9 A.2d 447 | Pa. Super. Ct. | 1939
Argued April 25, 1939.
The magnitude of the record in these appeals — nearly ten thousand printed pages — is out of all proportion to the size of the utility involved or the field of its operations; and those responsible for its unnecessary expansion should be visited with a share of its cost. Where, as in the Scranton-Spring Brook Water Company cases (
This is a rate case. It was complicated, and to some extent delayed, by proceedings for the acquisition of the plant, (1) by a larger company1 and (2) by the borough of Brookville.2 It began on August 13, 1929, *331
with the filing of a complaint by J.B. Stewart et al. alleging that the rates charged by Solar Electric Company, hereinafter called Solar, or respondent, were excessive and unreasonable, and praying for the reduction of the company's rates so as to return not more than seven per cent upon the fair and reasonable value for rate making purposes of its property used for the convenience of the public. This was entered to Complaint Docket, No. 8126. At the time this complaint was filed there was pending before the commission an application for the sale of all the property and franchises of Solar to Penn Public Service Corporation, or its successor, Pennsylvania Electric Company, hereinafter called Pennsylvania Electric. Some time later the Borough of Brookville was permitted to intervene as a party complainant. As the complaint affected rates that had been in force without objection for a long period of time the burden was on the complainants to sustain their complaint. An answer was duly filed by Solar, but a hearing of the matter was delayed pending a decision of the question whether the commission should act upon the application for approval of the sale of all the property and franchises of Solar to Pennsylvania Electric before hearing the complaint. This court decided in
Accordingly hearings on the rate case were begun on September 30, 1931. An inventory and appraisal made by the J.N. Chester Engineers, as of August 31, 1931, was introduced by the complainants. Two separate appraisals showing the reproduction cost, (1) new and (2) depreciated, of respondent's property were introduced by the respondent, one made by E.D. Dreyfus and the other by Maurice R. Scharff, both qualified engineers, based on an inventory made by Mr. Dreyfus and checked by Mr. Scharff. The Chester inventory *332 differed in material respects from that used by Dreyfus and Scharff and omitted some essential items of property contained in the latter. The engineer who testified for the complainants in support of the Chester Engineers' appraisal was Daniel E. Davis, so in referring to that appraisal we shall distinguish it as the Davis appraisal or valuation.
Under date of April 14, 1936, the commission entered an interim order requiring the parties to bring down their inventories and appraisals, submitted as of August 31, 1931, to December 31, 1935. These were submitted at hearings held on August 18 and 19, 1936.
On June 1, 1937 the Public Service Company Law was superseded by the Public Utility Law, approved May 28, 1937, P.L. 1053. On June 8, 1937, the Public Utility Commission, of its own motion, instituted an inquiry and investigation of Solar's rates, to Complaint Docket, No. 11404, which was, later, on motion of the attorney for the commission consolidated with the prior complaint, No. 8126. Section 312 of the Public Utility Law provides that in any proceeding upon the motion of the commission, involving any proposed or existing rate of any public utility, the burden of proof to show the rate involved is just and reasonable shall be upon the public utility. We are of opinion that this change in the law applied to the consolidated complaint in these cases.
At the same time, the new commission directed the complainants and respondent to bring down the data, relating to the inventories and appraisals of respondent's property, from December 31, 1935 to June 1, 1937. This was done by respondent and placed in the record at a hearing held on June 30, 1937. The inventory and appraisal furnished by complainants was notbrought down to June 1, 1937, but was trended to a date as of May 31, 1937 and placed in the record at a hearing held on October 29, 1937. This did not include additions *333 to the inventory since August 31, 1931, of the net value of $11,825.
Before the taking of testimony was concluded, the commission, under date of October 5, 1937, acting under the authority given it in section 310 of the Public Utility Law, fixed a tentative fair value of respondent's property at $200,000, and entered the following order: "It is ordered: That temporary rates be and the same are hereby imposed under section 310 of the Public Utility Law and that Solar Electric Company, respondent, file with the Commission on or before October 15, 1937, a new tariff, to become effective upon one day's notice, which shall effect a reduction in its gross operating revenues of not less than $11,300 per annum."
A review of the interim report, which is found in the Record, Vol. 1, pp. 33a to 51a, shows a careful consideration by the commission of the evidence then in the record, including not only the book value assigned to fixed capital, as disclosed by the books of the company, but also the reproduction cost of the property and the accrued depreciation, and this brought it within the constitutional requirements necessary for such a temporary rate order, as laid down by Mr. Justice REED, speaking for the Supreme Court of the United States, inDriscoll et al. v. Edison Light Power Co.,
Testimony before the commission was concluded on October 29, 1937. On July 5, 1938 the commission filed its report and order nisi. In this report, the commission wholly disregarded the evidence as to reproduction cost new of the utility's property used and useful in the public service, less depreciation, although, by its order and the order of its predecessor, the utility had twice been required to bring down its estimates and appraisals of such reproduction cost and depreciation, first, from August 31, 1931 to December 31, 1935, and second, to June 1, 1937; and also irrespective of the fact *334 that, in entering its interim order of October 5, 1937, the commission had used and relied upon, to some extent, the estimates and appraisals of reproduction cost thus brought down to present values; and, instead, it stated that, "It is the opinion of the Commission that the original cost of existing property, prudently invested, used and useful in utility enterprise, without any deduction for accrued depreciation, represents the money which has been invested and should, therefore, constitute a proper rate base" (111a). This it fixed at $143,765.57 and, with an allowance of $8836 for working capital and supplies on hand, it fixed the rate base at $152,601.57 (113a-114a) on which it allowed an annual return of 6%, or $9156. It also determined that the total annual net revenue to which Solar was entitled was $72,535, made up of $9156 aforesaid, plus operating expenses $54,539, annual depreciation, $2297, and taxes, $6543. It found that the operating revenue for the year 1936 and five months ended May 31, 1937 was $139,655.71 or $8215.04 per month; that on this basis the operating revenue for a twelve month period would be $98,580, which exceeded the allowable net revenue of $72,535, by $26,045, and it directed the respondent, Solar, further to modify its rates by an annual reduction of $14,745 in addition to the reduction of $11,300 provided for in its interim order of October 5, 1937 fixing temporary rates, and ordered it to file, post and publish a new tariff covering rates for electric service consisting of a "single schedule of block meter rates, applicable to all classes of customers, except street lighting" — instead of the company's division into domestic, commercial and power schedules — which was designed to produce the allowable annual net revenue of $72,535. Exceptions to this order were filed by both the respondent and the complainants. Except for slight modifications, not necessary to be recited, these were dismissed on November 1, 1938 and a final order as *335 above set forth entered. Appeals were filed by both respondent and complainants.
Fair value is the thing which this commission and its predecessor were authorized by the legislature to ascertain. By Section 20 of Art. V of "The Public Service Company Law" of July 26, 1913, P.L. 1374, 66 PS Sec. 683, which was in force when the complaint in this *336 proceeding was filed, the public service commission was given power "to ascertain and determine the fair value of the property of every public service company," whenever it deemed "such valuation or determination" necessary or proper. That section also specifically enumerated certain matters to be considered by the commission "in ascertaining and determining such fair value", and to be "given such weight by the commission as may be just and right in each case", among which was "the reproduction costs of the property, based upon the fair average price of materials, property and labor." This section of the statute of 1913 was supplied by Section 311 of Art. III of the new "Public Utility Law" of May 28, 1937, P.L. 1053, 66 PS sec. 1151. Under it, fair value is still the thing the commission is authorized to ascertain and fix. The applicable provision of the new statute reads:
"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." (Italics supplied) 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.
As before stated, three reproduction cost estimates, new and depreciated, were received in evidence during the hearings in this case and used by the present commission *337 "to demonstrate the basis of [its] determination of [its] tentative calculation of the fair value of the property of respondent" for the purpose of prescribing temporary rates, effective October 15, 1937 (39a). However, in its final report of July 5, 1938, the commission described these estimates as "unsatisfactory, conjectural and without probative value." (96a).
In the course of that report (107a) the commission expresses its opinion that its predecessor, and incidentally the courts, had failed "to perceive the problem [presumably, of determining the fair value of a utility's property for rate-making purposes and fixing just and reasonable rates] from the investors' and rate payers' standpoint." It then gives expression to its intention to determine "the rate base . . . . . . in a manner somewhat different from that reflected in the orders issued in the past." In this connection the commission said:
"Heretofore the rate base has been determined generally by the commission on a basis of reproduction cost new less accrued depreciation. This formula produced a result arrived at entirely through approximations and theoretical calculations and, when determined, had no lasting usefulness, because of fluctuations in material and labor costs from year to year.
