PENNSYLVANIA PUBLIC UTILITY COMMISSION Harrisburg, PA 17105-3265

Public Meeting held December 22, 2016

Commissioners Present:

Gladys M. Brown, Chairman Andrew G. Place, Vice Chairman John F. Coleman, Jr. Robert F. Powelson David W. Sweet

Petition of Columbia Gas of Pennsylvania, Inc. for a P-2016- 2521993 Waiver of the Distribution System Improvement Charge (DSIC) Cap of 5% of Billed Distribution Revenues and Approval to Increase the Maximum Allowable DSIC to 10% of Billed Distribution Revenues

OPINION AND ORDER TABLE OF CONTENTS I. Matter Before the Commission

BY THE COMMISSION:

Before the Pennsylvania Public Utility Commission (Commission) for consideration and disposition are the Exceptions of Columbia Gas of Pennsylvania, Inc. (Columbia or the Company) filed on November 1, 2016, to the Recommended Decision of Administrative Law Judge (ALJ) Conrad A. Johnson, issued on October 13, 2016. The following Parties filed Replies to Exceptions: the Office of Consumer Advocate (OCA), on November 10, 2016; and the Commission’s Bureau of Investigation and Enforcement (I&E) and the Office of Small Business Advocate (OSBA), on November 14, 2016. For the reasons delineated in this Opinion and Order, we shall deny Columbia’s Exceptions , adopt the ALJs’ Recommended Decision, and deny Columbia’s Petition requesting to waive the 5% DSIC cap and increase the cap from 5% to 10% of billed distribution revenues. II. History of the Proceeding

On February 14, 2012, Governor Corbett signed into law Act 11 of 2012, (Act 11), which amended Chapters 3, 13 and 33 of the Public Utility Code (Code). 66 Pa. C.S. § 101, et seq. Act 11, inter alia, provides jurisdictional water and wastewater utilities, electric distribution companies, and natural gas distribution companies (NGDC) or a city natural gas distribution operation with the ability to implement a distribution system improvement charge (DSIC) to recover reasonable and prudent costs incurred to repair, improve, or replace certain eligible distribution property that is part of the utility’s distribution system. On August 2, 2012, the Commission entered its Order in Implementation of Act 11 of 2012, Docket Number M-2012-2293611 (Final Implementation Order), which established procedures and guidelines necessary to implement Act 11 and included a Model Tariff for DSIC filings.

On December 31, 2015, Columbia filed a Petition for a waiver pursuant to Section 1358(a) of the Code, 66 Pa. C.S. § 1358(a) (Petition), requesting the Commission’s approval of the following: (1) waiver of the DSIC cap of 5% of billed revenues; and (2) increase of the maximum allowable DSIC from 5% to 10% of billed distribution revenues. The Petition did not state a specific effective date for the requested DSIC increase. However, during a prehearing conference, counsel for Columbia represented as follows:

Columbia’s current rates were established pursuant to a settlement. Columbia may not put into effect a new DSIC under that settlement until it has reached a trigger point defined as the amount of the additional client-invested, client-added that was projected in that rate case, and that rate case used a fully-forecasted rate year ending – the 12 months ending December 31, 2016.

* * * [But] we are looking . . . for any increase allowed in the DSIC to be made effective no later than December 31, 2016.1

On January 20, 2016, I&E filed an Answer, and the OCA filed a Notice of Intervention, Public Statement and an Answer to the Petition.

On January 29, 2016, the Columbia Industrial Intervenors (CII) filed a Petition to Intervene and an Answer.

On February 1, 2016, the OSBA filed a Notice of Intervention, Public Statement and an Answer.

A prehearing conference was held on February 19, 2016. Counsel for Columbia, I&E, the OCA, the OSBA and CII participated.

On February 24, 2016, Columbia, I&E, the OCA and OSBA filed their respective direct, rebuttal and surrebuttal testimony.

On May 6, 2016, the ALJ approved the Parties’ request to waive cross-examination of all witnesses and the submission of rejoinder testimony.

The evidentiary hearing was held on May 10, 2016. Columbia, I&E, the OCA, the OSBA and CII participated in the evidentiary hearing. During the hearing, Columbia, I&E, the OCA, and the OSBA, presented written testimonies and exhibits for admission into the record. CII did not sponsor any documents for 1 Columbia avers that in light of the aforementioned settlement at Docket No. R-2016-2529660, with a fully projected future test year ending December 1, 2017, the DSIC may likely not go into effect until early 2018. Exc. at 22 (citing Columbia St. 1-R at 9). admission into the record. R.D. at 3. Columbia, I&E, the OCA and the OSBA each moved to have their exhibits and written testimonies entered into the record. As there were no objections, all of the Parties’ testimony and/or exhibits were admitted into the record during the hearing.

The Parties, with the exception of CII, filed Main Briefs on June 1, 2016, and Reply Briefs on June 15, 2016. By letters submitted on June 1 and 15, 2016, CII indicated that it fully supports the arguments set forth in the Main Briefs of I&E, the OCA and the OSBA stating that Columbia had not provided adequate evidence to support the need for an increase of the DSIC cap from 5% to 10%. Therefore, consistent with I&E, the OCA, and the OSBA’s argument, CII requested that the Petition be denied.

The record consists of the transcript of the prehearing conference and evidentiary hearing consisting of forty-two pages, orders issued herein, the written testimonies and exhibits admitted into the record. The record closed June 24, 2016, upon receipt of the Reply Briefs.

In the Recommended Decision, issued on October 13, 2016, the ALJ denied the Petition. R.D. at 35, 37.

The Parties filed Exceptions and Replies to Exceptions as previously noted. III. Legal Standards

In thisOpinion and Order, we will address whether Columbia has met the standard under Act 11 for: (1) waiver of the current DSIC cap of 5% of billed distribution revenues; and (2) approval of an increase of the current DSIC cap from 5% to 10% of billed distribution revenues.

A. General Legal Standards

As the petitioner or moving party, Columbia has the burden of proof in this proceeding pursuant to Section 332(a) of the Code. 66 Pa. C.S. § 332(a). To establish a sufficient case and satisfy the burden of proof, Columbia must show, by a preponderance of the evidence, that the relief sought is proper under the circumstances. Samuel J. Lansberry, Inc. v. Pa. PUC, 578 A.2d 600 (Pa. Cmwlth. 1990), alloc. denied, 529 Pa. 654, 602 A.2d 863 (1992). That is, Columbia’s evidence must be more convincing, by even the smallest amount, than that presented by an opposing party. Se-Ling Hosiery, Inc. v. Margulies, 364 Pa. 45, 70 A.2d 854 (1950). Additionally, this Commission’s decision must be supported by substantial evidence in the record. More is required than a mere trace of evidence or a suspicion of the existence of a fact sought to be established. Norfolk & Western Ry. Co. v. Pa. PUC, 489 Pa. 109, 413 A.2d 1037 (1980).

Upon the presentation by Columbia of evidence sufficient to initially satisfy the burden of proof, the burden of going forward with the evidence to rebut the evidence of Columbia shifts to an opposing party. If the evidence presented by an opposing party is of co-equal value or “weight,” the burden of proof has not been satisfied. Columbia now has to provide some additional evidence to rebut that of the opposing party. Burleson v. Pa. PUC, 443 A.2d 1373 (Pa. Cmwlth. 1982), aff’d, 501 Pa. 433, 461 A.2d 1234 (1983). While the burden of going forward with the evidence may shift back and forth during a proceeding, the burden of proof never shifts. The burden of proof always remains on the party seeking affirmative relief from the Commission. Milkie v. Pa. PUC, 768 A.2d 1217 (Pa. Cmwlth. 2001).

The ALJ made twenty-eight Findings of Fact and reached nine Conclusions of Law. R.D. at 5-8, 35-36. The Findings of Fact and Conclusions of Law are incorporated herein by reference and are adopted without comment unless they are either expressly or by necessary implication rejected or modified by this Opinion and Order.

Before addressing the Exceptions, we note that any issue or Exception that we do not specifically delineate shall be deemed to have been duly considered and denied without further discussion. The Commission is not required to consider expressly or at length each contention or argument raised by the parties. Consolidated Rail Corp. v. Pa. PUC, 625 A.2d 741 (Pa. Cmwlth. 1993); also see, generally, University of Pennsylvania v. Pa. PUC , 485 A.2d 1217 (Pa. Cmwlth. 1984).

B. Act 11 Legal Standards Applicable to this Proceeding

Section 1350 of the Code, 66 Pa. C.S. § 1350, establishes a DSIC mechanism that allows certain utilities, including electric distribution companies; NGDCs, such as Columbia; city natural gas operations; and water and wastewater companies, with distribution or collection systems to recover the costs related to the repair, improvement, and replacement of eligible property outside of a rate case. Section 1351 of the Code sets forth the definition for “eligible property” for each utility type. 66 Pa. C.S. § 1351. Section 1351(2) provides as follows:

(2) For natural gas distribution companies and city natural gas distribution operations, eligible property shall include:

(i) Piping. (ii) Couplings. (iii) Gas services lines and insulated and noninsulated fittings. (iv) Valves. (v) Excess flow valves. (vi) Risers. (vii) Meter bars. (viii) Meters. (ix) Unreimbursed costs related to highway relocation projects where a natural gas distribution company or city natural gas distribution operation must relocate its facilities (x) Other related capitalized costs.

66 Pa. C.S. § 1351(2).

As a precondition to the implementation of a DSIC, Act 11 requires that a utility must file a Long-Term Infrastructure Improvement Plan (LTIIP) with the Commission and specifies the information to be included in the LTIIP. 66 Pa. C.S. § 1352. Section 1353(a) of the Code explains the process for requesting approval of a DSIC, and allows a NGDC to petition the Commission for approval of a DSIC “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.” 66 Pa. C.S. § 1353(a). Section 1357(a) of the Code establishes that the DSIC shall be calculated to allow for the recovery of the fixed cost of eligible property that has not “been reflected in the utility’s rates or rate base” and has been “placed in service during the three-month period ending one month prior to the effective date of the [DSIC].” 66 Pa. C.S. § 1357(a)(1)(i),(ii). Section 1357 of the Code also addresses, in detail, the elements of the DSIC computation. The DSIC calculation is described as follows:

(d) Calculation.

(1) The distribution system improvement charge shall be expressed as a percentage carried to two decimal places and shall be applied in a manner consistent with section 1358 (relating to customer protections) to each customer under the utility's applicable rates and charges. The charge shall not be applied to amounts billed for public fire protection service by water utilities and the State tax adjustment surcharge.

(2) The distribution system improvement charge shall be calculated by dividing one-fourth of the annual fixed costs associated with all eligible property under the distribution system improvement charge by the projected revenue for the quarterly period during which the distribution system will be collected. The projected revenues shall not include revenues from public fire protection service earned by water utilities and the State tax adjustment surcharge.

(3) Supporting data for each quarterly update shall be filed with the commission and served upon the commission, the Office of Consumer Advocate and the Office of Small Business Advocate at least ten days prior to the effective date of the update. 66 Pa. C.S. § 1357(d).

Section 1358 of the Code provides various customer protections. Section 1358(a)(1), 66 Pa. C.S. § 1358(a)(1), which establishes a general rate cap, is particularly significant to this proceeding. Section 1358(a)(1) provides that a DSIC may not exceed 5% of distribution rates billed for a NGDC; however, upon petition, the Commission may grant a waiver of the 5% limit in order for the NGDC “to ensure and maintain adequate, efficient, safe, reliable and reasonable service.”

