BEFORE THE

PENNSYLVANIA PUBLIC UTILITY COMMISSION

Petition of : P-2014-2431005

Pennsylvania-American Water Company :

Wastewater Operations for Approval of Long Term :

Infrastructure Improvement Plan and Approval to :

Establish and Implement a Distribution System :

Improvement Charge :

Mary Jane Stigliano : P-2014-2431005

:

v. :

:

Pennsylvania-American Water :

Company Wastewater Operations :

Office of Consumer Advocate :

:

v. : C-2014-2433700

:

Pennsylvania-American Water :

Company Wastewater Operations :

RECOMMENDED DECISION

Before

Jeffrey A. Watson

Administrative Law Judge

2

TABLE OF CONTENTS

I. SYNOPSIS 1

II. HISTORY OF PROCEEDINGS 1

A.  Procedural History 1

B.  Settlement Filings, Objections Period and Record 6

III. DESCRIPTION OF THE TERMS OF SETTLEMENT 7

IV. DISCUSSION OF THE SETTLEMENT 8

A. Applicability of the DSIC to PAWC’s Franklin

and Koppel Wastewater Systems 8

B. Stipulated Terms 10

C. Conditions of Stipulation 11

D. Recommendation 12

V. CONCLUSIONS OF LAW 12

VI. ORDER 14

2

I.  SYNOPSIS

This decision recommends that the Commission approve the Joint Stipulation filed by the Office of Consumer Advocate (OCA), the Office of Small Business Advocate (OSBA), and Pennsylvania-American Water Company (PAWC or Company) (hereafter sometimes referred to collectively as the Parties or the Settling Parties) in the above-captioned proceedings. On December 4, 2014, the Commission entered an Opinion and Order approving the Company’s Long Term Infrastructure Improvement Plan (LTIIP) and Distribution System Improvement Charge (DSIC) Petition. The Commission referred the unresolved issue regarding the applicability of the DSIC to the Franklin and Koppel wastewater systems to the OALJ for evidentiary hearings and preparation of a recommended decision.

The Joint Stipulation confirms the resolution of the contested issue relating to the applicability of the DSIC to the Franklin and Koppel wastewater systems, which are excluded in the company’s distribution system improvement charge.

II.  HISTORY OF PROCEEDINGS

A. Procedural History

PAWC is a corporation organized and existing under the laws of the Commonwealth of Pennsylvania. The Company is in the business of furnishing water and sewer service to retail customers within the Commonwealth, and is therefore a “public utility” within the meaning of Section 102 of the Public Utility Code, 66 Pa.C.S. §§ 102, subject to the regulatory jurisdiction of the Commission.

Historically, water companies were permitted to request recovery of certain infrastructure improvement expenses pursuant to 66 Pa.C.S. § 1307(a). In the Commission’s view, it was desirable to permit the recovery of these expenses on an expedited basis and to avoid the repeated filing of base rate applications which cause significant expense to ratepayers.[1] Section 1307 was thereafter amended by the General Assembly to explicitly permit water companies to recover costs of certain distribution improvement projects.[2] The Commission was delegated the discretion to determine the procedures to be followed to establish such a surcharge.

By utilizing the DSIC mechanism, water companies were able to accelerate the replacement of aging infrastructure and improve water quality and water service. Accordingly, the Public Utility Code, at Chapter 13, was again amended to permit other utilities to utilize a DSIC mechanism for the recovery of costs related to the improvement of infrastructure in order to improve the reliability of service to utility customers. Section 1307(g) was repealed and replaced with more specific statutory authority found in Sections 1350-1360, commonly referred to as Act 11.[3]

PAWC provides wastewater service to approximately 16,800 customers through its wastewater collection systems located in seven counties across the state.[4] PAWC provides this wastewater service through approximately 267 miles of mains, 3,814 manholes, and 47 lift stations that it owns, operates and maintains.[5]

On July 3, 2014, the Company filed Pennsylvania-American Water Company Wastewater Operation’s Petition for Approval of Long Term Infrastructure Improvement Plan (LTIIP) and Approval of a Distribution System Improvement Charge (DSIC). PAWC’s DSIC Petition included Supplement No. 4 to Tariff Wastewater—Pa. P.U.C. No. 15 (Initial Tariff), to introduce the DSIC Rider into the Company’s tariff, effective January 1, 2015.[6]

On July 11, 2014, an individual Complainant, Mary Jane Stigliano (Ms. Stigliano) filed a Formal Complaint with the Commission opposing the proposed rate increase and averring that the proposal was excessive and will create additional hardship for PAWC’s customers, particularly customers on fixed incomes.

