Pittsburgh v. Pennsylvania Public Utility Commission

To remand this case to the Public Utility Commission serves no purpose, and merely delays a proceeding which should have been terminated long ago. The order of the commission, filed December 7, 1942, which we reversed in Peoples Natural Gas Company v.Pennsylvania Public Utility Commission, 153 Pa. Super. 475,34 A.2d 375, was substantially and reasonably correct both on the facts and on the law. But the commission, in its order of February 16, 1944, clearly attempted to apply the directives — now conceded by the majority to have been erroneous in part — of this court set forth in its opinion reversing the commission's order of December 7, 1942. The commission, in making its first order, as stated in the order of February 16, 1944, avoided "the acceptance of original cost, prudent investment, reproduction cost, or other single element, as the rate base," but considered "every element and [gave] it proper weight in the ultimate finding of fair value." The last order of the commission was the result of the application of principles which it realized, and we now acknowledge, were incorrect.

The commission, in making its order of December 7, 1942, was of the opinion that the reproduction cost figures in the record presented by the utility were entirely unreliable and worthless. See order nisi, March 4, 1942 (3531a); final order, December 7, 1942 (3721a). Upon the case being remitted under our decision of November 10, 1943 (153 Pa. Super. 475, 34 A.2d 375), the commission thereupon accepted such estimates, which it had thus characterized, and based its order of February 16, 1944, thereon. Counsel for the commission confirmed this fact at the argument of the present appeal at Pittsburgh on April 25, 1945. But the majority opinion still leaves the commission with no alternative but to repeat the error. It is immaterial that the utility has not questioned the present order as confiscatory; the order is a nullity, and the proceeding is before us in its entirety for an independent judicial determination of findings of fact establishing value. Accordingly, it is my view, in order that no more confusion may be created in the utility law especially as it relates to valuation, we should make our own determination of fair value and express our independent judgment as to both the law and the facts.¹ See Solar Electric Co. v. Pennsylvania Public Utility Commission et al., 137 Pa. Super. 325, 353, 354,9 A.2d 447. The utility had claimed that confiscation of its property would result from the enforcement of the commission's order of December 7, 1942. Naturally it does not make such a claim as to the order of February 16, 1944,² which is invalid due to our manifest errors with which the commission sought to comply against its own judgment. But for such an erroneous view of the law given by this court, the commission would not have reached the conclusion that it did upon this record.

The majority opinion now reverses Peoples Natural Gas Companyv. Pennsylvania Public Utility Commission, 153 Pa. Super. 475, 34 A.2d 375, as to expensed items in the determination of the rate base. To this extent I concur. My reasons are given in my dissent in 153 Pa. Super. 475, 503, 34 A.2d 375, 391. In 153 Pa. Super. 475, 34 A.2d 375, in reversing the commission for the exclusion of expensed items, this court relied upon Hope Natural Gas Company v. Federal PowerCommission, 134 F.2d 287, later reversed in Federal PowerCommission et al. v. Hope Natural Gas Co., 320 U.S. 591,64 S. Ct. 281, 88 L. Ed. 333, and indicated that as long as present fair value is the base capital investment items must be included although charged to expense. In that opinion this court also said (p. 486): "That appellant owns the property and is using it in the service is unquestioned. And, so long as present fair value is the test, it makes no difference whether appellant bought it, received it as a gift, or won it in a lottery." It is significant that the majority opinion now modifies this concept of fair value.

In the majority opinion the principle of "the law of the case" is invoked but not followed. It corrects at least one of the errors in the opinion in the Peoples case, 153 Pa. Super. 475, 34 A.2d 375. I am at a loss to understand upon what principle of law it can be supposed that this court has no power in this case now before us to correct other more material errors. The principle of "the law of the case" has little, if any, application in public utility rate cases. I believe we are free to make a complete, instead of a partial, correction of errors made in our former decision. See Reamer's Estate, 331 Pa. 117,122, 123, 200 A. 35; 3 Am. Jur. p. 546, § 990.

The majority opinion goes on to say: "Solar Electric Co. v. P.U.C., supra (137 Pa. Super. 325, 9 A.2d 447), is the present rate-making law of this State. . . . It was our intention in the prior appeal (153 Pa. Super. 475) not to modify the general principles of the Solar case." In view of such statements in the majority opinion, it is impossible to ascertain the applicable law of this state in determining the fair value of the property of a utility.

I do not agree that Solar Electric Co. v. Pennsylvania PublicUtility Commission et al., 137 Pa. Super. 325, 9 A.2d 447, is the present rate-making law of this state, or the applicable law in determining the fair value of the property of a utility. I think the Solar Electric Company case, inter alia, has been overruled.