Section 1358(c) of the Code, 66 Pa. C.S. § 1358(c), provides that absent an express limitation on existing ratemaking authority, the Commission retains its full and existing ratemaking authority. Accordingly, the Commission has the full power and authority under the Code to examine, investigate, and audit any and all aspects regarding the data, operation, and implementation of the DSIC to the same extent that it would review a non-DSIC rate matter. As such, Section 1301 of the Code, which requires that “[e]very rate made, demanded, or received by any public utility . . . shall be just and reasonable, and in conformity with regulations or orders of the commission,” applies to the DSIC rate in this proceeding. Section 1358(e) requires that all DSICs shall be subject to audits by the Commission and annual reconciliation based on a period consisting of the twelve months ending December 31 of each year, or quarterly reconciliation. 66 Pa. C.S. § 1358(e)(1)(i),(ii).

Section 1501 of the Code, 66 Pa. C.S. § 1501, requires all public utilities to furnish and maintain adequate, efficient, safe, and reasonable service and facilities, and to make all repairs, changes, improvements, etc., to its service and facilities as shall be necessary or proper for the accommodation, convenience and safety of its patrons, employees, and the public.

IV. Columbia’s Petition

A. Overview

By its Petition, Columbia seeks waiver of Section 1358(a) of the Code, 66 Pa. C.S. § 1358(a), to increase the DSIC cap from 5% to 10% of billed distribution revenues in order to possibly extend the time between future base rate filings. Petition at 1. Columbia stated that its ongoing annual level of capital investment in DSIC-eligible plant would result in the Company reaching the current 5% DSIC cap in less than one year. Columbia averred that despite the DSIC surcharge in its tariff, it has filed base rate cases on an annual or near annual basis due to the inability of the DSIC to cover the pretax return and depreciation expense of DSIC-eligible plant added in a year. According to Columbia, an increase in its DSIC cap from 5% to 10% may better position the Company to utilize the DSIC and help the Company avoid annual base rate filings while at the same time continuing its accelerated pipeline replacement efforts.2 Id. at 1-2. In addition, Columbia stated that increasing the DSIC cap to 10% would help the Company provide safe and reliable service in the future as required by Section 1501 of the Code, 66 Pa. C.S. § 1501. Id. at 7.

Columbia provides natural gas service to more than 421,000 customers in twenty-six counties in Pennsylvania. Columbia provides gas service through its distribution system which consists of approximately 7,443 miles of mains and approximately 420,733 services. According to Columbia, the dispersed location of customers within its service territory requires the

2 According to Columbia, the timing of a base rate case is affected by several factors. For instance, increases to operating and maintenance expenses includes, but is not limited to new safety measures, non-DSIC eligible plant additions, wages, benefits and taxes, etc., which could all result in the need for a base rate case filing without regard to the DSIC. Petition at 2. Company’s distribution system to move natural gas over greater distances compared to any other NGDC in the state. Id. at 3.

Columbia indicated that beginning in 2007, prior to the enactment of Act 11, it doubled the rate at which it had been replacing its aging mains. Columbia has replaced an average of 427,062 feet of bare steel wrought iron and cast iron mains per year since 2007. Columbia averred that it continues to replace aging mains in its system at an unprecedented rate. Consistent with its Commission-approved LTIIP, the Company intends to replace, inter alia, at least 500,000 feet of main per year through 2017. Columbia projects an average annual spending of $131,480,000 on DSIC-eligible infrastructure replacement through 2017 which represents a significant increase over the average annual investment of $78,338,500 during the years 2007 through 2012. Columbia submitted that its current spending on infrastructure improvement and replacement is way above the projected amounts in its LTIIP and that it is committed to continuing the replacement of its at-risk mains at the current pace. Id. at 8-9.

Columbia noted that although its investments are recoverable through the DSIC surcharge when the Company’s investment in DSIC-eligible property exceeds the current projected levels, its current DSIC recovery remains limited to the 5% cap between rate cases. Columbia indicated that the 5% cap is insufficient to recover the pretax return and depreciation on a single year of projected DSIC-eligible plant additions. As of the date of the instant Petition, Columbia anticipates that its DSIC-eligible plant expenditures will be approximately $202 million in calendar year 2017 and that based on its calculations, it will reach the current 5% DSIC cap by the third quarterly DSIC for recovery of 2017 investment. After the third quarter of 2017, Columbia anticipates that the level of annual DSIC-eligible investment will continue to exceed the projections in its Commission-approved LTIIP and that a 5% DSIC cap will not be adequate to recover even a single year’s pretax return and depreciation on DSIC-eligible plant in the future. Id. at 9-10.

Therefore, Columbia proposed to increase the DSIC cap to 10% to allow recovery of the pretax return and depreciation on about seventeen months of DSIC-eligible plant at current projections of DSIC-eligible plant additions and the current allowed return on equity. Columbia asserted that the proposed 5% increase to the DSIC cap would also help reduce the potential need for frequent base rate filings and the associated rate case expenses.3 Columbia indicated that while it cannot make a commitment regarding the frequency of rate cases it would file in the future if this Petition is granted, it knows for a fact that without the increase in the DSIC cap, the Company would continue its current annual or near annual base rate case filings in order to recover the investment that results from its aggressive and accelerated main replacement program. According to Columbia, increasing the maximum DSIC cap to 10% would result in an estimated customer cost of $5.17 per month for an average residential customer compared to $6.91 per month for an average residential customer as shown in its last three base rate cases. Columbia believes this is a small incremental cost to customers compared to the noticeable and substantial benefits of accelerated distribution infrastructure improvements that results in safe, reliable, and reasonably continuous natural gas service and the potential for less frequent base rate filings. Id. at 10-11.

3 According to Columbia, over the eight-year period since 2008, it has sought base rate relief six times, resulting in in average annual distribution rate increases of 10.08% during that period. Petition at 10. Notwithstanding the benefits touted by Columbia, the OCA, I&E, and OSBA, all oppose Columbia’s Petition, and have raised a number of issues regarding Columbia’s DSIC cap waiver request as addressed below.

B. Columbia’s Request to Waive the 5% DSIC Cap and Raise the Cap to 10%

1. Positions of the Parties

a. Columbia’s Position

Columbia, in its Petition, requested a waiver of the statutory requirement that a DSIC be capped at 5% of a utility’s billed distribution revenues and approval to increase its DSIC cap to 10%. Petition at 1. Section 1358 of the Code, 66 Pa. C.S. § 1358, permits a waiver of the statutorily set 5% DSIC rate cap under Section 1353 of the Code, 66 Pa. C.S. § 1353, if a utility demonstrates that the initial 5% DSIC cap is insufficient to support the utility’s current and planned levels of plant replacement and DSIC-eligible spending. Columbia M.B. at 5. Columbia averred that it has met the standard to increase the DSIC cap because it has demonstrated that the DSIC at the current cap of 5% of billed distribution revenues is insufficient to support the Company’s aggressive main replacement plan. Columbia indicated that its current plant investment exceeds the amounts in its Commission-approved LTIIP and it plans to maintain an accelerated level of main replacement in the future to ensure the continued safety of its system. Id. According to Columbia, because the current 5% DSIC cap is insufficient to support even a single year of DSIC-eligible investment, it has been supporting its plant investments through annual or near annual base rate case filings. Columbia believes increasing the DSIC cap to 10% would support approximately seventeen months of plant investment and allow the Company to maintain its aggressive main replacement program,. In addition, the Company submitted that an increase to the DSIC cap may also slightly reduce the frequency of its base rate case filings. Id. at 5-6.

Columbia asserted that the standard for obtaining approval to charge a DSIC as stipulated in Section 1353 of the Code, should be the same as the standard applied for a waiver of the 5% DSIC cap in Section 1358(a)(1). Columbia argued that the Commission approved Columbia’s DSIC petition upon the Company’s showing that it planned to continue its already accelerated main replacement efforts even though the Company could have supported its main replacement program through base rate cases. 4 Columbia therefore requested that the Commission apply the same consideration in its review of Columbia’s current petition to waive the 5% DSIC cap and increase it to 10%. Id. at 7-9 (citing Initial Columbia DSIC Order at 41-44).

Columbia averred that even before Act 11 was enacted, the Commission demonstrated its support for accelerated main replacement efforts and continuation of such efforts in the Commission’s approval of Aqua Pennsylvania Inc.’s (Aqua PA’s) request to increase its DSIC cap from 5% to 7.5%. Columbia M.B. at 9-10 (citing Pa. P.U.C v. Aqua Pennsylvania, Inc., Docket Nos. R-2008-2079310, et al. (Order entered July 23, 2009) (Aqua PA Petition)). According to Columbia, subsequent to the enactment of Act 11, the Commission approved Philadelphia Gas Works’ (PGW’s) petition for waiver of the 5% DSIC cap. Columbia emphasized that the Commission again encouraged the acceleration of main replacement by allowing a waiver and

4 Petition of Columbia Gas of Pennsylvania, Inc. for Approval of its Long-Term Infrastructure Improvement Plan; Petition of Columbia Gas of Pennsylvania, Inc. for Approval of a Distribution System Improvement Charge, Docket No. P-2012-2338282 (Opinion and Order entered March 14, 2013) (Initial Columbia DSIC Order). increased PGW’s DSIC cap. Columbia M.B. at 10-12 (citing Petition of Philadelphia Gas Works for Waiver of Provisions of Act 11 to Increase the Distribution System Improvement Charge CAP and to Permit Levelization of DSIC Charges, Docket No. P-2015-2501500 (Order entered January 28, 2016) (Petition of PGW) at 41-44).

Columbia concluded its argument by asserting that a 10% DSIC cap, in effect, would support the Company’s acceleration of DSIC-eligible replacement above the levels in its current LTIIP, thereby allowing recovery of the pretax return and depreciation on less than seventeen months of DSIC-eligible plant investment, as opposed to less than nine months of recovery under the current 5% DSIC cap. Columbia asserted that a waiver of the 5% DSIC cap provides an opportunity for the Company to decrease the need for annual rate cases and enhances the efficiency and reasonableness of the service that the Company can provide now and in the future. According to Columbia, the waiver is in the public interest, and the Commission should approve the waiver request to allow Columbia to increase its DSIC from 5% to 10% of billed distribution revenues. Columbia M.B. at 12-15 and 17-19.

b. The OCA’s Position

The OCA opposed Columbia’s DSIC waiver request stating that Columbia has not satisfied the statutory standard nor shown that Commission discretion should be exercised in waiving the 5% DSIC cap. The OCA contended that Columbia’s waiver request should be denied because the Company failed to carry its burden of proof to demonstrate that without the waiver Columbia cannot ensure and maintain adequate, efficient, safe, reliable and reasonable service. OCA M.B. at 4-5. The OCA also disagreed with Columbia’s argument that a waiver and an increase of the DSIC cap from 5% to 10% is necessary to ensure the Company meets its obligations under Section 1501 of the Code, 66 Pa. C.S. § 1501, and would also potentially extend the time between base rate case filings. The OCA averred that contrary to Columbia’s claims, nothing in the record indicates that Columbia’s infrastructure poses significant safety and reliability issues or that the Company’s current main replacement rate is inadequate or potentially harmful to the public. According to the OCA, unlike PGW’s system, which consisted of at-risk mains with increasing gas leaks and broken mains, the Commission determined the following in a recent review of Columbia’s LTIIP:

Columbia is in compliance with its LTIIP obligations, and the Company is in fact exceeding its goals for infrastructure replacement and Columbia’s active leaks continue to trend downward.