On July 23, 2014, the OCA filed Comments to the LTIIP but did not initially request hearings. Additionally, on July 23, 2014, the OCA filed a Public Statement, a Formal Complaint at Docket No. C-2014-2433700, and an Answer to PAWC’s DSIC Petition. OCA averred that the Commission should deny PAWC’s Petition, as filed, suspend the proposed Supplement No. 4 to Tariff Wastewater – Pa. P.U.C. No. 15, and refer the matter to the Commission’s Office of Administrative Law Judge (OALJ) for a full hearing and investigation pursuant to the OCA’s complaint.[7]

On July 23, 2014, the OSBA filed an Answer, Notice of Intervention and Public Statement. The OSBA requested hearings and such relief as may be necessary or appropriate, but did not allege that any particular provision or relief requested by PAWC should be denied.[8]

On December 4, 2014, the Commission entered an Opinion and Order at Docket Numbers P-2014-2431005 and C-2014-2433700, approving the Company’s Long Term Infrastructure and Improvement Plan (LTIIP) and Distribution System Improvement Charge (DSIC) Petition, subject to refund and recoupment following hearings and a recommended decision by an administrative law judge. The Commission noted, among other things, that Marcel Lakes, Franklin and Koppel wastewater systems were acquired in 2013 and have low historical spending levels. Infrastructure replacement in newly acquired troubled wastewater systems will initially be minimal because the systems are undergoing condition and performance assessment, planning, design and permitting.[9]

Section 1353 of the Code, 66 Pa.C.S. § 1353, provides, in pertinent part, as follows:

(a)  Authority.--Except as provided under this subchapter, after January 1, 2013, a utility may petition the commission, or the commission, after notice and hearing, may approve the establishment of a distribution system improvement charge to provide for the timely recovery of the reasonable and prudent costs incurred to repair, improve or replace eligible property in order to ensure and maintain adequate, efficient, safe, reliable and reasonable service.

Act 11 provides, in part, that jurisdictional water and waste water utilities, natural gas distribution companies, city natural gas distribution operations and electric distribution companies may petition the Commission for approval to implement a DSIC charge. 66 Pa.C.S. § 1353(b)(4) further requires that the petition contain a certification that a base rate case has been filed within the past five years, prior to the filing of the petition.

The OCA raised the issue of whether the DSIC should be applied to the Franklin and Koppel wastewater systems. The OCA pointed out that PAWC’s last rate case was in 2013 and that, as verified by the Company, the Franklin and Koppel systems were not included in the last rate case because they were acquired after the filing of the base rate case.[10]

The Commission referred the matter regarding the applicability of the DSIC to the Franklin and Koppel wastewater systems to the OALJ for evidentiary hearings and preparation of a recommended decision.

The OCA also averred that PAWC’s DSIC calculation is incorrect because the DSIC calculation does not reflect the impact of accumulated deferred income taxes (ADIT) associated with DSIC investments made by the Company, which, in OCA’s view, in turn permits PAWC to earn a return on an investment balance that exceeds PAWC’s actual investment, and because the calculation of the state income tax component of the DSIC revenue requirement determination requires further examination to ascertain whether it is consistent with the actual taxes paid doctrine.[11]

The Commission, in its December 4, 2014 Opinion and Order, noted it previously addressed the issues regarding ADIT and the calculation of the state income tax in the Columbia Gas DSIC proceeding. See Petition of Columbia Gas of Pennsylvania, Inc. for Approval of a Distribution System Improvement Charge, Docket No. P-2012-2338282 (Order entered May 22, 2014) (May 22nd Order). The Commission further noted that the OCA has a pending appeal in Commonwealth Court against the May 22nd Order, and the OCA preserved the issues related to the impact of ADIT associated with DSIC investments and the calculation of the state income tax component of the DSIC revenue requirement. The Commission concluded the ADIT issue is a legal issue, pending at the Commonwealth Court in the OCA’s appeal of the May 22nd Order. Moreover, since there were no additional and non-tax fact issues raised in the OCA’s protest against the PAWC DSIC filing, the Commission concluded it would abide by previous determinations set forth in the May 22nd Order and did not refer the ADIT issue or the calculation of the state tax component of the DSIC revenue requirement to the OALJ for disposition.[12]

On December 15, 2014, PAWC filed a compliance tariff for the DSIC which specifies that the DSIC is applicable to the Coatesville, Claysville, Clean Treatment, Clarion, Pocono, Lehman Pike, Winona Lakes and Blue Mountain wastewater systems. Supp. 6 to Tariff-Wastewater Pa. P.U.C. No. 15 at 5G. The compliance tariff, which excludes the Franklin and Koppel wastewater systems, was approved by Secretarial Letter issued on December 22, 2014.[13]

