Petition — Pennsylvania Gas & Water Co. v. Pennsylvania Public Utility Commission
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Office -Supreme Court, U.S.
rite
80-1917
No. VAY 15 198]
ALEXA,’
> v
CLER
Supreme Court of the United State
October Term, 1980
PENNSYLVANIA GAS AND WATER COMPANY,
Petitioner,
t?)
PENNSYLVANIA PUBLIC UTILITY COMMISSION,
Respondent.
[35 May Term, 1978]
PETITION FOR A WRIT OF CERTIORARI TO THE
SUPREME COURT OF PENNSYLVANIA
CHARLES Epwarp THOMAS
D. Mark THOMAS
Patricia LEE ARMSTRONG
Tuomas & THOMAS Tuomas & THOMAS
212 Locust Street 212 Locust Street
Post Office Box 999 Post Office Box 999
Harrisburg, PA 17108 Harrisburg, PA 17108
Of Counsel Attorneys for Petitioner
International Printing Co., 711 So. 50th St., Phila., Pa, 19143-— Tel. (215) 727-8711
QUESTIONS PRESENTED
1. A public utility financed a portion of its facilities
with a payment received as compensation for highway
construction damages to its water system. May the public
utility, consistent with the Fourteenth Amendment, be de-
nied a return on and recovery through depreciation ex-
pense of its investment in facilities financed with the high-
way damage payment?
2. A lower state court entered on the same day con-
sistent decisions in two appeals involving the same consti-
tutional issue. A state regulatory commission, respondent
in both lower court appeals, simultaneously filed petitions
for allowance of appeal in each case with the state’s highest
court. May such court, consistent with the Fourteenth
Amendment, grant one of the two appeals and enter an
opinion resulting in the affirmance of the lower court’s con-
stitutional ruling and thereafter grant the other appeal and
enter an opinion reversing the lower court's ruling on the
identical constitutional issue?
3. A state regulatory commission filed a petition for
allowance of appeal with the state’s highest court from a
lower court decision reversing its ratemaking order. May
such court, consistent with the Fourteenth Amendment,
grant such appeal approximately three years after it was
requested, issue a decision reversing the lower court’s de-
cision almost five years after it was entered and then delay
acting on a petition fox reargument for more than a year
after its filing?
(i)
LIST OF ALL PARTIES
Review is sought of the February 1, 1980 judgment
and opinion of the Supreme Court of Pennsylvania in the
case of Pennsylvania Public Utility Commission v. Penn-
sylvania Gas and Water Company, No. 35 May Term,
1978.1 The parties to the proceeding below included
Pennsylvania Gas and Water Company (PG&W) * and the
Pennsylvania Public Utility Commission (PUC).? PG&W
filed an application for reargument with respect to the
February 1, 1980 judgment and opinion. Applications
for reargument were also filed as amici curiae by the Na-
tional Association of Water Companies—Pennsylvania
Chapter, Pennsylvania Gas Association, Mechanicsburg
Water Company, Philadelphia Suburban Water Company,
T. W. Phillips Gas and Oil Company, Western Pennsy]l-
vania Water Company and Equitable Gas Company. All
applications were denied February 18, 1981.
1. The Supreme Court of Pennsylvania issued a consolidated
opinion at No. 35 May Term, 1978 and No. 278 January Term,
1978, with the latter appeal involving a subsequent PG&W water
rate increase. The facts and issues at No. 35 May Term, 1978,
the subject of this Petition, were separate and distinct from those
at No. 278 January Term, 1978. A separate Petition is being filed
with this Court from No, 278 January Term, 1978.
2. PG&W is now a wholly-owned subsidiary of Pennsylvania
Enterprises, Inc., which is a holding company with two groups of
subsidiaries: One group includes PG&W and its five subsidiaries
(Trucksville Water Company, Hillcrest Water Co., Homesite
Water Company, Shavertown-Kingston Township Water Com-
pany and Penn Gas Development Co.) and the other group
includes Pennsylvania Energy Resources, Inc. and Theta Land
Corporation.
3. The City of Scranton (City) and County of Lackawanna
(County) were parties before the Commonwealth Court of Penn-
sylvania and although listed in the caption below did not partici-
pate.
(ii)
TABLE OF CONTENTS
QUESTIONS PRESENTED .........csseceeseeseeseceescenens
Laee OF ASd, PARTUM oo ccccccccvccvccevccteeveccessscces
TaseR CF COMMITS 2c cccccccsccccccvccccccsoscsssveses
THEE GP ROTTED oc vcccccccncsiesnccesorvessvesess
OCpmemons BELOW .ncccccccccccscccscccccccsccecce
JORMIDEOTION oo cc ccccccccccccccccscsccceccccccccceeet ;
CONSTITUTIONAL PROVISION INVOLVED ......++0seeeeeeeees
STATEMENT OF THE CAGE ..ccccccccccccscccccvece PTTTTT
REASONS FOR GRANTING THE WRIT .......-000eseeeeeeeees
I. The Court Below Misinterpreted the Issue and Its
Opinion Results in Confiscation of Private Property
II. The Action of the Court Below in Rendering Incon-
sistent Opinions on Appeals Simultaneously Filed
Involving the Same Issue Is a Violation of Both
Due Process and Equal Protection of the Laws ...
III. The Long and Unjustified Delay of the Court Below
in Deciding the Case Is a Violation of Both Due
Process and Equal Protection of the Laws ........
eG i Ou cons bubs aibare due bebe kee ee eeaws
Appenpix A—Opinion of the Supreme Court of Pennsylvania,
Pa. P. U. C. v. Pennsylvania Gas and Water Company ..
Aprenpix B—Notice of Denial of Applications for Reargu-
TROT wcccccccccccccccccvcscencescoeccesecoeeescoces
Appenpix C—Opinion of the Commonwealth Court of Penn-
sylvania, Pa. P. U. C, v. Pennsylvania Gas and Water
COMMPERY cc ccccccccccccccccesccvccveesccesoveccoes
Page
o@Qonwnns’ ® <
12
Al
TABLE OF CONTENTS (Continued)
Page
Apprenpix D—Pennsylvania Public Utility Commission Order
at R. I. D. 72, Pa. P. U. C. v. Pennsylvania Gas and
Water Company (Excerpt) .........sesevseeceeees ... A56
Appenpix E—Opinion of the Commonwealth Court of Penn-
sylvania, Keystone Water Co., White Deer District v.
DR Bias Mls Naccacevescccaxansoscberiandenecensecns A67
Aprenpix F—Opinion of the Supreme Court of Pennsylvania,
Keystone Water Co., White Deer District v. Pa. P. U. C. A92
(iv)
TABLE OF AUTHORITIES
Cases: Page
Barbier v. Connolly, 113 U. S. 27 (1885) .........eeeeeeees 9
Board of Public Utility Commissioners v. New York Tele-
phone Company, 271 U. S. 23 (1926) .............46. 8
Duncan v. State of Missouri, 152 U. S. 377 (1894) ........ 8,9, 11
Federal Power Commission v. Hope Natural Gas Co., 320
Te Ge GE COED a ccccvcccvcscccsbcccscetesnssteess 7
Fidelity & Columbia Trust Company v. City of Louisville,
BP We Oe Oe CUED hind cavckccctpdcverdiccviviceeces 10
Keystone Water Co., White Deer District v. Pa. P. U. C., 19
Pa. Commonwealth Ct. 292, 339 A. 2d 873 (1975) . .4, 5, 6,9, 10
Keystone Water Co., White Deer District v. Pa. P. U. C., 477
ye © Fe 8 ks Rewer Tyee rries 5, 10, 11
Lindheimer v. Illinois Bell Telephone Company, 292 U. S.
SEE Sc ckiwerkeecncdh ovnausee nee Saabvaseeneeas 7,8
Market Street Railway Company v. Railroad Commission of
the State of California, 324 U. S. 548 (1945) ......... 7
Missouri ex rel. S. W. Bell Telephone Co. v. Public Service
Commission of Missouri, 262 U. S. 276 (1923) ........ i
Pa. P. U. C. v. Pennsylvania Gas and Water Company, 19 Pa.