Id. at 5-6 (citing Periodic Review of Columbia Gas of PA’s Long-Term Infrastructure Plan, Docket No. M-2015-2501471 (Order entered April 7, 2016) (Periodic Review of Columbia’s LTIIP) at 7; Petition of PGW at 41-42). 5

The OCA also opposed the waiver request because Columbia has indicated that there would be no further acceleration of its main replacement as a result of the increase of the 5% DSIC cap. According to the OCA, Columbia’s current pace of acceleration is already faster than most of the other NGDCs in the state. The OCA also pointed out that because Columbia chose to use base rate increases and the fully projected future test year (FPFTY) mechanism to recover its main replacement costs, the Company has used the DSIC for only

5 The OCA also indicated that while the Commission approved a 7.5% DSIC cap for PGW to reduce the replacement time for cast irons from eighty-six to forty-eight years, Columbia is on pace to completely replace or retire its target mains in thirteen years even with the current 5% DSIC cap. OCA M.B. at 7 (citing Petition of PGW at 4142). one quarter with no “between rate cases” period. This, in essence, means Columbia has not experienced any regulatory lag and has not been prevented from recovering its infrastructure investment in a timely manner. OCA M.B. at 7- 9. The OCA argued that Columbia’s minimal experience using the DSIC disqualifies the Company from obtaining a waiver of the 5% DSIC cap and that Columbia has not met the requirements of having an approved LTIIP in place to support charging a DSIC that exceeds 5% of billed distribution revenues. OCA R.B. at 9-11

Finally, the OCA disputed Columbia’s argument that an increase in the DSIC cap to 10% might help the Company extend the time between base rate filings and ultimately reduce rate case expense. The OCA asserted that there is no language in Act 11 or the DSIC cap waiver provision that specifically addresses the frequency of base rate cases or rate case expenses. According to the OCA, the standard for waiver of the DSIC cap is that the DSIC cap can only be increased above the statutory limit of 5% “in order to ensure and maintain adequate, efficient, safe, reliable and reasonable service. OCA M.B. at 11 (citing 66 Pa C.S. § 1358(a)(1)). The OCA observed that Columbia failed to commit to a reduction in the frequency of its base rate case filings if the DSIC is increased to 10% despite the fact that Columbia is capable of extending the time between rate cases in its current 5% cap. According to the OCA, Columbia could still fully recover its investment costs through the use of the FPFTY and the 5% DSIC cap. OCA M.B. at 11-14.

c. I&E’s Position

I&E contended that Columbia failed to establish its burden of proof in this proceeding. According to I&E, the required burden of proof which Columbia has failed to meet is for Columbia to establish that a waiver of the 5% DSIC cap is necessary to ensure that the utility will be able to provide and maintain safe, efficient, adequate and reliable service. In support of its argument, I&E stated as follows:

the single determining factor set forth in Section 1358 regarding whether the Commission should grant a waiver of the 5% DSIC cap is whether the waiver is necessary to ensure that the utility will be able to provide and maintain safe, efficient, adequate and reliable service.

I&E M.B. at 4-5 (citing 66 Pa. C.S. § 1358(a)(1)).

Furthermore, after a careful and thorough analysis of Columbia’s current main replacement program including the Company’s LTIIP, Distribution System Integrity Management Plan (DIMP), and OPTMAIN program, I&E concluded that Columbia is providing and maintaining adequate, efficient, safe, reliable and reasonable service at the current 5% DSIC cap. I&E M.B. at 5. In addition, I&E contended that because the Company never fully utilized the 5% DSIC and never allowed the FPFTY to elapse before filing its base rate cases, the Company has no historic data or actual experience of utilizing the full 5% DSIC. I&E posited that Columbia’s argument that increasing the DSIC from 5% to 10% may help the Company stay out longer between base rate cases is “nothing but a red herring” and should therefore be dismissed. Id. at 56, 11 and 13-15.

Additionally, I&E stated that Columbia’s waiver request of the 5% DSIC is unnecessary for several reasons, including the following:

1) Columbia’s system is currently operating safely and reliably; and, Columbia continues to address the systemic challenge of replacing its unprotected steel, cast iron, and wrought iron facilities.

2) The use of a forward-looking test period, such as a FPFTY, by a utility such as Columbia that files a rate case approximately every year renders the DSIC nonessential making a waiver and increase unnecessary.

3) The DSIC is not intended to replace a base rate proceeding; and, increasing the DSIC cap requires customers to pay more for replacement of facilities without the benefit of a cost of service study and the ability to argue that other cost decreases should be reflected and netted against the requested increase (two key components that are part of a normal base rate proceeding.)

4) Increasing the DSIC cap arguably must result in a greater impact on larger customers.

5) Columbia’s system is arguably currently safe and reliable, as evidenced by Columbia’s ability to address Type-1 and Type-2 leaks appropriately with frequent leakage surveys and efficient emergency leak response.

6) A waiver of the 5% cap is not necessary for the Company to recover the costs of its investments because rate proceedings provide an opportunity to request rate increases needed for system improvements.

I&E M.B. at 10-11 (Footnotes omitted).

Finally, in response to Columbia’s reference to Petition of PGW, I&E retorted that the Commission’s decision in Petition of PGW cannot be used as a precedent in support of Columbia’s waiver request because PGW presented extreme safety and reliability issues that are not pertinent to this case. I&E argued that the differences between the two cases are quite clear in that in addition to the extreme safety and reliability issues in Petition of PGW, PGW was also replacing its mains based on an eightyyear plan compared to Columbia, which is on a fourteen-year plan. According to I&E, Columbia’s favorable cash flow status is also a stark difference from PGW’s. Moreover, unlike PGW, Columbia has indicated that it is not seeking the increase in the DSIC cap to accelerate its main replacement above the current level. I&E M.B. at 15.

d. The OSBA’s Position

The OSBA is opposed to Columbia’s 5% DSIC cap waiver request. The OSBA argued that considering the restrictions in Act 11 regarding approval of waiver of the 5% DSIC cap, Columbia did not present sufficient evidence to warrant a waiver, irrespective of the amount of increase over the 5% cap that the Company is requesting. The OSBA argued that none of the reasons presented by Columbia as a basis for its waiver request was considered in the statute or the statutory language for approval of a waiver request. The OSBA averred that because none of the evidence presented by the Company met the burden of proof that a waiver of the 5% DSIC cap is necessary to “ensure and maintain adequate, safe, reliable and reasonable service,” Columbia’s waiver request should be denied. OSBA M.B. at 4-6.

In particular, the OSBA asserted that Columbia’s stated reasons for requesting the 5% DSIC waiver are obligations required of the Company in its tariff and under Section 1501. As noted, Section 1501 requires every regulated utility in the Commonwealth to maintain its infrastructure in such a way that allows the utility to provide adequate, efficient, safe and reliable service. According to the OSBA, in order to provide basic service to its customers, Columbia is required to continue replacing its aging infrastructure and reduce the number of leaks in its system. The OSBA does not believe Columbia needs a DSIC cap increase to perform these functions, except if for some reason Columbia is unable to make these required investments, which the OSBA noted is not the case in the instant proceeding. Id. at 8-9. From the OSBA’s perspective, that Columbia is spending more than is required in its Commission- approved LTIIP, does not qualify the Company for approval to waive the DSIC cap, especially since the prudency of the additional costs cannot be properly vetted in a DSIC proceeding like they would in a base rate case proceeding. Id. at 10-11.

2. ALJ’s Recommendation

In his analysis, the ALJ stated that while the General Assembly did not give any guidelines on factors that should be considered in waiving the 5% DSIC cap under Section 1358(a)(1), the legislative history of Act 11, while not dispositive, provides some insight on the legislature’s intent to protect ratepayers from utilities overreaching and overcharging. R.D. at 26. According to the ALJ, during the passage of Act 11, legislators commented as follows:

HB 1294 also contains important consumer protections. For instance, any utility proposal to use one of the mechanisms authorized by HB 1294 is subject to PUC (Public Utility Commission) review and approval, rejection or modification. Additionally, the PUC is required to set a cap on the amount that may be recovered through a mechanism as a condition of its approval of a utility proposal. Finally, use of a mechanism is subject to quarterly reviews and an annual audit. All of these protections are intended to continue to provide consumers with a voice in matters relating to their utility services.

Id. at 26-27 (citing Pa. Leg. Jour. H.R. October 4, 2011 at 1954). But we have also put some consumer stopgaps in there, and I would like to be able to thank the Senate, because the previous speaker raised the issue that for many times on this side of the aisle we raise certain consumer issues to be able to protect the consumer, to be able to give them a right to be able to not pay for things that are beyond what is necessary. The Senate amendments, I think, address those issues to the best that we can, and the amount of money a utility company can charge customers is capped.

R.D. at 27 (citing Pa. Leg. Jour. H.R. February 2, 2012 at 156).

While affording utilities the tools they need to make their updates to their systems, it is creating, as I said earlier, good family-sustaining jobs, and this bill ensures that consumers are protected as we move forward. They include a 5-percent cap that would be imposed upon the amount collected from consumers; it preserves the PUC’s authority over the ratemaking and the rate structure of Pennsylvania utilities.

R.D. at 27 (citing Pa. Leg. Jour. H.R. February 2, 2012 at 157).

The ALJ indicated that the statute clearly shows that the General Assembly intended to protect customers by captioning Section 1358 with the heading “Customer Protections.” Consequently, the ALJ noted that in executing Act 11, the Commission issued an implementation order and specifically noted the consumer safeguards relating to the rate cap as follows:

Section 1358 – Customer Protections

Section 1358 establishes a number of customer protections. There are seven components to this discussion.

1. General Rate Cap Section 1358(a)(1) provides that a DSIC may not exceed 5% of amounts billed (wastewater utility) or 5% of distribution rates billed (electric and natural gas utilities); however, upon petition, the Commission may grant a waiver of the 5% limit if necessary to ensure and maintain safe and reliable service.

66 Pa. C.S. § 1358(a)(1). Act 11 makes clear that the DSIC cap for energy utilities is to be applied to distribution revenues only. While the Commission does have authority to increase the cap above 5% upon petition, the Tentative Implementation Order noted that the Commission does not expect to exercise its discretion to do so absent some experience with actual operation of the DSIC for energy utilities under the present 5% cap.

R.D. at 27-28 (citing Final Implementation Order at 41).

The ALJ observed that in issuing the Final Implementation Order, the Commission prefaced the statutory language of Section 1358(a)(1), “to ensure and maintain safe and reliable service,” with the words “if necessary.” The ALJ noted that the Commission did not insert such qualifying language when discussing Section 1353(a) in the Final Implementation Order. According to the ALJ, with regard to Section 1353(a), the Commission simply stated the following:

Section 1353 permits a utility, on an (sic) after January 1, 2013, to petition the Commission for approval to establish a DSIC. The DSIC is intended to provide for 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.” 66 Pa. C.S. § 1353(a).

R.D. at 28 (citing Final Implementation Order at 22). The ALJ explained that in the absence of this qualifying language, the burden of proof under Section 1358(a)(1) is not the same as the burden of proof under Section 1353, as suggested by Columbia. According to the ALJ, something more is required under Section 1358(a)(1). Specifically, the ALJ referenced the Commission’s ruling in Petition of PGW. The ALJ noted that in granting PGW a waiver of the 5% DSIC cap, the Commission reasoned as follows:

It is clear that in order for PGW to address these substantial infrastructure issues, it must obtain the additional funding necessary to further accelerate its main replacement efforts. We believe that granting PGW a waiver of the statutory 5% DSIC limitation, as provided for in Act 11, may be the most cost-effective and least problematic means of ensuring that the Company can obtain this additional funding in a timely fashion. Based on the evidence presented in this case, we find that PGW has met its burden of showing that a waiver of the 5% DSIC cap will “ensure and maintain adequate, efficient, safe, reliable and reasonable service,” as required by 66 Pa. C.S. § 1358(a)(1). We further find that PGW’s proposal to spend an additional $11 million per year on its main replacement program is reasonable and will permit the Company to achieve an approximate 44% reduction in the projected timeline to replace its at-risk mains, while having a modest impact on ratepayers.[8] PGW St. 1 at 10. Thus, we will grant PGW’s request to increase its DSIC cap to permit it to collect DSIC-eligible costs at a level representing 7.5% of its distribution revenues, which will provide the Company with the means to recover the additional $11 million it intends to spend to implement the accelerated replacement of its mains.