"The cost of reproduction as a determining factor in value had, it is true, been approved by a number of decisions, Smythv. Ames,
Then follows a statement by the commission of a number of alleged justifications for its determination to ignore established legal principles by abandoning *338 the beaten track of the federal and state decisions, blazing a new trail and setting up in this case its conception of the proper method of ascertaining and determining the basic figure upon which to calculate the return the owners of a utility are entitled to receive for furnishing service to the public.
In its order of June 8, 1937, the Public Utility Commission directed that "Using the estimates of reproduction cost new and depreciated, now of record, both principal parties . . . . . . submit [on June 30, 1937] revised estimates thereof, in the same form, [1] trended from the date of the original appraisal, August 31, 1931 to June 1, 1937, . . . . . . [2] trended from the date of the revised appraisal, December 31, 1935 to June 1, 1937, with consequent adjustments of overhead allowances."
It was in obedience to these directions that respondent submitted its revised estimates of reproduction cost, new and depreciated, trended to June 1, 1937, including *339 net additions to its property. The trend factors were agreed upon at an engineering conference with the engineers of the commission. The estimates of its witnesses, Dreyfus and Scharff, as to Physical Property of the respondent, follow:
Reproduction Cost Estimate of Physical Property by Edwin D. Dreyfus, (Exhibit R-10, (N.S.) Vol. XXI, p. 8965a).
Account No. Item New Depreciated
227 Land .................................. $800.00 $800.00 229 Power Plant Structures ................ 14,241.00 10,681.00 {232 Gas Engines {233 Electric Generators ................... 63,044.00 40,348.00 234 Other Electric Equipment .............. 8,950.00 7,608.00 236 Other Power Plant Equipment ........... 1,152.00 691.00 254 Rights of Way ......................... 116.00 116.00 256 Poles and Fixtures .................... 41,274.00 31,781.00 257 Overhead Conductors ................... 38,592.00 36,662.00 258 Overhead Transformers ................. 21,566.00 18,547.00 {259 Overhead Trans. Install. {260 Overhead Services ..................... 13,482.00 12,808.00 {266 Meters {267 Meter Installations ................... 21,607.00 17,286.00 273 Municipal St. Incan. System ........... 11,264.00 7,322.00 279 Other General Structures .............. 244.00 0 280 General Office Equipment .............. 3,493.00 2,550.00 281 General Stores Equipment .............. 913.00 712.00 284 General Garage Equipment .............. 720.00 0 285 General Laboratory Equip. ............. 282.00 211.00 286 General Tools Implements ............ 641.00 480.00 ----------- --------- $242,381.00 $188,603.00 Accrued depreciation .................. $53,778.00 Reproduction Cost Estimate of Physical Property by Maurice R. Scharff, (Exhibit R-4, (N.S.) Vol. XXI, p. 8953a).
Account No. Item New Depreciated
227 Land .................................. $800.00 $800.00 {229 Power Plant Structures {279 Other General Structures .............. 13,237.00 9,266.00 {232 Gas Engines ........................... 60,870.00 42,609.00 {233 Electric Generators 234 Other Electric Equipment .............. 8,925.00 5,355.00 236 Other Power Plant Equip. .............. 1,141.00 742.00 254 Rights-of-way ......................... 116.00 116.00 256 Poles and Fixtures .................... 38,913.00 29,185.00 257 Overhead Conductors ................... 35,504.00 31,954.00 {258 Overhead Transformers {259 Overhead Trans. Install ............... 21,377.00 18,170.00 260 Overhead Services ..................... 14,024.00 11,219.00 *340 {266 Meters {267 Meter Installations ................... 21,123.00 17,955.00 273 Municipal St. Incan. System ........... 10,344.00 7,241.00 {280 General Office Equipment {281 General Store Equipment ............... 4,405.00 2,775.00 284 General Garage Equipment .............. 720.00 0 285 General Laboratory Equip. ............. 282.00 197.00 286 General Tools Implements ............ 392.00 274.00 ----------- --------- $232,173.00 $177,858.00 Accrued Depreciation .................. $54,315.00 The reproduction cost estimate of Daniel E. Davis, put in evidence by the complainants, is not made up under the twenty-one account number items and titles used by the engineers for respondent, but for present purposes we may use complainants' Exhibit No. 1, (1937 Series) Vol. XIII, p. 6005a, trended from August 31, 1931 to June 1, 1937.
It does not include additions to the plant since August 31, 1931, amounting to $11,825.
Reproduction Accrued Cost New
Item Cost New Depreciation Depreciated
Power Plant and Equipment ..... $73,009.00 $66,823.00 $6,186.00 Distribution System ............. 116,710.00 47,270.00 69,440.00 ---------- ----------- ------------ $189,719.00 $114,093.00 $75,626.00 The details of the above figures under the item "Power Plant and Equipment" are as follows:
Accrued Cost New
New (1937) Depreciation Depreciated
Power Plant and Equipment Power House and Building .... $8,081.00 $4,670.00 $3,411.00 Retaining Wall .............. 1,442.00 1,317.00 125.00 Power Equipment 90 HP Bruce MacBeth ......... 8,231.00 7,931.00 300.00* 150 HP American-Crossly ..... 11,320.00 10,820.00 500.00* 250 HP Turner-Fricke ........ 14,976.00 14,376.00 600.00* 250 HP Bruce-MacBeth ........ 16,432.00 15,682.00 750.00* Switchboards, etc. ............ 7,930.00 7,730.00 200.00* Water Supply Cooling Tower .. 3,649.00 3,549.00 100.00* Misc. Power Plant Equip. ...... 948.00 748.00 200.00* ----------- ----------- ---------- 73,009.00 66,823.00 6,186.00
It is apparent from an inspection of the Dreyfus and Scharff appraisals of the physical property of respondent that the differences in the results reached by them *341 are not sufficient to justify a detailed analysis of the items in which they occur. It will be more profitable to compare the estimate of complainants' engineer, Davis, with the Dreyfus appraisal.
The controversy between the parties upon the question whether the "gas generating station" of appellant is used or useful in rendering service to the public, is sharply reflected in the Dreyfus and Davis appraisals. From the inception of the service down to September 17, 1928, appellant generated all its current at its own plant, but on that date entered into a contract to purchase its requirements from Pennsylvania Electric Company. In ascertaining "the book cost of fixed capital" as of May 31, 1937, the commission remarked:
"The commission concludes from the record in this case that the gas engine generating plant is not used or useful as an emergency, stand-by or reserve plant and we, therefore, exclude the gas engines, generators, and auxiliary equipment as being property not used or useful in the public service."
In this connection the commission made a tabulation (71a) of the book cost of the gas power generating plant as of May 31, 1937, under account numbers and titles comparable with the numbers and titles in the reproduction estimates. The following is a comparison of the commission's book cost estimate with the Dreyfus depreciated reproduction cost appraisal:
Account Commission Commission Dreyfus No. Account Title Amount Amount
227 Land .................................... $1,000.00 $800.00 229 Power Plant Structures .................. 3,500.00 10,681.00 {232 Gas Engines ............................. 36,153.97 .......... {233 Electric Generators ..................... 13,823.18 40,348.00 234 Other Electric Equip. ................... 5,361.58 7,608.00 236 Other Power Plant Equip. ................ 209.50 691.00 ----------- ---------- $60,048.23 $60,128.00 Pursuant to its above quoted finding the commission in its determination of a rate base "allowed the full cost of land and building to remain in fixed capital," *342 (74a) but "excluded the last four items noted above in the amount of $55,548.23."
A comparison of reproduction cost new estimates of Davis and Dreyfus of the items here involved may be thus stated:
Davis Dreyfus
Land and Building .................. 9,523.00 15,041.00 Equipment .......................... 63,486.00 73,146.00 --------- --------- 73,009.00 88,187.00 These tabulations indicate that it makes little practical difference whether the book cost or the depreciated reproduction cost basis be adopted in disposing of the controversy relative to the power plant. The commission excludes all the equipment, valued by it at $55,548, and Davis allows only a junk value of $2650 out of his appraisement of $63,486, or an elimination of $60,836.
The reason assigned by Davis for including only the salvage value of the equipment was set forth in the above quoted note to his estimate, "Salvage value only, due to fact that duplicate transmission lines, serving Borough, render generating plant unnecessary."
There is competent engineering testimony upon the record to the contrary. P.J. Morrissey testified (p. 4474a): "The transmission was adequate as a stand-by with the gas engine plant. The gas engine plant was a stand-by on the transmission line, whichever one could be used as the prime source of power."
