169 Pa. Super. 400 | Pa. Super. Ct. | 1951
Lead Opinion
Opinion by
This case involves the intrastate rates of the Bell Telephone Company of Pennsylvania (hereinafter called Bell) as fixed by the Public Utility Commission. The tariffs originally filed were suspended by the' Commission, ánd after extended hearings the Commission rendered its report and opinion on October 17, 1949. Bell filed appropriate tariffs according to that order, and the city of Pittsburgh and others appealed. The appeals were argued before us, and on our own motion we directed a reargument. The figures used herein are rounded off.
All the shares of stock of Bell are owned by the American Telephone & Telegraph Company, and the latter also owns 99.8% of the shares of Western Electric Company and 50% of the shares of Bell Laboratories (the remaining portion being owned by Western Electric Company). A. T. & T. operates in 45 states what is known as the “Bell System.” Its balance sheet for 1948 shows capital, surplus and undivided profits of 13,092,000,00o.
The Commission made an allocation between interstate and intrastate property and revenues and expense. It found as of December 31, 1948, that the fair value of its physical property used and useful in Bell’s intrastate service was $410,000,000, including $6,200,-000 for cash working capital
It must be recognized that there is always the desire of the utility to get as large a return as possible; and that likéwise there is a desire on the part of the ratepayer to buy as cheaply as possible. Only the Commission can stand between the public and the utility. It is almost the only protection which the public has. And we make this observation because the testimony of Bell was that its cost to prepare this rate case was $975,000, — and this exclusive of the salaries of its regular employes. The Commission allowed $458,000 as intrastate expense for preparing the case. No protestant
By tbe Act of 1937, 66 PS §1437, this Court is bound by tbe findings of fact of tbe Commission if there is evidence to support them. It is only where the utility appeals on the ground of confiscation that we may make independent findings; and confiscation is not involved here. We cannot reverse except for errors of law.
We do not propose to go into all the questions raised on this appeal, but treat only those which we consider merit discussion in the light of the factual findings (by which we are bound). In other respects than noted herein, the Commission is sustained.
L
26-MONTH AVERAGE PRICES.
Under Equitable Gas Company v. Pennsylvania Public Utility Commission, 160 Pa. Superior Ct. 458, 463 et seq., 51 A. 2d 497, and the cases therein cited, the Commission must consider “reproduction costs of the property, based upon the fair average price of materials, property and labor. . .” This reproduction cost is merely one of six elements entering into the determination of the fair value of the physical property. It is solely for the Commission what formula it shall use in determining fair average prices. The Commission determined that a 26-month average price should be applied. Inevitably it is influenced by whether the future holds an increase or decrease in prices. If prices were on a constant level, the reproduction cost would be at current or spot prices, less depreciation. Where the levels are inconstant the judgment of the Commission governs and we cannot substitute-our discretion for it: Blue Mountain Telephone & Telegraph Company v. Pennsylvania Public Utility Commission, 165 Pa. Su
II.
ADDING $6,200,000 TO THE PAIR VALUE OP BELL’S PROPERTY AS CASH WORKING CAPITAL.
The Commission added to the present rate base $6,-200,000 as cash working capital. By this allowance the utility had neither more nor less cash than before, for the fair value, or the rate base, concerns only the physical assets of the corporation; that is, neither cash nor current assets are considered. When the cash working capital allowed is added to the physical valuation of the utility, the result is that the utility is permitted to earn 6% on what is but a hypothetical amount, and this without regard to the cash position of the utility.
The whole question of including working capital in a public utility rate base needs to be reexamined. One of the earliest cases in Pennsylvania is Cheltenham & Abington Sewerage Company v. Public Service Commission, 122 Pa. Superior Ct. 252, 186 A. 149, where a sewage disposal business was allowed working capital of $2,500 to be added into the rate base of $197,000. This practice has been followed in a number of other cases, in some of which the doctrine was probably extended farther than it should have been.
As time went on, there grew up a regular practice by the Commission always to allow a fund for Cash working capital and to include this in the rate base. Primarily this was to take care of the needs of current expenditures over the period of any time lag; but in some cases the Commission has allowed it regardless of any time lag.
We are of the opinion that such allowance in the rate base is not something to which the utility is ipso facto entitled. The matter of the 24-day time lag in the present case must be viewed in connection with other funds of Bell, particularly cash and current assets, which ought to be credited against the cash working capital if such is needed. In other words, Bell is not entitled to “take the cash and let the credit go.” In the 1948 balance sheet of Bell the excess of the cash and current assets over current liabilities is $3,000,000. On any amount to be allowed for working capital, the Commission must consider the excess of cash and current assets over current liabilities as averaged over a period of not less than 26 months (the period of time used by Bell in fixing the reproduction value of the plant).