Based on our review of the record, the positions of the Parties, and the applicable law, we will grant PGW’s request for a waiver of the 5% DSIC cap, pursuant to Section 1358(a)(1) of the Code, and we will permit PGW to raise its DSIC cap to 7.5%, subject to the conditions set forth herein. It is undisputed in this proceeding that PGW’s aging gas distribution infrastructure poses significant safety and reliability issues, and that the current pace of the Company’s replacement efforts is unacceptable and potentially harmful to the public. The record reflects that 66% of PGW’s 3,000 miles of gas main infrastructure consists of at-risk cast iron and unprotected steel mains. This percentage is among the highest of any natural gas distribution company in Pennsylvania. In addition, there has been a definite upward trend in gas leaks and broken pipes on the Company’s system over the past several years. This state of affairs is particularly troubling given that PGW operates in an urban environment with a high population density. PGW St. 1 at 19. The Staff Report cited by PGW and I&E further describes the poor condition of PGW’s distribution infrastructure and confirms the need for PGW to undertake an aggressive main replacement strategy. [Citation omitted] (Emphasis added). ______[8] We note that even with this 44% reduction in PGW’s replacement timeline, the Company still expects that it will take forty-eight years for it to complete its main replacement program. [Citation omitted].

R.D. at 28-30 (citing Petition of PGW at 41-42). The ALJ posited that the Commission’s decision in Petition of PGW indicates that the standard for granting a waiver of the DSIC cap is based on the utility establishing a need for the waiver to address substantial and significant safety and reliability infrastructure issues. R.D. at 30.

The ALJ further noted that subsequent to the Final Implementation Order, the Commission recognized that various discrete issues regarding implementation of the DSIC surcharge mechanism that were not previously addressed in previous DSIC-released orders had arisen. As a result, the Commission issued a Tentative Supplemental Implementation Order on November 5, 2015, at Docket Number M-2012- 2293611, to solicit comments to further adopt procedures regarding additional implementation issues. According to the ALJ, after receiving comments, the Commission issued a Supplemental Implementation Order, at Docket No. M-2012-2293611, entered September 21, 2016 (Supplemental Implementation Order). Id.

The ALJ explained that in Supplemental Implementation Order, the Commission, again discussed the DSIC rate cap under Section 1358(a)(1), relevant to the Efactor, stating the following:

Section 1358(a)(1) of the Code, 66 Pa. C.S. § 1358(a) (1) and (2), provides a cap for the DSIC rate. Specifically, the DSIC rate cap may not exceed 5% of amounts billed (wastewater utility) or 5% of distribution rates billed (electric and natural gas utilities); however, upon petition, the Commission may grant a waiver of the 5% limit if necessary to ensure and maintain safe and reliable service. 66 Pa. C.S. § 1358(a)(1). Thus, in order to accommodate the acceleration of much-needed infrastructure improvements certain utilities may request that the Commission waive the 5% rate cap.

Clearly, the Commission has the statutory authority to increase the cap above 5% upon petition. However, the statute does not specify the calculation of the DSIC rate cap and whether utilities may be permitted to exclude the Efactor annual reconciliation component from the computation of the rate DSIC cap.

Id. at 30-31 (citing Supplemental Implementation Order at 25).

The Commission agrees with the comments presented by OCA and the FirstEnergy Companies. Act 11 does not empower the Commission to universally disaggregate the Efactor from the DSIC calculation. Rather, Act 11 only grants the Commission the authority to waive the DSIC rate cap upon petition of an individual utility. The form of this waiver may come in the exclusion of the E-factor, in an increase of the rate cap to a new percentage, or in whatever form that a utility validly claims is necessary to ensure safe and reliable service. Such waivers must be made on a case- by-case basis and substantiated within the context of a utility’s petition. Accordingly, the Commission determines that the E-factor is not a severable component and should not be excluded from the calculation of the DSIC rate cap.

R.D. at 31 (citing Supplemental Implementation Order at 28-29). The ALJ once again emphasized that in the Supplemental Implementation Order, the Commission prefaced the statutory language of Section 1358(a)(1) with the word “necessary.” The ALJ determined that because Columbia did not establish that a waiver of the 5% DSIC cap is necessary to ensure and maintain adequate, efficient, safe, reliable and reasonable service, it failed to establish that waiver of the 5% DSIC cap is necessary. R.D. at 31.

Additionally, the ALJ posited that Columbia failed to present any evidence to show that its system is currently unsafe or that its system will become unsafe without a waiver of the DSIC rate cap. The ALJ referenced I&E’s testimony, which states as follows:

There has been no claim in this proceeding that the current state of Columbia’s infrastructure poses significant safety and reliability issues or that the current pace of the Company’s replacement efforts is unacceptable and potentially harmful to the public.

R.D. at 31 (citing OCA St. 1 at 6). According to the ALJ, in Petition of PGW, the Commission found that the poor condition of PGW’s infrastructure posed significant safety and reliability issues, thereby warranting a waiver of the DSIC cap. The ALJ indicated that in this case, Columbia admits that “replacement of DSIC eligible plant remains on track to meet or exceed its long term goal to replace priority plant as identified in its LTIIP.” R.D. at 31-32 (citing Columbia St. 1 at 1and Columbia St. 2-R at 6). The ALJ observed that Columbia did not offer any evidence to indicate that its infrastructure is significantly and substantially unsafe so as to warrant a waiver of the 5% DSIC cap. R.D. at 32.

The ALJ also dismissed Columbia’s argument that the current 5% DSIC cap is insufficient to support the Company’s aggressive main replacement plan because the Company is ahead of its LTIIP schedule in terms of main replacement. Id. According to the ALJ, Columbia’s argument is without merit because Columbia used its DSIC for only a quarter calendar year and mostly utilized base rate increases and FPFTY mechanisms to fund its main replacement investments. The ALJ found that Columbia did not provide sufficient evidence to establish that its system is critically or substantially unsafe and would require a waiver to address any shortcomings in its system. Id. at 3233. The ALJ noted that unlike the instant proceeding, the evidence in Petition of PGW was undisputable:

PGW’s aging gas distribution infrastructure poses significant safety and reliability issues, and that the current pace of the Company’s replacement efforts is unacceptable and potentially harmful to the public.

Id. at 33. The ALJ posited the Commission granted PGW’s DSIC waiver request because PGW met the “necessity” standard. However, in the instant proceeding, the ALJ opined that Columbia failed to meet this standard. Id. The ALJ further dismissed Columbia’s argument that increasing the DSIC cap to 10% of billed distribution revenues could potentially provide substantial rate case expense savings for Columbia’s customers. Id. at 34 (citing Columbia R.B. at 9). The ALJ noted that the operative words in Columbia’s argument are “could potentially.” In other words, Columbia is suggesting that a waiver of the 5% DSIC may result in ratepayer savings because Columbia may submit base rate filings less frequently. The ALJ noted however, that Columbia admitted that since the enactment of Act 11, it filed four base rate cases with the most current base rate case filed this year at Docket No. R2016-2529660.6 Yet, the Company indicated that “Columbia cannot commit to a decrease in base rate frequency in the future if it were permitted to implement a 10% cap.” Id. at 34 (citing Columbia St. 1 at 12). Thus, the ALJ determined that Columbia’s argument in this regard also is without merit. R.D. at 34.

Finally, the ALJ concluded that while the Commission certainly will not condone a utility neglecting its infrastructure to fall into such disrepair so as to create a public safety hazard in order to be approved for a waiver of the 5% DSIC cap, Columbia simply has failed to present evidence in this case to demonstrate that its infrastructure is substantially and significantly unsafe so as to warrant a waiver of the 5% DSIC cap. In light of the aforementioned, the ALJ denied Columbia’s petition for a waiver of the 5% DSIC cap. Id. at 34-35 and 37.

3. Exceptions and Replies

In its Exceptions, Columbia reemphasizes the fact that it plans to continue its aggressive replacement of its at-risk mains in order to keep its

6 By Order entered October 27, 2016, at Docket No. R-2016-2529660, the Commission granted the Joint Petition for Settlement concerning Columbia’s 2016 rate request. system from becoming significantly unsafe and that it hopes to invest at least $150 to $200 million annually in DSIC-eligible plant replacements. Columbia avers that at the current rate of its annual investment, the Company would exceed the 5% cap in no more than three quarters or in less than nine months. According to Columbia, the ALJ’s recommendation that denies the Company’s waiver request on the basis that Columbia’s system is currently not unsafe will result in the Company continuing its current pattern of annual or near annual base rate case filings to recover the pretax return and depreciation associated with the $150 to $200 million in annual plant investments. Columbia questions the fact that the ALJ denied the waiver request because Columbia’s system is not significantly unsafe. Exc. at 1-2. a. Columbia’s Exception No. 1

In its Exception No. 1, Columbia presents three reasons it believes the ALJ erred in denying the Company’s waiver request. First, Columbia asserts that the ALJ’s recommended standard for approval of the waiver request would preclude utilities that continuously have invested in necessary distribution infrastructure improvements from obtaining a waiver of the DSIC cap to support further improvements. Id. at 3. Particularly, Columbia avers that the ALJ erred in adopting a “necessary” standard for waiver of the 5% DSIC cap that requires a utility to show that its system is “significantly and substantially unsafe” to be eligible for a waiver of the DSIC cap. Columbia asserts that the ALJ’s recommendation is not supported by any evidence, would prevent the Commission’s review of similar waiver petitions on a case-by-case basis, and therefore, should be rejected. Id. at 2-3 (citing R.D. at 35). Columbia further contends that the ALJ’s reliance on the word “necessary” in the Final Implementation Order and Supplemental Implementation Order in reaching a conclusion in his Recommended Decision that “in order for Columbia to prevail on its petition, Columbia must establish a waiver of the 5% DSIC cap is necessary to ensure and maintain adequate, efficient, safe, reliable service” is misplaced. According to Columbia, none of the two implementation Orders referenced by the ALJ in the Recommended Decision provides any support for the waiver standard relied upon by the ALJ. Exc. at 5, citing R.D. at 31. Columbia disputes the ALJ’s interpretation of the word “necessary” in the Final Implementation Order and Supplemental Implementation Order to mean that for a utility to qualify for a DSIC cap waiver, the utility must show that its system is currently unsafe or will become unsafe without the waiver. According to Columbia, the ALJ’s conclusion is unfounded because the word “necessary” does not appear anywhere in the statute and nothing in either of the referenced Orders suggests that the Commission intended to define the standard for waiver of the DSIC cap, or more specifically, limit when a waiver can be granted through the use of the word “necessary.” Exc. at 4-5. Furthermore, Columbia avers that there is no difference between what a utility must show to receive approval for initial DSIC implementation and what a utility must show to receive a waiver of the initial DSIC cap in the portions of the Final Implementation Order referenced by the ALJ in his Recommended Decision. Exc. at 6. In addition, Columbia asserts that the portion of the Supplemental Implementation Order relied upon by the ALJ in reaching his conclusion only focuses on form of waiver and specifically, whether the E-factor can be disaggregated from the DSIC calculation. Id. at 6-7 (citing Supplemental Implementation Order at 25-29). Specifically, Columbia avers that the word “necessary” in the Supplemental Implementation Order is irrelevant in determining whether a utility qualifies for a waiver. Exc. at 7.