Scharff testified (p. 3601a): "In my opinion, the company not only should not be required to remove its plant, but should notbe permitted to remove it, if it wished to do so, until the supply to Brookville is made to correspond with modern plants, applicable to a community of this importance, which would require an additional transmission line,3 from a separate source of *343 power there, in addition to this 6700 volt sub-station or the generating station, such transmission line to run through its entire length onto the pole line independent of the other line supplying the town, and also until the sub-station at Brookville is provided with at least one spare transformer; and until those conditions are realized, representing the minimum requirement for dependable supply on transmission lines into a community of the size of Brookville, the company should be required to maintain its generating equipment in readiness for service to meet the requirements in case of an interruption, due either to the Timblin sub-station going out of service or the present transmission lines going out of service, or the Brookville sub-station going out of service, or a single transformer in Brookville sub-station going out of service."
Upon an examination of the testimony we are of opinion that the equipment of the power plant should not be included in an estimate of reproduction cost at the figures appearing in the estimates of Messrs. Dreyfus and Scharff, but we are also of opinion that the portion of the order which totally excludes that equipment lacks evidence to support it. The plant, including the equipment, should be included in any estimate of reproduction cost at a figure representative of its value as an emergency, stand-by or reserve plant. Although not a part of the record at the time the testimony was closed, there is attached to and made a part of respondent's exceptions to the order nisi the affidavits of W.C. Sontum, superintendent of Pennsylvania Electric Company, and W.J. Utts, vice-president of respondent, to the effect that the plant was actually used on April 6, 7, 8 and 9, 1938, when the transmission *344 lines referred to by Davis and in the testimony were put out of service by a severe sleet storm, rendering it necessary to put respondent's power plant in service on April 8 and 9 for more than twelve hours on each day, during which it carried respondent's peak load consisting of 400 K.W.
Our conclusion is that the equipment should be included at fifty per centum of its depreciated reproduction cost as estimated by Messrs. Dreyfus and Scharff. This means that the Dreyfus total estimate of $188,603 must be reduced by one half of $48,647 (equipment items) or $24,324, making a net of $164,279. In the same way the Scharff total estimate of $177,858, must be reduced by one half of $48,706, making a net of $153,505.
If in lieu of the salvage value of $2650, stated by Davis there be substituted a similar estimate of $24,000 for the equipment, his estimate of depreciated reproduction cost of physical property would be approximately $97,000 plus $11,825, or $108,825.
We are of opinion that the order here appealed from, based, as it is, solely upon the commission's finding of the "original cost of fixed capital installed at May 31, 1937" and without giving any consideration whatever to the "reproduction cost" of the property as one of the factors to be taken into account in ascertaining its present "fair value", constitutes an "error of law" as that phrase is used in Section 1107 of Art. XI of the Statute of 1937,
From Smyth v. Ames,
In St. Louis O'Fallon Ry. Co. et al. v. United States et al.,
"`The elements of value recognized by the law of the land for rate-making purposes' have been pointed out many times by this court. Smyth v. Ames,
"`We hold, however, that the basis of all calculations as to the reasonableness of rates to be charged by a corporation maintaining a highway under legislative sanction must be the fair value of the property being used by it for the convenience of the public. And in order to ascertain that 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. What the company is entitled to ask is a fair return upon the value of that which it employs for the public convenience.'"
"In Southwestern Bell Telephone Co. v. Public ServiceCommission, supra, (287) we said: `It is impossible to ascertain what will amount to a fair return upon properties devoted to public service without giving consideration to the cost of labor, supplies, etc., at the time *346 the investigation is made. An honest and intelligent forecast of probable future values made upon a view of all the relevant circumstances, is essential. If the highly important element of present costs is wholly disregarded such a forecast becomes impossible. Estimates for tomorrow cannot ignore prices of today.' The doctrine above stated has been consistently adhered to by this court."
In the following cases the Supreme Court of the United States reversed the order of the fact-finding body as confiscatory because of the failure of the respective commissions to give due consideration to reproduction cost as an element in determining fair value: Bluefield Co. v. P.S.C.,
The case of R.R. Commission of California v. Pacific Gas Electric Co., supra, [
The case was reversed and sent back to the district court to pass on the question of confiscation. That court in an opinion by WILBUR, J., (
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. In Erie City et al. v.P.S.C.,
Reference is made in the briefs to the recent case of Driscollet al. v. Edison Light Power Co.,
It is equally significant that in the present case the commission in fixing the temporary rates prescribed by its interim order of October 5, 1937, expressly stated (39a), that the "estimates of reproduction cost new, less accrued depreciation," were set forth "to demonstrate the basis of our determination of our tentative calculation of the fair value of the property of respondent for the purpose of this interim order."
One of the grounds upon which the commission attempted to justify its refusal to give any consideration to the estimates of reproduction cost in fixing the final rates here in question was that they varied materially from each other. It would be difficult to conceive of a case in which there would not be material variations in the estimates of the engineers for the respective parties. In the Scranton-Spring Brook Water Company cases the estimates of the engineers for the complainants and respondents respectively were over twenty million dollars apart — see
In their discussion of the several appraisal estimates, counsel for the commission, after criticizing the Davis appraisal as already quoted, continued, "In making an inventory of the power house it does not appear that the contractor who made the estimate for Mr. Davis proceeded with sufficient thoroughness to ascertain the depth or width of the foundation, either of the structure or the engines. (R. 356a-358a). The testimony with regard to the classification of poles for the purpose of ascertaining depreciation is so theoretical and hypothetical as to be worthless. An extended quotation from that testimony and a discussion thereof is found in appellant's brief at pp. 185-216. As regards the amount of wire used in respondent's system, Mr. Davis and Mr. Johnson made frequent admissions of miscalculations and failure to make proper allowances, so that their estimates are open to serious question. (R. 1013a-1016a). . . . . .
"On the subject of accrued depreciation, it appeared to the Commission that complainants' witnesses had relied mainly on installation dates and theoretical formulae to compute expired life, and had not carefully and scrupulously related their calculation to the actual condition of the property. An estimate of accrued depreciation having such a basic defect is untrustworthy and misleading and must be rejected: Cheltenham Abington Sewerage Company, v. Public Service Commission,
It is self-evident that no reliance can be placed on an appraisal estimate where the inventory on which it is based is incorrect or incomplete or vitally deficient; such defects are almost impossible of correction; but where differences appear in the valuations put on correct inventories, they can be adjusted and a fair and reasonable valuation be arrived at. The differences in the respondent's engineers' appraisal estimates, as pointed out by counsel for the commission were chiefly of this type — (1) ignorance or disregard of local labor costs; (2) accrued depreciation; and (3) percentages allowed for overheads, referred to under a later head. These were matters that could be corrected and scaled down by the commission and its engineering force, and were wholly different from the defects in the complainants' appraisal pointed out in the commission's brief. The incurable defects in the latter furnish no reason for wholly disregarding the estimates of the respondent's engineers, prepared as directed by the commission and based on an inventory not seriously questioned.
Furthermore, from the very helpful argument of Mr. Wilson, present counsel for the Borough of Brookville, it appeared that where the estimates of the respective engineers related to items as to which there was no real dispute, the variation between them was not greater than would ordinarily be expected — they were in comparative agreement as to many items.
We find no indication in our new Public Utility Law that the legislature by its enactment intended to authorize the commission, as its agent, to discard, when ascertaining and fixing the fair value of the property of a utility, any or all of the established elements of fair value. No matter what economic theories the commission may have evolved to its own entire satisfaction, or how firmly it may be convinced that its predecessors and all the courts have, in its own language (107a), failed "to perceive the problem" from the proper point of view, it is still the duty of the commission, and our *351 duty, to "apply the law of the land to facts developed of record," until that law has been changed in a constitutional manner.
By section 1005 of Art. X of the Statute of 1937, 66 PS sec. 1395, the commission is charged with the duty of making findings "in sufficient detail to enable the court on appeal to determine the controverted question presented by the proceeding, and whether the proper weight was given to the evidence."
The commission having given no weight to the evidence of reproduction cost, and having made no findings relative to that cost, it becomes our duty to reverse the final order (S.W. BellTel. Co. v. P.U.C., supra; St. Louis O'Fallon Ry. Co. v. U.S. I.C.C., supra) because it is based upon an error of law.
