51 Pa. Commw. 61 | Pa. Commw. Ct. | 1980
Opinion by
The York Water Company (York)
On November 28, 1977, York filed Tariff Water-Pa. P.U.C. No. 13 proposing a January 27, 1978 addition to rates, designed to produce an increase of $1,-680,054 in annual operating revenues based upon the level of operations at July 31,1977, the end of the test year.
With the operation of the tariff automatically suspended, formal investigation ordered, and public hearings held, the Administrative Law Judge recommended that York be permitted to file tariff revisions providing annual operating revenues of $5,814,964, an increase of $964,338 over then-existing revenues, $715,716 less than proposed. Providing an income available for return of $1,827,000 after expenses, taxes and depreciation, the recommendation contemplates a fair value rate base at an original cost figure of $19,-030,131 with a corresponding 9.6 percent rate of return.
In its final adjudication,
Our point of origin and responsibility thus begins with the PUC. Charged with considering all relevant information, determining the weighing of evidence, credibility of witnesses, and reliability of estimates and opinions, the Commission must make definite, consistent, detailed findings, so as to enable this Court to review the decision and respond to the questions raised on appeal.
Fair Value
Preliminarily, the Court accepts the petitioner’s submitted measures of value as uncontroverted evidence: (1) an original cost depreciated measure of
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Historically, fair value was fixed at a numerical value near the average of originar cost as the lower limit and trended original cost as the upper boundary. Pennsylvania Public Utility Commission v. Pennsylvania Gas and Water Co. (P.G. & W. I), 19 Pa. Commonwealth Ct. 214, 341 A.2d 239 (1975); Johnstown v. Pennsylvania Public Utility Commission, 184 Pa. Superior Ct. 56, 133 A.2d 246 (1957). However, the recent Pennsylvania Supreme Court decision in Pennsylvania Public Utility Commission v. Pennsylvania Gas and Water Co. (P.G. & W.), Pa. , A.2d
(No. 35 May Term, 1978 & No. 278 January Term, 1978, filed February 1, 1980), has altered the course of public utility rate cases with respect to the fixation of fair value, and would seem to have functionally pre
With reference to our scope of review,
Fair Rate op Return
York argues that the Commission’s 7.88% fair rate of return finding is based upon an improper determination of the cost of common equity capital.
A degree of definitional background may be helpful. Fair rate of return is usually expressed as a percentage of the rate base fair value investment ratio,
The PUC’s fair rate of return dimites are set forth in the following table, with Yer&'s claims o'f different percentages annexed in brackets:
York’s expert witness produced evidence and testimony which offered 11.5% as a fair estimate for cost
However, the failure of the PUC’s opinion to delineate the effect of these mathematical ratios to the corresponding derivation of common equity capital cost leaves us in the position of not being able to determine as a matter of law whether the PUC abused its discretion.
We must, therefore, remand this portion of the case for new and appropriate findings as to cost of common equity capital, which may be supported by the record and explained by its adjudication. See Equitable Gas Co. v. Pennsylvania Public Utility Commission, 45 Pa. Commonwealth Ct. 610, 618, 405 A.2d 1055,1060 (1979).
Order
And Now, this 28th day of April, 1980, the order of the Pennsylvania Public Utility Commission, dated August 17,1978, is affirmed in part insofar as it concerns fair value; and the record is remanded in part to the Commission for a redetermination of the utility’s fair rate of return and income available for return, consistent with this opinion to the end that its discussion, findings of fact, and conclusions of law are sufficient to enable this Court on review to determine the merits of an appeal, if taken, from such revised order.
York is a publicly-owned utility providing water service in York County, Pennsylvania, to a population in excess of 121,000, serving approximately 34,789 residential, commercial, industrial and public customers, of which 13,272 were metered and 21,517 were flat rate.
Two formal complaints, from Intervenor St. Regis Paper Company and Colonial Square Developers, were filed to the new tariff. Also note that a third issue, involving the exclusion of an unamortized portion of the federal development credit as part of common equity capital, was withdrawn at argument.
Our case law is replete with the proposition that public utilities are entitled to a fair return based upon the fair value of property used and useful for its public service. Lower Paxton Township v. Pennsylvania Public Utility Commission, 13 Pa. Commonwealth Ct. 135, 317 A.2d 917 (1974).
York specifically draws attention to the figures charted below claiming that manipulation produced substantially the same result: Administrative Law
We deem a disposition of the confiscation issue unnecessary at this time in that one of the underlying issues is remanded to the PUC for further consideration. See Equitable Gas Co. v. Pennsylvania Public Utility Commission, 45 Pa. Commonwealth Ct. 610, 612, 405 A.2d 1055, 1057 (1979).
See Pennsylvania Gas and Water Co. v. Pennsylvania Public Utility Commission, 33 Pa. Commonwealth Ct. 143, 148 n. 4, 381 A.2d 996, 999 n. 4 (1977) ; Pennsylvania Public Utility Commission v. Pennsylvania Gas and Water Co., 19 Pa. Commonwealth Ct. 214, 341 A.2d 239 (1975) ; and Johnstown v. Pennsylvania Public Utility Commission, 184 Pa. Superior Ct. 56,133 A.2d 246 (1957).
Our scope of review in PUC cases has always been limited to a determination of whether constitutional rights have been violated, an error of law committed, or its findings and conclusions are unsupported in the record by substantial evidence. Id.
Though the estimation of capital cost is basically a matter of discretionary judgment, the Commission is obliged to consider a variety of factors, including “the utility’s financial structure, credit standing, dividends, interest, risks, regulatory lag, wasting assets, and any peculiar features of the utility involved.” Equitable Cas Co. v. Pennsylvania Public Utility Commission, 45 Pa. Commonwealth Ct. 610, 617, 405 A.2d 1055,1059 (1979). .
A cost of common equity capital estimate should take into account “the demands for the use of money, the growth in earnings expected by the investor, earning-price ratios, dividend yields, tfie marketing cost associated with raising common equity capital, and the earnings of comparable companies with similar risks.” Lower Paxton Township v. Pennsylvania Public Utility Commission, 13 Pa. Commonwealth Ct. 135, 144, 317 A.2d 917, 922 (1974).
In evaluating cost of common equity capital, the Commission order specifically provides that “primary weight was given earnings-price ratios since these most directly indicate aggregate investor evaluation of a given level of earnings.” A comparison of York’s 11.8% adjusted earnings price ratios for 1976 and 11.7% for 1977 seems inconsistent with the final 10% Commission adjudication. P.U.C. Order, dated August 17,1978, Table I, p. 5:
Market Price-Book Value Ratios/Earnings-Book Value Ratios (Pa. P.U.C. Exhibit No. 1A, Schedule 1-3), P.U.C. Order dated August 17,1978, Table III, p. 6:
The DOE technique, used as a secondary or testing method by the Commission, indicates a 13.2% cost of common equity, which is essentially a composite of dividend yield and earnings growth. P.U.C, Order, dated August 17, 1978, Table II, p. 6:
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In the recent past, the Commission has handled its fair value-fair rate of return adjudications in a rather perfunctory manner. In fact, this Court has found the necessity to remand more than twelve cases of this kind since September of 1977 for additional and more specific findings. We have been explicit in our reasoning of the present case with the hopes that the newly constituted Public Utility Commission will anticipate and prevent the remand problems which have confronted us in these rate controversies.