Commonwealth Ct. 214, 341 A. 2d 289 (1975) . .2, 4,5, 9, 10, 11
Pa. P. U. C. v. Pennsylvania Gas and Water Company, 47 Pa.
ie ie a Pe MPEP nn adeg tinny ededsecdaveadnacenene 2,4,5
Pennsylvania Gas and Water Co. v. Pennsylvania Turnpike
Commission, 428 Pa. 74, 236 A. 2d 112 (1967) ......... 3
Pa. P. U. C. v. Pennsylvania Gas and Water Company, —
Pa, —, 424 A. 2d 1213 (1980) ............. ii, 1, 2, 5, 6, 10, 11
Shelley v. Kraemer, 334 U. S. 1 (1948) ..........cceeeeuee ll
Stone v. Farmers Loan and Trust Company, 116 U. S. 307
CREED candcsceeveusncsdownesssdé césovtvencsecseves 7
Statutes:
ee ene veccenkedensecsswauhesteacwenswaue 2
Constitutions:
U. S. Constitution, Amendment XIV, Sec. 1 ..... i, 2, 4, 6, 7, 8, 9, 10
(v)
No.
IN THE
Supreme Court of the United States
October Term, 1980
PENWSYLVANIA GAS AND WATER COMPANY,
Petitioner,
0.
PENNSYLVANIA PUBLIC UTILITY COMMISSION,
Respondent.
[No. 35 May Term, 1978]
PETITION FOR WRIT OF CERTIORARI
TO THE SUPREME COURT OF
PENNSYLVANIA
Petitioner, Pennsylvania Gas and Water Company,
respectfully prays that a writ of certiorari issue to review
the judgment and opinion of the Supreme Court of Penn-
sylvania entered on February 1, 1980, in the case of Penn-
sylvania Public Utility Commission v. Pennsylvania Gas
and Water Company, No. 35 May Term, 1978.‘
4. See footnote 1, supra.
(1)
2 Petition for Writ of Certiorari
OPINIONS BELOW
The opinion of the Supreme Court of Pennsylvania
(the “court below”) is reported at — Pa. —, 424 A. 2d
1213 (1980) and together with the concurring opinions
appears as Appendix A hereto. Notice of denial of the
applications for reargument appears as Appendix B. The
opinion of the Commonwealth Court of Pennsylvania
(Commonwealth Court) which was reversed by the court
below is reported at 19 Pa. Commonwealth Ct. 214, 341
A. 2d 239 (1975) and appears as Appendix C, together
with a dissenting opinion. The order of the PUC which
was reinstated by the court below is reported at 47 Pa.
P. U. C. 750 (1974). The portion of the order pertaining
to the issue raised herein appears as Appendix D.
JURISDICTION
The opinion of the court below was entered on Feb-
ruary 1, 1980, and its order denying reargument was en-
tered on February 18, 1981. The jurisdiction of this Court
is invoked under Title 28 of the United States Code
§ 1257(3).
CONSTITUTIONAL PROVISION INVOLVED
U. S. Constitution, Amendment XIV, Sec. 1:
. . nor shall any State deprive any person of
life, liberty, or property, without due process of law;
nor deny to any person within its jurisdiction the
equal protection of the laws.”
Petition for Writ of Certiorari 3
STATEMENT OF THE CASE
PG&W is a Pennsylvania public utility corporation
providing both water and gas service to the public in
Northeastern Pennsylvania subject to regulation by the
PUC, an administrative agency of the Commonwealth of
Pennsylvania (Commonwealth).
In the 1960's, the Commonwealth acting through its
Department of Highways (later named Department of
Transportation ) proposed highway construction which be-
cause of the turbidity it would create would render useless
portions of PG&W’s water system including a reservoir,
several wells, and a thirteen square mile area of water-
shed as a source of water supply. The highway construc-
tion would have destroyed PG&W’s water supply to the
City of Scranton.
After extensive negotiations, an agreement was
reached in 1969 whereby the Commonwealth agreed to
pay PG&W $2,754,754 for damages which would be in-
flicted on its water system by the highway construction.
The basis employed for determining this amount was the
“cost-to-cure” method, i.e., the estimated cost to replace
that portion of the system to be rendered useless as a re-
sult of the highway construction.’ With the damage pro-
ceeds and substantial additional investor supplied capital,
PG&W constructed a reservoir and a thirty-inch pipeline
to replace the affected portion of its system and to provide
additional capacity.
On January 30, 1973, PG&W filed with the PUC a
proposed water rate increase including in its rate base and
depreciation expense claims the investment in the facilities
5. The “cost-to-cure” method had previously been found by
the court below to be appropriate for determining damages to a
water utility's property caused by highway construction. See
Pennsylvania Gas and Water Co. v. Pennsylvania Turnpike Com-
mission, 428 Pa. 74, 236 A. 2d 112 (1967).
4 Petition for Writ of Certiorari
financed with the damage payment. In its final order
dated July 9, 1974 at R. I. D. 72 (Appendix D), the PUC
disallowed $628,313 of the proposed rate increase, based
in part on the exclusion of $2,558,634 from consideration
in the determination of the rate base and depreciation ex-
pense findings. The $2,558,634 represented the invest-
ment in the new facilities financed by the damage pay-
ment after deducting from the total damage payment the
depreciated original cost of the property rendered useless.
Although PG&W had contended that such a holding would
be a violation of the Fourteenth Amendment, the PUC’s
order did not address the constitutional issue.
PG&W petitioned the Commonwealth Court for re-
view of the PUC’s order contending, inter alia, that the
exclusion from rate base and disallowance of the deprecia-
tion expense amounted to confiscation of its property.®
By order and opinion dated May 27, 1975 (hereinafter
“PG&W opinion”) (Appendix C), the Commonwealth
Court affirmed with one exception the PUC’s order. It
reversed the order as to the treatment of the facilities
financed with the highway damage payment and held that
the exclusion thereof from the PUC’s ratemaking findings
was a violation of due process, citing its discussion in its
companion opinion in Keystone Water Co., White Deer
District v. Pa. P. U. C., 19 Pa. Commonwealth Ct. 292, 339
A. 2d 873 (1975) (hereinafter “Keystone opinion”). The
Keystone opinion, Appendix E hereto, involved the same
issue and was filed simultaneously with the PG&W opin-
ion on May 27, 1975.
On June 26, 1975, the PUC petitioned the court below
for allowances of appeal from both the Commonwealth
Court’s PG&W and Keystone opinions, raising in each
6. The City and County, raising different issues, also peti-
tioned for Commonwealth Court review of the PUC’s order. See
footnote 3, supra.
Petition for Writ of Certiorari 5
petition precisely the same contentions. Without taking
any action on the petition from the PG&W opinion, the
court below granted the allowance of appeal from the
Keystone opinion and affirmed that opinion by an equally
divided court on April 7, 1978, in Keystone Water Co.,
White Deer District v. Pa. P. U. C., 477 Pa. 594, 385 A. 2d
946 (1978), which opinion appears as Appendix F. Fol-
lowing its Keystone decision, the court below on June 21,
1978, approximately three years after its filing, granted the
PUC’s petition for allowance of appeal from the Common-
wealth Court’s PG&W opinion.
On February 1, 1980, almost five years after the
Commonwealth Court’s PG&W opinion was entered, the
court below by a judgment and opinion (Appendix A),
directly contrary to the affirmance in the Keystone appeal,
reversed the Commonwealth Court’s PG&W opinion on
the highway damage payment issue and reinstated the
PUC’s July 9, 1974 order.
PG&W filed with the court below an application for
reargument contending that the decision was in error and
in violation of its constitutional rights. On February 24,
1981, over one year after its filing, the application for re-
argument was denied (Appendix B).
The federal constitutional issue involving the rate-
making treatment of the highway damage payment was
timely and properly raised. It was raised initially before
the PUC, though not addressed in its order. It was also
subsequently raised beforé and addressed by both the
Commonwealth Court (see Appendix C, pp. A31, A32 and
Appendix E, pp. A75-A83 referred to therein) and the
court below (see Appendix A, pp. A9-A16).
6 Petition for Writ of Certiorari
REASONS FOR GRANTING THE WRIT
I. The Court Below Misinterpreted the Issue and Its Opin-
ion Results in Confiscation of Private Property.
In its opinion, the court below stated the issue to be
“the correct standard to be employed” in fixing the value
of the rate base property (Appendix A, p. Al). It then
proceeded with a discussion as to whether the Fourteenth
Amendment requires consideration to be given to repro-
duction cost in determining the value of a public utility’s
rate base. The court concluded that such consideration
need not be given and reinstated the PUC order denying
PG&W a return on and recovery of its investment in the
facilities financed with the highway damage payment pro-
ceeds.
