 2.59 5.25 20 18.22 9 1.98 2.12 4.78
TOTAL100 100 100 6.76 4.09 4.23 6.29
OCA M.B., p. 45.
4. Capital Structure and Proxy Group
Capital 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&E
used 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.24 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
24 In the OCA’s Main Brief, the reference is to 99.6% debt/0.4% equity (OCA St. 1 at 14-15) which was revised in Ms. Everette’s surrebuttal.
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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. 46-48.25 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
25 The City’s weighted cost of debt is relatively low – 3.02%. The City would have the outside customers pay an equity return on that low cost debt. Under the City’s proposal, that would mean outside customers would pay 10.5% on weighted debt that cost 3.02%. As Ms. Everette explained, using the City’s claimed overall rate of return of 6.76% and the City’s pro forma capital structure would result in an excessive 14.98% return on equity. OCA M.B. at 50; OCA St. 1 at 15-16.
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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:
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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.26
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
26 Id., at 54.
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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.
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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.27 City M.B. at 38. This
argument is without merit. As explained by Ms. Everette:
27 In this Recommended Decision, I&E’s rate case normalization period of 64 months was accepted.
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[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 Debt
Long 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.
6. Return on Common Equity
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a. Introduction
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 4
City of DuBois – Bureau of Water
OCA Total Cost of Capital
Item Percent CostWeighted
Cost
Long Term
Debt70.00% 3.02% 2.11%
Equity 30.00% 6.60% 1.98%
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Total 100.00% -- 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 Model
I&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
65
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 Analysis
I&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:
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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 asset
Using the calculations outlined in testimony, I&E derives CAPM results as
follows:
Forecasted 7.76%Historic 8.97%
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-
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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.28 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 hypothesis29
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
28 City Statement No. 4, pp. 23-24.
29 Standard & Poors, Corporate Ratings Criteria, Utilities: Key Credit Factors: Business and Financial Risks in The Investor-Owned Utilities Industry, Nov. 26, 2008.
68
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. Annin30 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 30 City Statement No. 4-R, p. 35.
69
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.31 I&E M.B., p. 38.
I&E is not aware of any academic or empirical studies that support Mr. Walker’s
leverage adjustment32 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,33 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
adjustment34 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
31 City Statement No. 4, p. 47.
32 I&E Statement No. 1, p. 41.
33 Inter alia Pa Pub. Util. Comm’n v. City of Lancaster – Bureau of Water, Docket No. R-2010-2179103, Pa. Pub. Util. Comm’n v. Metropolitan Edison Co., Docket No. R-00061366, p. 34 (January 11, 2007), Pa. Pub. Util. Comm’n v. Aqua Pennsylvania Inc., Docket No. R-00072711 (July 31, 2008).
34 City Statement No. 4, p. 60.
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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 Adjustment
The 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.
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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 Bonds35 (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 35 I&E Statement No. 1-SR, p. 20-21.
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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 Ratio
To 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”36 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’37 for Water and
Sewer utilities. To further demonstrate the extreme positions taken by the City’s Witness, it 36 Evidentiary Hearing Transcript, p. 90.
37 I&E Statement No. 1, p. 57.
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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 Return
The 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 Structure
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. 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
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).
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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. R-2013-
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.
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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
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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). 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, 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.
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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) = 0.25
OSBA M.B., pp. 7-8.
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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) = $14,005.25
OSBA 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.38
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.
38 City Statement No. 2-R, pp. 25-26.
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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 Structure
Sandy 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
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deemed necessary, propose its preferred revenue allocation. I also agree with the City’s
withdrawal of Tariff Rule 36 in this proceeding.
I. Miscellaneous Issues
1. Stipulations
At 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
City/OCA Stipulation 1 provides:
In future rate cases, the City will provide UFW39 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
39 Unaccounted for Water (UFW).
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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
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.
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(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.
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c. The Submission of Written Monthly Estimates of Unmetered Water Use from Fire Companies
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.
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d. Estimation of Water Loss at the Time Repair is Made
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
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
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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.
f. Complaint Logs
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:
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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
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compliant logs being kept for all consumer contact with the City regarding water service issues.
OCA M.B., pp. 71-72.
g. Isolation Valves
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 Companies
In 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.
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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.40 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.41 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.42 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.
40 The City’s highest tariff rate since 2013 was $5.15. In its 2013 Annual Report, the City had an average rate of $8.65 per thousand gallons for driller sales. In its 2014 Annual Report, the City had an average rate of $9.11 per thousand gallons for driller sales. In its 2015 annual report, the City had an average rate of $7.38 per thousand gallons for driller sales.
41 Transcript, p. 32.
42 The City should continue to comply with the terms of the previous 2013 Settlement and continue to report all revenues received from shale gas exploration or drilling companies. The Settlement neither states a specific end date nor contains a provision stating that the Settlement remains in effect only until the next base rate case. See generally, 2013 Settlement, Docket No. R-2013-2350509.
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3. Sales of Water to the Borough of Falls Creek
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.
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:
1. The date service began2. The annual number of gallons to be sold to Falls Creek3. The rate to be charged per thousand gallons4. The expected annual customer charge revenue and5. A copy of the contract with Falls Creek
OCA 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.
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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.43
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
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
43 The City Manager not being a lawyer has no effect on the City Manager’s testimony at the evidentiary hearing in which he agreed to report future sales to Falls Creek. This suggestion, that only lawyers can make such determinations on behalf of the City, has no support in the law.
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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 . . . .”
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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 Return
I&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
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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
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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).
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).
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).
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). See also Pa. Pub. Util.
Comm’n v. National Fuel Gas Dist. Corp., 73 Pa. PUC 552, 603-605 (1990).
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).
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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); accord Pa. Pub. Util. Comm’n v. Aqua Pa, Inc., 99 Pa. PUC 204,
233 (2004).
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).
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V. ORDER
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.
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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. Hoyer
Deputy Chief Administrative Law Judge
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