PHILADELPHIA – The Commonwealth Court of Pennsylvania recently issued a decision reaffirming the ability of utility companies to charge a greater surcharge on customers’ monthly bills to cover infrastructure improvements.

The ability to surcharge, formally referred to as the Distribution System Improvement Charge (DSIC), was first implemented only for major Pennsylvania water companies in the late 1990s, David P. Zambito, vice chair of Cozen O'Connor's Energy, Environmental and Public Utilities Group, told the Pennsylvania Record.

In 2012, Pennsylvania Act 11 extended the ability to implement a DSIC to electric, gas and wastewater companies, effectively making it easier for utility companies to make improvements on their infrastructures.

According to Zambito, in order to implement a DSIC, a utility must first file a Long-Term Infrastructure Improvement Plan (LTIIP) and petition the Pennsylvania Public Utility Commission (PUC) to approve its DSIC calculation methodology.

In an attempt to collect a DSIC to cover a multimillion-dollar bare steel main pipe replacement, Columbia Gas, which serves 415,000 customers in 26 counties across Pennsylvania, filed the required LTIIP with the PUC in 2012. A year later, it filed its petition for approval to implement a DSIC. The PUC approved both filings.

However, in 2014, the Office of Consumer Advocates (OCA) protested the approval of Columbia’s DSIC calculation methodology, which excluded adjustments for Accumulated Deferred Income Taxes (ADIT), and included adjustments income tax gross-ups, that OCA claimed unjustly made the surcharge higher.

The PUC rejected the OCA’s protests, and the OCA appealed the issue to the Commonwealth Court. On Nov. 3, the court reaffirmed the PUC’s approval of Columbia’s calculation methodology, effectively setting a precedent that allows utility companies to exclude ADIT and include income-tax gross-ups in their DSIC calculation methodologies.

DSICs are calculated using an “innovating rate making tool,” Zambito said. It is capped at between 5 and 7.5 percent of the amount billed to the customer monthly, and limited to what the utility company has actually spent on infrastructure repair, replacement and reasonable return, gradually increasing until it reaches its cap and then resetting back at zero.

According to Zambito, the Commonwealth Court's decision does not come as a surprise.

“The decision will not change how utilities are currently calculating their DSICs. The Commonwealth Court affirmed the PUC-approved calculation methodology that utilities have been using, and that has been historically used since the late 1990s by the major water companies,” Zambito said.

“From a broad perspective, the decision represents a deferral by the Court to the ratemaking expertise of the PUC. It reaffirms an old adage among utility rate lawyers and consultants: ‘ratemaking is an art, not a science.’”

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