The court below’s statement of the issue to the con-
trary notwithstanding, there was no issue as to any con-
stitutional requirement in respect to the weight to be
given reproduction cost in arriving at rate base. The issue
was whether it is permissible to deny a public utility a
return on and recovery through depreciation expense of
its investment in property c»nstructed and financed with
proceeds from a damage payment made to replace the
portions of its system which would be rendered useless as
a result of highway construction. This was specifically
recognized by the Commonwealth Court in the Keystone
opinion (Appendix E, p. A75).
“_.. The question before us in this case, however,
is not whether the value allowed for rate-making pur-
poses by the PUC was one of several possible valua-
tions, but rather, whether the PUC’s action in entirely
eliminating this piece of property from the rate base
was proper.”
Petition for Writ of Certiorari 7
The decisions of this Court reveal that such action is con-
fiscatory in violation of the Fourteenth Amendment.
As early as 1886, this Court in Stone v. Farmers Loan
and Trust Company, 116 U. S. 307, 331 (1886) held:
“From what has thus been said it is not to be
inferred that this power of limitation or regulation is
itself without limit. This power to regulate is not a
power to destroy, and limitation is not the equivalent
of confiscation. Under pretense of regulating fares
and freights, the State cannot require a railroad cor-
poration to carry persons or property without reward;
neither can it do that which in law amounts to a tak-
ing of private property for public use without just
compensation or without due process of law.” (em-
phasis added )
In subsequent decisions, this Court has recognized that it
is the capital investment which comprises the rate base
and it is this investment that cannot be confiscated. As
stated by Justice Brandeis in the concurring opinion in
Missouri ex rel. S. W. Bell Telephone Co. v. Public Service
Commission of Missouri, 262 U. S. 276, 290 (1923):
“The thing devoted by the investor to the public
use is . . . capital embarked in the enterprise. Upon
the capital so invested the Federal Constitution guar-
antees to the utility the opportunity to earn a fair
return.” (emphasis added)
Also, see Federal Power Commission v. Hope Natural Gas
Co., 320 U. S. 591, 603 (1944) which cited this opinion
of Justice Brandeis, and Market Street Railway Company
v. Railroad Commission of the State of California, 324
U. S. 548, 567 (1945).
Furthermore, this Court in Lindheimer v. Illinois Bell
Telephone Company, 292 U. S. 151, 167 (1934), recog-
8 Petition for Writ of Certiorari
nized that the Fourteenth Amendment requires “an allow-
ance for consumption of capital” through depreciation ex-
pense “in order to maintain the integrity of the investment
in the service rendered.”
The $2,558,634 damage proceeds in issue were with-
out question the property of PG&W and its investors. Had
PG&W not been a public utility with a legal duty to render
adequate service, the damage proceeds could have been
distributed in the form of dividends to its stockholders.
The damage proceeds, however, were reinvested to con-
struct uew facilities to assure that adequate service was
maintained. Under the aforementioned decisions of this
Court, the failure to allow any return whatsoever on this
investment, as well as the recovery of the associated de-
preciation expense, violates the Fourteenth Amendment.
The effect of the decision below is to give private
property to the ratepayer, which is contrary to this Court's
decision in Board of Public Utility Commissioners v. New
York Telephone Company, 271 U. S. 23, 32 (1926):
“Customers pay for service, not for the property
used to render it.... By paying bills for service they
do not acquire any interest, legal or equitable, in the
property used for their convenience or in the funds of
the company.”
It is respectfully submitted that this constitutional
violation should not be allowed to stand.
II. The Action of the Court Below in Rendering Incon-
sistent Opinions on Appeals Simultaneously Yiled In-
volving the Same Issue Is a Violation of Both Due
Process and Equal Protection of the —.aws.
“[D]ue process of law and the equal protection of the
laws” this Court has held “are secured if the laws operate
Petition for Writ of Certiorari 9
on all alike, and do not subject the individual to an arbi-
trary exercise of the powers of government.” Duncan v.
State of Missouri, 152 U. S. 377, 382 (1894). To satisfy
the due process and equal protection guarantees, the ap-
pellate process must operate uniformly on all parties simi-
larly situated. As this Court held in Barbier v. Connolly,
113 U. S. 27, 31 (1885):
“The 14th Amendment, in declaring that no State
‘Shall deprive any person of life, liberty or property
without due process of law, nor deny to any person
within its jurisdiction the equal protection of the
laws,’ undoubtedly intended, not only that there
should be no arbitrary deprivation of life or liberty
or arbitrary spoliation of property but that equal
protection and security should be given to all under
like circumstances in the enjoyment of their personal
and civil rights; that all persons should be equally
entitled to pursue their happiness and acquire and
enjoy property; that they should have like access to
the courts of the country for the protection of their
persons and property, the prevention and redress of
wrongs, and the enforcement of contracts; that no
impediment should be interposed to the pursuits of
anyone except as applied to the same pursuits by
others under like circumstances; that no greater
burdens should be laid upon one than are laid upon
others in the same calling and condition . . .”
These Fourteenth Amendment requirements were
violated in the inconsistent holdings by the court below.
Here, the Commonwealth Court on May 27, 1975, entered
both its PG&W and Keystone opinions holding that the
PUC’s ratemaking exclusion of property financed with a
highway damage payment was in violation of the Four-
teenth Amendment. On June 26, 1976, the PUC filed with
10 Petition for Writ of Certiorari
the court below petitions seeking allowances of appeal
from both the Commonwealth Court’s PG&W and Key-
stone opinions, which petitions raised precisely the same
contentions. The Court below in a timely fashion pro-
ceeded to grant the appeal from the Keystone opinion and
rendered its decision at Keystons Water Company, White
Deer District v. Pa. P. U. C., 477 Pa. 594, 385 A. 2d 946
(1978) (Appendix F), affirming by an equally divided
court the Commonwealth Court’s Keystone opinion that
the PUC’s ratemaking exclusion of property financed with
a highway damage award was a violation of due process.
In sharp contrast, the court below delayed the grant-
ing of the appeal from the PG&W opinion for approxi-
mately three years and approximately a year and one-half
thereafter issued its decision reversing the opinion and
finding that the PUC’s ratemaking exclusion of property
financed with a highway damage award was not a viola-
tion of due process. Thus, in appeals simultaneously filed
before the same court, the utility in one was allowed a
return and depreciation while the utility in the other was
not.
Under the circumstances, the action of the court
below in rendering two totally inconsistent decisions in
appeals filed on the same day, by the same party and in-
volving the same issue is a violation of the Fourteenth
Amendment.’
7. This is not a situation such as Fidelity & Columbia Trust
Company v. City of Louisville, 245 U. S. 54 (1917), where the
appellate court reversed one of its earlier decisions, The incon-
sistent decisions rendered by the court below involved appeals
filed on the same day by the same party and it was only as a
result of the court delaying action on the PG&W opinion that its
decision below was rendered subsequent to its decision in Key-
stone Water Co., White Deer District v. Pa, P. U. C., supra.
Petition for Writ of Certiorari 11
III. The Long and Unjustified Delay of the Court Below
in Deciding the Case Is a Violation of Both Due
Process and Equal Protection of the Laws.
As recognized on many occasions by this Court, the
limitations imposed by the constitutional requirements of
due process and equal protection of the laws extend to the
judicial branch of government. See e.g., Shelley v.
Kraemer, 334 U. S. 1 (1948). The judicial branch in
carrying out these requirements must not act arbitrarily
in processing appeals of persons similarly situated. Dun-
can v, State of Missouri, 152 U. S. 377 (1894). In light
of the action of the court below in processing its decision
in Keystone Water Co., White Deer District v. Pa.
P. U. C., supra, in a much more timely fashion, the in-
ordinate and arbitrary delay of the court below in this case
is so flagrant that it should shock the judicial conscience
as an outright violation of both due process and equal
protection of the laws.
The court below took over five and one-half years to
finally dispose of the appeal from the Commonwealth
Court’s May 27, 1975 PG&W opinion. The court did not
act on the PUC’s petition for allowance of appeal for ap-
proximately three years; it did not enter its judgment and
opinion for approximately one and one-half years follow-
ing the granting of the appeal; and it did not take action
on PG&W’s application for reargument for over a one-year
period.
This arbitrary and unjustified delay is particularly
egregious to PG&W. Over the last six years, PG&W has
been collecting rates in accordance with the Common-
wealth Court’s May 27, 1975 PG&W opinion. The action
of the court below in reversing the PG&W opinion some
five years after it was entered has exposed this public
utility to a claim for refunds involving the reasonableness
of the water rates collected during the entire period.