This $6,200,000 allowance enables the utility to collect from its customers (at the 6% allowed return) the sum of $372,000. A. T. & T., the parent company, has been making loans to Bell at 2%%. It is also notorious that short term loans to a corporation of the wealth of Bell can be made at 2%%, — with the lender well pleased with the bargain. Thus if cash working capital is needed it can be obtained at a cost of $155,-000, instead of the imposition of $372,000 upon the ratepayers. ■ ■
No good reason exists for imposing such a charge on the ratepayers except the custom mentioned, plus
Likewise, in addition to the excess of cash and current assets over current liabilities, the Commission should have examined what other cash is ordinarily in the possession of Bell. For instance, the utility set up and the Commission allowed a contemplated expenditure of $12,900,000 for income taxes. As we read the record and the various exhibits, this is not segregated, but is in the nature of a budget item to keep expenditures from impinging upon future tax liabilities. Income taxes are paid in installments for a past period, and there certainly must be available a large amount of cash which can be used temporarily to take care of the time lag, and which can be restored at the expiration of 24 days. We do not agree that the epithets of accounting can affect this matter.' There may be, however, some occasion for Bell to make. short term
For rate making the Commission properly made a separation of the interstate and intrastate business of this utility. But the interstate business of Bell produces a large amount of money which goes into the Bell treasury and is not segregated. If there be a necessity for cash working capital for the interstate business (in this case set up as $800,000); — there is, nevertheless, a large fund available.
Likewise the Commission should examine all other sources of cash “banked” or included in other items of Bell’s statement; and other matters pertinent to the issue.
In connection with the cash working capital, and also in connection with the dollar return allowed Bell, the Commission should reexamine the tariffs which were effective as of December 31, 1948. These tariffs have been in force for a considerable period of time. The Commission’s approval of the tariffs was in the nature of a prophesy, and experience may now be substituted therefor, and a determination made whether they have produced a dollar return above that allowed by the Commission. In such reexamination the Commission will take such additional testimony as is necessary, and make proper allowance for any new business occasioned, through additional facilities and construction, and similar matters.
The finding allowing $6,200,000 cash working capital is reversed.
III.
PENSIONS.
In 1913 A. T. & T. set up a pension plan for its employes. It is what may be called a horizontal system, in which the amount of the pension is fixed according
When the pension plan was started, pensions were paid as they accrued. In other words, there was no “fund” but the plan was financed on a pay-as-you-go basis, the pension payments being charged to a balance sheet reserve account, which was kept at its initial level by charging to operating expense 'annual additions, which were considerably below 2% of the annual payroll.
A. T. & T. was one of the earliest corporations to set up a pension plan and is entitled to great credit therefor. When set up in 1913 there was no experience to furnish a guide. The percentage of the annual payroll gradually increased, and by 1926 it was recognized that eventually it would rise as high as 12%. In 1927 A. T. & T. formally set up a trust fund of $35,000,000, of which $5,000,000 was set aside to cover pensions for the then retired employes, and the remaining $30,000,-000 was deposited, interest being derived therefrom.
But on August 10, 1926, Comptroller Heiss of the A. T. & T. gave a written report to his company concerning the increased past service liability, and advised the company to take steps to prevent it mounting. The report called attention to the fact that, it would he unfair to burden present consumers with past deficiencies. In 1928 George Buck, consulting actuary to A. T. & T., advised the initiation of freezing payments hereinafter explained.
If the plan had been actuarially sound, the fund would have amounted to some $177,000,000 in 1927, made up of payments during the prior years, and rep
In 1937 there was deposited in the fund an amount equal to interest at 3% on the UAL, so as to “freeze” the UAL at its existing level.
In the instant case the Commission allowed $6,000,-000 as a part of the operating expenses of Bell, being Bell’s share of the freezing payments in connection with the UAL. It is perfectly apparent that the effect of the allowance of freezing payments (from 1927 on) was to relieve the consumers of that period, and to place all of that burden on the consumers from 1948 forward.
Whether called a mistake of management, an unwise action, or an error in judgment, it is still a fact that the original pension plan in 1913 was unsound. Nevertheless, because there was a lack of experience with pension funds in industry as a whole, we are of the opinion that Bell should not be charged with the consumers’ load from the year 1913 to 1927.