In the Peoples case, 153 Pa. Super. 475, 34 A.2d 375, all of the elements upon which the commission made its finding of fair value (exclusive of working capital) were eliminated except reproduction cost new less depreciation. The commission had considered reproduction cost depreciated, original cost depreciated, book value, and invested capital for a limited purpose (see footnote 2). Under that decision of this court it is obvious that the commission could not make a finding of fair value based on any elements other than reproduction cost depreciated, or the equivalent — original cost trended. It can readily be seen that the commission is bound to a formula which requires adherence to one element, to wit, reproduction cost new less depreciation. I think it may be safely asserted that this is in conflict with our statutory law and the pronouncements of this court. In that opinion it is said (p. 489): "Since the legislature put fair value into our law, together with what in 1937, when the law was passed, was universally understood to have been the elements of fair value, that body alone can take it out and substitute something else in its place." Reliance was placed upon McCardle v. Indianapolis Water Co., 272 U.S. 400,47 S. Ct. 144, 71 L. Ed. 316, as establishing reproduction cost as the dominant basis of value. The McCardle case was decided in 1926. In 1933, Mr. Chief Justice HUGHES wrote the opinion in LosAngeles Gas Electric Corp. v. Railroad Commission ofCalifornia, 289 U.S. 287, 53 S. Ct. 637, 77 L. Ed. 1180. There is no reasonable ground to intimate or assert that the legislature in 1937 meant fair value to be as indicated in the McCardle case in 1926 rather than as understood in the Los Angeles case in 1933. Our present situation is a glaring example of the failure to realistically approach the subject of valuation. To attempt to control the commission's judgment on a matter of valuation by insisting upon a particular formula is only conducive to chaos in the field of rate-making. Valuation, under Smyth v. Ames, 169 U.S. 466, 18 S. Ct. 418, 42 L. Ed. 819, may be cumbersome and permit consideration of a polyglot of elements, but it at least has afforded an opportunity for a commission to utilize its judgment without undue restraint. Mr. Justice HARLAN, in Smyth v. Ames, 169 U.S. 466, 18 S. Ct. 418,42 L. Ed. 819, 849, said: "And, in order to ascertain that value [fair value], the original cost of construction, the amount expended in permanent improvements, the amount and market value of its bonds and stock, the present as compared with the original cost of construction, the probable earning capacity of the property under particular rates prescribed by statute, and the sum required to meet operating expenses, are all matters for consideration, and are to be given such weight as may be just and right in each case. We do not say that there may not be other matters to be regarded in estimating the value of the property."

In Solar Electric Co. v. Pennsylvania Public Utility Commissionet al., supra, 137 Pa. Super. 325, 347, 9 A.2d 447, 461, we said: "The Supreme Court of Pennsylvania and this court have consistently followed the rule of Smyth v. Ames in the valuation of the property of public utilities." See Erie City et al. v.Public Service Commission, 278 Pa. 512, 521, 123 A. 471; BangorWater Co. v. Public Service Commission, 82 Pa. Super. 48. In the Solar Electric Company case, in making our own determination of fair value, we said that our "independent judgment" was exercised "after considering the character of respondent's plant, the book cost of invested capital as shown on the company's books, the reproduction cost new and the accrued depreciation."

In view of these pronouncements by our court, determination of fair value, in the manner prescribed in the Peoples case,153 Pa. Super. 475, 34 A.2d 375, is diametrically contrary to the legal principles recognized as applicable up to that time.

The elements upon which a finding of fair value could be made were enumerated in section 20, art. 5, of the Public Service Company Law of 1913, P.L. 1374, which reads as follows: "In ascertaining and determining such fair value, the commission may determine every fact, matter, or thing which, in its judgment, does or may have any bearing on such value; and may take into consideration, among other things, the original cost of construction, particularly with reference to the amount expended in the existing and useful permanent improvements; with such consideration for the amount in market value of its bonds and stocks, the probable earning capacity of the property under particular rates prescribed by statute or ordinance, or other municipal contract, or fixed or proposed by the commission, and for the items of expenditures for obsolete equipment and construction, as the circumstances and the historical development of the enterprise may warrant; the reproduction costs of the property, based upon the fair average price of materials, property, and labor, and the developmental and going concern value of such public service company; and these, and any other elements of value, shall be given such weight by the commission as may be just and right in each case.