12 Petition for Writ of Certiorari
The court below has so far departed from the ac-
cepted and usual course of judicial proceedings that
PG&W’s constitutional rights have been violated.
CONCLUSION
For all of the foregoing reasons a writ of certiorari
should issue to review the judgment and opinion of the
Supreme Court of Pennsylvania
Respectfully submitted,
CHARLES Epwarp THOMAS
D. Mark THOMAS
Patricia LEE ARMSTRONG
Tuomas & THOMAS
212 Locust Street
Post Office Box 999
Harrisburg, PA 17108
Attorneys for Petitioner
APPENDIX A.
IN THE
SUPREME COURT OF PENNSYLVANIA
Mipp.e District AND EASTERN DisTRICT
No. 35 May Term, 1978
PENNSYLVANIA PUBLIC UTILITY COMMISSION,
Appellant
v.
PENNSYLVANIA GAS AND WATER COMPANY
(WATER DIVISION ),
Appellee
CITY OF SCRANTON, et al.
v.
PENNSYLVANIA GAS AND WATER COMPANY,
(WATER DIVISION )
Appeal from Order of the Commonwealth Court of Penn-
sylvania, Dated May 27, 1975, at Nos. 1092, 1122,
1123 C.D. 1974, Reversing in Part of the Order of
the Pennsylvania Public Utility Commission at R.I.D.
72, Dated July 9, 1974.
No. 278 January Term, 1978
PENNSYLVANIA PUBLIC UTILITY COMMISSION,
Appellant
v.
PENNSYLVANIA GAS AND WATER COMPANY—
WATER DIVISION
Appellee
(Al)
A2 Appendix A
OFFICE OF CONSUMER ADVOCATE
and
PENNSYLVANIA ATTORNEY GENERAL,
Intervenors
Appeal from the Order of the Commonwealth Court Dated
December 21, 1977, at No. 1523 Commonwealth
Docket 1976, Reversing the Order of the Pennsylva-
nia Public Utility Commission at Rate Investigation
Docket No. 209, Dated August 4, 1976.
Opinion
(Filed February 1, 1980)
Nix, J.
These two appeals present this Court with the trouble-
some issue of the correct standard to be employed by the
Public Utility Commission (PUC) in fulfilling its legis-
lative mandate to “ascertain and fix the fair value of the
whole or any part of the property of any public utility.”
Act of May 28, 1937, P. L. 1053, art. III, § 311, 66 P. S.
§ 1151 (1958) * (the Act). For the reasons that follow,
we are of the view that the PUC was correct in its deter-
mination and that its orders should not have been dis-
turbed. Accordingly, we reverse the orders of the
Commonwealth Court below.
The complex facts surrounding these appeals are
fully set forth in the opinions of the Commonwealth
Court.’ For our purposes, the following brief factual reci-
(1) This Act was repealed by the Public Utility Code of 1978,
66 Pa. C. S. A. §§ 1 et seq., effective August 29, 1978. The instant
appeals are concerned solely with the 1937 Act.
(2) The opinion of the Commonwealth Court in No, 35 May
Term 1978 (PG&W I) is set forth at 19 Pa. Commw. Ct. 214, 341
Appendix A A3
tation is sufficient. The appeal at No. 35 May Term 1978
(PG&W I) concerns construction and improvement
projects undertaken by the Pennsylvania Department of
Highways that were anticipated to affect the water supply
of the Pennsylvania Gas & Water Company (PG&W)
within its Roaring Brook watershed area. An agreement
was entered into between the Department and PG&W to
remedy and minimize the adverse effect of this federally
funded highway project on the turbidity and purity of
the water derived from the watershed. This agreement
provided that the Department would contribute to PG&W
a sum in excess of $2.7 million toward the construction of
a new dam, reservoir, and a 30-inch pipeline. The PUC
rejected the attempt by PG&W to include this $2.7 million
payment in its base for accounting and rate making pur-
poses.* The Commonwealth Court reversed the PUC on
the ground that the exclusion of the $2.7 million payment
from the rate base constituted a violation of the principles
enunciated in Keystone Water Co. v. PUC, 19 Pa. Commw.
Ct. 292, 339 A. 2d 873 (1975), affirmed by an equally
divided Court, 477 Pa. 594, 385 A. 2d 946 (1978). We
granted the PUC’s petition for allocatur.
The appeal at No. 278 January Term 1978 (PG&W
II) concerns PG&W’s request for a two-step increase in
its rates. The PUC approved the first step, but disallowed
the second step after ascertaining and fixing PG&W’s rate
base at $87,700,000 and allowing it a return of 8.53 per
cent. The Commonwealth Court reversed the PUC, find-
2. (Cont'd. )
A. 2d 239 (1975). The opinion of that court in No. 278 January
Term 1978 (PG&W II) is found at 33 Pa. Commw. Ct. 143, 381
A. 2d 996 (1977).
(3) By including this payment into its base, PG&W could pass
this windfall on to its stockholders and also request higher rates
from the public in order to compensate for the injury to its water-
shed.
A4 Appendix A
ing that the PUC’s determination of the fair value of
PG&W’s rate base was legally incorrect in view of its
earlier opinions in the PG&W I and Keystone. We
granted the PUC’s petition for review and the petitions
to intervene filed by the Attorney General and the Office
of Consumer Advocate, and ordered the matters to be
argued together.
1. The Appeal at No. 35 May Term, 1978
Before we discuss the legal and historical basis sur-
rounding the “fair value” controversy, we think it proper
to set forth the rationale employed by the PUC in support
of its Order rejecting PG&W’s attempt to include the
state’s $2.7 million payment in its base for accounting and
rate making purposes:
For public utility accounting and rate making
purposes we must reject respondent's contention.
Property, which is used or useful in rendering a pub-
lic utility service and which has been a part of a pub-
lic utility's rate base is dedicated to a public use, and
is impressed with a public trust. It (or the proceeds
or accruals therefrom) is subject to regulation by the
properly designated regulatory body and remains
subject to that regulation until such time as that regu-
latory body duly finds it in the public interest to
approve its release from public service. Such prop-
erty must be regulated in the interest of the public
no less than in the interest of the utility. Equities
must be balanced and justice must be done to all con-
cerned. Accordingly, when a utility suffers extraor-
dinary losses in service value of utility property
abandoned or otherwise retired from service, or
suffers unforeseen damages to property which dam-
ages could not reasonably be anticipated, and where
the utility has not otherwise recovered its investment,
Appendix A A5
this Commission can and, where equities require,
does permit the utility to recover from the ratepayers,
as a proper and necessary expense of rendering the
public service, the necessary amount to make the
utility whole. On the other hand, where, as here, the
utility recovers an amount or sum as a result of com-
pensation for particular property and the potential
consequential injury to the service of the ratepayers
for whom that property was dedicated to the public
use, the Commission, where the equities dictate, may
require that amount received by the utility to be
treated, for public utility accounting and rate making
purposes, in such manner as will place the utility and
the ratepayers in the same position, insofar as rea-
sonably possible, as they were before the extraordinary
event or transaction which gave rise to the sum or
amount in question.
For rate making purposes, we cannot permit re-
spondent to receive all the salutary effects of the agree-
ment and pass them on to the stockholders as a wind-
fall while passing on to the ratepayers only the
increased rates that would become necessary had there
been no agreement and contribution. Clearly, the
payment in question resulted and stemmed from con-
sideration of the property’s dedication to public use
as a water utility, and recognition of the potential
injury to the interests and service of the water utility
customers. In situations and circumstances such as
this, the customers of a utility are in the nature of
third party beneficiaries whose interest in the utility
service must be protected. The essence of public
utility regulation is the protection of the public and
the assurance of adequate service to them at reason-
able rates on the one hand, and, on the other, a fair
opportunity to the utility to secure a reasonable rate
A6 Appendix A
and no windfall from such services. To reflect
equitably and meaningfully the near restoration of, or
equitable substitution for, the pre-agreement status
quo, both the utility and its customers must be made
whole insofar as reasonably possible.