But when the year 1927 came, A. T. & T. knew that freezing payments would have to be made. They were not initiated until 1937, and possibly only then because in that year Congress enacted income tax legislation favorable to corporations making such payments to a pension plan. Since the. freezing payments were not made until 1937, it is beyond all doubt that the consumers from 1927 to 1937, and from then forward, escaped the cost which should have been borne by the revenues of Bell of Pa. and which was acquired by payment of the rates by the consumer. It also follows that past consumers escaped the increased cost not only from 1927 to 1937, but escaped all the increased cost until 1941, when the full freezing payments were
The present consumers, by means of an increased rate or tariff, cannot be saddled with the deficiency in the payments tó the pension fund running from 1927. By the action of the Commission this $6,000,000 freezing payment goes into the increased rates of the new tariffs. If the plan had been on an actuarially sound basis in 1927, the ratepayers (presumably) each year thereafter would have contributed a larger sum than they did, and the present ratepayers would be relieved of a considerable portion of that which was the burden of the prior ratepayer.
Whatever was the cause of the original decision in 1913 to place the fund on a pay-as-you-go basis; or whatever was the cause of A. T. & T. not going on an actuarially sound basis in 1927; — it is certain that such decisions were not of the ratepayers. The longer the freezing payments were delayed, the larger the payments had to be.
A very careful and clear statement of all of the questions involved appears in 64 Harvard Law Review 833, with annotations. We have adopted much from this article, which annotates the various decisions of the- commissions and courts.
One view allows the freezing payments to be charged to current expense, but such decisions consider only that the expenditures are needed to maintain the solvency of the fund.
We therefore remand this matter to the Commission to take such evidence as may be necessary to determine what part of the freezing payments made from 1927 through 1948 should have been borne by the consumers prior to 1948, and to reduce the amount of $6,000,000 (allowed as an expenditure to Bell) by the sum thus found.
The decision of the Public Utility Commission is reversed, the record is remanded for the taking of tes
Company Exhibit 51, page 25.
Company Exhibit 20-A, page 1.
Company Exhibit 20-A, page 2.
3299-a, 3300-a.
With his usual clarity, the then counsel for the Commission stated: “The fixed unfunded reserve of $22,800,000 in 1941 and $21,300,000 in 1948 may be described as the additional amount which would have been in the pension fund if full accrual payments had been made to the trustee from the inception of business. Stated in another way, the fixed unfunded reserve in 1941 was the difference between the present worth of all then future pensions, for service prior to 1941, and the actual amount in the pension fund in 1941. The ‘freezing’ payment is the amount that the fixed unfunded reserve would have earned, at the assumed interest rate of 3 percent, if the unfunded reserve had actually been funded in 1941.”
On'a pay-as-you-go basis we glean from tbe record that'the pension-expense would vary" from $103,000'-in 1941 to $182,000 in •1948; on'the actuarial basis the variance was from $2,000,000 in 1941 to $5,600,000 in 1948.
In addition to the cases cited in 64 Harvard Law Review is the recent ease: Petitions of New England Tel. & Tel. Co., Supreme Court of Vermont, rendered May 1, 1951, 80 A. 2d 671.
Dissenting Opinion
Dissenting Opinion by
I dissent from that portion of the majority opinion which treats of respondent’s (intervening appellee’s) reproduction cost estimate based on 26-month average prices extending from April 1, 1946, to May 31, 1948. At the hearing on January 20, 1949, counsel for the Commission on the record requested respondent to present reproduction cost estimates based on 5-year average prices and 10-year average prices. This the respondent refused to do.
It is true that reproduction cost is merely one of the elements entering into the determination of fair value of the property of a utility; and the weight to be given a reproduction cost finding is for the Commission. In arriving at a fair value of respondent’s property, the Commission used respondent’s estimate of reproduction cost. It does not appear that the Commission made an explicit finding of reproduction cost. It merely said: “Our finding with respect to a measure of value based upon depreciated original cost, related to intrastate operations, totals $358,121,177. Were we to apply the same ratio for accrued depreciation as we did with respect to original cost, the corresponding amount based upon 26 months’ depreciated reproduction cost would approximate $478,126,897.”