"(b) The Commission shall also have power to make revaluations of the property of any public service company, from time to time, and to ascertain and determine the value of new construction, extensions, and additions to the same."

The Act of 1937 did not enumerate the elements to be considered by the commission in fixing fair value of a utility's property. Section 311, art. 3, of the Act of May 28, 1937, P.L. 1053, 66 P. S. § 1151, reads as follows: "The commission may, after reasonable notice and hearing, ascertain and fix the fair value of the whole or any part of the property of any public utility, in so far as the same is material to the exercise of the jurisdiction of the commission, and may make revaluations from time to time and ascertain the fair value of all new construction, extensions, and additions to the property of any public utility. When any public utility furnishes more than one of the different types of utility service enumerated in paragraph seventeen of section two of this act, the commission shall segregate the property used and useful in furnishing each type of such service, and shall not consider the property of such public utility as a unit in determining the value of the property of such public utility for the purpose of fixing rates."

The term "fair value" in section 311, 66 P. S. § 1151, and the term "just and reasonable rates" in section 309, 66 P. S. § 1149, were apparently left undefined by the legislature for a purpose. At most, reproduction cost is to be considered; it is not the dominant basis of fair value. As the legislature did not define or limit such terms, it could very properly be assumed that the concept of that which is "fair value" and the concept of that which is "just and reasonable" might change from time to time, although this court has taken the position that the Act of 1937, in section 311, art. 3, 66 P. S. § 1151, continued the provisions of section 20, art. 5, of the Act of 1913.

I think the commission originally gave as much consideration to the reproduction cost element as was reasonably warranted under the conditions presented in this case, and we had no substantial ground for reversal. The burden of proof in a rate case is on the utility. "What the commission may see fit to ask for is one thing, but what a utility must produce in order to sustain its burden of proof in a rate case is a different matter": PeoplesNatural Gas Co. v. Pennsylvania Public Utility Commission,141 Pa. Super. 5, 15, 14 A.2d 133, 137. The commission made a finding of reproduction cost, but it pointed out that this finding was on unreliable evidence. The weight therefore to be given to such finding was to be determined by the facts in this case. The basis of calculation of fair value, in the order of February 16, 1944, as admitted by commission's counsel at the argument at Pittsburgh, is the discredited testimony as to reproduction cost. It is true that the United States Supreme Court, in McCardle v. Indianapolis Water Co., supra,272 U.S. 400, 47 S. Ct. 144, 71 L. Ed. 316 (1926), places great emphasis on reproduction cost. It reiterated this doctrine in St. Louis O'Fallon Railway Co. v. United States, 279 U.S. 461,49 S. Ct. 384, 73 L. Ed. 798 (1929), but prior to the enactment by the Pennsylvania legislature of the Public Utility Law of 1937 there was a considerable change in attitude on the part of the United States Supreme Court as to those theories which we have adopted without any consideration of subsequent modification by that court. In 1933, in Los Angeles Gas Electric Corp. v. RailroadCommission of California, supra, 289 U.S. 287, 53 S. Ct. 637,77 L. Ed. 1180, 1193, Mr. Chief Justice HUGHES said: "The actual cost of the property — the investment the owners have made — is a relevant fact. Smyth v. Ames, 169 U.S. 466, 547, 42 L. Ed. 819,849, 18 S. Ct. 418." In that case the court found that while the California commission had based its rates principally upon investment costs, it had done so largely because evidence as to reproduction cost was unreliable; and that on the whole the California commission had given as much consideration to the reproduction cost factor as was warranted under the circumstances. Mr. Chief Justice HUGHES, in his opinion, also pointed out that both actual cost and reproduction cost were relevant facts, but that neither was the final and exclusive test; and that the weight to be given to either of them was to be determined by the facts of the particular case.

In 1942, in Federal Power Commission v. Natural Gas PipelineCo., 315 U.S. 575, 62 S. Ct. 736, 86 L. Ed. 1037, 1049, 1050, the United States Supreme Court went on to say: "The Constitution does not bind rate-making bodies to the service of any single formula or combination of formulas. Agencies to whom this legislative power has been delegated are free, within the ambit of their statutory authority, to make the pragmatic adjustments which may be called for by particular circumstances. Once a fair hearing has been given, proper findings made and other statutory requirements satisfied, the courts cannot intervene in the absence of a clear showing that the limits of due process have been overstepped."

Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591,64 S. Ct. 281, 88 L. Ed. 333, 345, was decided on January 3, 1944, wherein it was said: "It is not theory but the impact of the rate order which counts. If the total effect of the rate order cannot be said to be unjust and unreasonable, judicial inquiry under the Act³ is at an end. The fact that the method employed to reach that result may contain infirmities is not then important. Moreover, the Commission's order does not become suspect by reason of the fact that it is challenged. It is the product of expert judgment which carries a presumption of validity. And he who would upset the rate order under the Act carries the heavy burden of making a convincing showing that it is invalid because it is unjust and unreasonable in its consequences."

In the field of rate-making, we have been largely guided by the decisions of the United States Supreme Court, and have necessarily relied upon the views of that court as to the constitutional requirements. In Bangor Water Co. v. PublicService Commission, supra, 82 Pa. Super. 48, 55, this court, in an opinion by the late President Judge KELLER, said: "The decisions of the Supreme Court of the United States require us to base the fair return upon its present value; that is, its reasonable value at the time it is being used for the public."

"It is impossible," the majority opinion states, "from the order of the commission now before us to determine the process by which it determined the rate base." On the contrary, the order has no other basis to support its validity than the worthless testimony of the utility's witness as to reproduction cost. The standard furnished by the majority opinion for the future guidance of the commission is of such a nature as to be impossible of practical application except in so far as the commission is obliged to accept the utility's evidence as to depreciated reproduction cost in the determination of fair value and in fixing a rate base.

A pertinent inquiry would be: Where do we stand on utility valuation as a result of the Peoples case, 153 Pa. Super. 475, 34 A.2d 375, and Philadelphia Transportation Co. v.Pennsylvania Public Utility Commission, 155 Pa. Super. 9,37 A.2d 138, and the majority opinion in the present case? In the Philadelphia Transportation Company case this court said (p. 21): "This finding [of original cost] is ineffective in determining value for the reason that the costs were not trended to reflect current prices of labor and materials on that date." In the same case we also said (p. 22): "In the absence of adjustments of original or historical costs to determine present fair value as of the date in question the finding of the commission [as to original cost] is entitled to little consideration as a determining element."

In the Peoples case, 153 Pa. Super. 475, 484,34 A.2d 375, this court said that unless there has been no great change in cost levels, or there has been a change but proper adjustment made based upon competent evidence of price trends, original cost is irrelevant to rate base determination. Now we again say — original cost must be trended. Such pronouncements are judicial legislation, and are in conflict with our own statements and with the statutory law which we have recognized. If any such qualification of original cost as an element of fair value exists, it is not to be found in any statute or legislative enactment; and no acceptable reason has been even suggested in support of the validity of such judicial amendment. In the Peoples case, 153 Pa. Super. 475, 482,488, 34 A.2d 375, we said "the legislative mandate in this commonwealth is that the rate base is fair value," and that "our legislature adopted the Public Utility Law of 1937 and wrote `fair value' into section 311 (66 P. S. § 1151), and that standard, minus a detailed list of the elements constituting fair value, was carried over from the Public Service Act of 1913." In order to retain a proper perspective, it is to be noted that five months later, in the Philadelphia Transportation Company case, we refused to be bound by these declarations, and rejected the fair value elements which did not suit us notwithstanding the plain words of the statute which we had held controlling but did not follow.

I have previously quoted section 20, art. 5, of the Public Service Company Law of 1913. In construing that section we have said it was mandatory to consider all of the elements enumerated in the section. We said in Beaver Valley Water Company v. PublicService Commission, 76 Pa. Super. 255, at page 259: "The Public Service Company Law (article V, section 20a), directs that in ascertaining and determining the fair value of a public service company's property it may [shall] take into consideration among other things (1) the original cost of construction; (2) the amount in market value of its bonds and stocks; (3) the probable earning capacity under the rates fixed by the commission; (4) expenditures for obsolete equipment and construction, — (as warranted, in connection with (2), (3) and (4), by the circumstances and historical development of the enterprise) —; (5) reproduction costs of the property, based upon the fair average price of materials, property and labor; (6) developmental and going concern value — all of which, together with any other elements of value, are to be given such weight as may be just and right in each case." See, also, Bangor Water Co. v. PublicService Commission, supra, 82 Pa. Super. 48, 52.

