1 Pa. Commw. 300 | Pa. Commw. Ct. | 1971
Opinion by
This is an appeal by the City of Pittsburgh and two individuals
This order, which set the minimum prices for certain milk products regulated by the Board and which affects a population of approximately three million people in western Pennsylvania in Milk Marketing Area No. 7 (comprising 10 western Pennsylvania counties in their entirety and three counties partially), came as a result of the filing of a petition on May 11, 1970, by 27 dairy dealers (which companies comprise the Greater Pittsburgh Dairy Association) seeking an increase in the price of regulated milk and dairy products.
Apparently there are a total of about 80
The City argues that the Board’s General Order No. A-762 is invalid, illegal, arbitrary, and contrary to law and that the Board’s adjudication was an abuse of the Board’s discretionary power, in that (1) the Board failed to carry out its duty to consider all the evidence presented and available; (2) the Board refused to permit the introduction of evidence on consumer prices in other market areas and refused any cross-examination on such matters; (3) the Board’s findings and the rec
The Board (which became the appellee on appeal), together with the dairy dealers (which became inter-venors on appeal), argue that the record does support the findings of the Board and that the entire proceedings together with General Order No. A-762 are in compliance with the law.
With the exception of a special increase in the wholesale discount rate (Official General Order No. A-753, effective June 1, 1970), the last overall order affecting the resale and producer prices of milk immediately preceding the order in question in this case was General Order A-725, which became effective October 15, 1969 (some seven months prior to the petition requesting another increase in milk prices in this case).
The effect of General Order No. A-762 is (among other price increases) to increase the price of Class 1 milk two cents per quart, four cents per half-gallon, and eight cents per gallon on both out-of-store
The constitutionality of the Pennsylvania milk regulation statutes has been tested and is well settled. The courts consistently have held them to be constitutional. Colteryahn Dairy v. Milk Control Commission, 332 Pa. 15, 1 A. 2d 775 (1938), Milk Control Commission v. Eisenberg, 306 U.S. 3, 46, 83 L. ed. 752 (1939), Penn Dairies, Inc. v. Milk Control Commission, 318 U.S. 261, 87 L. ed. 748 (1943), Milk Control Commission v. Lily-Penn Food Stores, Inc., 434 Pa. 189, 253 A. 2d 630 (1969).
The Milk Marketing Law (Act of April 28, 1937, P. L. 417, as amended by the Act of July 31, 1968, P. L.
, No. 294, 31 P.S. 700j-101 et seq.) at Section 906 (31 P.S. 700j-906) sets down the guidelines for the scope of inquiry by this Court, where it states: “Upon any appeal the court shall determine whether or not the order appealed from is reasonable and in conformity with law. The appellant shall have the burden of proving that an order of the board is unreasonable or illegal. If the court shall determine that the order is unreasonable or illegal, it shall remit the case to the board with directions to reform the findings or order, or to revoke the order, in accordance with the court’s
Before getting to the issues on which this Court must rule, we feel compelled to mention the Board’s view of its function vis-a-vis the persons who purchase and consume milk, because that view is relevant to a
This statement together with Board counsel’s argument that the absence of members of the consuming public as protestants at the Board’s hearings somehow supports an increase in the price of milk, invite the inference that the consumers’ interests received scant consideration in these proceedings. In a determination of whether the consumers were entitled to more, we must examine the statute.
In referring to the statute, we note that, in the first section pertaining to milk control, the legislative purpose reads as follows: “In the exercise of police power of the Commonwealth, it is hereby declared that the production, transportation, manufacture, processing, storage, distribution, and sale of milk in the Commonwealth is a business affecting the public health and affected with a public interest, and it is hereby declared that this act shall be and is hereby enacted for the pur
In 1968 the title of the Milk Control Law of 1937 was changed to “Milk Marketing Law”, Act of July 31, 1968, P. L. . The purpose clause remained the same.
In Section 801 of the Act (31 P.S. 700j-801), which is the price fixing section, the Legislature reiterates its legislative intent on the subject of protection to the public, wherein it says, “The board . . . shall ascertain and maintain such prices for milk in the respective milk marketing areas as will be most beneficial to the public interest . .