Columbia contends that contrary to the ALJ’s interpretation of Section 1358(a)(1), an assessment of the legislative history of Act 11 indicates that the legislature intended to give the Commission discretion in determining whether to grant a waiver of the DSIC cap.7 According to Columbia, if the legislature intended to limit the Commission’s ability to balance various factors in determining whether a particular utility’s request for waiver is appropriate, the legislature could have done so in the statutory language. Columbia argues that the legislature instead conferred upon the Commission the same authority to grant a waiver of the DSIC cap or the implementation of a DSIC using the exact language in Section 1358(a)(1) that appears in Section 1353. Columbia asserts that adopting the ALJ’s “one-size fits all” approach to making a determination for a DSIC cap waiver not only limits the authority granted to the Commission by the legislature in Act 11, but also undermines the main reason for establishing the DSIC, which is to avoid costly rate cases. Id. at 7-9. 7 Columbia argues that Act 11 is aimed at providing an alternative to rate filings by establishing a simplified method to recover accelerated infrastructure investments without the need for frequent and costly rate filings. Exc. at 7-8. More importantly, Columbia argues that as a matter of policy, the standard relied upon by the ALJ that utilities must show that their system is substantially and significantly unsafe before they can qualify for a waiver of the DSIC cap, is adverse to utilities that proactively have invested in necessary main improvements and replacements to ensure the continued safety of their distribution systems and limits or discourages utilities from consistently making investments to improve or replace their distribution infrastructures. Columbia posits that the ALJ’s reliance on Petition of PGW in reaching his conclusion is short-sighted and misdirected. Columbia argues that while it was evident in Petition of PGW that PGW needed to increase its investment in distribution infrastructure improvement and needed to accelerate its main replacement efforts to remedy the state of its system, the existence of a significantly and substantially unsafe system should not be an absolute prerequisite for obtaining a waiver of the DSIC cap. Exc. at 9-10. Columbia maintains that similar to the accelerated distribution system replacement efforts identified as necessary to cure PGW’s system, Columbia’s current and planned distribution infrastructure replacements are also needed for the Company to maintain the safety of its distribution system. Columbia argues that the only difference between its request and PGW’s is that unlike PGW, Columbia committed in advance to making necessary improvements to its system in order to prevent its system from presenting an imminent public safety threat like PGW’s. Id.

Columbia also argues that although the Recommended Decision states that the Commission “certainly would not condone a utility allowing its infrastructure to fall into such disrepair so as to create a public safety hazard in order to waive the 5% DSIC cap,” by granting a waiver only to those utilities with identified significant and immediate safety problems, the ALJ is indicating that the only qualifier for obtaining a waiver request of the 5% DSIC cap is if a system is unsafe. Id. 11-12 (citing R.D. at 35). Columbia does not believe the law or Commission precedent prevents a utility from obtaining a DSIC waiver simply because the utility committed to operating and maintaining a safe distribution system by upgrading and replacing at-risk mains. According to Columbia, nothing in the law currently supports a requirement that a utility must show the existence of an unsafe or imminent unsafe condition before they can qualify for approval of a waiver of the DSIC cap. Exc. at 12 (citing Initial Columbia DSIC Order; Aqua PA Petition).

Columbia argues that in Initial Columbia DSIC Order, the Commission relied on the statutory standard in Section 1353 of the Code in granting Columbia’s request to charge a DSIC even though there was no evidence that Columbia’s system was unsafe or would be unsafe without a DSIC.8 Exc. at 13 (citing Initial Columbia DSIC Order at 42-43). Columbia further argues that in Aqua PA Petition, the Commission granted Aqua PA’s permission to increase its DSIC rate even though the company did not claim it would need to reduce its improvement program if the proposed DSIC cap waiver and increase was not approved. Exc. at 13 (citing Aqua PA Petition). Columbia posits that similar to the Aqua PA situation, the Company remains committed to undertaking necessary improvements and replacements of its distribution infrastructure regardless of whether it has the opportunity to recover the investment through a base rate proceeding or through the increased DSIC. Columbia therefore requests that the Commission rely on the same statutory standard in Section 1353 in reviewing Columbia’s DSIC cap waiver request. Exc. at 13.

8 Columbia avers that its proposed DSIC in the Initial Columbia DSIC Order allowed the Company to continue its already accelerated main replacement program, resulting in fewer leaks in Columbia’s distribution system, installation of additional safety mechanisms, and improved customer service. Exc. at 13. Secondly, Columbia contends that the Commission should not use the Company’s compliance with its obligations to provide safe and reliable service under Section 1501, 66 Pa C.S. § 1501, and related federal regulations, 49 C.F.R. §§ 192.1001-1015, as a reason to deny the Company’s request for a waiver of the DSIC cap. Exc. at 14 (citing R.D. at 32-33). Columbia argues that the notion that the Commission can only allow DSIC waivers to utilities that have demonstrated noncompliance with their obligations under Section 1501 by allowing their systems to deteriorate to the point that such utilities are no longer able to provide “adequate, efficient, safe, and reasonable service,” is improper and should be rejected. Exc. at 14. Columbia posits that the Commission should not use Columbia’s commitment to an aggressive accelerated main replacement program against the Company by denying Columbia’s waiver request under the notion that the Company’s system is not substantially or significantly unsafe, as advocated in the Recommendation Decision. Id. at 15.

Finally, Columbia posits that the ability to use rate cases to recover DSIC-eligible investments should not be used as a reason to deny the Company’s 5% DSIC cap waiver request. Columbia asserts that the ALJ’s suggestion that Columbia should use base rate cases to recover investment in DSIC-eligible plant should be rejected. According to Columbia, the ALJ explained this position as follows:

Waiver of the 5% DSIC cap was not intended to support an aggressive pipeline replacement plan when a gas utility has failed to establish that its system is critically or substantially unsafe. As I&E submits, “A waiver of the 5% cap is not necessary for the Company to recover the costs of its investments because rate proceedings provide an opportunity to request rate increases needed for system improvements.” Exc. at 15-16 (citing R.D. at 33).

Columbia states that the ALJ’s proposed standard would make it practically impossible for any utility to qualify for the 5% DSIC cap waiver because most utilities are able to support their investment in distribution infrastructure through the filing of base rate cases. Columbia argues that this restrictive standard may serve as a roadblock to a utility that has accelerated its main replacement efforts beyond what can be supported through the 5% DSIC cap. Exc. at 16 (citing R.D. at 31-33; 66 Pa. C.S. § 1308). In addition, Columbia contends that contrary to the ALJ’s recommendation, the Commission established in Petition of PGW that “a DSIC cap increase, while arguably the most efficient means of obtaining additional funding to support main replacement, is not the only means of recovering the additional investment.” Exc. at 16-17 (citing Petition of PGW at 41). This, according to Columbia, affirms the Commission’s recognition of the fact that the availability of base rate case filings or an alternative rate relief mechanism to recover DSIC-eligible investment should not be a barrier to granting the 5% DSIC cap waiver request. Exc. at 17. (1) The OCA’s Reply to Columbia’s Exception No. 1

In its Reply to Columbia’s Exception No.1, the OCA avers that the ALJ applied the correct standard for waiver of the 5% DSIC cap and that the “necessity” standard is based on the plain language of Act 11. In responding to Columbia’s argument that having met the requirements to charge a DSIC under Section 1353, the Company is not required to provide any additional evidence to establish need for a waiver under Section 1358, the OCA posits that it is evident from the plain language of the Statute that the standard for approval to charge an initial DSIC up to 5% must not be the same as the standard for granting a waiver of the 5% DSIC cap. OCA R. Exc. at 2-3. Specifically, the OCA maintains that while Section 1353 requires, inter alia, an approved LTIIP and authorizes the Commission to approve a DSIC with a 5% cap in order to “provide for the timely recovery of reasonable and prudent costs incurred to repair, improve or replace eligible property” the same cannot be said of Section 1358. Id. at 3 (citing 66 Pa. C.S. §§ 1353(a),(b)(1)-(4) and § 1358(a)(1)).

The OCA points out that the provision for waiver of the DSIC cap serves the specific purpose of limiting a DSIC established under Section 1353, stating as follows:

Section 1358 – Customer Protections

(a) Limitation. – As follows: … the distribution system improvement charge may not exceed 5% of the amount billed to customers under the applicable rates of the wastewater utility or distribution rates of the electric distribution company, natural gas distribution company or city natural gas distribution operation. The Commission may upon petition grant a waiver of the 5% limit under this paragraph for a utility in order to ensure and maintain adequate, efficient, safe, reliable and reasonable service. 66 Pa. C.S. § 1358(a).

According to the OCA, based on the plain language of Act 11, the fact that there is a 5% cap or limit means that more evidence is required for a waiver of the consumer protection provision compared to what is required for approval of the initial DSIC with a 5% cap. OCA Exc. at 3 (citing R.D. at 25-27). The OCA states that in addition to finding additional support for distinguishing the standard for waiver in the legislative history of Act 11, the ALJ also considered all the arguments presented by the Parties to this proceeding and reached a conclusion that supports the OCA, I&E, and the OSBA’s position that Columbia can ensure and maintain safe and reliable service without increasing the DSIC above the 5% cap. OCA R. Exc. at 3-5.

The OCA also disputes Columbia’s second argument that the standard applied by the ALJ would discourage utilities from actively investing in their utilities. The OCA argues that the standard applied by the ALJ was not meant to deny a utility’s ability to recover infrastructure investment costs but was meant to enforce the statutory rate cap. The OCA reiterates that the DSIC mechanism was created with a 5% limit to ensure that utilities do not use it as a replacement for cost recovery through traditional ratemaking. The OCA argues that the 5% DSIC cap serves to underscore the function of the DSIC, which is to supplement, rather than to replace base rate proceedings. More importantly, the OCA avers that since Columbia has failed to show that the waiver is necessary, the Company can still recover its DSIC-eligible investments through base rates and its current 5% DSIC surcharge. OCA R. Exc. at 6-7 (citing Exc. at 9-15; R.D. at 2627 and 32-33). Lastly, the OCA disputes Columbia’s third argument that the fact that every utility can file a base rate case to fund infrastructure investment, makes it almost impossible for any utility to show that a waiver of the DSIC cap is “necessary.” According to the OCA, Columbia’s ability to file a base rate case is just one of the many reasons the waiver request should be denied. The OCA argues that contrary to Columbia’s argument, waiver of the statutory rate cap should be a last resort after a utility has exhaustively used every other cost recovery mechanism. The OCA argues that unlike Columbia, who chose to use base rate increases, the FPFTY, and only one quarter of DSIC to fund its main replacement program, 9 the Commission, in Petition of PGW, allowed PGW’s waiver request based on its determination that PGW’s circumstances were

9 OCA’s witness, Jerome D. Mierzwa, summarized Columbia’s DSIC use as follows:

Columbia’s initial DSIC was set at 1.5% of distribution revenues. The DSIC was effective April 1, 2013 through June 30, 2013. On July 1, 2013, concurrent with the implementation of new base rates, the DSIC was reset to zero to reflect the inclusion of the DSIC eligible investment in rate base. Thereafter, in late December 2015 and in January 2016, Columbia increased its base rates to reflect the inclusion of DSIC eligible investment in rate base. In each of these base rate cases, Columbia chose to use another revenue recovery tool provided by Act 11, the fully forecasted rate year (FFRY). 66 Pa. C.S. § 315(e). The FFRY corresponds to the first full year the rates will be in effect and allows the Company to reflect projected plant in service, including forecasted DSIC-eligible plant additions. Thus the December 2014 rates reflected the FFRY amounts of DSIC eligible investment (January 2015 through December 2015) and the December 2015 rates reflected the FFRY amounts of DSIC eligible investment (January 2016 through December 2016).

OCA R. Exc. at 8 (citing OCA St. 1 at 7-8). urgent, exigent, and unique such that base rate relief was not a viable option for timely recovery. OCA R. Exc. at 7-8 (citing Petition of PGW at 10, 41-43 and 68- 69). Thus, OCA concludes that Columbia’s ability to utilize other rate recovery mechanisms to fully recover its DSIC-eligible investments including base rates makes its request for a waiver of the 5% DSIC cap unnecessary. OCA R. Exc. at 8-9.

