A Pennsylvania Public Utility Commission administrative law judge has recommended that the commission approve a rate case settlement calling for National Fuel Gas Co. subsidiary National Fuel Gas Distribution Corp. to increase gas distribution base rates by $23 million effective Aug. 1.

A final commission decision in the pending base rate case (Docket No. R-2022-3035730) is required by July 27 but may come earlier due to the settlement.

The judge's recommendation is not unexpected as the use of settlements to resolve major rate cases is the rule rather than the exception in Pennsylvania.

As is typical of rate case settlements in Pennsylvania, the agreement is silent with respect to the rate of return and rate base metrics supporting the stipulated rate change.

National Fuel Gas Distribution (NFGD) does not use a distribution system improvement charge (DSIC) mechanism to reflect incremental infrastructure investment in rates between rate cases, but the settlement provides guidelines for implementing such a mechanism if the company files for one.

Regulatory Research Associates views the regulatory climate for energy utilities in Pennsylvania as relatively constructive from an investor viewpoint. While a new PUC chairman has been appointed, RRA does not anticipate that the change will bring about a significant shift in policy in the state.

Most rate cases in Pennsylvania are resolved via black box settlements; of the 32 energy rate cases decided in Pennsylvania since 2014, only three have been fully litigated.

While the settlement is silent on rate of return and rate base issues, the agreement specifies that the revenue requirement reflects a fully forecast test year beginning Aug. 1, 2023, and ending July 31, 2024.

NFGD has indicated that it plans to file for approval to implement a DSIC mechanism; NFGD is currently the only company that does not use one. Assuming the DSIC is approved, the settlement specifies that the initial DSIC will reflect eligible property placed into service during the three-month period ending one month prior to the effective date of the DSIC. However, no plant additions placed into service before Aug. 1, 2024, would be eligible to be included, and NFGD would not be able to implement its first DSIC until its total plant-in-service balance exceeds the $781.3 million level projected by NFGD in its filing in this case; plant-in-service is one component of a company's rate base calculation.

In addition, since the company has not had a rate case in which a new return on equity (ROE) was established within the last two years, for purposes of calculating the revenue requirement under the DSIC, the company would use the proxy ROE contained in the commission's most recent quarterly report on the earnings of the jurisdictional utilities at the time of its first DSIC filing. As is common practice for utilities that use DSICs, the ROE would be updated as appropriate for subsequent DSIC filings.

In the most recent report issued in February, the PUC established a proxy ROE of 10.15% for gas utilities. That ROE is 40 basis points above the average ROE authorized for gas utilities across the US in cases decided during the first quarter of 2023. According to data gathered by RRA, the average ROE approved for gas utilities in the first quarter of 2023 was 9.75%. For the 12 months ended March 31, the average was 9.60%, and for calendar year 2022 the average was 9.54%. For a chronological listing of the major energy rate case decisions issued during 2022 and historical summary data going back to 1990, see RRA's latest Rate Case Decisions Quarterly Update.

NFGD would be authorized to implement a five-year pilot WNA program that would apply only to residential, commercial and public authority rate schedules for bills rendered during the October May heating season. Bill adjustments under the WNA would be calculated by comparing actual heating degree days for the relevant month with the average number of heating degree days for the 15 years 2006 2020. No bill adjustment would be made if the actual sales are within 3% above or below the weather-normalized average.

While NFGD agreed to withdraw proposed residential energy efficiency and gas conversion pilot programs, it does not appear that the company would be precluded from refiling the proposals at a later date.

The company had proposed to increase the residential fixed monthly customer charge to $18.00 from $12.00, but the agreement specifies a $14.00 residential monthly customer charge.

Case history

This proceeding was initiated Oct. 28, 2022, when NFGD filed for a $28.1 million rate increase premised upon an 11.2% return on equity (54.9% of capital) and an 8.53% return on a year-end rate base valued at $456.8 million for a test year ending July 31, 2024.

The parties filed testimony during the first quarter of 2023, but the testimony was not made public at the time.

On March 20, the PUC suspended the procedural schedule to accommodate settlement negotiations and set April 13 as the deadline for the parties to file an agreement.

Prior to the settlement, the company supported a $27.5 million increase based on the initially filed returns. The PUC's Bureau of Investigation and Enforcement supported a $19.7 million rate increase based on a 9.29% ROE, and the Office of Consumer Advocate recommended a $15.4 million rate increase that reflected a 9.00% ROE.

The settlement, filed April 13, was signed by NFGD, the Bureau of Investigation and Enforcement, the Office of Consumer Advocate, the Office of Small Business Advocate, the Coalition for Affordable Utility Service and Energy Efficiency in Pennsylvania, and the Pennsylvania Weatherization Providers Task Force Inc.

RRA's view of regulatory climate in Pennsylvania

RRA views the regulatory climate for energy utilities in Pennsylvania to be constructive from an investor viewpoint, even though persistent strife between the former governor, Democrat Tom Wolf, and the Legislature regarding the pace of energy transition policy in the state created uncertainty for investors.

The term of current PUC Chairman Gladys Dutrieuille expired in April 2023, and new governor, Democrat Josh Shapiro, has named Dutrieuille's chief of staff, Kimberly Barrow, to the commission. Shapiro has not indicated whether Barrow will serve as chair or whether one of the incumbent commissioners will play that role. Barrow's appointment awaits Pennsylvania Senate confirmation.

Energy transition and commission membership issues aside, by law, rate cases before the PUC incorporate fully forward-looking test years that generally start on or around the date new rates are effective. In addition, unlike many other states that use forward-looking test years, Pennsylvania uses a year-end rather than average rate base valuation, reducing regulatory lag.

In addition, the utilities are permitted to adjust rates on a quarterly basis to reflect incremental investment through the state's DSIC mechanism. There are caps on the annual percentage rate increase that can flow through the DSIC, and the utilities cannot implement a DSIC increase if doing would cause them to earn above their authorized returns.

RRA continues to accord the regulatory climate for energy utilities in Pennsylvania an Above Average/2 ranking. However, the conflict concerning the energy transition, which is likely to continue with the election of another Democratic governor, bears watching.

Regulatory Research Associates is a group within S&P Global Commodity Insights.