First, the majority opinions of the Commonwealth
Court in Keystone and in the instant case reflect a mis-
perception of the regulatory authority of the Common-
wealth and its chosen instrumentality for carrying out the
desired objectives (the Pa. PUC) and the significance of
the notion of deference which accompanies that regulatory
scheme. The PUC’s functions in valuing utility property *
and in fixing just and reasonable rates of return thereon °
are exercises of the regulatory powers of the Common-
(4) Valuation of property of a public utility
The commission may, after reasonable notice and hearing, as-
certain and fix the fair value of the whole or any part of the
property of any public utility, in so far as the same is material
to the exercise of the jurisdiction of the commission, and may
make revaluations from time to time and ascertain the fair
value of all new construction, extensions, and additions to the
property of any public utility. When any public utility fur-
nishes more than one of the different types of utility service
enumerated in paragraph seventeen of section two of this act
[66 P. S. §1102(17)], the commission shall segregate the
property used and useful in furnishing each type of such serv-
ice, and shall not consider the propery of such public utility as
a unit in determining the value of the property of such public
utility for the purpose of fixing rates,
Public Utilities Law, § 311, 66 P. S. § 1151.
(5) Rates to be just and reasonable
Every rate made, demanded, or received by any public utility,
or by any two or more public utilities jointly, shall be just and
reasonable and in conformity with regulations or orders of the
commission,
Id. at § 301, as amended, 66 P. S, § 1141.
Appendix A A7
wealth. Cf., Nebbia v. New York, 291 U. S. 502 (1934).
Regulation amounts to a taking when government forces
“some people alone to bear public burdens, which, in all
fairness and justice, should be borne by the public as a
whole.” Armstrong v. U. S., 364 U. S. 40, 49 (1960).
Accordingly, it must be determined whether the PUC’s
exclusion from PG&W's rate base of a payment made out
of public funds to construct a reservoir and pipeline to
minimize the effects of a public construction project on
the performance of water supply functions which are pub-
lic in nature, forced PG&W’s investors and shareholders
alone to bear public burdens which in fairness and justice
should have been borne by the utility’s rate payers as a
whole.
Tlie second deep-rooted fallacy in the Commonwealth
Court analysis in this area has to do with confusing valua-
tion for eminent domain purposes with valuation for
regulatory purposes. These various processes of valuation
are no more necessarily interrelated or interdependent
than valuation for real property assessment purposes or
any other circumstances in which the law requires valua-
tion of property for the performance of a discrete and
separate governmental function. See generally Bon-
bright, Valuation of Property (1937). The mere fact that
a particular part of the company’s property was valued at
its cost of reproduction in an eminent domain award is
not dispositive nor controlling as to its proper valuation
for regulatory purposes. The purpose of just compensa-
tion in eminent domain is to put the owner “in as good a
position pecuniarily as it would have occupied, if its prop-
erty had not been taken.” U. S. v. New River Collieries,
262 U. S, 341 (1923). But it has been cogently observed
that “the purpose of regulating utility rates, unlike that of
condemning property, is to correct an economic maladjust-
ment whereby the company owning the property is ad-
A8 Appendix A
judged to have an undue advantage over the rest of the
community.” Hale, Freedom Through Law—Public Con-
trol of Private Governing Power, p. 463.
In the case of water companies, the advantages which
they have secured over the rest of the community have
stemmed directly from their status as public corporations.
White v. City of Meadville, 177 Pa. 643, 35 A. 695 (1896).
For example, at various times, water companies have been
vested with eminent domain taking powers which gave
them the right to take streams" and to acquire land to
preserve their water supply from contamination." So, too,
such rights as any water company enjoys to divert water
for the purpose of supplying municipalities or other con-
sumers are, because they exceed the common law rights of
the riparian owner, wholly public in that they arise by
virtue of public eminent domain and regulatory powers.
Lord v. Meadville Water Co., 135 Pa. 122, 19 A. 1007
(1890); Haupt’s Appeal, 125 Pa. 211, 17 A. 436 (1889).
In refusing to include the $2.7 million contribution
made by the Commonwealth toward the capital construc-
tion costs of the reservoir and pipeline necessitated by the
anticipated impact of the federally aided highway con-
struction project in PG&W’s rate base, the PUC in effect
disallowed PG&W an addition to the original cost measure
upon which the property in question was valued. In so
doing, PG&W contends that the PUC contravened the
controlling statutory norm requiring it “to ascertain and
fix the fair value of the whole or any part of the property
of any public utility.” Public Utility Law, § 311, 66 P. S,
§ 1151 (emphasis supplied). PG&W further contends that
this statutory norm of “fair value” either incorporates by
(6) Corporation Act of 1874, Act of April 29, 1874, P. L. 73,
No, 32, § 34 as amended by the Act of May 16, 1889, P. L, 226,
No, 232.
(7) Act of May 26, 1893, P. L. 158, No. 103,
Appendix A AQ
reference the meaning of that term as adumbrated in
Smyth v. Ames * or, in the alternative, is bottomed on the
continuing validity of Smyth as a standard for adjudicating
the constitutionality of rate regulation under the Federal
Constitution.
In construing the statutory norm of fair valuation, we
must, of course, view that standard within the context of
the enactment as a whole. Accordingly, we find that the
overriding principle governing the PUC’s performance of
its duty is to determine “just and reasonable” rates pur-
suant to Public Utility Law § 301, 66 P. S. § 1141. New
York Telephone and Telegraph v. PSC, 309 N. Y. 569,
579-580, 132 NE. 2d 847, 850-51 (1956). Thus, the
“fair value” must reflect rates that are “just and reason-
able.” The rate making function consists of a two-step
process to effectuate the paramount responsibility of fix-
(8) 169 U. S. 466 (1898). The holding in Smyth reads as
follows:
We hold . . . that the basis of all calculations as to the
reasonableness of rates to be charged by a corporation main-
taining 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 improve-
ments, 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 re-
garded 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. On the
other hand, what the public is entitled to demand is that no
more be exacted from it for the use of a public highway than
the services rendered by it are reasonably worth, Jd. at 546,
Al0 Appendix A
ing “just and reasonable” rates: fair valuation of utility
property and the ascertainment of a reasonable rate
thereon. There is ample authority for the proposition that
the power to fix “just and reasonable” rates imports a
flexibility in the exercise of a complicated regulatory
function by a specialized decision-making body and that
the term “just and reasonable” was not intended to confine
the ambit of regulatory discretion to an absolute or math-
ematical formulation but rather to confer upon the regu-
latory body the power to make and apply policy concern-
ing the appropriate balance between prices charged to
utility customers and returns on capital to utility investors
consonant with constitutional protections applicable to
both. See Utah Power and Light Co. v. PSC, 107 Utah
155, 190-191, 152 P. 2d 542, 558 (1944). Accord, State v.
N. J. Bell Telephone Co., 30 NJ 16, 152 A. 2d 35 (1959).
The opinion in support of affirmance in Keystone did
not deny the primacy of the “just and reasonable” stand-
ard or that it represented a delegation of policy-making
powers to the PUC which are basically legislative in
nature. That opinion, however, accepted the notion that
the term “fair value” was intended to have a fixed meaning
incorporating by reference the rule in Smyth v. Ames, as
interpreted in Bluefield Water Works v. Public Service
Commission,’ with respect to the weight of reproduction
cost data in rate making. Keystone, 477 Pa. at 607-08,
385 A.2d at 953-54.
The legislative history of public utility regulation in
this Commonwealth does not support this assertion. The
1913 Public Service Company Law which is the grand-
father of the present statute spelled out the meaning of
“fair value” by express incorporation of each factor enu-
merated in Smyth v. Ames. Act of July 16, 1913, P. L.
1734, No. 854, art. V, § 20. The purpose of such enumera-
(9) 262 U. S, 679 (1923).
Appendix A All
tion was to draft a constitionally valid statute by includ-
ing therein almost in ipsis verbis the constitutional rule
concerning rate fixing powers as it was understood at the
time that the statute was drafted. See Munson, The Pub-
lic Service Company Law (1914). The 1937 statute
superseding the 1913 law significantly omitted any defini-
tion or specification of the meaning of “fair value.” The
Superior Court considered that this omission was con-
sistent with a legislative intent to define “fair value” as
synonymous with that concept as expressly defined by the
prior statute and in Smith v. Ames. Solar Electric Co. v.
PUC, 137 Pa. Super. 325, 326, 9 A. 2d 447 (1939). How-
ever, this omission is equally consistent with a legislative
intent to free itself from the shackles of express adherence
to an understanding of the constitutional meaning of “fair
value” which was in evolution at the time that the 1937
statute was drafted. See Rose, The Hope Case and Public
Utility Valuation, 54 Col. L. Rev. 188, 195 (1954); Bauer
& Gold, Public Utility Valuation for Purposes of Rate Con-
trol, p. 155 et seq. (1935).
