Allegheny Ludlum Steel Corp. v. Pennsylvania Public Utility Commission

459 A.2d 1218, 501 Pa. 71, 1983 Pa. LEXIS 531

• Court: Supreme Court of Pennsylvania
• Decided: May 4, 1983
• Docket: 45 W.D. Appeal Docket, 1982 and 5 W.D. Appeal Docket 1983
• Status: Published

Opinions

OPINION OF THE COURT

FLAHERTY, Justice.

This is an appeal from an order of the Commonwealth Court¹ which upheld the constitutionality of a public-utility rate-setting procedure employed by the Pennsylvania Public Utility Commission (PUC), appellee, in reviewing an increase in electric rates sought by West Penn Power Company (West Penn), appellee. The appellant, Allegheny Ludlum Steel Corporation (Allegheny Ludlum), a large industrial customer of West Penn, challenges, on procedural due process grounds, the statutory and regulatory framework under which the PUC approved an increase in West Penn’s rates.

On November 20, 1981, West Penn applied to the PUC for an increase in its 1982 electric rates pursuant to Section 1307 of the Public Utility Code.² Section 1307(c) provides for automatic adjustment of rates, in a manner prescribed by the PUC, to reflect fuel cost increases. Accordingly, the PUC has adopted the Energy Cost Rate (ECR)³ formula to govern automatic adjustment of rates. Allegheny Ludlum filed an objection to the proposed increase, yet on December 18,1981 the PUC approved the increase, effective January 1, 1982. The meeting at which approval was granted was open to the public, but, although Allegheny Ludlum was provided notice of the proceeding by West Penn, the PUC denied Allegheny Ludlum an opportunity to be heard, in accordance with its policy of allowing the public to observe but not participate in such proceedings.

Allegheny Ludlum contends that, as a constitutional prerequisite to allowance of the rate increase, the PUC had a duty to provide advance notice, access to supplemental data, an opportunity to be heard, and a determination on the record. Specifically, it is asserted that the decisions of this Court in Conestoga National Bank of Lancaster v. Patterson, 442 Pa. 289, 275 A.2d 6 (1971) and Pennsylvania Coal Mining Assn. v. Insurance Department, 471 Pa. 437, 370 A.2d 685 (1977) require nullification of the instant agency action on procedural due process grounds. We disagree.

In Conestoga, where approval by the Department of Banking of an application for the establishment of a branch bank was held to be a judicial determination involving substantial property rights of the applicant, as well as of protesting banks and the surrounding financial community, the Court set forth the applicable principle of procedural due process as follows: “Procedural due process does not require notice and a hearing in every conceivable situation involving administrative action. (Citation omitted.) However, these procedural safeguards should accompany a situation where the administrative action is adjudicatory in nature and involves substantial property rights.” 442 Pa. at 296, 275 A.2d at 9. Actions are adjudicatory in character when they culminate in a final determination affecting personal or property rights. See Id., 442 Pa. at 298, 275 A.2d at 11. In the present case, Allegheny Ludlum has incurred substantial increases, of approximately $10,000 per day, in rates paid to West Penn. Safeguards are, however, afforded through a subsequent, year-end, automatic proceeding for final determination and adjustment of rate increases allowing full participation by all interested parties, and requiring refunds, with interest, calculated at the prevailing rate,⁴ of overpayments in the event previous ECR increases are determined to have been excessive. See Section 1307(e), n. 2 supra; n. 3 supra. These are factors of significance to the procedural due process inquiry. See Pennsylvania Coal, 471 Pa. at 454, 370 A.2d at 694. In contrast, the process held unconstitutional by this Court in Conestoga afforded the protesting banks no opportunity to be heard, either prior or subsequent to the challenged administrative determination, and the determination was not merely provisional, but final.