Nevertheless, in the Peoples case, 153 Pa. Super. 475,34 A.2d 375, and in the Philadelphia Transportation Company case, 155 Pa. Super. 9, 37 A.2d 138, and again in the present majority opinion, this court has ruled out original cost of construction unless the items are trended, and by elimination nothing is left upon which a rate base can be predicated by the commission except reproduction cost new less depreciation. The result is palpably wrong, and the power to fix fair value passes largely to the utility. As the first specific element of fair value, original cost is mentioned both in the Act of 1913 and in our opinion in the Beaver Valley Water Company case without any limitation or suggestion that consideration of this element shall depend either upon the persistence of price levels or the application of trends. The same is true of Smyth v.Ames. To the contrary actual invested capital has always been considered in Pennsylvania as one of the relevant valuation factors. See Highspire Water Co. v. Public Service Commission,76 Pa. Super. 504; Borough of Lewistown v. Public ServiceCommission, 80 Pa. Super. 528; New Street Bridge Co. v.Public Service Commission, 271 Pa. 19, 38, 114 A. 378.

In the Solar Electric Company case, in making our own determination of fair value, we considered book cost of investments, and therefore the commission should not be prohibited from doing likewise. Rate-making should be a simple process rather than a tangled and mystic affair. The administrative agency should have freedom of action under equitable principles. Original cost less depreciation is a ready and equitable element for making a finding of fair value and for ultimate fixing of rates; likewise the straight-line or age-life method is proper for determining the amount of depreciation to be deducted from the cost of the plant.

Adding to the confusion is our statement in the PhiladelphiaTransportation Company case that the market value of securities as one of the elements to be considered in finding fair value should have been disregarded by the commission. This holding is in conflict with the statutory mandates as interpreted by us in other cases, as well as with the rules of law previously laid down by this court with respect to the factors to be considered in arriving at a fair value determination. In Solar Electric Company case, supra, 137 Pa. Super. 325, 9 A.2d 447, we said that we followed Smyth v. Ames, and that the elements to be considered by the commission in ascertaining and determining fair value were those enumerated in section 20, art. 5, of the Public Service Company Law of 1913, P.L. 1374, and we went on to say (p. 336): "While the new act (Public Utility Law) does not go into details as to the items which should be considered by the commission in fixing the fair value of a utility's property, as fully as the old act (Public Service Company Law) did, this was not because of any intention to change the law in this respect, but because the decisions of the United States Supreme Court and of our Supreme Court had definitely settled the principles to be applied by the commission in arriving at such fair value, and they did not require elaboration in the statute." Section 20, art. 5, of the Public Service Company Law of 1913, and Smyth v. Ames recognized market value of bonds and stocks as one of the relevant elements to be considered by the commission in determining fair value.

We have thus, so far as the State of Pennsylvania is concerned, neither consistency nor continuity of the utility law.

I think a solution of this case might be for us to accept the commission's original finding of fair value, including working capital, of $21,566,085, and accept the alleged additions to the utility's property since 1938, in the net amount of $4,334,096, providing it is stipulated that this amount represents capital investment and not expensed items. We would thus have a rate base of $25,900,181, with an allowable return of 6 1/2 per cent. This would be adequate for all purposes, and would represent fair value determined in accordance with the law.

ROSS, J., joins in this dissent.

¹ "The argument for insisting upon the necessity for an independent judicial determination of findings of fact establishing values can be neatly stated in the form of a syllogism. Rate-making is an appropriate exercise of the legislative power provided that the rates are not confiscatory. Whether or not they are confiscatory depends upon the correctness of the finding as to value. The facts relating to value must thus be independently found by a court in order for a court to conclude that a particular legislative act was within the legislative power; otherwise the legislature would itself be finding the facts upon which the very exercise of legislative power depends. It was thus not enough for a court to satisfy itself that the trier of the facts, the administrative, had followed the correct rules as to valuation. Instead, the actual determination of value had to be made by the court": The Administrative Process, James M. Landis, pp. 127, 128. See OhioValley Water Co. v. Ben Avon Borough, 253 U.S. 287,40 S. Ct. 527, 64 L. Ed. 908.

² Utility's average annual earnings for 10 years preceding rate increase (4173a, 4191a) ................... $1,010,206.60

Utility's own estimate of annual earnings in justification of increased rates (2763a) ............................. 708,295.04

Annual earnings allowed by commission's original order of December 7, 1942 (3721a) ........................... 1,401,796.00

Annual earnings allowed by commission's order of February 16, 1944, after case remanded by this court (4364a) ..................... 2,528,500.00

The commission originally found that the Standard Oil Company was the sole owner of the utility, and that the total invested capital was $12,744,126. (3563a) The commission did not consider invested capital as being a direct factor in fair value determination, but it did point out that such capital performed a very important function by showing at what point a fair value finding would work a hardship on the utility's owners.

³ The Federal Natural Gas Act of 1938 and the Pennsylvania Public Utility Law of 1937 are similar in some respects.