In any event, even assuming arguendo that the legis-
lature intended to acquiesce in the “fair value” principle
as enunciated in Smyth v. Ames, little comfort is thereby
afforded to PG&W. The rule in Smyth v. Ames fixes the
very broad constitutional boundaries within which the
legislature may exercise or infer discretionary leeway in
rate-making. As a leading commentator observed:
It is obvious that the instruction that is the essence of
‘fair value’-—to give the matters for consideration
(principally original cost and reproduction cost) such
weight as may be just and right—is not operational.
It offers no criterion or rule to determine what is ‘just
and right’ and, therefore, does not provide a method
to ascertain a uniquely determinate value of the
weight to be assigned to each of the ‘matters for con-
Al2 Appendix A
sideration’ in a finding of fair value.... The fact
is that fair value is an indeterminate magnitude lying
anywhere between original cost and reproduction
cost. [Emphasis added]. ’
Rose, Confusion in Valuation for Public Utility Rate
Making, 47 Minn. L. Rev. 1, 23 (1962).
Properly understood, Smyth v. Ames speaks only to
the outer boundaries beyond which, on the one hand, a
regulator approaches an uncompensated eminent domain
taking of investor property by valuing it below its origi-
nal cost and, on the other hand, a regulator approaches
an unlawful taxation of consumers under the guise of rate
fixing by valuing the property in excess of its reproduction
cost. Between these extremes, the question is one of
policy for the regulatory body concerning which the judi-
cial branch is not warranted in interposing economic
theories. Unless the PUC’s decision does not bear a real
and substantial relationship to the regulatory objects
sought to be obtained by it, that judgment must prevail.
Gambone v. Commonwealth, 375 Pa. 547, 101 A. 2d 634
(1954); Pennsylvania State Bd. of Pharmacy v. Pastor,
441 Pa, 186, 272 A. 2d 487 (1971).
Thus, “fair value” as understood in Smyth v. Ames
does not compel reversal of the PUC’s determination either
as a matter of statutory or constitutional law. In the
instant case, the PUC duly considered the evidence prof-
fered by PG&W as to the reproduction cost of the water-
shed properties but concluded that, under the circum-
stances of the particular case, the allowance of any
addition to original cost figures for rate making purposes
was not just and reasonable and that the 2.7 million dollar
payment should be more appropriately treated as a “con-
tribution,” as it was designated by the agreement between
PG&W and the Department of Highways, rather than as
Appendix A Al3
an additional investment of capital. As we observed in
an earlier case:
The ascertainment of the fair value of the prop-
erty, for rate making purposes, is not a matter of for-
mulas, but is a matter which calls for the exercise
of a sound and reasonable judgment upon a proper
consideration of all relevant facts. The commission is
not bound to adopt any one method to the exclusion
of all others. It may take into consideration various
methods, and use its judgment as to the extent to
which they shall be employed. The original cost of
the property is not to be taken as controlling, for there
may have been extravagance in purchasing, or bad
management; and, on the other hand, there may have
been an actual increase in values since the original
purchase or construction. Then again the reproduc-
tion cost, less depreciation, may not give the present
fair value of an old property, for it may not now be
desirable to reproduce the old type of plant. Im-
proved machinery, and better methods of operation,
may have come into vogue, which would make it true
economy to relegate much of the physical structure
of an old plant to the scrap heap. Much must be left
to the sound discretion of the appraising body, the
tribunal appointed by law and informed by experi-
ence, for the discharge of these delicate and complex
duties. Its report must, of course, justify itself in
reason, upon review in the appellate courts.
Ben Avon Boro v. Ohio Valley Water Co., 260 Pa.
289 at 308-309, 103 A. 744 (1918).
The error which the Commonwealth Court and the
opinion in affirmance in Keystone fell into was the assump-
tion of a constitutionally mandated nexus between the
“fair value” standard and cost of reproduction figures. The
Al4 Appendix A
unsoundness of this assumption is manifested in the fact
that this Court denies that reproduction cost figures have
any probative value for real property tax assessment pur-
poses because of their hypothetical and speculative na-
ture. Buhl Foundation v. Bd. of Property Assessment,
407 Pa. 567, 180 A. 2d 900 (1962); U. S. Steel Corp. v.
Bd. of Assessment & Rev. of Taxes, 422 Pa. 463, 223 A. 2d
92 (1966). Reproduction cost figures are clearly admissi-
ble in PUC proceedings but we see nothing in the “fair
value” rule that requires, either as a statutory or constitu-
tional mandate, that they must be accepted in whole or in
part for valuation purposes. We, therefore, repudiate any
intimations in these decisions or in prior case law that has
the effect of suggesting a constitutional mandate requiring
the inclusion of reproduction cost figures in arriving at the
appropriate rate structure in public utility valuation cases.
To follow the Commonwealth Court and the opinion
in affirmance in Keystone down the path of attempting to
apply a constitutional taking analysis to valuations of prop-
erty by the PUC which do not go beyond original cost, is
unsound both in principal and as a matter of judicial
policy.
In the former respect, it commits the judicial branch
to a constitutionally grounded review of all rate requests
in which the PUC has on an item by item basis failed to
go beyond original cost valuation. In the case at bar,
PG&W sought to include a replacement cost figure in toto
in the rate base because of the fortuity that the property
in question was subject to taking for eminent domain pur-
poses. But if PG&W’s entitlement is constitutionally
founded, then it must be accorded revaluation at repro-
duction cost as to every item on its property concerning
which it requests revaluation since the maturing of its
constitutional rights cannot turn on the mere happen-
stance of a public taking. It is no answer to say that the
Appendix A Ald
PUC’s accounting rules do not permit such a result since
the accounting rules as creatures of statute cannot prevail
against a constitutionally grounded right.
In the latter respect, the opinions commit us without
either statutory or constitutional warrant to a slippery slope
of judicial intervention into rate making whose limit we
cannot now foresee. We can, call upon the experience of
the United States Supreme Court with respect to judicial
intervention in these matters as a guide. As Justice Stone
warned in his dissenting opinion in West v. Chesapeake &
Potomac Telephone Co., 295 U. S. 662, 689 (1935), “In
assuming the task of determining judicially the present
fair replacement value of the vast properties of public
utilities, courts have been projected into the most specula-
tive undertaking imposed upon them in the entire history
of English jurisprudence.” It is a task which this Court
refused to undertake in Ben Avon Boro, supra and the
wisdom of that judgment was ultimately recognized by
the United States Supreme Court in FPC v. Natural Gas
Pipeline Co., 315 U. S. 575, 586 (1942) (the Constitution
does not bind rate making bodies to the service of any
single formula or combination of formulas). Thus in
Natural Gas Pipeline that Court limited its scope of re-
view, “if the Commission’s order, as applied to the facts
before it and viewed in its entirety, produces no arbitrary
result, our inquiry is at an end.” Id.
A careful examination of the record in this case has
led us to the conclusion that in the items wherein the Com-
monwealth Court differed from the PUC upon the ques-
tions presented to it, there was merely the substitution of
the court’s judgment for that of the Commission, rather
than a determination that the order of the latter was un-
lawful.
Accordingly, we reverse the order of the Common-
wealth Court below, and reinstate the order of the Public
Utility Commission.
Al6 Appendix A
2. The Appeal at No. 278 January Term, 1978
As the preceding discussion has totally undercut the
legal foundation for the Commonwealth Court’s decision
in this case, we reverse that court’s order entered below.
Based on our analysis of the arguments presented to this
Court on the merits of the rate increase, we find that the
order of the PUC is supported in law and by sufficient
facts. Accordingly, we reinstate the order of the PUC
entered below.
The orders of the Commonwealth Court are reversed
and the orders of the Public Utility Commission are
reinstated.
Justice Manderino did not participate in the decision
of this case.
Mr. Justice Roberts joins the majority and filed a
concurring opinion.
Mr. Justice Larsen joins the majority and filed a con-
curring opinion.
Appendix A Al7
SUPREME COURT OF PENNSYLVANIA
Mipp.e District
No. 35 May Term, 1978
PENNSYLVANIA PUBLIC UTILITY COMMISSION
v0.
PENNSYLVANIA GAS AND WATER COMPANY
CITY OF SCRANTON, et al
0.