(2) I&E’s Reply to Columbia’s Exception No. 1

In its Reply to Columbia’s Exception No. 1, I&E also supports the ALJ’s recommendation. I&E R. Exc. at 6-9. In response to Columbia’s argument that pursuant to the Supplemental Implementation Order, determination of a DSIC cap waiver request should be made on a “case-by-case basis,” I&E asserts that the ALJ’s conclusion was based on a careful consideration of all the evidence presented by Columbia. Id. at 9-10. With regard to Columbia’s argument that the ALJ’s recommendation implies that only utilities that show that their system is substantially and significantly unsafe are qualified for a waiver, I&E argues Columbia is oversimplifying the ALJ’s reasoning. I&E asserts that the ALJ conducted a thorough and careful analysis of the evidence presented by Columbia and the Parties to this proceeding regarding Section 1358. I&E reiterates that the ALJ exercised the discretion accorded to the Commission under Act 11 in reviewing the waiver request and correctly reached a determination that the General Assembly and the Commission addressed the issue of consumer protections in the legislative history of Act 11 to protect ratepayers from energy companies’ overreaching and overcharging. I&E concludes that the ALJ’s decision was based on his evaluation of all the relevant facts specific to this case. Id. at 9-10 (citing R.D. at 25-30; Exc. at 3 and 13). (3) The OSBA’s Reply to Columbia’s Exception No. 1

The OSBA also echoes the OCA and I&E’s position that the ALJ utilized the correct standard for the waiver of the 5% DSIC cap. The OSBA posits that while the statutory language in Sections 1353 and 1358 may be the same, the analysis needed in determining the approval of an LTIIP and/or DSIC should be different from the analysis for waiver of the consumer protections or the 5% DSIC cap. Specifically, the OSBA argues that “if the utility’s service is safe and reliable, then the waiver should not be granted since there is no need for extraordinary funding for infrastructure improvements.” OSBA R. Exc. at 4 (citing 66 Pa. C.S. §§ 1353 and § 1358(a)(1)-(2); Supplemental Implementation Order at 25). The OSBA asserts that Columbia’s reasoning that the same standard applies to both the initial approval of the DSIC and the waiver of the 5% DSIC cap implies that approval of the initial DSIC means an automatic approval of a waiver request for the DSIC cap, which is contrary to the intent of the legislature in passing Act 11. The OSBA argues that the “Consumer Protections” and “Limitations” provisions in Act 11 are there for a reason and that Columbia’s arguments confirm why the legislature included the provisions in Act 11. OSBA R. Exc. at 5 (citing Supplemental Implementation Order at 25; OSBA R.B. at 8). The OSBA contends that absent an unusual situation where the safety and reliability of the utility’s infrastructure is at stake or the systems customers are at risk, such as in Petition of PGW, in which the waiver was needed to bring the system into compliance, there is really no basis for approval of the 5% DSIC cap waiver. OSBA R. Exc. at 5-6 (citing Petition of PGW).

The OSBA believes Columbia’s current dilemma is of the Company’s own making because Columbia made a business decision to spend more than what is required in the Company’s Commission-approved LTIIP. According to the OSBA, the fact that Columbia made a decision to accelerate its infrastructure spending by 58% above the Commission-approved level does not obligate the Commission to override the 5% DSIC cap meant to protect Columbia’s ratepayers from Columbia’s overreach or overcharge. OSBA R. Exc. at 6-7 (citing Exc. at 23). In addition, the OSBA asserts that Columbia’s misrepresentation of the facts in this case to make a case for an approval of its waiver request does not change the fact that the Commission-approved spending in Columbia’s LTIIP is adequate and that Columbia’s distribution system is currently safe and reliable. OSBA R. Exc. at 7-8 (citing R.D. at 6; Petition of PGW).

Lastly, the OSBA echoes the OCA’s argument that the DSIC was established to supplement the recovery of investment in infrastructure between rate cases and was not intended to replace base rate cases. The OSBA insists that Columbia’s current DSIC at the 5% cap is adequate to fund the Company’s distribution infrastructure, especially because Columbia’s distribution system is safe and reliable. OSBA Exc. at 89. b. Columbia’s Exception No. 2

In its Exception No. 2, Columbia avers that the ALJ erred in adopting a standard for waiver of the DSIC cap that differs from the standard for granting an initial DSIC. Exc. at 17 (citing R.D. at 28-29). Columbia argues that the Commission should interpret the provisions of Section 1358(a)(1) in a manner consistent with the identical provisions of Section 1353 by using the same standard it uses for approving initial DSIC requests for the 5% DSIC waiver request. According to Columbia, the standard is “whether the requested waiver will allow a utility to ensure and maintain adequate, efficient, safe, reliable and reasonable service without initial consideration of whether other rate alternatives are available.” Exc. at 17-18. Columbia contends that the Commission’s review of DSIC cap waiver requests should be based on factors specific to the utility in question. Specifically, Columbia requests a revision of the Recommended Decision to reflect a standard for waiver of the 5% DSIC cap that “considers whether a utility has shown that its DSIC-eligible investment is necessary to maintain a safe and reliable distribution system and that the DSIC at its initial 5% cap is insufficient to recover such investments.” Id. at 18.

Furthermore, Columbia argues that the emphasis on what is “necessary” for a DSIC waiver under Section 1358(a)(1), as represented in the Recommended Decision, is misplaced. According to Columbia, rather than making unsafe condition of a utility’s system as the prerequisite for granting a DSIC waiver, a more reasonable basis for approval should be “whether a utility has shown that its level of investment is necessary to maintain a safe distribution system and if the necessary level of investment exceeds the amount that can be supported through the DSIC at the current rate cap.”10 Id. In other words, the Commission should decide whether a utility has made the investments necessary for infrastructure improvement in an accelerated manner. Columbia avers that in the Final Implementation Order, the Commission emphasized an acceleration of replacement investment as an “essential element to qualify for DSIC recovery under Act 11,” stating as follows:

The Commission expects that the long-term plan filed along with the DSIC petition will reflect and maintain an acceleration of infrastructure replacement over the utility’s historic level of capital improvement, consistent with the statutory requirements. Those utilities that have already accelerated infrastructure improvements should indicate in their long-term plan how a DSIC will maintain or augment acceleration of infrastructure replacement and prudent capital investment.

Exc. at 19 (citing Final Implementation Order at 24).

Additionally, the Company asserts that in Initial Columbia DSIC Order, the Commission accepted evidence of past accelerated main replacement efforts and a plan to continue such efforts at a level beyond the amount of investment that could be supported by the 5% DSIC cap, as sufficient for granting the DSIC petition. Exc. at 19 (citing Initial Columbia DSIC Order at 43). Columbia contends that the Commission’s review of the DSIC cap waiver request should consider whether the Company’s rate of accelerated main replacement is so high that an increase in the 5% DSIC cap will be required to maintain the acceleration. Columbia states that in considering the extent of a waiver, the Commission should also consider the length of time that the DSIC could be used

10 Columbia avers that the inability to use the DSIC at the initial 5% rate cap is more indicative of whether a waiver of the DSIC rate cap is “necessary.” Exc. at 18. in order not to invalidate the consumer protection of a rate cap that ensures utilities cannot indefinitely postpone a rate case due to the use of the DSIC. Columbia argues that this was the standard used by the Commission prior to Act 11 and that nothing in Act 11 indicates an intent to limit the Commission’s authority to continue that standard. Exc. at 19 (citing Aqua PA Petition). Finally, Columbia contends that it should not be punished for aggressively replacing its aging infrastructure in order to maintain a safe and reliable system and that increasing the DSIC cap is necessary for the Company to continue this aggressive main replacement. Exc. at 19-20.

(1) The OCA’s Reply to Columbia’s Exception No. 2

In its Reply to Columbia’s Exception No. 2, the OCA disputes Columbia’s argument asserting that the ALJ rejected Columbia’s waiver request in his Recommended Decision, “finding ‘something more’ than the showing made to receive approval of the DSIC with a 5% cap is required for a utility to show that waiver is necessary.” OCA R. Exc. at 9, citing R.D. at 35. The OCA further asserts that the ALJ considered several factors including safety, current state of Columbia’s system, Columbia’s experience using the DSIC, Columbia’s projected replacement rate and evidence regarding the frequency of the Company’s future rate case filings before reaching a conclusion in denying the waiver request. OCA R. Exc. at 9 (citing R.D. at 31-35).

In addition, the OCA presents two reasons it believes the ALJ correctly dismissed Columbia’s interpretation of the statutory standard for a waiver. First, the OCA states that going by Columbia’s interpretation of Act 11, every utility that qualifies for a DSIC automatically qualifies for a waiver of the DSIC cap upon request, which should not be the case. OCA R. Exc. at 9-10. In disputing Columbia’s argument, the OCA echoes the argument put forth by the OSBA’s witness, Robert D. Knecht, as follows:

If simply exceeding the cap is sufficient justification for a waiver, there is obviously no point to including the cap as a basic consumer protection within the legislation.

OCA R. Exc. at 10 (citing OSBA St. 1 at 8). According to the OCA, the fact that there is a statutory cap on the amount that can be recovered through the surcharge is an indication that the General Assembly intended the Commission to require additional evidence to establish the necessity for a waiver. OCA R. Exc. at 10 (citing 66 Pa. C.S. § 1358(a)(1)).

Secondly, the OCA disputes Columbia’s argument that a denial of the waiver request prevents the Company’s ability to use the DSIC to support its accelerated main replacement efforts. The OCA argues that contrary to Columbia’s suggestion, despite the ALJ’s denial of the waiver request under Section 1358(a)(1), Columbia still has other cost recovery tools such as the 5% DSIC and the FPFTY under Section 315(e), 66 Pa. C.S. § 315(e), to allow the Company continue its accelerated main replacement program. OCA R. Exc. at 10-11.

(2) I&E’s Reply to Columbia’s Exception No. 2

In its Reply to Columbia’s Exception No. 2, I&E also disagrees with Columbia’s argument that the provisions and standards applicable to Section 1353 should apply to Section 1358. I&E disagrees with Columbia’s argument that a more appropriate interpretation of Section 1358 would be to consider if a utility has shown that its level of investment is necessary to maintain a safe distribution system and that the necessary level of investment exceeds the amount that can be supported through the DSIC cap at the current 5% rate. According to I&E, Columbia’s argument undermines the Commission’s responsibility to protect the interest of the ratepayers. I&E contends that the filing of a petition for a waiver should not result in an automatic approval or a rubber stamp of Columbia’s petition, without consideration of the interest of the other Parties to the proceeding. I&E R. Exc. at 11-13 (citing R.D. at 25-35; I&E M.B. at 7-15). I&E supports the ALJ’s Recommended Decision which states as follows:

Section 1358 requires Columbia to provide substantial evidence supporting its petition that goes beyond that which was provided under Section 1353 to establish the initial DSIC program in order to persuade the Commission to grant a waiver of the 5% DSIC cap.

I&E R. Exc. at 13 (citing R.D. at 35).

(3) The OSBA’s Reply to Columbia’s Exception No. 2

In its Reply to Columbia’s Exception No. 2, the OSBA echoes the OCA and I&E’s position that the ALJ was correct in adopting a standard for waiver of the DSIC cap that is different from the standard for approving an initial DSIC petition. In opposition to Columbia, the OSBA argues that Columbia made a business decision to spend $202 million in 2017 in infrastructure improvement and replacement compared to the $116.9 million approved by the Commission in the Company’s LTIIP. According to the OSBA, this projected spending amount, which is approximately 58% above the Commission-approved amount and doubles the amount ratepayers are directly liable for, should not be the basis for approving the Company’s waiver request to increase the DSIC cap from 5% to 10%. The OSBA asserts as follows: the standard for approval of a waiver should be whether a waiver is necessary for the utility to provide safe and reliable service, and not whether “at the utility’s current and planned level of investment [something completely controlled by the utility], the utility can effectively use the DSIC as a ratemaking tool . . . .”