A preference has been recognized for procedural protections effective prior to governmental action that threatens to deprive citizens of their interests, unless important governmental interests, or the preservation of others’ interests, require otherwise. Pennsylvania Coal, 471 Pa. at 451, 370 A.2d at 692. The need for a public utility to receive a fair rate of return on its property to assure its continued financial integrity, necessary to achievement of the important goal of preserving modern, efficient, and dependable public service, consonant with rights of customers, is not to be ignored. The legislature, seeking to balance these competing interests, has authorized the PUC to employ an automatic fuel cost adjustment, the ECR, to maintain a just and reasonable return. In so doing, the legislature has not conferred broad discretion upon the PUC; rather, Section 1307(c) specifically sets forth factors to govern the fuel cost adjustment employed by the PUC. See n. 2, supra. Hence, the instant case is not comparable to that of Pennsylvania Coal, where the administrative agency acted without the equivalent of a legislatively guided formula governing rate increases.

In Pennsylvania Coal, this Court held that coal mining companies, required to carry insurance providing for black lung disease benefits, had an interest in insurance rate-setting proceedings that was entitled to the protection of due process. Under the applicable regulatory scheme, a private organization composed of insurance carriers offering black lung coverage,proposed rates, which, after a waiting period of thirty days, were “deemed” approved unless disapproved or modified by the Insurance Commissioner. In holding that coal mining companies were entitled to notice of the proposed rates and an opportunity to present views, in writing, as to reasons the rates should not be deemed into effect, the Court stated that procedural due process protections were to be afforded the coal companies because of the “private” nature of the rate-setting process:

Where proposals by a private party must be reviewed and approved by a regulatory agency before they become effective, there is no unconstitutional delegation. The possibility of an arbitrary disregard of individual interests when the recommendations of a private body are deemed into effect without the specific approval of a public official, however, demands greater procedural protection than due process might otherwise require.

471 Pa. at 451, 370 A.2d at 692 (emphasis added). In the instant case, the challenged rate-setting scheme lacks the “private” character of that held unconstitutional in Pennsylvania Coal; indeed, the PUC must expressly approve ECR increases sought by West Penn.

We reject, therefore, the contention of Allegheny Ludlum that the decisions of this Court in Conestoga and Pennsylvania Coal mandate nullification of the rate-setting procedure in question. In view of the interest of West Penn to be protected, the automatic year-end final determination of rates through which excessive rates paid can be recovered with interest, calculated at the prevailing rate, the notice and full opportunity to be heard accompanying that determination, the specific guidelines restricting the PUC’s formulation of the ECR formula, and the absence of a rate-setting process that could be characterized as “deeming” the proposals of “private” interests into effect, we find the instant rate-setting process not to be violative of procedural due process.

Affirmed.

LARSEN, J., files a dissenting opinion in which McDERMOTT, J., joins.

1 . Allegheny Ludlum Steel Corp. v. Pa. Public Utility Commission, 67 Pa.Commw. 400, 447 A.2d 675 (1982).

2 . Public Utility Code, Act of July 1, 1978, P.L. 598, No. 116, § 1, 66 Pa.C.S.A. § 1307 (1979), which provides:

(a) General rule. — Any public utility, except a common carrier, may establish a sliding scale of rates or such other method for the automatic adjustment of the rates of the public utility as shall provide a just and reasonable return on the fair value of the property used and useful in the public service, to be determined upon such equitable or reasonable basis as shall provide such fair return. A tariff showing the scale of rates under such arrangement shall first be filed with the commission, and such tariff, and each rate set out therein, approved by it. The commission may revoke its approval at any time and fix other rates for any such public utility if, after notice and hearing, the commission finds the existing rates unjust or unreasonable.

(b) Mandatory system for automatic adjustment. — The commission, by regulation' or order, upon reasonable notice and after hearing, may prescribe for any class of public utilities, except a common carrier, a mandatory system for the automatic adjustment of their rates, by means of a sliding scale of rates or other method, on the same basis as provided in subsection (a), to become effective when and in the manner prescribed in such regulation or order. Every such public utility shall, within such time as shall be prescribed by the commission, file tariffs showing the rates established in accordance with such regulation or order.