B. Settlement Filings, Objections Period and Record

On January 12, 2015, a hearing notice was issued, which scheduled a prehearing conference for January 28, 2015. All Parties were provided with a copy of the prehearing conference notice. The prehearing conference was convened as scheduled. The OCA, OSBA and PAWC participated in the prehearing conference. At the prehearing conference, counsel for PAWC represented that the compliance tariff filed by PAWC on December 15, 2014, specifies that the DSIC is applicable to the Coatesville, Claysville, Clean Treatment, Clarion, Pocono, Lehman Pike, Winona Lakes and Blue Mountain wastewater systems. Supp. 6 to Tariff-Wastewater Pa. P.U.C. No. 15 at 5G. PAWC further represented that based upon the tariff filing, the proposed DSIC is not applicable to PAWC’s Franklin and Koppel wastewater systems, and accordingly, the issue referred to the OALJ for evidentiary hearing had been resolved.

Upon conclusion of the prehearing conference, an interim order was issued on February 2, 2015, directing the settling parties to file a joint stipulation to memorialize the resolution of any outstanding issues in this proceeding as well as the applicability of the DSIC to the Franklin and Koppel wastewater systems.

The OCA, OSBA and PAWC memorialized their agreement and filed a Joint Stipulation on February 13, 2015. Accordingly, no evidentiary hearing was scheduled and no testimony was presented. The certificate of service indicates that a copy of the Joint Stipulation was served upon all parties.

On March 3, 2015, an interim order was entered consolidating in this

proceeding at Docket No. P-2014-2431005, the formal complaint filed by the Office of Consumer Advocate at Docket No. C-2014-2433700 and the formal complaint filed by

Mary Jane Stigliano July 11, 2014. In addition, it was ordered that the Office of Consumer Advocate and Mary Jane Stigliano shall be added to the Service List for this proceeding.

Additionally, on March 2, 2015, the undersigned presiding officer sent a letter to Ms. Stigliano advising her that the undersigned intends to consider and dispose of the Petition filed by PAWC, the Joint Petition regarding the proposed settlement, as well as her formal complaint, through the preparation of a recommended decision in this matter. Ms. Stigliano was advised to carefully review the Joint Stipulation and to file any objection in writing with the Secretary for the Commission and to mail a copy of the objection to the parties to this proceeding no later than March 16, 2015. Ms. Stigliano was advised that objections received after that time would not be considered.

No objections were filed to the proposed settlement and an interim order admitting the Joint Stipulation into the record was entered on March 18, 2015. The record was closed by interim order dated March 19, 2015.

III. DESCRIPTION OF THE TERMS OF SETTLEMENT

The proposed settlement acknowledges that on December 4, 2014, the Commission entered an Opinion and Order approving the Company’s Long Term Infrastructure and Improvement Plan and Distribution System Improvement Charge Petition. The Company acknowledges that the Commission referred the matter regarding the applicability of the DSIC to the Franklin and Koppel systems to the OALJ for evidentiary hearings and preparation of a recommended decision. Subsequent to the entry of the December 4, 2014 Opinion and Order, and prior to the scheduling of an evidentiary hearing in this matter, on December 15, 2014, PAWC filed a compliance tariff. The compliance tariff specifies that the DSIC is applicable to the Coatesville, Claysville, Clean Treatment, Clarion, Pocono, Lehman Pike, Winona Lakes and Blue Mountain wastewater systems. Supp. 6 to Tariff-Wastewater Pa. P.U.C. No. 15 at 5G. The compliance tariff was approved by Secretarial Letter issued on December 22, 2014. The compliance tariff filed by PAWC on December 15, 2014, specifies that the DSIC is not applicable to PAWC’s Franklin and Koppel wastewater systems, and accordingly, the issue referred to the OALJ for evidentiary hearings and preparation of a recommended decision has been resolved.

IV. DISCUSSION OF THE SETTLEMENT

The Commission encourages parties in contested on-the-record proceedings to settle cases.[14] Settlements eliminate the time, effort and expense of litigating a matter to its ultimate conclusion, which may entail review of the Commission’s decision by the appellate courts of Pennsylvania. Such savings benefit not only the individual parties, but also the Commission and all ratepayers of a utility, who otherwise may have to bear the financial burden such litigation necessarily entails.

By definition, a “settlement” reflects a compromise of the positions that the parties of interest have held, which arguably fosters and promotes the public interest. When active parties in a proceeding reach a settlement, the principal issue for Commission consideration is whether the agreement reached suits the public interest.[15] In their Joint Stipulation, PAWC, OCA and OSBA conclude that the Joint Stipulation is proposed by the Settling Parties to resolve the single issue referred by the Commission to OALJ in the

December 4, 2014 Opinion and Order and should be approved by the Commission.