In addition, the Legislature says in that same section, “The board . . . shall. . . maintain such prices . . . as . . . will best protect the milk industry of the Commonwealth and insure a sufficient quantity of pure and wholesome milk to inhabitants of the Commonwealth, having special regard to the health and welfare of children residing therein.” This same section directs the Board to set prices upon “all conditions” which will yield a reasonable return to the producer, at not less than the cost of production, and a reasonable return to the milk dealer or handler. We find nothing in the Act nor in the reported cases which support the proposition that anyone should receive any kind of preference over anyone else, or that there is no “authority” to protect the consumer’s cause.
From a reading of the statute, therefore, it is possible to break down the legislative purpose of milk price regulations in this state into three categories, each of which is entitled to equal consideration, as follows: (1) the producers of milk, (2) the transporters, proces-
It is not within the purview of this Court to make the decision on whether or not there should be any regulation of the dairy industry. Only the Legislature can do that, and it has consistently been the sense of that deliberative body to continue the regulation. Once that decision is made for us there must be compliance within the full meaning of the legislative intent. Halfway measures are not compliance.
PROCEDURE
In this case an organization representing twenty-seven dairy dealers filed a Petition requesting an increase in prices. Normally, and under the Board’s rules, they should have been required to go forward at the hearing to support their petition.
This was not done. Instead, the Board directed that its own witness (its Executive-Secretary) be called first. He was asked a total of twelve questions concerning (1) his identification, (2) the identification of his (including his staff) summary exhibit, and (3) the identification of the thirty dairy dealers chosen for his exhibit. He was not called upon to explain the details of his exhibit which ultimately was the basis upon which the Board made its findings.
Bather, the Board then permitted the dairy dealers’ counsel to cross-examine this Board’s staff witness, over
The procedure used in this case was improper in a number of particulars. We cannot understand how the Board’s staff could make a recommendation on costs of service and prices without first hearing the petitioners’ case. It is only after hearing, examining, and weighing the petitioners’ case that the staff of the Board can make an evaluation and recommendations to its Board. It was improper for the Board’s staff to prejudge the petitioners’ case. It could happen in a hearing such as this that the Board’s staff may want to revise its studies and recommendations, and this it cannot do under the procedure used in this case. This is not to say that calling witnesses out of order may not be proper, but rather that an administrative agency should not put itself in the partisan position of proving the case for those parties carrying the burden of proof.
Statistical Clarity
Any time a regulatory agency is called upon to set prices, rates, costs, or profits for a regulated company (or industry) it can do so only with statistics which have meaning and applicability. Usually this is done through a study of the total operations of the regulated company or companies over a test period. All test period statistics are the actual operation figures adjusted for known changes. Next, where the company is engaged in both regulated and nonregulated operations, it is necessary to break down the total test period reve
Any competent accountant familiar with the regulated business can determine the accounting methods which will give the Board a reasonably accurate guide to fixing prices within the statute. Whether the approach ought to be dollars, pounds of milk, or labor is realistically only a matter of what can stand the test of scrutiny and reasonableness under our administrative law procedures. So long as the agency has a record to support what it has done in its findings and conclusions, which permits a reviewing court to determine whether it has abused its discretion or committed an error of law, the courts should not interfere. But when an agency fails to carry out its obligations under the statute, the reviewing court has a duty to interfere.
We are well aware of the oft-quoted passages of Chief Justice Kephart in Colteryahn Dairy v. Milk Control Commission, 332 Pa. 15, 1 A. 2d 775 (1938), that in Pennsylvania milk regulation, allocations and separations are not used; but a careful reading of Col-teryahn indicates that the Court there was referring more to allocations by class of milk purchased from the producers, than to all phases of the industry, and was based upon the then existing economics of the industry. We do not read Colteryahn as restricting the use of allocations for every purpose in milk regulation for all time to come.