The Commission in its order also made this statement: “In determining the reasonableness of the rates of a public utility, we are required, in arriving at the fair value of property used and useful in the public service, to give consideration to reproduction cost of
The Commission did not approve or disapprove of the 26-month price average, and it did not find that such price average was fair or representative, or that the 26-month period was a fair period for such purpose. I am of the opinion that it must appear from a finding supported by evidence that the average prices used in a reproduction cost estimate covered a fair period and were representative and the “fair average price of materials, property, and labor as required by law.” Pittsburgh v. Pennsylvania Public Utility Commission, 165 Pa. Superior Ct. 519, 525, 69 A. 2d 844, 847. See Equitable Gas Co. v. Pennsylvania Public Utility Commission, 160 Pa. Superior Ct. 458, 463, 51 A. 2d 497. If such measure of value submitted by respondent does not comply with this requirement, it does not merit any consideration. Whether such measure of value as submitted meets the legal requirement is a question of law, and subject to review by this Court. To be fair and representative, average prices must relate to a fair period or cover a sufficient extent of time so that they do not reflect merely unusual or temporary economic conditions. Whether or not it is a fair period is a question of fact with which the Court will not interfere if the finding is supported by competent evidence. It is not a matter of discretion on the part of the Commission; it is a matter of evidence and a finding.- The use of
Furthermore, we recognize that some matters as, for example, accrued depreciation is essentially for the exercise of the Commission’s judgment. Pittsburgh, v. Pennsylvania, Public Utility Commission, supra, 165 Pa. Superior Ct. 519, 526, 69 A. 2d 844; Pittsburgh, v. Pennsylvania Public Utility Commission, 168 Pa. Superior Ct. 95, 108, 78 A. 2d 35. And, in forecasting probable future revenues under a given tariff, the Commission must necessarily have the power to exercise its own judgment “upon a view of all the relevant circumstances.” Pittsburgh, v. Pennsylvania Public Utility Commission, supra, 168 Pa. Superior Ct. 95, 106, 78 A. 2d 35, 40. But I think the statement in the majority opinion to the effect that the judgment of the Commission is supreme whether the future holds an increase, or decrease in prices may be misconstrued and misapplied. In finding the present fair value, future values, greater or less, are not part of the picture.'
In Equitable Gas Co. v. Pennsylvania.Public Utility Commission, supra, 160 Pa. Superior Ct. 458, 466, 51
In Pittsburgh v. Pennsylvania Public Utility Commission, supra, 165 Pa. Superior Ct. 519, 525, 69 A. 2d 844, 847, we said: “Notwithstanding its disapproval of five year average prices and its conclusion that they were unrepresentative, the Commission gave weight in determining the rate base to reproduction cost based on such averages. Either five year average prices were representative and entitled to be used in a finding of reproduction cost in this case or they were not.”
In Blue Mountain Telephone & Telegraph Co. v. Pennsylvania Public Utility Commission, supra, 165 Pa. Superior Ct. 320, 67 A. 2d 441, reproduction cost based on 10-year average prices as a standard for reproduction costs was affirmed by this Court.
The Blue Mountain case furnishes a striking contrast with the present case. In that case the Commission resorted to 10-year average prices in finding reproduction cost in the amount of $330,300. In the present case the Commission allowed a 26-month price average covering a. relatively high period of price levels, and accepted respondent’s estimate of reproduction cost based thereon. Respondent’s- reproduction cost estimate depreciated apparently used by the Commission was- approximately $478,126,897. Respondent' is- a wholly owned subsidiary of the American Telephone -& Telegraph Company, a multibillion dollar corporation. The majority opinion has this' significant statement
I am also of the opinion that a 6 per cent rate of return allowed by the Commission on a fair value finding of respondent’s property is arbitrary. In Blue Mountain Telephone & Telegraph Co. v. Pennsylvania Public Utility Commission, supra, 165 Pa. Superior Ct. 320, 329, 67 A. 2d 441, 446, we said: “Appellant vigorously contends that it is entitled to a 7.25% return, on the opinion evidence of the appellant. Under the circumstances here existing no fault can be found with the Commission for fixing the rate of return at 6%.” If the Blue Mountain Company, with a fair value of $325,000 requires only a 6 per cent return to attract capital and to keep its enterprise stable and profitable, certainly an allowance of 6 per cent return for respondent is unconscionable. In its order the Commission said: “A fair return must enable respondent to maintain its credit and attract necessary capital. Respondent’s financial reputation and ability to maintain its general credit or attract new capital is greatly enhanced by its inclusion in the Bell System family which the United States Supreme Court has characterized as no ‘ordinary public utility,’ Smith v. Illinois Bell Telephone Co., 282 U.S. 133, 161 (1930). As an integral part of the nationwide Bell System, respondent not only has unique advantages' in obtaining credit or new capital, but through affiliated sources, of production and research respondent has immediate access
In remanding the record to the Commission for further consideration, we should require the Commission’s reconsideration of reproduction cost and rate of return; the fair value of respondent’s property for rate making purposes and the allowable return from the tariffs should be revised to comply with the evidence- and the law.