Thus far we have discussed the commission's report on the basis of its assumption that the total book cost of fixed capital as reflected on the books of the respondent on May 31, 1937, $197,516.70, represented the actual original cost thereof, from which, in arriving at the `rate base', the commission deducted the amount invested in the generating plant, etc., as no longer used and useful. We are, however, of the opinion that the assumption is untenable and that the total book cost of fixed capital as reflected on the books of the respondent has not been sufficiently proved to be the original cost to justify its use as the rate base. It is admitted that no books were kept by the corporation from the date of its incorporation, January 20, 1897 to March 31, 1914, and from that date to 1925 we find that they were not kept in the manner directed by the Public Service Commission, and cannot be relied upon to show accurately the investment in the plant. In those cases in which we have discussed and upheld the use of original cost less depreciation as the measure of present value — see Clark's Ferry Bridge Co.v. P.S.C.,
The commission and the counsel for the complainants — appellants in No. 183 April Term, 1939 — have apparently wholly overlooked the compounding effect of plowing back profits into the business. To take a supposititious case, if a corporation with $10,000 paid in capital is successful from the start, that is, — as complainants contend is the fact in this case — has no lag in business such as to justify a special allowance for going concern value, and makes an annual and continuous profit of 8% on the money invested, but pays out nothing in dividends, putting back all its earnings, as soon as realized, into the business, at the end of nine years its plant will have invested not $17,200 but $20,000; and at the end of eighteen years, it will have invested not $24,400, but $40,000. By plowing back its earnings at 8% per annum, the original investment doubles in nine years and quadruples in eighteen years. And at the end of eighteen years it cannot truly be said to have earned on its investment an annual profit of 16-2/3% ($30,000 divided by 18 = $1667: 16-2/3% *353 on $10,000) but only 8%, because all the earnings were put back into the plant and immediately formed part of the invested capital, which was earning 8% per annum.
It was this oversight which contributed in large degree to the extravagant figures presented by counsel for the complainants in their briefs and at the argument as to the rate of interest earned by respondent.
Following the example of the Supreme Court of the United States in West v. C. P. Telephone Co.,
The provisions of the Act of June 12, 1931, P.L. 530, amending section 22 of the Public Service Company Law of 1913, that in every appeal taken involving a question of the reasonableness of rates, whether taken by a complainant or by a public service company, it shall be the duty of the court to consider the entire record of the proceedings before the commission and on its own independent judgment to determine whether or not the findings made and the valuation and rates *354
fixed by the commission are reasonable and proper; and that if the court shall determine that the findings or the valuations are unreasonable it shall remit the case to the commission with directions to reform the findings, valuations, and rates in accordance with the court's opinion; were not re-enacted or included in the Public Utility Law of 1937. Hence the situation in these respects remains the same as it was before the approval of the Act of June 12, 1931, supra, and as laid down by the Supreme Court of the United States in Ohio Valley Water Co. v.Ben Avon Boro.,
The average of the estimates of cost of reproducing the physical property, without considering the overhead expenses, of Dreyfus and Scharff, as adjusted upon the basis of 50% of the depreciated cost of the equipment in the power plant is $158,892. This we think is too high. The average of the estimates of Dreyfus, Scharff and Davis similarly adjusted is $138,261, which we are satisfied is too low. Our best independent judgment as to the reproduction cost depreciated, of the physical property, exclusive of overhead expenses and intangibles, is approximately $150,000. We are also of opinion that the working capital allowance, which includes supplies and materials on hand, made by the commission is too low. We are of opinion that a working capital allowance of $11,000 ($7000 for cash and $4000 for materials) should be made. *355
In Ohio Utilities Co. v. P.U.C.,
In addition, an organization must be maintained to represent the stockholders during the period of construction, to provide for the payment of expenses and oversee construction on behalf of such stockholders. A staff must also be gathered together ready to function when the plant is completed. There was abundant testimony in the record from which it could only be concluded that there were here items contributing to the fair value of the property. To disallow all claims on this account amounted to confiscation. However, such expenses are not to be confused with those which are usually considered in the category of going concern value. Dreyfus allowed 12.55% as the aggregate of these items, divided, engineering 5.22%, administration 2.08%, legal 1%, interest, taxes, etc., during construction 3.25%. Scharff allowed 11% made up of engineering 5%, administration and legal 3%, interest and taxes during construction 3%. Davis allowed 9% *358 made up of engineering 5% (deducting 3% for omissions and contingencies from 8% for all three items), administration 1 1/2%, interest, taxes, etc., during construction 2 1/2%. We find that 10% is a fair aggregate allowance for these items combined.
We take it to be settled that when reproduction cost is considered as it must be in determining present fair value, some allowance should be made under the head of cost of financing. InCity of Erie v. P.S.C.,
The items of intangible values which may be included under the head of cost of financing comprehend brokerage fees and the mechanical costs of issuing the securities, such as cost of preparing, engraving, printing, registering and distributing bonds, costs of preparing and recording mortgages and other documents, trustees' and counsel fees and expenses connected with the issuing of securities so as to comply with the security laws enacted for the protection of the investing public. There may not be included the interest or discount paid to the purchaser of the security for the use of the money. A utility which devotes its property to a semi-public service undertakes to supply all the capital necessary for the efficient execution of the plan. It is compensated for this service by an allowance of a reasonable net return described in utility law as fair rate of return. It may not be compensated twice for the same service: Cheltenham Abington Sewerage Co. v. P.S.C.,
The utility may supply all of the required capital without resort to borrowing or it may itself supply part of the capital and borrow the balance, sometimes hypothecating the property as security for the loan. In the latter case, the utility in effect guarantees the loan and takes the greater risk. The loan is usually made at a lower rate than the utility receives as an allowable *360 net return. The ratio of the amount of the loan to the value of the security, amount of bonds to total security, determines, within limits, the amount of the brokerage fee as well as the rate of interest paid for the loan.
It is apparent that this item of cost of financing has a direct relation to the allowable net return. In fixing fair value and rate of return experience has demonstrated that owing to the complexities of modern business resort must be had to tested methods before a safe and satisfactory answer can be obtained. The practice of financing public utility operations by borrowing in part has become so general and has come to have such a direct relation to fixing the rate which persons demand and should receive for furnishing capital that commissions and courts have found that by recognizing the actual transactions as they are carried out a more accurate and fairer solution can be obtained. For this reason, it has been the almost universal practice to give separate consideration to cost of financing. As we are concerned here with the question of confiscation, the final question is whether the utility has received due compensation for the use of its property. Intangible values allowed above bare physical value are frequently comprehended under different categories and we must take such fact into consideration before we can say that there is confiscation: Los Angeles Gas Co. v.R.R. Comm.,
We cannot agree with the contention of the respondent that it is entitled to capitalize the expense of marketing the stock of the company. It would confuse rather than simplify the process of rate making to treat the expense of marketing the common stock of the utility as cost of financing. That subject may better be considered under a different head. The expenses incident to the issuing of common stock are naturally items to be properly treated under the heading of *361 preliminary or organization expense, while the marketing of the stock is a matter between the original subscriber for the stock of the company and any person to whom he may sell. We are of the opinion, therefore, as we have before indicated, that the cost of marketing the stock of the company is not a matter for capitalization as part of the rate base. The utility is compensated for the capital furnished by it in the fair return allowed.
The fact that the utility did not actually pay brokerage fees does not prevent the inclusion of a fair amount on this account:Ben Avon Boro v. Ohio Valley W. Co., supra. We find that 3% is a fair allowance for this item. Cf. Chambersburg Gas Co. v. P.S.C.,
It is implicit in the federal cases, as well as our own, that "there is a difference between even the cost of duplication, less depreciation, of the elements making up the plant and the commercial value of the business as a going concern"; that an assembled and established plant, doing business and capable of earning a fair return has a value in excess of the component parts considered separately at their cost; and that this element of value is a property right which should be considered *362 in determining the present value of the plant. On the other hand, the company by receiving a prompt and fair return on its investment may have been compensated in that form for this property right.
This element of value is readily recognizable in at least two forms. At times it is represented by the value that arises from the development of a force of trained employees skilled in performance of the service rendered by the utility. Again, it appears where the utility has made a prudent investment but there is a lag in fair return before the public has appreciated and taken advantage of the service offered and made a return therefor. The extent of this value is difficult to determine and cannot be defined with exact accuracy.
In this connection it is helpful to refer to certain conditions where losses or expenditures are not entitled to be capitalized for rate making purposes. It does not depend entirely upon deficits of operation for in some cases the investment may not have been prudent and to allow such value would be merely to capitalize past losses: Hanover Boro v. Hanover Sewer Co.,
The respondent's expert, Dreyfus, attempted to support a claim for $25,000 and its expert, Scharff, a claim for $18,000 for going concern value. The complainants' expert, Davis, allowed nothing on this account, but admitted that it was common practice to allow ten per cent of present value. The commission allowed nothing. The testimony of the company's engineers was based wholly on theoretical lag and was therefore insufficient to support its claim: Scranton-Spring Brook W.S. Co. *363 v. P.S.C., supra, p. 139. A claim on this account, when allowed, must be supported by evidence of actual lag, not necessarily from the books of the company: Cheltenham Abington S. Co. v. P.S.C., supra, p. 266. The experts, in place of considering the history of the respondent, relied upon the fact that in many rate cases an allowance of ten per cent of present value was made. They failed to show that they had taken into account or considered the extent to which incoming revenues kept pace with investment. It was not shown that either the original installation or any extensions were made in advance of the demand for service, while there was some evidence that the public were asking for service in advance of the time at which it was supplied. The result is that the testimony is placed upon a purely theoretical basis and does not disclose either a sufficient history to determine whether any allowance should be made or that the experts considered such actual facts and took them into consideration in stating their conclusions.