The milk industry has changed drastically from the time of Colteryahn in 1938. In those days the industry was fragmented and parochial; today it is big busi
The law does not remain static. It is a living thing, and when conditions change, the legislative intent must be read in the light of changed circumstances. Today the producer, dairy dealer, and seller are entitled to recover their costs together with a fair profit; the consumer is entitled to the lowest reasonable price, and all of this is implicit in the legislative intent to protect the public health and welfare.
With these general principles in mind, we now look at what transpired in this case to determine whether or not the Board carried out its duties and responsibilities as mandated by the statute.
CONSIDERATION 03? ALL CONDITIONS
The Board and the dairy dealers rely heavily upon the case of Colteryahn Dairy v. Milk Control Commission, supra, for the purpose of excluding evidence, but Chief Justice Kephart stated at page 27 (332 Pa. 15, 27) : “Any price must consider all the factors which, of necessity, enter into the conduct of the milk industry. The problem before the Commission in price-fixing is to provide a fair return to producer and dealer and to maintain a just consumers’ price ” (Emphasis added)
The record in this case discloses that the City was not permitted to enter into the record any evidence concerning any milk prices or practices in areas outside Milk Area No. 7, although the Board itself and the dairy dealers were freely permitted to introduce evidence concerning the prices for producers and dairy dealers in other states and earnings from all over the United States. Regardless of whether the excluded evidence would have had any effect on the outcome of the
Although we agree with the Board that it is not necessary (even though it might have been helpful) for the Board to consult with its Bureau of Consumer Affairs in malting its determinations in this case, it was error to prohibit the City from attempting to establish evidence on whether or not the Board’s staff did consult with the Bureau of Consumer Affairs in arriving at the staffs recommendations on the consumer prices which were set in General Order No. A-762.
Uniform System of Accounts
Before moving to the other statistical problems, we should at this point turn to the argument of the City that the Board has not to the date of this writing put into effect
There can be no question what tbe legislative intent was in passing this measure. Tbe long history of complaints on tbe administration of tbe milk pricing laws in this state has involved tbe deficiency of accounting in tbe milk industry, whereby one could not make a proper assessment or audit of tbe statistics offered. There can be no proper audit where all of tbe dairy dealers are left to their own discretion on accounting for revenues and expenses, especially when there is a problem of dividing those revenues and expenses between jurisdictional and nonjurisdictional items.
Most of tbe problems, discussed later, on statistical support for tbe Board’s findings would be cured by a uniform system of accounts.
Counsel for tbe Board boldy stated to this Court that even after carrying out tbe Board’s long-delayed compliance, tbe end result, which is shown in a booklet offered to tbe Court, entitled “Financial Reporting Instructions Manual for Milk Dealers to Become Effective in 1971”,
There is a difference between a uniform reporting system and a uniform system of accounts.
In a uniform reporting system tbe regulated companies or persons must transform their accounting records into a form of reporting as required by tbe regulatory agency.
In a uniform system of accounts all of tbe regulated companies or persons must keep their accounting rec
This, by the way, does not preclude a dairy dealer from keeping its own separate set of records if it desires to do so for tax or stockholder’s purposes, but under the uniform system of accounts approach to regulation, it must keep at least one set of records as prescribed by the regulatory agency. A review of the booklet which the Board offered to the Court as showing its compliance with Section 704 does not appear to meet these requirements, and so the Board as of this writing may still not have complied with the mandate of the Legislature. We do not specifically rule on this point inasmuch as the book was not specifically put at issue in this case.
The record is clear that the Board did not utilize the mandated uniform system of accounts for any purpose in this case.
The Board's Use of Statistics
In its Finding of Fact No. 17, the Board found that the “net sales”
This record indicates that during the test year of 1969, there was a milk price increase effective October 15, 1969, so that for the test year only two and one-half months of the increased price is reflected in the “net sales” figure. The problem becomes, obviously, why wasn’t the actual “net sales” figure for the test year adjusted upwardly to give effect to the October 15,1969, increase for the other nine and one-half months of the 1969 test period? According to the record, the
If that be the fact, then the increase found to be proper cannot be justified. If there was an adjustment to “net sales” for the October 1969 increase in revenues, it is not shown in the record. It is interesting to note that although the Board failed to increase revenues for the test period, it did increase the labor expense for the whole test period of 1969 in Finding No. 14. This matter must be remanded to the Board for clarification. This apparent error is a clear abuse of discretion.