(c) Fuel cost adjustment. — In any method automatically adjusting rates to reflect changes in fossil fuel cost under this section, the fuel cost used in computing the adjustment shall be limited, in the case of an electric utility, to the cost of such fuel delivered to the utility at the generating site at which it is to be consumed, and the cost of disposing of solid waste from scrubbers or other devices designed so that the consumption of Pennsylvania-mined coal at the generating site would comply with the sulfur oxide emission standards prescribed by the Commonwealth. The cost of fuel handling after such delivery, or of waste disposal, other than as prescribed in this section, shall be excluded from such computation. In any method automatically adjusting rates to reflect changes in fuel cost other than fossil fuel cost under this section, the fuel cost used in computing the adjustment shall be limited, in the case of an electric utility, to the cost of such fuel delivered to the utility at the generating site at which it is to be consumed after deducting therefrom the present salvage or reuse value of such fuel, as shall be established by commission rule or order.

(d) Fuel cost adjustment audits. — The commission shall conduct or cause to be conducted, at such times as it may order, but at least annually, an audit of each public utility which, by any method described in this section, automatically adjusts its rates to reflect changes in its fuel costs, which audit shall enable the commission to determine the propriety and correctness of amounts billed and collected under this section. Whoever performs the audit shall be a person knowledgable in the subject matter encompassed within the operation of the automatic adjustment clause. The auditors report shall be in a form and manner directed by the commission.

(e) Automatic adjustment reports and proceedings.—

(1) Within 30 days following the end of such 12-month period as the commission shall designate, each public utility using an automatic adjustment clause shall file with the commission a statement which shall specify for such period:

(i) the total revenues received pursuant to the automatic adjustment clause;

(ii) the total amount of that expense or class of expenses incurred which is the basis of the automatic adjustment clause; and

(iii) the difference between the amounts specified by sub-paragraphs (i) and (ii).

Such report shall be a matter of public record and copies thereof shall be made available to any person upon request to the commission.

(2) Within 60 days following the submission of such report by a public utility, the commission shall hold a public hearing on the substance of the report and any matters pertaining to the use by such public utility of such automatic adjustment clause in the preceding period and may include the present and subsequent periods.

(3) Absent good reason being shown to the contrary, the commission shall, within 60 days following such hearing, by order direct each such public utility to, over an appropriate 12-month period, refund to its patrons an amount equal to that by which its revenues received pursuant to such automatic adjustment clause exceeded the amount of such expense or class of expenses, or recover from its patrons an amount equal to that by which such expense or class of expenses exceeded the revenues received pursuant to such automatic adjustment clause.

(4) For the purpose of this subsection, where a 12-month report period and 12-month refund or recovery period shall have been previously established or designated, nothing in this section shall impair the continued use of such previously established or designated periods nor shall anything in this section prevent the commission from amending at any time any method used by any utility in automatically adjusting its rates, so as to provide the commission more adequate supervision of the administration by a utility of such method and to decrease the likelihood of collection by a utility, in subsequent periods, of amounts greater or less than that to which it is entitled, or, in the event that such deficiency or surplus in collected amounts is found, more prompt readjustment thereof.

3 . The purpose of the ECR is to provide an automatic mechanism enabling utilities to recover specific energy costs not covered by general rates, by allowing collection of rates based on projected cost data for the calendar year. “[T]he ECR is calculated by dividing the projected, applicable energy costs by the projected total system kilowatt hour sales, subtracting from this quotient the energy base rate and adjusting this remainder for prior period’s energy costs over or under recovered.” PUC — Bureau of Audits ECR Procedure. The ECR determines, therefore, the amount per kilowatt hour which the customer pays in addition to the base rate. Undercollections and overcollections of realized energy costs are reconciled annually. 66 Pa.C.S.A. § 1307(e), n. 2 supra. Undercollections are recovered from customers in the subsequent billing year without liability for interest. However, it is the practice to refund overcollections with interest, the interest rate being computed monthly in accordance with the variable rate set forth in the Public Utility Code, 66 Pa.C.S.A. § 1308(d), which pertains to general rate changes as opposed to automatic rate adjustments. In pertinent part, this section provides the rate “shall be the average rate of interest specified for residential mortgage lending by the Secretary of Banking in accordance with the Act of January 30, 1974 (P.L. 13, No. 6), referred to as the Loan Interest and Protection Law [41 P.S. § 101 et seq.], during the period or periods for which the commission orders refunds.” This rate averaged 14.73% for the twelve month period ending October 31, 1981.

4 . See n. 3, supra.