The respondent in its brief falls into the same error for it relies largely upon the fact that in numerous cases the appellate courts have allowed a going concern value varying from 9.5% to 13.9%. While that fact is interesting, it lends little support to the claim made here, for the right to any allowance depends upon the facts shown in the particular case.
The evidence is equally unsatisfactory as to the existence of any special value in the organization of employees found here. The company purchases its power from another company and likewise purchases any trained service that it requires from affiliated companies. The commission might have concluded under the evidence that all of the service required to operate this company could have been procured in less than thirty days.
While the commission might have concluded that there was some slight evidence of going concern value, *364 certainly much less than that claimed by respondent, we cannot say that it was sufficient to warrant the conclusion that fair value could not be arrived at without special allowance on this account. The burden of proof was upon the respondent to show confiscation and incidentally that it was entitled to a special allowance for going concern value. This it failed to do. Our conclusion is, therefore, that we cannot say under the proofs as made that a sufficient and fair value could not be fixed for this company without a special allowance for going concern value.
As we have pointed out, while the respective engineers for respondent and complainants were wide apart on the allowances to be made in dollars for overhead and intangible costs entering into the reproduction cost new, they were not greatly apart as to the percentages on the items which they included as proper to be considered. The discrepancy was largely due to the base on which the percentages were to be calculated.
We have found that a fair percentage for all the overheads and intangibles, including cost of financing, would be 17 1/2%.
While in making such calculations, it is usual to add the percentage to the physical cost new and then deduct the depreciation from the aggregate, it makes no practical difference if we add the percentage to the depreciated reproduction cost, bearing in mind that these overhead and intangible items are subject to the same ratio for accrued depreciation.
Hence we have as the reproduction cost, depreciated, the following:
Value of physical property depreciated ..... $150,000 Add Intangibles and overheads, 17 1/2% ..... 26,250 -------- Total reproduction cost, depreciated ....... $176,250
Using our independent judgment, after considering the character of respondent's plant, the book cost of invested capital as shown on the company's books, the reproduction *365 cost new and the accrued depreciation, and giving effect to the fact that the respondent's plant is a going concern, we find that the fair value of respondent's plant, used and useful for utility purposes, at the date of the final order in this case was $175,000. To this must be added $11,000 allowed for working capital and supplies and material; and we determine that $186,000 was the proper rate base on which a fair and reasonable return should be allowed the respondent.
We agree with the conclusion of the commission and the expert witnesses that allowances for annual depreciation should be reasonably consistent with allowances for accrued depreciation. We also agree with the assumption of the commission that where the actual experience of a particular utility is available and the rates of that utility are being examined, such information is of great value.
The company presented its claim for annual depreciation principally through the testimony of the two experts, Dreyfus and Scharff, and the complainants in the testimony of the expert, Davis. Dreyfus fixed the amount at $6500, Scharff at $5109, and Davis at $4202, while the commission concluded that the company was only entitled to $2297. The commission disregarded the conclusions of the experts on both sides and refused to follow the methods adopted by those experts. They adopted a method of their own. The commission turned to the books of the company and discovered that for the period from January 1, 1920 to May 31, 1937, the company had annually set up as a reserve for depreciation from the earnings of the company sums which *366 aggregated in the end $78,422.38. It then found as a fact that that sum was a reasonable amount of depreciation for that period. It then showed by calculations that this would amount to an annual depreciation of $4,369.34, and that if the 4% sinking fund method were adopted an annual allowance of $2297.16 would with interest at 4% produce the total of $78,422.38. It states that the percentage that will produce this sum, when applied to the fixed capital on the books of respondent at the close of each year or period from January 1, 1920 to May 31, 1937, is 3.03%. The commission conceded as a basis for its calculations and conclusions that the amount claimed by the company was proper.
In short, the commission accepted $4,369.34 as a reasonable amount for depreciation and then proceeded arbitrarily to reduce that amount to $2297 by multiplying and dividing, forgetting that it had found the larger sum represented the actual depreciation. The commission's whole calculation is based on the conclusion that the amount claimed by the company is a fair amount and that the amount so claimed on the books of the company is conclusive against it, but the company claimed $4369.34 and not $2297, and no theory for calculating depreciation can change that fact. Consequently, the commission's finding is left without any support whatever. In addition, it is out of all proportion, not only to the conclusion of the company's experts, but is only about one-half of that shown to be proper by the experts representing the parties who initiated this proceeding. Such a conclusion is arbitrary, unreasonable and without legal warrant.
We are also of the opinion that the commission in discussing the general subject of depreciation showed that it failed to give due consideration to the element of obsolescence as an item to be considered in arriving at a proper allowance. For further discussion of this subject we refer to what the expert, Scharff, said in his testimony. That obsolescence is an important item was *367 shown by the history of electric street railways and is made evident today by the rapid improvements that have been made in electric equipment resulting in the displacement of much machinery before it has served its normal life. In determining a proper amount to be allowed for depreciation, consideration must be given to the interests of the investing public as well as to the consumer. No business can be successfully operated for any reasonable length of time without making adequate allowance for depreciation. The claim for depreciation is never fanciful but is just as real as any other element with which we must deal in fixing rates.
Finally, even though the proper basic facts are found for fixing annual depreciation, the sinking fund method must be applied with discrimination as we pointed out in the Cheltenham Abington case. We make special reference again to what was there said because it is applicable to the present, situation. In our opinion, if the sinking fund method is adopted the increment by way of return in the form of interest should be calculated on the basis of the highest grade investments such as federal, state or municipal securities and it is clear that such investments cannot be secured at this time so as to yield 4% and have the funds available when needed. The commission in this connection said: "It follows, therefore, that respondent can invest 62 per cent of its depreciation funds in its own property on which it will receive a return of at least 6 per cent, and that only 38 per cent of the fund need be kept in marketable assets available for ready liquidation in order to meet current requirements. On this basis, if the funds necessarily invested in marketable assets earned only 1 per cent, the overall earnings of the fund would be in excess of 4 per cent. Therefore, the Commission in this case finds that an allowance for annual depreciation based upon the annuity required by a 4 per cent sinking fund will adequately provide for return *368 of the investment at the end of its life." The fallacy in this argument is readily discovered. Interest returns vary in inverse proportion to the sufficiency of the security on which the loan is made. Assume that a 2% return can be secured on a state or federal bond, while 6% may be secured on some other less sound security. The lender demands the higher rate for the risk which he takes. When the sinking fund method is employed it assumes that no risk is to be incurred and on such a basis should the accumulations be calculated. If the company sees fit to invest the money in less desirable securities on account of receiving a greater gain, it assumes the risk and is entitled to the additional return. In short, the whole method of calculating depreciation on the sinking fund basis is predicated on the assumption of absolute safety. In our opinion a much fairer result will be obtained if the commission gives consideration to different methods of calculating depreciation before reaching a final result for there are advantages and disadvantages, as we have pointed out, in the employment of the sinking fund method.
The discussions of the experts require some further comment by us. As we understand the position of the expert, Davis, he excluded from the value of the physical property as a basis for calculating depreciation, the overhead items of administrative and engineering expenses incident to construction and allowance for omissions and contingencies. These items are just as much a part of the value of the physical plant as anything else that enters into its construction and such values disappear and are lost as the plant depreciates in value or becomes obsolescent.
Giving due weight to the methods of calculating depreciation adopted by the several engineers and the sinking fund method used by the commission, at a fairer rate of return than 4%, we find that $4500 is a fair and reasonable allowance for annual depreciation. *369
The commission determined the allowable operating expenses of respondent for the seventeen month period from January 1, 1936 to May 31, 1937, and was of the opinion that such allowable expenses reflected the reasonable, average, and normal operating expenses of respondent. To the period so used we find no substantial objection.
The operating expenses of respondent, exclusive of taxes and provision for depreciation (and exclusive of rental of its general office at Brookville, in the amount of $1200 for 1936, and $500 for 1937), were $75,590.16 for the year 1936, and $28,049.16 for the five months ending May 31, 1937. The commission disallowed a total of $22,760.51 of the operating expenses incurred for the twelve months ending December 31, 1936, and $4586.41 of the operating expenses incurred for the five months ending May 31, 1937.4 The commission allowed *370 $600 for rental of its general office at Brookville as a proper annual charge to operating expenses.