OSBA R. Exc. at 9-10 (citing Exc. at 8; OSBA R.B. at 8-9).

c. Columbia’s Exception No. 3

In its Exception No. 3, Columbia asserts that the ALJ erred in his conclusion that Columbia failed to prove that it has met the proper standard for a waiver and an increase of the DSIC cap to 10% of billed distribution revenue. Columbia avers that the ALJ overlooked the Company’s argument that it cannot effectively recover its investment at the current 5% DSIC cap. According to Columbia, the ALJ relied on an incorrect standard that requires a utility to prove its distribution system is currently unsafe to be granted a waiver. Exc. at 20. Columbia argues that because it has been investing in main replacement at an unprecedented pace, the current 5% DSIC cap is insufficient to support even a single year of the Company’s DSIC-eligible investments. 11 Columbia also asserts that increasing the DSIC cap to 10% of billed distribution revenues is justified because it would allow the Company to continue its accelerated replacement of at-risk mains while also making the DSIC a viable option for recovery of those investments. Columbia states that increasing the 5% DSIC

11 According to Columbia, its current LTIIP projects an average annual spending of $131,480,000 on DSIC-eligible infrastructure replacement through 2017, which represents a significant increase over the average annual investment of $78,338,500 during the years 2007 through 2013. Columbia projects that its DSIC-eligible plant expenditures for calendar year 2017 will approximate $202,000,000. Exc. at 22-23. cap would also help extend the DSIC period an additional eight months or a total of seventeen months. Id. at 20-21.

Columbia further asserts that the ALJ’s conclusion that Columbia failed to demonstrate that the 5% DSIC cap is insufficient suggests that the Company chose to use base rate cases instead of the DSIC surcharge to recover its replacement investments. Columbia argues that it filed base rate cases because the Company’s current level of main replacements is so substantial that the DSIC at the current 5% cap is insufficient for recovery of its investments. Exc. at 21 (citing R.D. at 32; Columbia St. No. 1 at 11). Columbia contends that contrary to the ALJ’s conclusion, due to the significant amount of investments the Company has made, it is practically impossible for the Company to depend on only the DSIC for recovery and so the Company also relies on base rate cases for recovery. According to Columbia, it exceeds the current 5% cap in less than nine months of pretax return and depreciation recovery with its current level of investment. Therefore, requiring the Company to use the DSIC for six to nine months to prove it would reach the current 5% maximum would be a futile exercise. Exc. at 21-22 (citing R.D. at 8; Columbia St. No. 1-R at 10).

Additionally, Columbia emphasizes the need to maintain its accelerated main replacement efforts by referencing the Commission’s recent review of the Company’s planned spending and replacement level in Columbia’s LTIIP. According to Columbia, the Commission stated that “the company appears to be on track to meet or exceed their current LTIIP and long-term goals in a cost effective manner.”12 Exc. at 23 (citing Periodic Review of Columbia’s LTIIP at 6). Columbia reiterates that the DSIC at the current 5% cap has been and continues to be insufficient to support the Company’s current level of investment. Columbia avers that although it is eligible to recover investment that exceeds the projected levels in its LTIIP at the end of the fully projected future test year in its latest rate case, the Company is still limited to the 5% DSIC cap between rate cases. Columbia asserts that a 10% DSIC cap would support its acceleration of DSIC-eligible replacement above the current levels and allow recovery in about seventeen months of DSIC-eligible plant instead of about nine months under the current 5% DSIC cap. Exc. at 23-24.

(1) The OCA’s Reply to Columbia’s Exception No. 3

In its Reply to Columbia’s Exception No. 3, the OCA reiterates its argument that Columbia will recover its DSIC-eligible investments whether or not the 5% DSIC cap is waived. The OCA argues that contrary to Columbia’s belief that Act 11 was enacted to eliminate the risk of lag in cost recovery, the DSIC is just an additional tool for “timely” recovery or to reduce regulatory lag. OCA R. Exc. at 11-12 (citing 66 Pa. C.S. §§ 1350-60; Final Implementation Order at 4 and 58). The OCA argues that the ALJ considered all the arguments of the Parties to this proceeding before reaching a conclusion and so the ALJ’s recommendation is accurate and should be upheld. OCA R. Exc. at 12-13.

12 According to Columbia, its main replacement for the 2013-2014 period “represente[d] a 6.1% increase in footage of main replaced over the two year period when compared to the planned replacements in Columbia’s LTIIP” and that “Columbia is 22.6% ahead of schedule on [replacement of] services as well.” In addition, Columbia spent $11.8 million or 3.9% more than the level of spending provided for in its LTIIP. Exc. at 23 (citing Columbia St. No. 1-R at 3). (2) I&E’s Reply to Columbia’s Exception No. 3

In its Reply to Columbia’s Exception No. 3, I&E agrees with the ALJ’s conclusion that Columbia failed to present substantial evidence to demonstrate that a waiver of the 5% DSIC cap is necessary to ensure and maintain adequate, efficient, safe, reliable and reasonable service. I&E R. Exc. at 14. I&E asserts that Columbia’s Exceptions fail to recognize the customer protection mechanisms built into Section 1358 and base rate proceedings, as well as the Commission’s goal of protecting the public interest. Id. at 14-15 (citing Exc. at 20-24; R.D. at 26-28, 31-35; I&E M.B. at 8-10).

(3) The OSBA’s Reply to Columbia’s Exception No. 3

In its Reply to Columbia’s Exception No. 3, the OSBA also supports the ALJ’s conclusion that Columbia failed to meet its burden of proof for a waiver of the DSIC cap and to increase the DSIC cap from 5% to 10% of billed distribution revenues. The OSBA contends that the consumer protection provisions in Act 11 should not be waived, except in an extraordinary event, i.e., a substantially unsafe utility distribution system that requires obtaining the waiver to make necessary improvements. According to the OSBA, Columbia has not demonstrated this to be the case, especially, because throughout this proceeding, Columbia has maintained that its system is safe and reliable and that the Company is on track to completely replace or retire target mains in thirteen years, even at the 5% cap level. The OSBA concludes that because Columbia does not need an accelerated replacement program to keep its distribution system “safe and reliable” and because the Company does not propose additional acceleration even if the cap is waived, it should not be granted a waiver of the 5% DSIC cap. OSBA R. Exc. at 10-12. 4. Disposition

Based on our review of the record, the positions of the Parties, and the applicable law, we will deny Columbia’s Exceptions and adopt the ALJ’s recommendation that denies Columbia’s request for a waiver of the 5% DSIC cap and request to increase the DSIC cap from 5% to 10% of billed distribution revenues.

With regard to Columbia’s Exception No.1, the Company highlights three issues which we shall address in detail. First, Columbia argues that the standard for waiver of the 5% DSIC cap recommended by the ALJ would prevent utilities that have continuously invested in improving their distribution systems from obtaining a waiver. Thus, Columbia requests that the Commission use the same standard it applied in the approval of Columbia’s initial DSIC filing pursuant to Section 1353 for approval of the Company’s 5% DSIC cap waiver request pursuant to Section 1358. We note, however, that Section 1353 explains the process for requesting approval of a DSIC and allows an NGDC to petition the Commission for approval of a DSIC while Section 1358 provides various customer protections. While we acknowledge that both Sections 1353 and 1358 involve the timely recovery of reasonable and prudent DSIC-eligible investments, we disagree with Columbia’s position as it pertains to their application. We note that Section 1358 particularly emphasizes a customer protection limitation on the amount that can be recovered as reflected in the 5% DSIC cap. In this regard, we agree with the OCA’s argument that the General Assembly intended that different evidence apply for granting a waiver of the 5% DSIC cap compared to the evidence that is required for the approval of a utility’s initial DSIC filing:

The very fact that there is a statutory cap on the amount that can be recovered through the surcharge is an indication that the General Assembly intended the Commission to require different evidence to establish the necessity of a waiver.

OCA R.B. at 3 (citing 66 Pa. Code §1358(a)(1)).

We concur with the positions of the opposing Parties that if the legislature intended that we use the same standard of approval for both Sections 1353 and 1358, the plain language of Act 11 would have clearly indicated that an approval of the initial DSIC automatically approves the 5% DSIC cap waiver. We also agree with the ALJ’s conclusion that more evidence is required for approval of a waiver of the 5% DSIC cap or limit in Section 1358, than is required in Section 1353. Therefore, we find no merit in Columbia’s argument that the same standard should be applied in approving both the initial DSIC request and the 5% DSIC cap waiver request.

With regard to the second issue raised by Columbia in its Exception No. 1, while we appreciate Columbia’s aggressive main replacement efforts, we disagree with the Company’s assertion that the ALJ’s denial of the waiver request implies that Columbia is being punished for actively investing in its distribution system and complying with its obligations under Section 1501 of the Code, 66 Pa. Code §1501. The ALJ’s recommendation was based on Columbia’s failure to provide adequate support to warrant a waiver of the DSIC cap. The record evidence demonstrates that Columbia’s investment under the current 5% DSIC cap is adequate and the Company has confirmed that an increase in the DSIC cap would not necessarily amount to an acceleration of its DSIC-eligible investments. Thus, we are of the opinion that Columbia and other utilities in the same situation cannot be construed as “being punished” when such utilities have reasonably adequate means in place to be able recover the costs associated with its distribution system improvements. As indicated in Act 11, the goal of the DSIC is to help facilitate acceleration of main replacement or capital investments. However, Columbia has indicated that it does not intend to further accelerate its already aggressive rate of main replacement even if the DSIC cap is increased. Columbia St. 1 at 7. We therefore agree with the ALJ that Columbia’s current main replacement efforts within the 5% DSIC cap are sufficient and there is no basis at this time to increase the DSIC cap from 5% to 10% of billed distribution revenues.

Lastly, regarding the third issue in Columbia’s Exception No.1, we disagree with Columbia’s interpretation of the ALJ’s conclusion. We find no merit in Columbia’s position when it argued that the ALJ relied on the Company’s ability to use base rate cases to recover DSIC-eligible investments as a basis for denying the Company’s 5% DSIC cap waiver request. It is clear from the record evidence in this proceeding that in addition to the 5% DSIC cap currently available to Columbia, the Company has effectively utilized base rate cases including the FPFTY to adequately address its main replacement efforts. We agree that the 5% DSIC cap underscores the function of the DSIC, which is to supplement, rather than replace base rate proceedings. Thus, we are not convinced that Columbia’s request to increase its DSIC cap from 5% to 10% of billed distribution revenues is warranted at this time. In light of the above, Columbia’s Exception No. 1, is hereby, denied.

With regard to Columbia’s Exception No. 2, as stated above, we disagree with Columbia’s argument that we should apply the same standard for the Company’s current waiver request that we used in reviewing the Company’s initial DSIC. We note that pursuant to Act 11, the requirements for the initial approval of the DSIC are not the same as the requirements for approval of the 5% DSIC cap waiver. In this regard, we concur with the OCA’s argument when it stated: Contrary to Columbia’s claim, the standard for establishing a DSIC under Section 1353 and a waiver under 1358 are not the same. Section 1353 authorizes the Commission to approve a DSIC with a 5 percent cap in order to “provide for the timely recovery of the reasonable and prudent costs incurred to repair, improve or replace eligible property” and requires an initial tariff, evidence that the DSIC is in the public interest and will facilitate utility compliance with applicable statutes and regulations, an approved LTIIP, certificate that a base rate case has been filed within 5 years and any other information required by the Commission. Section 1358(a)(1) contains no similar list of requirements nor provides any limitations on the evidence the Commission will consider for waiver of the DSIC.13

OCA R.B. at 4 (citing 66 Pa. Code §§ 1353(a), (b)(1)-(4) and 1358(a)(1)).

As earlier indicated, despite the fact that both Sections 1353 and 1358 involve the timely recovery of DSIC-eligible investments, the requirements for filing and approving an initial DSIC implementation in Section 1353(b), 66 Pa. Code § 1353(b), are not exactly the same as the requirements for approving the 5% DSIC cap waiver in Sections 1358(a) to (d) of the Code, 66 Pa. Code § 1358(a)-(d). In our opinion, approval of the waiver beyond the 5% DSIC cap cannot be granted haphazardly. As the ALJ appropriately noted:

Section 1358 requires Columbia to provide substantial evidence supporting its petition that goes beyond that which was provided under Section 1353 to establish the initial DSIC program in order to persuade the Commission to grant a waiver of the 5% DSIC cap.