PENNSYLVANIA GAS AND WATER COMPANY
APPEAL OF: PENNSYLVANIA PUBLIC UTILITY
COMMISSION
Judgment
On ConsmvERATION WHEREOF, it is now here ordered
and adjudged by this Court that the orders of the Com-
monwealth Court of Pennsylvania are reversed and the or-
ders of the Public Utility Commission are reinstated.
/s/ Mitprep E. WILLIAMSON
Deputy Prothonotary
Dated: February 1, 1980
Al18 Appendix A
IN THE
SUPREME COURT OF PENNSYLVANIA
Mipp.e District
No. 35 May Term, 1978
PENNSYLVANIA PUBLIC UTILITY COMMISSION,
Appellant
v.
PENNSYLVANIA GAS AND WATER CCMPANY
(WATER DIVISION )
CITY OF SCRANTON ET AL.
v.
PENNSYLVANIA GAS AND WATER COMPANY
(WATER DIVISION)
Appeal from order of the Commonwealth Court of Penn-
sylvania, dated May 27, 1975, at Nos. 1092, 1122, &
1123 C. D. 1974, Reversing in part the order of the
Pennsylvania Public Utility Commission at R. I. D.
72, dated July 9, 1974.
Appendix A Al9
IN THE
SUPREME COURT OF PENNSYLVANIA
EASTERN DISTRICT
No. 278 January Term, 1978
PENNSYLVANIA PUBLIC UTILITY COMMISSION,
Appellant
v.
PENNSYLVANIA GAS AND WATER COMPANY
(WATER DIVISION )
OFFICE OF CONSUMER ADVOCATE and
PENNSYLVANIA ATTORNEY GENERAL,
Intervenors
Appeal from order of the Commonwealth Court of Penn-
sylvania, dated December 21, 1977, at No. 1523 C. D.
1976, Reversing the order of the Pennsylvania Public
Utility Commission at R. I. D. 209, dated August 4,
1976.
Concurring Opinion
Filed February 1, 1980
Roserts, J.
The PUC is statutorily and constitutionally obliged
to set “just and reasonable” rates and may, but is not re-
quired to, use cost of reproduction in the rate base. See
Keystone Water Co. v. Pennsylvania Public Utility Com-
mission, 477 Pa. 594, 615-26, 385 A. 2d 946, 957-63 (1978)
(Opinion of Roberts, J., in Support of Reversal, joined by
Eagen, C.J. & Nix, J.). I join the majority opinion which
is in accord with the views expressed in the Opinion in
Support of Reversal in Keystone Water, and I agree with
the majority that the orders of the Commonwealth Court
should be reversed and the orders of the PUC reinstated.
A20 Appendix A
IN THE
SUPREME COURT OF PENNSYLVANIA
Mippe District AND Eastern Districr
No. 35 May Term, 1978
PENNSYLVANIA PUBLIC UTILITY COMMISSION,
Appellant
v.
PENNSYLVANIA GAS AND WATER COMPANY,
(WATER DIVISION),
Appellee
CITY OF SCRANTON, et al.
v.
PENNSYLVANIA GAS AND WATER COMPANY
(WATER DIVISION )
Appeal from Order of the Commonwealth Court of Penn-
sylvania, Dated May 27, 1975, at Nos. 1092, 1122,
1123 C. D. 1974, Reversing in Part of the Order of
the Pennsylvania Public Utility Commission at R. I. D.
72, Dated July 9, 1974.
No, 278 January Term, 1978
PENNSYLVANIA PUBLIC UTILITY COMMISSION,
Appellant
v.
PENNSYLVANIA GAS AND WATER COMPANY—
WATER DIVISION,
Appellee
Appendix A A2l
OFFICE OF CONSUMER ADVOCATE
and
PENNSYLVANIA ATTORNEY GENERAL,
Intervenors
Appeal from the Order of the Commonwealth Court Dated
December 21, 1977 at No. 1523 Commonwealth
Docket 1976 Reversing the Order of the Pennsyl-
vania Public Utility Commission at Rate Investigation
Docket No. 209, Dated August 4, 1976.
Concurring Opinion
' Filed February 1, 1980
Justice Ror LARSEN
I join in the majority opinion. Additionally, I would
add that under no circumstances can a “windfall” or gift
to a utility be included in a rate base.
A22 Appendix B
APPENDIX B.
[Letterhead of]
SUPREME COURT OF PENNSYLVANIA
Mupp.e Districr
CARL RICE, ESQ. 434 Main Capitol Buildin
PROTHONOTARY rs O, Box 624
MILDRED E, WILLIAMSON Harrisburg, Penssyivenia 17108
Deruty PrornonoTany (717) 787-6181
February 24, 1981
Charles E. Thomas, Augustine A. Mazzei, Jr.,
Esquire Esquire
P. O. Box 999 420 Boulevard of the Allies
Harrisburg, Pa. 17108 Pittsburgh, Pa. 15219
Re: Pa. Gas & Water, etc. v. Pa. Public Utility Comm.,
etc. No. 35 May Term, 1978 (J. 237/79)
Dear Mr. Thomas & Mr. Massei:
This is to advise you that the Applications for Reargu-
ment on behalf of Pa. Gas and Water Company and
Equitable Gas Company have been denied.
Very truly yours,
/s/ Mutprep E, WittiaAMson
Deputy Prothonotary
MEW/sb
ce: D. Mark Thomas, Esquire
Patricia Armstrong, Esquire
West Publishing Company
Joseph J. Malatesta, Jr., Esquire
Appendix B A23
[Note: The Prothonotary has advised that the Applications
for Reargument were denied on February 18, 1981
and that the denial was endorsed by the court
below upon the cover of the application, but no
order was issued, }
A24 Appendix C
APPENDIX C.,
IN THE
COMMONWEALTH COURT OF PENNSYLVANIA
No. 1095 C, D, 1974
PENNSYLVANIA PUBLIC UTILITY COMMISSION
OF THE COMMONWEALTH OF PENNSYLVANIA,
Appellee
0.
PENNSYLVANIA GAS AND WATER COMPANY
(WATER DIVISION),
Appellant
No. 1122 C, D, 1974
COMMONWEALTH OF PENNSYLVANIA,
PENNSYLVANIA PUBLIC UTILITY COMMISSION,
Appellee
0.
CITY OF SCRANTON,
Appellant
PENNSYLVANIA GAS & WATER CO.,
Intervening Appellee
CARBONDALE AREA SCHOOL DISTRICT,
Intervening Appellant
No. 1123 C. D. 1974
Appendix C A25
COMMONWEALTH OF PENNSYLVANIA,
PENNSYLVANIA PUBLIC UTILITY COMMISSION,
Appellee
v.
COUNTY OF LACKAWANNA,
Appellant
PENNSYLVANIA GAS & WATER CO.,
Intervening Appellee
CARBONDALE AREA SCHOOL DISTRICT,
Intervening Appellant
BEFORE:
HonoraB_e JAMEs S. Bowman, President Judge
HonoraBe JAMEs C. CruMuisi, Jr., Judge
Honoras_e Harry A. KraMer, Judge
HonoraBLe Roy WILKINSON, JR., Judge
HonoraB_e GLENN E. MENCcER, Judge
HonoraB_e THeopore O. Rocers, Judge
HonoraB_e GENEVIEVE BLATT, Judge
Argued: February 3, 1975
Opinion
Opinion By JupGeE KRAMER Fitep: May 27, 1975
This opinion involves three appeals taken from a long-
form order, dated July 9, 1974, issued by the Pennsylvania
Public Utility Commission (PUC). The PUC order is
typical of the extensive, complicated, and technical ad-
judication usually involved in a public utility rate case.
A26 Appendix C
The pertinent procedural and factual aspects of the case,
together with the parties involved in this appeal, will be
described hereinafter.
The public utility involved is the Pennsylvania Gas
and Water Company (PG&W). It is a combination public
utility ' rendering both natural gas service and water serv-
ice. At the end of the test year, September 30, 1972, it
rendered public utility water service to 145,726 consuming
units, in a 165 square mile area, stretching from Forest
City in Susquehanna County on the north, to Glen Lyon
in Luzerne County 70 miles to the south. Its water service
area includes 60 municipalities, including Scranton and
Wilkes-Barre. Its service area is divided into two divisions,
viz., Spring Brook Division and Scranton Division, which,
for all practical purposes, are not interconnected. It sup-
plies water service from over 60 reservoirs and various
water wells situated in mountainous regions, and operates
for the most part on a gravity-flow basis, with a storage
capacity of over 21 billion gallons. PG&W transmits its
water through 1,600 miles of water mains.