The total allowable operating expenses, as found by the commission, over the seventeen month period were $77,264.09, or $4544.94 per month, and on this basis the commission allowed yearly operating expenses of $54,539.28 (190a).
The items of expense disallowed, and for which respondent now claims an allowance, may be classified as follows:
A. Charges made by affiliates (admitted) and others to respondent through the Pennsylvania Electric Company.
B. Direct charges made to respondent by affiliates (admitted or so found by commission), including management fees.
C. Other direct expenses of respondent.
It appears that all accounting work incident to keeping consumer and miscellaneous operating records was performed by the office force at Brookville, and that the general books of account of respondent were kept by the accounting department of Pennsylvania Electric Company at Johnstown. Included in the operating expenses on the books of respondent, as recorded by the accounting department and management of Pennsylvania Electric Company, were charges from admitted affiliate interests and others included in certain accounts which were pooled on the books of Pennsylvania Electric Company and apportioned in part to respondent. The charges to the pool account of Pennsylvania Electric Company consisted of (1) charges arising from Utility Clearing Corporation; (2) contributions to Utilities *371 Employees Securities Company; and (3) charges from other sources including Pennsylvania Electric Company itself. (119a, 120a, 144a).
Utility Clearing Corporation, Utilities Employees Securities Company, and Utility Management Corporation are admitted affiliates. The commission found that Utilities Accountants and Tax Consultants (Utility and Financial Accountants, Inc.), Corporate Records and Secretarial Assistants, and E.J. Cheney were affiliates of respondent. Such finding was based largely on the report of J.A. Wilhelm and Harry Osman, which was a report submitted to the Federal Power Commission. This report was received in evidence by the commission, over the objection of counsel for respondent. It contained facts showing affiliation between respondent and the non-admitted affiliates, and it was upon the facts contained in this report that the commission based its findings of affiliation. Both Wilhelm and Osman, the former an employee of the Pennsylvania Public Utility Commission, and the latter an employe of the Federal Power Commission, identified the report and explained its sources, and were available to counsel for respondent for cross-examination. The sources were the books of the various companies comprising the Associated Gas and Electric system. We think that the report was properly admissible. As stated in Muskogee Gas Electric Company v.State,
Neither the Public Service Company Law (Act of July 26, 1913, P.L. 1374,
We conclude that the commission's finding with respect to affiliation between respondent and Utility Accountants and Tax Consultants (Utility and Financial Accountants, Inc.), Corporate Records and Secretarial Assistants, and E.J. Cheney, was supported by the evidence.6 *373
Consequently, the burden was on respondent to show that such expenses paid to these affiliates were for services which were reasonable and proper, and that such amounts so paid were not in excess of the reasonable cost of furnishing such services. See Section 701 (a) and (c) of Act of May 28, 1937, P.L. 1053, 66 PS Sec. 1271.
By its orders dated June 8, June 15 and July 1, 1937, the commission required respondent to submit certain information which it deemed pertinent to a consideration of such items of operating expenses. The information which was sought by the commission was as follows: (a) copies of bills, (b) cost to billing company for alleged services and necessity therefor, (c) amounts charged to each account on books of respondent, together with complete underlying details, (d) proof that any specific service was rendered, and (e) analysis of pool accounts of Pennsylvania Electric Company and amounts allocated therefrom to respondent together with the same information required under (a) to (d) inclusive. (141a).
The commission disallowed any payments made to these affiliated interests on the ground that there was no evidence in the record as to the value, necessity, or benefit of the services rendered by these affiliated companies to respondent (280a); but the commission in its brief recognizes that respondent did receive some necessary services from its affiliates and that the affiliates may be able to supply those services at a cost to respondent lower than if the services were secured elsewhere. In the commission's brief it is also stated: "If appellant will properly support the charges, the Commission will allow them." (p. 83).
Charges arising out of intercompany relationships between *374
affiliated companies should be scrutinized with care (Johnsonburgv. P.S.C.,
The commission's appraisal of the evidence led it to conclude that many of the charges by the affiliated companies were for the direct or indirect benefit of holding and intermediate holding companies in the Associated Gas and Electric system. With this we concur. Moreover, the record in this case is an illustration of the fact that effective and satisfactory State regulation of utilities is made increasingly difficult by the progressive integration of utility services under holding company domination. (178a).
The desire of public utility management, evidenced by various methods, to secure the highest possible return to the ultimate owners is incompatible with the semi-public nature of the utility business, which the management directs. It therefore follows that the commission should scrutinize carefully charges by affiliates, as inflated charges to the operating company may be a means to improperly increase the allowable revenue and raise the cost to consumers of utility service as well as an unwarranted source of profit to the ultimate holding company.
A. The commission disallowed charges made by Utility Clearing Corporation and Utilities Employees Securities Company (admitted affiliates) to respondent through the Pennsylvania Electric Company. The Utility *375 Clearing Corporation, the commission found, acted in the capacity of a clearing house for the acceptance, payment, and apportionment of bills rendered to holding and intermediate holding companies in the Associated system by affiliated companies and others, and that bills thus rendered were charged to pool accounts on the books of the clearing corporation, and upon apportionment the pool accounts were credited and concurrent charges made to the Utility Management Corporation and various operating companies in the Associated system, including Pennsylvania Electric Company and respondent. (145a) During the year 1936 the amount thus apportioned or charged to the Pennsylvania Electric Company was $300,169.37, and for the five months ending May 31, 1937, $60,671.92. The Pennsylvania Electric Company allocated these total pool expenses to itself and other Associated system companies operating in the western part of Pennsylvania, and commonly called the "Western Pennsylvania group," based upon the relationship of the gross operating revenue of each company in the group to the total gross operating revenue of the companies in that group. The total expense thus found and applied to the total pool expense in arriving at the amount to be allocated to appellant was 0.50 per cent in 1936, and 0.81 per cent for the five months ending May 31, 1937. The cost of the services to the Utility Clearing Corporation does not appear, nor was the need for the service by respondent adequately established. Respondent failed to sustain the burden of proof, and the commission committed no error, nor did it act improperly, in excluding such payment as an operating expense. It is evident from the bills of the Utility Clearing Corporation that much of the service performed by this company was for the benefit of holding and intermediate holding companies in the Associated Gas and Electric system, although some service which was necessary and beneficial *376 may have been rendered to respondent and other operating companies.
The commission likewise properly disallowed respondent's apportioned contributions to Utilities Employees Securities Company, an admitted affiliate. The record does not show that these payments were for benefits received by respondent. (154a) The record shows that out of a total of $71,066.83 "charged to Injuries and Damages on the books of Pennsylvania Electric Company, $61,926.85 represented contributions made by Pennsylvania Electric Company to Utilities Employees Securities Company during the year 1936; and also that contributions were made to the same company in the amount of $26,346.43 during the five month period ended May 31, 1937, and charged to account `800. Employees Welfare Expense.'" (154a) These sums were also prorated in part to respondent. The commission found that the contributions were used to increase the stock equity of Associated Gas and Electric Company in Utilities Employees Securities Company, and that the contributions accrued entirely to the benefit of the former. (156a) After excluding charges from Utility Clearing Corporation and contributions to Utilities Employees Securities Company, the commission allowed the balance prorated to respondent from the pool accounts of Pennsylvania Electric Company, which was $891.25 for the year 1936, and $621.75 for the five month period ending May 31, 1937, representing, as the commission found, a fair and reasonable allowance for the services rendered and expenses incurred by Pennsylvania Electric Company on respondent's behalf. (157a, 158a)
B. The commission disallowed charges made by Corporate Records and Secretarial Assistants, Utility Accountants and Tax Consultants, and E.J. Cheney, which were found by the commission to be affiliates of respondent. The commission disallowed these items as proper operating expenses because respondent "failed, *377 refused or neglected to furnish data showing (a) the cost to the original billing company of furnishing the service, (b) proof that specific service was rendered and the necessity therefor, and (c) contractual relationship and working arrangements with respondent." (171a) The commission was justified in disallowing these items on the evidence in the record.
The commission disallowed a charge of $149.72 made directly to respondent by Utility Clearing Corporation, an admitted affiliate. The evidence does not support the allowance of this charge as an operating expense; the charge does not appear to have been for the benefit of respondent.