13 I&E and the OSBA also made a similar argument. I&E R.B. at 5-7; OSBA at 3, 5-6, 7-13. R.D. at 35. The gravamen of the ALJ’s Recommended Decision focuses on whether Columbia has a need, immediate or other, for the waiver. Nothing in the record convinces us that Columbia has demonstrated a need to increase the DSIC cap from 5% to 10% because the current 5% DSIC cap remains sufficient for Columbia to continue to maintain safe and reliable service to all of its customers through the “timely recovery of the reasonable and prudent costs incurred to repair, improve or replace eligible property,” consistent with Section 1353 of the Code. As noted by the OCA in its Replies to Columbia’s Exceptions, the ALJ considered the following criteria in determining whether the necessity standard for waiver was met: (1) the state of Columbia’s infrastructure; (2) current and projected pace of replacement; (3) the Company’s experience in using the DSIC; (4) evidence regarding future filings; and (5) ability to fund its replacement program without a waiver. OCA Exc. at 4 citing R.D. at 31-35. For each criterion, the OCA, the OSBA, and I&E presented evidence that showed that Columbia can ensure and maintain safe and reliable service without increasing the DSIC above 5%.14 In its Replies to Exceptions, the OCA summarized the evidence against the need for a waiver of the current cap:

1. There has been no showing in this proceeding that the current state of Columbia’s infrastructure poses significant safety and reliability issues or that the current pace of the Company's replacement efforts is unacceptable and potentially harmful to the public.1

2. By 2012, the Company reported that it had reduced Open Class 2 leaks by nearly 50 percent as a result of its accelerated replacement program and annual surveying of target mains. 2

14 See, OCA M.B. at 5; R.D. at 31-35; OCA St. 1 at 5-9; OCA St. IS at 2-5; I&E St. 1 at 7-9; I&E St. 2 at 7-11; OSBA St. 1 at 2-5; OSBA St. IS at 2-3. 3. As of 2016, Columbia’s target or “at risk” mains comprised only 21 percent of its total mains.3

4. The Company’s current pace of acceleration is already faster than other utilities. Columbia indicates it is on track to completely replace/retire target mains in 13 years.4

5. Columbia proposes no further acceleration to its replacement program if the DSIC cap were increased above 5 percent.5

6. Columbia has no actual experience with a DSIC rate that nears or exceeds 5 percent; it has charged a DSIC in only one quarter at a level of 1.5 percent.6

7. Columbia has used the Fully Forecasted Rate Year (FFRY) mechanism in three base rate cases to fully recover the costs of its DSIC eligible investment.7

8. The Company is able to continue an aggressive, accelerated infrastructure replacement program without any increase to the DSIC cap.8 ______1 OCA St. 1 at 6; CPA Exh. NMP-6 at 1-2; CPA Exh. NMP-5 at 17; Periodic Review of CPA's LTI1P, Docket No. M-2015-2501471, Order at 7 (Apr. 7, 2016) (2016 LTIIP Order). 2 CPA Exh. NMP-5 at 17. 3 CPA Exh. NMP-6 at 1-2 (1,555 miles of at risk mains ÷ 7,460 total miles of main). 4 Petition of Philadelphia Gas Works, 2015 Pa. PUC LEXIS 560 at *28; CPA St. 1 at 8-9; CPA Exh. NMP-5 at 8, 18; CPA Exh. NMP-6; see OCA St. 1. at 7. 5 CPA St. 1 at 7. 6 OCA St. 1 at 5-6. 7 Id. at 7-8. 8 OCA St. 1 at 6 (quoting CPA response to OSBA-1- 009).

OCA R. Ex. at 4-5. We agree with the OCA, OSBA and I&E that all of the criteria quoted above weigh against the need by Columbia for a waiver of the 5% DSIC cap. Since Columbia failed to provided sufficient evidence to demonstrate that an increase beyond the currently approved 5% DSIC cap is warranted, we shall also deny its second Exception.

With regard to Columbia’s Exception No.3, we agree with the ALJ’s conclusion that Columbia failed to meet its burden of proof to demonstrate that a waiver of the 5% DSIC cap and an increase of the DSIC cap from 5% to 10% of billed distribution revenues is warranted. Absent extraordinary circumstances, such as those demonstrated by PGW in PGW Waiver Petition, we may, in exercising discretion in accordance with Act 11, consider a waiver of the 5% DSIC cap if it will aid in accelerating Columbia’s main replacements or reduce the Company’s frequency of base rate filings.15 However, throughout this proceeding, Columbia has maintained that the waiver may not necessarily accelerate its main replacement. Columbia also could not guarantee that the waiver would reduce the frequency of its base rate case filings. Columbia’s witness, Nicole M. Paloney, demonstrated the Company’s noncommittal stance regarding the frequency of base rate case filings in her testimony, stating as follows:

There are many factors that influence the need to seek base rate relief, such as increases in operating and maintenance expenses, non-DSIC eligible plant additions, wages, taxes or decreases in revenue. Consequently, Columbia cannot commit to a decrease

15 We emphasize that the facts and circumstances contained in the PGW Waiver Petition are not dispositive of whether a waiver is permissible under 66 Pa. C.S. § 1358(a)(1). Each requested waiver must be made on a case-by- case basis after consideration of all the evidence of record. in base rate frequency in the future if it were permitted to implement a 10% DSIC cap.

Columbia St. 1 at 12.

We agree with the opposing Parties’ argument that Aqua PA Petition and PGW Waiver Petition are not dispositive in the instant proceeding due to their distinguishable and unique situations. OCA R.B. at 6-8; I&E M.B. at 11-13; and I&E R.B. at 8-9. In Aqua PA Petition, the Commission stated that Aqua PA satisfied its burden of proving that an increase in the DSIC cap was warranted. Unlike the instant proceeding in which Columbia has not filed an LTIIP to support its waiver request, in Aqua PA Petition, the ALJ relied on the results of Aqua PA’s “Water Main Renewal Program Study” in reaching a conclusion to approve the request.16 The ALJ in Aqua PA Petition also found Aqua PA’s argument that it had expended more than it recovered through its 5% DSIC cap in 2005, 2006 and 2008 to be persuasive. Aqua PA Petition at 6-7, 13. Particularly, unlike the instant proceeding in which Columbia used the DSIC for only one quarter (second quarter of 2013 at 1.5%),17 in Aqua PA Petition, the Commission noted that the company historically reached or exceeded the DSIC cap in its DSIC- eligible investments. For example, Aqua PA’s DSIC-related expenses exceeded the 5% cap in the fourth quarter of 2005 at 5.26%, the second quarter of 2006 at 7.21%, and the second quarter of 2008 at 6.03%. Aqua PA Petition at 13-14.

16 Columbia’s current LTIIP covers the period from 2013-2017. Columbia anticipates filing a new LTIIP in 2017 and averred that if its waiver petition is approved, it will have a new LTIIP in place before charging a DSIC that exceeds the 5% DSIC cap. Columbia M.B. at 25.

17 By the Recommended Decision of ALJs Mark A. Hoyer and Jeffrey A. Watson, at Docket No. P-2012-2338282, the Commission approved the DSIC calculation proposed by Columbia, which does not include the Accumulated Deferred Income Tax (ADIT) and state income tax gross-up. Columbia’s DSIC became effective on April 1, 2013. Furthermore, in Aqua PA Petition, the ALJ considered Aqua PA’s intention to continue acquiring small troubled water companies that would need infrastructure improvements. The Commission reasoned that increasing the DSIC cap for Aqua PA would facilitate the Commission’s policy of encouraging large, well-run, water companies to acquire small, non-viable water systems.18 Id. at 14.

Likewise, in PGW Waiver Petition, the Commission made a determination that PGW’s main replacement efforts were unacceptable. To help PGW accelerate its main replacement efforts and address the safety and reliability issues of PGW’s distribution system, the Commission approved PGW’s waiver request and increased the DSIC cap from 5% to 7.5%. In its approval of PGW’s waiver request, the Commission stated:

We believe that granting PGW a waiver of the statutory 5% DSIC limitation, as provided for in Act 11, may be the most cost-effective and least problematic means of ensuring that the Company can obtain this additional funding in a timely fashion. Based on the evidence presented in this case, we find that PGW has met its burden of showing that a waiver of the 5% DSIC cap will “ensure and maintain adequate, efficient, safe, reliable and reasonable service,” as required by 66 Pa. C.S. § 1358(a)(1). We further find that PGW’s proposal to spend an additional $11 million per year on its main replacement program is reasonable and will permit the Company to achieve an approximate 44% reduction in the projected timeline to replace its at-risk mains, while having a modest impact on ratepayers.19 PGW St. 1 at 10. Thus, we will grant PGW’s request to increase its DSIC cap to permit it to collect DSIC-eligible costs at a

18 See, 52 Pa. Code §§ 69.701, 69.711 (relating to small non-viable water systems.

19 We noted that even with this 44% reduction in PGW’s replacement timeline, the Company still expects that it will take forty-eight years for it to complete its main replacement program. PGW St. 1 at 10. level representing 7.5% of its distribution revenues, which will provide the Company with the means to recover the additional $11 million it intends to spend to implement the accelerated replacement of its mains.

PGW Waiver Petition at 42.

The Commission also stated in PGW Waiver Petition as follows:

While it is clear that Act 11 contemplates the possibility that an increase to the 5% DSIC cap may be advisable under certain circumstances in order to ensure safe and reliable service, it does not mandate that the Commission guarantee that a utility be able to collect DSIC revenues at the full percentage designated by the cap in any given quarter. We conclude that allowing PGW to increase its DSIC cap to 7.5% will permit the Company to significantly accelerate its main replacement efforts to address the problems resulting from its aging infrastructure, as discussed above, and PGW has met its burden of proof to demonstrate that an increase to 7.5% is necessary to ensure “adequate, efficient, safe, reliable and reasonable service.” This is consistent with the legislative intent of Act 11.

PGW Waiver Petition at 54-55.

However, unlike PGW Waiver Petition, in our recent review of Columbia’s LTIIP, we concluded that “the company appears to be on track to meet or exceed their current LTIIP and long-term goals in a cost effective manner.” Periodic Review of Columbia’s LTIIP at 6. Furthermore, Columbia stated that the waiver of the DSIC cap may not necessarily accelerate its main replacement schedule. While we applaud Columbia’s resolve to keep its system safe and reliable by aggressively replacing its at-risk mains, nothing on the record affirms that a waiver of the 5% DSIC cap is necessary to “ensure and maintain adequate, efficient, safe, reliable and reasonable service,” as required by 66 Pa. C.S. § 1358(a)(1). Therefore, we conclude that Columbia has not presented sufficient evidence to warrant a waiver of the DSIC cap and an increase of the cap from 5% to 10% of billed distribution revenues. As such, we will deny Columbia’s Exception No. 3.

Consistent with the above discussion, we will deny Columbia’s Exceptions and adopt the ALJs’ Recommended Decision. V. Conclusion

Based on our review of the record, and consistent with the foregoing discussion we shall: (1) deny Columbia’s Exceptions (2) adopt the ALJs’ Recommended Decision, and; (3) deny Columbia’s Petition requesting to waive the 5% DSIC cap and increase the cap from 5% to 10% of billed distribution revenues; THEREFORE, VI. Order

IT IS ORDERED:

1. That the Exceptions filed by Columbia Gas of Pennsylvania, Inc. on November 1, 2016, are denied, consistent with this Opinion and Order.

2. That the Recommended Decision of Administrative Law Judge Conrad A. Johnson, issued on October 13, 2016, is adopted, consistent with this Opinion and Order.

3. That the Petition of Columbia Gas of Pennsylvania, Inc., filed on December 31, 2015, is denied, consistent with this Opinion and Order. 4. That this proceeding be marked closed.

BY THE COMMISSION,

Rosemary Chiavetta Secretary

(SEAL)

ORDER ADOPTED: December 22, 2016

ORDER ENTERED: December 22, 2016