Calculation of Public Utility DSIC Rates: What Was the Legislative Intent?

T.J. McCloskey, Acting Consumer Advocate v. Pennsylvania Pub. Util. Comm’n, 2019 WL 3022041 (Pa. Cmwlth. 2019) (unreported), allocatur granted April 7, 2020, appeal docket 26 MAP 2020.

In this case the Supreme Court has granted the Pennsylvania Public Utility Commission’s (PUC) and the First Energy Companies’ petitions for allowance of appeal from the Commonwealth Court’s decision reversing the PUC and construing provisions of the Public Utility Code that affect the calculation of utilities’ Distribution System Improvement Charges (DSIC). The Commonwealth Court’s decision adopted the Consumer Advocate’s (OCA) position that the PUC must include in the DSIC rate adjustment income tax deductions and credits related to DSIC infrastructure investments to reduce rates.

The purpose of a DSIC is to allow a utility a simple mechanism to adjust rates to recover the cost of infrastructure investments that are made consistent with a PUC-approved plan as incurred, rather than through a base rate case, in order to encourage needed utility infrastructure investment through timely rate recognition of the investment.  Under the DSIC provisions of the Public Utility Code enacted in 2012, the PUC did not require the DISC calculation to reflect income tax deductions and credits related to DSIC infrastructure investments

The Public Utility Code was amended in 2016 shortly before the First Energy Companies made DSIC filings at the PUC.  Act 40 of 2016 added Section 1301.1 to the Code. It addressed the manner in which the PUC must treat income tax deductions and credits associated with utility plant on which a utility is permitted to earn a return on and of its investment. The first sentence of Section 1301.1(a) provides that if an investment is included in a public utility’s rates, the related tax deductions and credits also must be included:

If an expense or investment is allowed to be included in a public utility’s rates for ratemaking purposes, the related income tax deductions and credits shall also be included in the computation of current or deferred income tax expense to reduce rates.

If applied to a DSIC filing, which is what the OCA advocated in the First Energy Company DSIC cases, the result would be to reverse the PUC’s approach to tax treatment of DSIC filings and provide less immediate rate recovery for the utility.  However, the third sentence of Section 1301.1 could be read to suggest that the prescribed treatment of taxes should occur only in utility base rate cases, not in DSIC filings:

The deferred income taxes used to determine the rate base of a public utility for ratemaking purposes shall be based solely on the tax deductions and credits received by the public utility and shall not include any deductions or credits generated by the expenses or investments of a public utility’s parent or any affiliated entity.

The PUC deemed that Section 1301.1 is ambiguous and went on to interpret it using principles of statutory construction and legislative history to mean that it applies only in base rate proceedings, thereby leaving intact the PUC’s existing policy concerning the treatment of tax deductions or credits associated with DSIC filing infrastructure investment rate adjustments.

Commonwealth Court reversed, adopting the OCA’s position that Section 1301.1 applies to all rate filings, including DSIC filings, such that DSIC rate adjustments must include the effect of income tax deductions and credits associated with the investments included in the DSIC filing to reduce rates.  As Commonwealth Court reasoned: “[i]n order for this Court to conclude that Section 1301.1(a) of the Code is ambiguous, it would have to assign a meaning to the word ‘rates,’ different from the General Assembly’s explicit definition, which this Court may not do.” Slip Op. at 14.

The Supreme Court will examine:

(1) Does the manner in which the Commonwealth Court ignored and omitted relevant portions of the statutory definition of “rate,” set forth in Section 102 of the Public Utility Code, conflict with the holding of the Pennsylvania Supreme Court that states: if the General Assembly defines words that are used in a statute, those definitions are binding?

(2) Did the Commonwealth Court depart from accepted judicial practices and commit an error of law by not abiding by the rules of statutory construction when it determined that Section 1301.1 of the Public Utility Code, which is a general utility ratemaking statutory provision that eliminated the consolidated tax adjustment from the income tax adjustment computation methodology that is to be used when setting utility base rates, has superseded or repealed Section 1357 of the Public Utility Code, which is a special utility ratemaking statutory provision that explicitly outlines the computation method for calculating the rates for distributed system improvement charge mechanisms?

(3) Did the Commonwealth Court nullify the General Assembly’s purpose and intent for enacting alternate ratemaking mechanisms that allow for a simpler and more streamlined ratemaking approach so that jurisdictional public utilities can adjust their rates to recover specific and discrete kinds of costs outside the general rate case?

(4) Did the Commonwealth Court abuse its discretion by not giving deference to the Pennsylvania Public Utility Commission’s interpretation of utility law and expertise regarding utility ratemaking and holding that the statutory language of subsection 1301.1(a) of the Public Utility Code was unambiguous and that it was not legally permissible and reasonable to consider matters other than the statutory language in ascertaining the General Assembly ‘s intent for enacting the statutory provision?

For more information, contact Kevin McKeon or Dennis Whitaker.