Under the terms of a contract, Solar paid Utility Management Corporation 2 1/2 per cent per year of its gross earnings for acting as its operating manager; the amount which respondent paid for 1936 was $2392.24, and for the five months ending May 31, 1937, $1112.87. The commission disallowed these payments as proper operating expenses. The commission stated that respondent did not obey the order of the commission, dated June 15, 1937, in which order the commission directed it to submit "data with respect to billings by The Utility Management Corporation, for the year 1936 and five months' period ending May 31, 1937, setting forth (a) cost to respondent as evidenced by billings for management fees, (b) cost to The Utility Management Corporation for furnishing management service to respondent together with full and complete underlying details, (c) the accounts charged on the books of respondent as the result of billings by The Utility Management Corporation, and (d) necessity for such service and proof of specific service having been rendered," (163a), and disallowed the management fees in their entirety as operating expenses of respondent, for the following reasons: (169a) — "(a) That respondent did not submit data to show the cost to the operating manager for specific management services allegedly furnished *378 or the necessity therefor as provided in the commission's order of June 15, 1937; (b) that respondent placed no data in the record to indicate what the cost to respondent for management service would have been if such service had been secured from a non-affiliated interest; (c) that the record indicates that the operating personnel at Brookville is adequate to meet the management problems of a company of this size; (d) that respondent has failed to sustain the burden of proof to show that management services were actually rendered or that any such services were reasonably necessary to the efficient operation of the property of respondent; and (e) that respondent has failed to show that the management contract is in the public interest or even that it is in the interest of respondent itself and that on the contrary, the record strongly indicates the contract to be detrimental to respondent and against public interest."
"Management fees charged against a public service company by the holding corporation in control by virtue of its stock ownership, [are] in a somewhat different position from ordinary operating expenses. The relation between the companies warrants the Commission in giving close scrutiny to and requiring adequate proof of the benefit or advantage accruing to the public service company, and in turn to the public, by the management contract, which the Commission found wholly lacking in this case":Scranton-Spring Brook Water Service Co. et al. v. P.S.C.,
We find no compelling reason to object to the ruling of the commission, except as to (c), which, although the conclusion may be correct, lacks evidential support in the record; however, it does not affect the main contention.
C. The commission's disallowance of contributions by respondent in the amount of $28.56, and $25 for the year 1936 and the first five months of 1937, respectively, *379
must be sustained; the amounts involved are trivial. They are expenditures which are entirely optional and not compulsory, and it does not appear that any adverse effect on respondent's revenue would ensue if such contributions and donations were not made. Denver Union Stock Yard Co. v. United States,
Respondent included in operating expenses for 1936 and the five months ending May 31, 1937, the sums of $600 and $500, respectively, for uncollectible consumers accounts. The commission disallowed $259.20 for the five months of 1937 as being an excess amount to place in a reserve for such purpose, and found that the proper provision for uncollectible consumers accounts should be $577.92 for the year 1936, and $240.80 for the five months ending May 31, 1937. The commission's finding was based upon the actual experience of respondent during a sixty-five month period. On the basis of the respondent's experience, we are of the opinion that the commission's allowance for uncollectible consumers accounts is proper and adequate.Chambersburg Gas Co. et al. v. P.S.C., supra, p. 225. (160a)
Respondent made provision for certain advisory and corporate expenses by creating an account entitled "Reserve for Advisory and Corporate Expenses," with concurrent charges to "Other General Expenses" for the five months ending May 31, 1937. This item of $437.75 represents the difference between the amount thus accrued for the five months period and the amount actually expended during that period. The commission disallowed this item in determining the normal operating expenses of respondent for the reason that there were no data of record to show that there were any legitimate anticipated expenses for which such an accrual should be provided. We find no error in the commission's action in this respect, as the overaccrual is not supported by respondent's experience or by any other facts in the record. (174a) *380
As an operating expense respondent included in "Generation by Gas Power" for the year 1936 and the five months ending May 31, 1937, the amounts of $4118.57 and $615.77, respectively. The commission found that respondent's gas engine generating plant was not used and useful in the public service, and excluded the gas engine, generators, and auxiliary equipment of said plant as being property not used or useful in the public service, in its determination of a rate base. We have previously stated that it is our conclusion that such equipment should be included at 50 per cent of its depreciated reproduction cost, as estimated by Messrs. Dreyfus and Scharff. Consequently, there should be an allowance for the related items of expense of operation of the plant, which were disallowed by the commission. See commission's brief, p. 93. The allowable expenses for the gas engine generation plant would be $4118.57 for the twelve month period ending December 31, 1936, and $615.77 for the five month period ending May 31, 1937. In view of our conclusions, the commission's allowance for the quantity of power generated by the gas engine generating plant for the year 1936 and the five months ending May 31, 1937, should be excluded.
The payment to Ford, Bacon and Davis in the amount of $1099.63 was disallowed by the commission as an operating expense because it represents rate case expense. This is an item that should be amortized over a reasonable period with the other rate case expenses, which we think were improperly disallowed by the commission. (174a)
The commission disallowed, under operating expenses, any amounts which were paid by appellant as charges for this rate case litigation, for the reasons that (1) respondent's action in this case has been arbitrary and unwarranted, and (2) that the rates charged by respondent have been excessive. (282a) The total charges and accruals for rate case expenses for 1936 *381 and the five months ending May 31, 1937, were $12,240.25 and $1000, respectively. The commission determined that $2589.52 in 1936 and $1000 for the five months ending May 31, 1937, represented expenses incurred in connection with investigations undertaken by the Public Service Commission and the Federal Power Commission with regard to contractual relationships and working arrangements between Pennsylvania operating companies in the Associated Gas and Electric system (including respondent) and their admitted and non-admitted affiliates, and that the balance of the charges in the year 1936 amounting to $9650.73 was incurred in connection with the rate proceeding under review. All of the expenditures were disallowed. (161a)
In addition to the proceedings referred to in the opening of this opinion, on January 6, 1936, at the instance of the Pennsylvania Public Service Commission, the Federal Power Commission, by its order in the matter of Metropolitan Edison Company et al., at Docket IT 5015, included respondent as one of the organizations whose affairs the commission intended to investigate. (6712a) The charges appearing on respondent's books for the expenses incurred in connection with this matter, which was instigated by the Public Service Commission of the Commonwealth of Pennsylvania, and which respondent was obliged to defend, are among the charges disallowed as operating expenses by the commission. The relationship of these expenditures to the rate case litigation was such that, if the latter expenses should be allowed, the former should be included therein. "Moreover, there is nothing in the record justifying an inference that the figures were erroneous or the payments improvident": West OhioGas Co. v. Public Utilities Commission of Ohio,
The litigation to which respondent has been subjected did not result from any action taken by it whereby it sought through a new tariff to raise its rates, *382
which were then found to be excessive and unreasonable; but rather the expenses have resulted from charges incurred in self-defense. The inception of the rate case may have resulted from the proposed merger of respondent and Pennsylvania Electric Company (see Borough of Brookville v. P.S.C. et al.,
In Scranton-Spring Brook Water Service Co. et al. v. P.S.C.,
Respondent pays $1200 per year, or $100 per month, for its general office at Brookville, and the same is used for collection and other general office purposes, while electrical appliances are also there on display. The commission disallowed in gross income deductions $600 of the rental item for 1936 and $250 for the five months ending May 31, 1937. The commission points out that respondent did not include this rental in operating expenses, but in gross income deductions. The reason given by the commission for the allowance of only $600 of this rental as a proper annual charge to operating *384 expenses was that only approximately 50 per cent of the available floor space in the building in question is used for general office purposes, and that therefore only 50 per cent of this annual rental should be permitted as a reduction from gross income of respondent. This was an actually incurred expense and reflected by the books of respondent. A rental item of the amount here involved is not unreasonable, and we think that the commission has arbitrarily concluded otherwise. As we view the record, the evidence does not support the commission's finding, and we think that the commission's apportionment of the rental to the amount of floor space which it considered actually utilized for collection and other general office purposes is purely arbitrary. Full allowance for the rental paid by respondent under the circumstances should be made. If there has been a violation of the law, as the commission's brief indicates, of section 912 of the Public Utility Law, 66 PS sec. 1352, that is a matter which is not here involved, (188a).
The duty upon the commission was to determine what the fair and reasonable expenses of operating respondent company would be(Chambersburg Gas Co. et al. v. P.S.C.,
One of the main reasons for our ruling was that we felt that the fair value of Solar's property should be determined and the operating expenses and other items which enter into the fixing of fair and reasonable rates should be ascertained before a sale and merger should be effected, as "it would be very much more difficult and expensive to ascertain the salient facts from the books of a company which has absorbed about 150 smaller systems" (p. 509).