Other examples of the gross inadequacies in the statistics used by the Board are the repeated admissions in the record of the inability of the Board’s witness to give the percentage of net sales, labor, revenue, and cost of products applicable to jurisdictional business. And then, there is a final admission on the part of the Board’s witness that the staff did not allocate between jurisdictional and non jurisdictional statistics at all. Under these facts the Board was not able to make any findings on jurisdictional prices.
Over 7% (or $6,000,000) of the “net sales” of the thirty dairy dealers were made out-of-state. Neither the staff nor the Board made any determination in this record on whether those sales were at higher or lower than Pennsylvania prices or whether they in any way affected the earnings and returns of the thirty dairy dealers used. Yet without this information the Board fixed increased regulated prices to adjust the revenues in an attempt to grant the dairy dealers a proper return.
All of these items must be substantiated by the Board on remand.
The Thirty Dairy Dealers Used
Although the Board chose thirty dairy dealers in Area. No. 7, and the dairy dealers chose eight dairy dealers in Area No. 7, as the number of dairy dealers which would be a cross section of the “normally efficient” ones of all of the eighty-some dairy dealers in Area No. 7, there is nothing in this record other than meaningless generalities to describe why these thirty or eight were chosen. The statute (Section 801) specifi
Because of tbe peculiar nature of regulating tbe prices to be charged by so many dairy dealers over such a large area of tbe State, it is understandable that it would not be possible to determine a cost of service for each and every dairy dealer. Therefore it is reasonable to utilize tbe statistics of some of tbe dairy dealers cbosen as a “cross section” of tbe “normally efficient” ones. Statistical difficulty does not preclude tbe Board from approaching an evaluation of such a conglomeration of figures in a way which will explain fully bow and why it made its determination.
If this creates very difficult accounting problems, those problems must be approached in a very technical, expert, and professional manner. Certainly tbe utilities of this State have as many difficult accounting problems as dairy dealers, but they have solved their allocation and separation accounting problems in a reasonable fashion with tbe help of a uniform system of accounts. Some natural gas utilities sell gas in more than one state and to interstate customers, as well as selling household gas appliances. Some electric utilities even operate whole nonelectric businesses, both regulated and not regulated. If utilities can properly describe, explain, and support tbe methods used in allocating revenues and expenses, there is no reason why tbe dairy dealers and this Board cannot do likewise.
We are long past tbe time when books and recoi’ds were kept by handwritten methods. Accounting and
This problem must be remanded to the Board with the direction that it establish, in a reasonable way, why the dairy dealers chosen are representative as the “normally efficient” ones. Under the present status of the record there is no way for a reviewing court to determine whether or not the Board in exercising its discretion has been arbitrary in its choice of representative dealers.
We note in passing that the statute also requires the Board to base producers’ prices on the operating statistics of a cross section of normally efficient producers of milk, and that producers’ prices should be determined on the cost of production plus a reasonable profit. In this case the Board made no findings on these statutory mandates and therefore on remand the Board will be required to determine whether the rising costs it finds in the cost of producing milk used as the basis for producer prices meet the statutory criteria. Furthermore, if the Federal Milk Marketing Orders mentioned in the Board’s adjudication in any way influence or determine the producers’ prices set by the Board, this should be explained by the Board.
Allocation
The record discloses no explanation of how the staff or the Board separated or allocated revenues and expenses between jurisdictional and nonjurisdictional items. The economic reasons given by Chief Justice Kephart in Colteryahn, supra, have substantially
The record in this case fails to disclose whether or not the nonregulated business of these dairy dealers, whose statistics were utilized by the Board, are involved in any losing nonregulated businesses. All we know with certainty is that the dairy dealers do engage in nonjurisdictional businesses. This is not to say that there could not be justification for a regulated sale to support a nonregulated sale under all conditions. What we do say is that until the record discloses the facts, the dairy dealer petitioners have not proven their case, and the Board cannot make conclusions upon which increased prices can be approved. It should be noted here that the Board did allocate the increased labor expenses “to controlled products” in Finding No. 14.
