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A Guide to Public Utility Ratemaking

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A Guide to Public Utility Ratemaking New Foreword The Pennsylvania Public Utility Commission, as an organization of professionals, stands on the shoulders of the commissioners and staff that went before. Our predecessors’ policy issues and economic challenges were different, but the solutions they shaped are the foundation that subsequent generations have built upon to solve their own. The original 1983 Rate Case Handbook was still in active use well past any probable expiration date, largely because the fundamental principles of base ratemaking remained unchanged. “It’s very helpful, except that none of what has occurred in the last 35 years is included” was the familiar grievance. Hopefully, this rewrite fills in those gaps and ages with equal grace. Since Jim Cawley and I authored this book, with a lot of help, 35 years ago, the world has transformed profoundly. The original handbook was typed on an IBM Selectric or similar typewriter that possessed very, very limited memory. When the seemingly endless rounds of revisions were complete, the typist was the most relieved of all. In comparison, this version is being written on a Dell OptiPlex 7050 with 238 GB hard drive, 4 GB of RAM, and a 3.4 GHz processor. It has sophisticated software that can “link” to a mysterious hole in the universe called the “internet.”1 The document has been atmospherically shared and edited among its multiple contributors in “the cloud.” In 1983, voice telephone service was all there was to know about telecommunications. Although the telecommunications industry was becoming selectively competitive, notably in long-distance calling plans, AT&T was broken up only later by the U.S. Department of Justice’s antitrust law suit. Natural gas was in short supply with the process of deregulating wellhead prices only having begun in 1978 with the Natural Gas Policy Act. Commodity prices were still very high (in 1983 dollars especially). Gas companies retailed the gas itself, as well as performed the transport and delivery functions. Customers’ ability to purchase directly from the gas producer was limited to only the largest users and subject to tight limitations. The electric industry was also vertically integrated as a monopoly. The generation side of the house was 1 The links appearing in this handbook were accessed during September through November 2017. Most likely, they will change over time and may appear “broken” when clicked on at some point in the future. As this forward acknowledges; all things change. i under great financial stress, struggling to build 1,000 Mw nuclear generating facilities with large cost overruns. The 1979 accident at Three Mile Island was still recent. There were no solar or wind resources. Economic circumstances were very dissimilar as well. Inflation had peaked at 13.5 percent three years earlier in 1980 but was still very high in 1983. The 10-year treasury yield exceeded 10 percent, reaching an apex of almost 12 percent in 1985. The nation’s highest ever annual unemployment rate of 9.7 percent had been recorded in the prior year. Electric and natural gas demand was tanking, stranding a great deal of capacity in the pipelines and wires of the utilities. The country as a whole and Pennsylvania, in particular, were experiencing a severe economic recession that officially started in 1980. The term “rust belt” came to describe the then- unfolding, sorry decline in large-scale American manufacturing. Today, in many ways, things are better. Inflation, unemployment, and the cost of money are all very low.2 The Marcellus Shale natural gas play, centered in Pennsylvania, has revolutionized the world energy landscape. Commodity prices are lower now, even nominally, than they were in 1983, and supply is abundant.3 The electric utility industry in Pennsylvania is metamorphosing from a centralized generation-and-transmission operation into a diversified mix of traditional and distributed generation operating in a competitive environment with the controls created by smart meters and smart grids. The focus of telecommunication has shifted to focus on something we could hardly imagine—the internet. The monopoly market of Ma Bell has been invaded by cable, cellular, and satellite providers. Texting, not the phone call, is the generationally-preferred means of interpersonal communications. These developments are almost all good. When viewed from the perspective of a 1983 younger self, they become truly remarkable. But now we worry about cyber-attacks. As was true of the original handbook, many individuals contributed. First, a special thank you to Chairman Gladys Brown for supporting this project and to Director Rick Kanaskie for broaching the idea of a handbook rewrite, providing refuge as it was being authored and donating BI&E’s considerable collective expertise. The book owes much indebtedness to the very substantial revisions and suggestions of Rachel Maurer, Allison Kaster, Lisa Gumby, Christine 2 Inflation is a subdued 1.3 percent (2016). Current unemployment is 4.8 percent. The current 10-year treasury yield is 2.26 percent. 3 The nominal delivered price of natural gas has increased, but in real dollars has remained constant. ii Wilson, Joe Kubas, Jeremy Hubert, Rich Layton, Matt Stewart, Dave Washko, Sean Donnelly, Derek Vogelsong and Dan Mumford. Also, thanks to TUS Director Paul Diskin, Chief Administrative Law Judge Charles Rainey, and Secretary Rosemary Chiavetta for their contributions. And finally, a wistful and heartfelt acknowledgement to those who have gone before. Norman J. Kennard, Commissioner Harrisburg, February 2018 Copyright Notice Copyright © 1983, Pennsylvania Public Utility Commission. Revised 2018. All rights reserved, international and domestic. Permission to quote from or to reproduce materials in this publication is granted strictly provided that due acknowledgment is made, except that prior permission to reproduce material, or portions thereof, which has been noted to be copyrighted by others, must first be obtained from the copyright holder. The views and opinions expressed in this Handbook are solely those of the authors and do not necessarily reflect the views of the Pennsylvania Public Utility Commission. Printed in the United States of America. iii iv About the Authors James H. Cawley (above right) served two terms as a member of the Pennsylvania Public Utility Commission (PUC), from 1979 to 1985 and from 2005 to 2015, the second longest combined tenure in the Commission’s (and its predecessor, the Public Service Commission’s) history dating to 1913. He served as Chairman from 2008 to 2011. After completing his term of office in 2015, he became Of Counsel to Skarlotos Zonarich LLC, a Harrisburg, PA, law firm. A graduate of St. Bonaventure University and Notre Dame Law School, Cawley was one of the original law clerks for Pennsylvania’s Commonwealth Court when it came into existence in 1970, served as majority counsel to the state Senate Consumer Affairs Committee and chief counsel to the Democratic floor leader in the Senate, and was a major drafter of the Pennsylvania Public Utility Code. While at the PUC, Cawley was appointed by the Federal Communications Commission to serve as a member of the Federal-State Joint Board for Universal Service. Norman J. Kennard (above left) was sworn in as a member of the Pennsylvania Public Utility Commission PUC on Nov. 14, 2017. Prior to that, he was engaged in the private practice of law for thirty plus years (1983-2014) representing various consumer, supplier and utility interests. The scope of his legal practice included natural gas transportation, broadband infrastructure legislation, the negotiation of power generation and gas supply contracts, interconnection agreements, intercarrier compensation and rate case filings of all sorts. He has had experience across all regulated industries, in multiple forums, state and federal, regulatory and legislative, as well as litigation and appellate representation. His career began with the Office of Consumer Advocate in 1979. He has served as counsel to two previous PUC Chairmen: Robert F. Powelson (2014-17) and Clifford L. Jones (1981- 83). Kennard received his bachelor’s degree from Hartwick College and earned his law degree from the University of New Hampshire School of Law. v vi TABLE OF CONTENTS I. Introduction ......................................................................................................................... 1 A. Public Utilities ............................................................................................................. 1 1. The Monopoly Franchise ................................................................................ 1 2. Operating Characteristics ............................................................................... 4 B. The Pennsylvania Public Utility Commission ........................................................ 35 1. Legal Powers .................................................................................................. 35 2. Administrative Description. .......................................................................... 37 C. OCA and OSBA ........................................................................................................ 39 1. Office of Consumer Advocate ....................................................................... 39 2. Office of Small Business Advocate ............................................................... 40 II. Basic Rate Case Procedures ............................................................................................
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