Our ruling was, in large measure, ignored, for the *386 respondent has, to all practical intents and purposes, been operated by Pennsylvania Electric, and forms a link in the complicated Associated Gas and Electric system. Respondent has been assessed for managerial, consultant and other like charges and expenses that bore no reasonable relation to its own needs and requirements. We are not able, any more than the commission, to find from the evidence in the record what is the fair and reasonable amount properly chargeable to the respondent on these accounts. Until the management in actual charge of the respondent is willing to furnish the commission the full and complete data justifying the contracts entered into with its affiliates in the Associated system and the basis justifying the assessments made against it in this respect, it has only itself to blame if it must bear the consequences flowing from its nullification of our order and its inability or refusal to segregate the items of expense properly chargeable to respondent.
The changes which we have made in the commission's determination of allowable operating expenses are reflected in the following statement, [cf. footnote 4].
5 Mos. Ended
1936 May 31, 1937
Operating expenses as reflected on books of res- spondent exclusive of taxes and provision for depreciation ................................. $75,590.16 $28,049.16
Adjustments:
Disallowed Expenses:
Pool Expenses from Pennsylvania Electric Co.:
Utility Clearing Corporation ................... 1,503.10 491.42 Utility Employees Securities Co. ............... 309.63 213.38
General Expenses:
Management Fees .............................. 2,392.24 1,112.87 Corporate Records and Secretarial Assistants ... 371.82 121.77 Utility Accountants and Tax Consultants ........ 631.63 149.78 E.J. Cheney .................................. 43.00 9.75 Overaccrual for Corporate and Advisory Exp. .... ...... 437.75 Utility Clearing Corporation ................... ...... 149.72 Contributions and Donations .................... 28.56 25.00 Uncollectible Consumers Accounts ............... 22.08 259.20 ---------- --------- Total Disallowed Expenses ................ $5,302.06 $2,970.64 ---------- --------- $70,288.10 $25,078.52
Additional Expenses Allowed:
Rent of office at Brookville ................. 1,200.00 500.00 ---------- --------- *387 Adjusted operating expenses exclusive of taxes and provision for depreciation and rate case expense ..................................... $71,488.10 $25,578.52 Less rate case expense .................... 13,339.88 1,000.00 ---------- --------- $58,148.22 $24,578.52 Using the method of calculation adopted by the commission, we find a total of $82,726.74 allowable operating expenses for the seventeen month period, which is at the rate of $4,856.28 for one month, and $58,395.36 for twelve months or one year.
The respondent called two witnesses who testified respecting the rate of return. Mr. Knudsen expressed the opinion that eight per cent would be a fair rate for respondent and Mr. Phelps stated that in his judgment the minimum rate of return should be seven per cent. These witnesses had a very limited knowledge of the actual operations of this utility, the locality it serves, and other individual factors proper for consideration in determining a fair rate of return. Their testimony, at most, reflected only their views and was not binding on the commission. There was ample evidence of the amount of the investment, size and nature of the utility, risks, maintenance charges, and all other elements attending this company's origin, development, and operation, to give the commission sufficient information on which to base a proper rate of return.
We concede that no definite, fixed rule can be laid *388
down which is arbitrarily applicable to all utilities. The risks incurred by some utilities are much greater than others. The rate of return should therefore vary according to the circumstances of each case and be determined from the evidence adduced, like any other fact; Pennsylvania P. L. Co. v. P.S.C. et al.,
The courts have held that the return should be reasonably sufficient to assure confidence in the financial soundness of the utility, and should be adequate, under efficient and economical management, to pay all expenses of operation, provide for depreciation, payment of interest and reasonable dividends, and for a reasonable amount to be applied to a surplus account, thus insuring the maintenance of credit and enabling it to raise money necessary for proper discharge of its public duties: BluefieldWater Works Improve. Co. v. P.S.C.,
The rate allowed, while not generous, is not out of line with the rates approved by the appellate courts and cannot be said in this case to be confiscatory. In Willcox v. Consolidated Gas Co.,
It will be noted, however, that the order of the commission is based on conditions existing at the date of *389 its entry. It cannot be applied as a determination of a fair and reasonable return in the past. The fact that the complainants in their prayer for relief asked for a reduction of respondent's rates so as to return not more than seven per cent upon the fair and reasonable value of its property, shows the change which has occurred in the matter of fair return since the institution of these proceedings and which is reflected in the commission's order, and affords ample justification for its refusal, in the present proceeding to make any order of refund or reparation, as contended for by complainants, as appellants in No. 183, even if it had authority to do so in a proceeding begun in 1929.
One other matter is to be considered. Six per cent is, in our opinion, a fair and reasonable return for an established electric light and power company, in present usual and ordinary circumstances, with its existence assured and operating under favorable conditions. If it is harassed by continual agitation and litigation affecting its corporate existence, its corporate structure and credit may be affected, and as a consequence it may be entitled to a return of seven, or even eight, per cent per annum.
That separate schedules of rates applicable to domestic, commercial and industrial purposes respectively are not in violation of law, is clearly indicated by section 307 of the Public Utility Law of May 28, 1937, (P.L. 1053, 66 PS sec. 1147), which provides that a utility "may establish a sliding scale of rates or such other method for the automatic adjustment of the rate of the public utility as shall provide a just and reasonable return on the fair value of the property used and useful in the public service, to be determined upon such equitable or reasonable basis as shall provide such fair return."
A summary, submitted at the argument, of the gross operating revenues of the company since the single schedule under the temporary order of October 5, 1937 went into effect, shows that the consumption for domestic purposes has been increasing, but for commercial and industrial purposes it has been decreasing. The increase was due partly to increase in customers and also in the amount of the average consumption. It would seem that while the commission has authority to control the rates so that they are not unreasonable, a utility furnishing electricity should have the right, in the absence of any proof of unfairness, to establish different schedules of rates for electric service for domestic, commercial and industrial uses.
There is nothing in our ruling in the Pennsylvania Power
Light Co. case (
Return — 6% on $186,000 ..................... $11,160
Operating expenses, exclusive of provision for annual depreciation and taxes .......... 58,395
Annual Depreciation .......................... 4,500
Taxes ........................................ 6,543
Rate case expenses, amortized (for 6 yrs.) ... 2,916 -------- $83,514
This is based on the assumption that the allowance for taxes by the commission is correct. If the amount actually paid is more or less than $6543, the total will be correspondingly affected. So will operating expenses, if respondent furnishes the commission full and satisfactory data as to the managerial, engineering, legal and secretarial expenses properly chargeable to respondent.
This amount, $83,514, is $15,066 less than the respondent's operating annual revenue of $98,580, during the seventeen month period above mentioned. It is $3766 less than the net revenue permitted by the order of October 5, 1937, but $10,979 more than the net revenue allowed by the final order appealed from.
Appeal No. 179 — To the extent herein indicated the order of the commission is reversed, and it is ordered that within thirty days of the return of this record, *392 the respondent, Solar Electric Company, shall file, post and publish new tariffs, effective upon ten days' notice to the public, embodying rates for electric service designed to yield annual revenues not to exceed the sum of $83,514. Each party to pay the costs of printing its or his own brief; the cost of printing the record in No. 179, used in both appeals, to be divided equally between the respondent and the intervening appellees, each paying one-half.
Appeal dismissed at the costs of appellants.
Operating expenses as reflected on books of respondent exclusive of taxes and provision for depreciation and rental (p. 50) ... $75,590.16 $28,049.16
Adjustments:
Disallowed Expenses:
Generation by Gas Power ......... 4,118.57 615.77
Pool Expenses from Pennsylvania Elec. Co.:
Utility Clearing Corporation .... 1,503.10 491.42 Utility Employees Securities Co.. 309.63 213.38
General Expenses:
Management Fees ................... 2,392.24 1,112.87 Corporate Records and Secretarial Assistants ............ 371.82 121.77 Utility Accountants and Tax Consultants ................... 631.63 149.78 E.J. Cheney ....................... 43.00 9.75
Overaccrual for Corporate and Advisory Exp. ................. ...... 437.75 Ford, Bacon and Davis ............. 1,099.63 ...... Utility Clearing Corporation ...... ...... 149.72 Contributions and Donations ....... 28.56 25.00
Uncollectible Consumers Accounts .... 22.08 259.20
Public Service Commission Expenses .. 12,240.25 1,000.00 --------- -------- Total Disallowed Expenses ..... $22,760.51 $4,586.41 ---------- --------
Additional Expenses Allowed:
Generation by Gas Power ........... 85.90 35.79 Rent of Office at Brookville ...... 600.00 250.00 ---------- -------- Total Additional Expenses ..... $685.90 $285.79 --------- -------- Adjusted operating expenses exclusive of taxes and provision for depreciation ................... 53,515.55 23,748.54
Order Nisi of P.U.C. dated July 5, 1938 — (189a, 190a).
(Order Nisi of P.U.C. dated July 5, 1988, pp. 132a, 133a)