Fair Return
The statute states (Section 801) that the Board should determine “a reasonable return to the milk deal
We then refer to Table 14 of the Board’s own exhibit, entitled “Financial Earnings of Leading Dairy Products Corporations, by Years, 1954-1969”, which would indicate that on a national basis the return on “net assets” between 1954 and 1969 has never been more than 12.6 per cent, and for the year 1969 was 11 per cent. On Table 15 entitled, “Net Income of Leading Corporations for the Years 1968 and 1969”, the return on “net worth” for “dairy products” businesses in the nation was 11 per cent for the year 1969.
The question immediately arises as to where in the record is there any justification for a return on “net worth” 50 per cent higher than has ever been earned in the industry over the past 15 years. Either this is an unreasonably high return on “net worth” or there is a misuse of or double meaning to the Board’s use of “net worth” in its own exhibit. If we add the possible adjustment mentioned hereinbefore for the October 15, 1969 price increase for the applicable nine and one-half months (about $6,000,000 gross), then the return
In any event, the matter must be remanded to the Board for some justification or explanation.
General Order A-757
The record discloses that between the October 15, 1969, general milk increase and the filing for this new milk increase in this case, the Board issued another General Order No. A-757 on June 20, 1970. This order in effect increased the wholesale milk discount for those stores receiving 400 quarts or more per delivery. There is nothing in this record to indicate what effect that order will have on the cost of service statistics utilized in determining milk prices in this case. In other words, General Order No. A-757 changed the regulated price of milk, and unless there is something in the record to show that it did not affect the cost of regulated milk products or the earnings of the dairy dealers, then it should show by how much it did or will increase or decrease the cost of milk to consumers.
We agree with the Board that it would be improper to retry the issues involving the principle of permitting an increased wholesale discount to stores receiving more than 400 quarts per delivery; however, if that sales classification affects the prices under consideration, then it does become relevant. The record discloses that the reason for this special discount was to eliminate the practice of large supermarkets buying their milk supply in Ohio at a cheaper price and transporting it to Pennsylvania. Inasmuch as there is no adequate explanation or support for this item and what effect it has on the prices for regulated milk, this matter will have to be justified and explained on remand.
In connection with the Board’s refusal to permit the City to introduce consumer prices and evidence from areas outside Milk Marketing Area No. 7, it should be remembered that in the case of Colteryahn Dairy v. Milk Control Commission, 332 Pa. at p. 31, Chief Justice Kephabt said: “Prices in other areas should not be taken as a guide unless it appears from the record that theré is a fair comparison under similar situations and conditions.” (Emphasis added) As stated before, although the Board utilizes the Colteryahn case to eliminate such evidence, the statement of Chief Justice Kephabt is clear that such evidence should be permitted, and that only after all factors affecting the pricing of milk are permitted on the record can such a “comparison” be made. It was error to prohibit this kind of information to be presented to the Board. It might very well be that such information would not be used by the Board, but until it is offered and placed in the record, that determination cannot be made.
Summary
We have concluded that the Board did not carry out its statutory duty to consider all of the evidence available in keeping with the legislative intent to protect all the parties involved in a milk price hearing, i.e., producers, dairy dealers, handlers, and consumers.
The case must be remanded to the Board for further hearing and consideration in conformity with this opinion. Without intending to limit such rehearing, but for the purpose of aiding the Board, the rehearing should include:
a. A cost of service study related to a test period with all statistics being either actual or adjusted with satisfactory explanation for such adjustments. (1) revenues and expenses should be adjusted (again with ex
b. In choosing a cross section of normally efficient dealers in Milk Marketing Area No. 7, there must be an explanation for such choice.
c. The record should show a breakdown of the total cost of service statistics into jurisdictional and non-jurisdictional items (e.g., plant equipment, facilities, services, revenues, expenses, etc.). (1) All allocations must be explained and supported in the record.
d. The Uniform System of Accounts presents a peculiar problem. We have determined in this case (as well as in G. S. F. v. Milk Marketing Board, supra) that the matter should be remanded for compliance with the legislative mandate. However, in the G.8.F. case the ordered increased milk prices were permitted to stand. Here we cannot permit that to happen because the record indicates that the dairy dealers’ present earnings may be adequate, based upon a possible adjustment to “net sales” as explained above. Therefore on remand we direct the Board to hold a separate hearing, as soon as possible under its rules, restricted solely to the question of whether the Board’s use of $107,196,450, as “net sales” does or does not reflect an adjustment for the test period figures used (the year 1969) for a whole year under the prior milk price increase of October 15, 1969. We expect the Board to complete the hearing restricted to this matter of “net sales” figures with an adjudication on or before May 1, 1971. If it is determined that the “net sales” figures do include all proper adjustments so that it represents the realistic revenues received for the test period, then the prices set in General Order No. 762 will be permitted to remain effective during the rehearing period. If such a hearing indicates that no adjustment has been
It is our intent here to assure the dairy dealers that they will not earn less than permitted under the statute during the rehearing. Therefore we direct first a rehearing on “net sales” and thereafter a rehearing on the remaining matters.
e. The record shall disclose an explanation of the terms “net sales”, “cost of sales”, “net worth”, and “employed capital”.
f. The Board must make findings on all items required by the statute, e.g.: (1) that the prices set for producers is not below the cost of production plus a reasonable profit.
g. The record must support a finding that the wholesale discount rate is justified under the statute, and what effect, if any, it has on the test period statistics.
h. The Board shall receive all evidence and testimony relevant to the issues involved in milk pricing hearings and shall have the prices set “upon all conditions affecting the milk industry” as provided in the statute.
i. On all matters pertaining to the Uniform System of Accounts the Board will embark immediately to comply with the legislative mandate, and except for the special hearing described in paragraph (d) of this summary, all other rehearings shall be in accord with Section 704 of the Act (31 P.S. 700j-7Q4).
At the rehearing hereon, the petitioners shall be required to go forward to support their petition, and the intervenors and staff of the Board shall thereafter proceed to offer such evidence and testimony as may be proper.
Accordingly, we enter the following
Now, March. 5, 1971, it is hereby ordered that the record in this proceeding be remanded to the Milk Marketing Board for further hearings consistent with this opinion; with the prices as fixed in Official General Order No. A-762 to remain in effect consistent with this opinion.
The City Solicitor and Assistant City Solicitor of the City of Pittsburgh.
The record is not clear as to the total number of dairy dealers in the new Area No. 7. Even the Executive Secretary of the Board was not certain of the number, which, according to the record, could be anywhere from 80 to 107.
In the parlance of the milk industry, “out-of-store” or “cash and carry” purchases are those made by a customer in a retail store. “Wholesale” or “in-store” purchases are those made by the store from a supplier, usually a dairy dealer. “Retail” or “home-delivery” purchases are those made by the customer when delivery is made, usually at his home.
There is no comparable percentage on a dollar basis anywhere in the record.
The new Financial Reporting Manual will become effective 90 days after December 31, 1970.
Section 704. “The board shall, after reasonable notice and hearing, establish systems of accounts (including cost finding procedures) to be kept by licensees and shall prescribe the manner and form in which accounts are to be kept Every licensee shall establish such systems of accounting and shall keep accounts in the manner and form required by the board in order to facilitate the costs studies provided for in section 801.”
Now a matter of public record with the Board.
This is not something new or novel. Utilities have for years used such a system with great benefit to themselves as well as to all others concerned.
Nowhere in the record is there a definition or description of “net sales”. What the amount of gross sales might be is left to the imagination. What is included in “net sales” is anyone’s guess. The only adjustment made to “net sales” was in the amount of $152,484 for nondairy sales. In Finding No. 13, the Board says that “total sales” are “net sales”, hut this must be an error left unexplained.
Apparently the Board did not use the dairy dealers’ statistical exhibit inasmuch as it is not mentioned in the adjudication.