This case had its beginning on January 30, 1973,
when PG&W filed various supplements to its tariffs under
which it proposed to increase its water rates so as to pro-
duce a total annual increase in revenue of $4,870,103, or
approximately a 50 percent increase over the then existing
rates, exclusive of the state tax adjustment surcharge.’ All
1. PG&W is a combination public utility in that it renders
natural gas service as well as water service. No issues have been
raised concerning the allocation of costs or expenses incurred in
this joint operation.
2. The following chart shows the pertinent detail on the vari-
ous supplements:
PG&W Tariff Water—Pa. P, U. C. No. 3 (Spring Brook Division)
Supp. No. 8—increase $1,299,949—collected from 4/12/73
Supp. No.9— ” $1,559,939—not collected
Appendix C A27
of the filed supplements were to become effective April
1, 1973, but they were subsequently and voluntarily post-
poned, to become effective April 12, 1973. The increased
rates were to affect all of its customers, except municipal-
ities and public fire-protection consuming units. Some of
the supplements, calculated to produce $2,213,683 of ad-
ditional revenue, were permitted to become effective April
12, 1973. The remainder of the supplements were sus-
pended by the PUC for the full statutory suspension
periods of nine months, to January 12, 1974. PG&W vol-
untraily extended the suspension period to March 15,
1974. On March 14, 1974, the PUC fixed the then effec-
tive rates of that date as temporary rates, until final order.
Twenty-three formal complaints were filed, all of
which were consolidated for the purposes of the hearings.
Three of the complaints were withdrawn or dismissed.
From a reading of the record we can state that in reality
only the City of Scranton and the County of Lackawanna
(hereinafter referred to as complainants) actively partici-
pated at the hearings. After 13 days of hearings (over
1,300 pages of testimony and 32 exhibits), the PUC issued
its long-form order from which came these appeals.
In its adjudication, the PUC found a fair value of
$102,000,000 and a fair rate of return of 7.35 percent, thus
providing income available for return in the amount of
$7,497,000. This return, together with the PUC’s findings
on operating expenses, depreciation, taxes, and other ad-
justments set forth in the adjudication, led the PUC to
2. (Cont'd. )
PG&W Tariff Water—Pa. P. U. C. No. 4 (Scranton Division)
Supp. No. 9—increase $ 913,734—collected from 4/12/73
Supp. No.10— ” $1,096,481—not collected
There was another supplement to Tariff Water—Pa. No. 5 which
in effect transferred service thereunder to Tariff Water—Pa. P. U. C.
No. 4 (Scranton Division)
A28 Appendix C
conclude that the allowable annual revenues were
$13,491,929, or $628,318 less than the total revenues
sought by PG&W in its filings of the various supplements
to its tariff mentioned above.
PG&W, the City of Scranton and the County of
Lackawanna filed separate appeals to this Court. PG&W
filed a petition to intervene in the appeals of the City and
the County which was granted by this Court, after which
all of the appeals were consolidated for disposition. On
September 11, 1974, the Carbondale Area School District
filed a petition to intervene, which was granted on that
same date. However, PG&W filed a motion to quash the
intervention by the school district as an appellant for the
reason that the school district had not filed a timely ap-
peal. Argument on the motion to quash was listed at the
consolidated argument. Preliminarily, we will dispose of
the motion to quash by stating that a party to an adminis-
trative proceeding with the right to appeal may not utilize
a petition to intervene to obviate the statutory time limit
on appeal, and this Court is powerless to extend the man-
datory statutory appeal provisions. See Pittsburgh v.
Pennsylvania Public Utility Commission and Duquesne
Light Company, 3 Pa. Commonwealth Ct. 546, 284 A. 2d
808 (1971) and Smith v. Pennsylvania Public Utility Com-
mission, 174 Pa. Superior Ct. 252, 101 A. 2d 435 (1953).
Therefore, we must grant the motion to quash.
Because these three appeals have been consolidated,
we will deal with each of the issues raised in the various
appeals under appropriate subtitles hereinafter.
Our scope of review is limited by statute. In section
1107 of the Public Utility Law (Act), Act of May 28,
1937, P. L. 1053, as amended, 66 P. S, § 1437, we find:
“The order of the commission shall not be vacated or
set aside, either in whole or in part, except for error
of law or lack of evidence to support the findings, de-
Appendix C A29
termination, or order of the commission, or violation
of constitutional rights.”
We have stated in a recent opinion that this section of the
statute means that the appellate courts cannot conceive an
independent judgment from the record, and substitute it
for the judgment of the PUC. We may not indulge in the
process of weighing evidence and resolving conflicts in
testimony. The PUC’s discretionary findings and conclu-
sions must be accepted unless they are totally without
support in the record, are based on error of law, or are
unconstitutional. See Lower Paxton Township v. Com-
monwealth of Pennsylvania, Public Utility Commission,
13 Pa. Commonwealth Ct. 135, 317 A. 2d 917 (1974) and
Johnstown-Pittsburgh Express, Inc. v. Public Utility Com-
mission, 5 Pa. Commonwealth Ct. 521, 291 A. 2d 545
(1972). With these guidelines in mind, we now turn to
the specific issues raised in these three appeals.
I. RATE BAsE ExcLusion
To understand the issue involved here, it is necessary
to set forth some pertinent facts. At some time prior to
1969 the Commonwealth of Pennsylvania, acting through
its Department of Highways (now known as the Pennsyl-
vania Department of Transportation and hereinafter re-
ferred to as PennDOT), proposed to construct portions
of Interstate Route 81-E and Interstate Route 84 through
a portion of PG&W’s service area, rendering “useless” one
of PG&W’s reservoirs and the Roaring Brook watershed.
The proposed action directly affected approximately 13
square miles of watershed used to deliver water to PG&W’s
customers. The effect of PennDot’s construction would
have destroyed, for all practical purposes, the water sup-
ply then existing for the City of Scranton. As a result of
A30 Appendix C
years of negotiations between PennDOT and PG&W, on
October 21, 1969, they entered into an agreement setting
forth a compromise on the reimbursement by PennDOT
to PG&W for the expected damages to its water supply
system. Under this agreement PG&W was paid $2,754,-
753.56. The determination of the damages paid was
based upon what is known as a “cost-to-cure” method,
ie., the estimated cost to replace the company’s water
supply facilities rendered useless as a result of the pro-
posed highway construction. The agreement specifically
set forth that $1,703,103.56 represented the cost of the
construction of pipeline facilities and $1,051,650 for the
cost of construction of a new dam and reservoir to substi-
tute and replace the facilities taken by the proposed high-
way construction. The record indicates that PG&W
constructed 32,000 feet of 30-inch pipeline, and a 1.3 bil-
lion gallon capacity reservoir, and that these new facilities
created additional supply capacity over and above the
capacity of the facilities actually rendered useless by the
PennDOT construction. PG&W invested an additional
$243,202 in the pipeline construction, and $4,122,290 ad-
ditional funds for the new reservoir. In other words,
PG&W used all of the monies paid under the agreement
by PennDOT for new facilities, and as a result of the
entire transaction, spent substantial additional sums.
Based generally upon equitable principles, the PUC
termed the payment by PennDOT as a contribution or
“contributed property” and concluded that it would dis-
allow from the original cost measure of value $2,558,634,
which is the amount deemed to be the net figure, after
deducting PG&W’s unrecovered investment in plant re-
sulting from the transaction. The end results of this de-
duction from the rate base were (1) that PG&W was not
permitted to earn anything on the dollars of investment
in plant, used and useful in the public service, which the
Appendix C A31
PUC characterized as having been “contributed” by Penn-
DOT; and (2) the incomprehensible inclusion in the rate
base of $196,120, representing the unrecovered investment
in plant no longer in service. Annual depreciation allow-
ance was likewise affected.
PG&W, in its appeal to this Court, contends that the
PUC erred in excluding this investment in plant from both
the company’s original cost measure of value and the fair
value determination, and in ordering such part-payment
of PennDOT to be accounted for as contribution in aid of
construction for accounting and rate-making purposes.
This very same issue was presented to this Court in
Keystone Water Company, White Deer District v. Penn-
sylvania Public Utility Commission, 19 Pa. Commonwealth
Ct. 292, 339 A. 2d 873 (No. 633 C. D. 1974, filed May 27,
1975), the opinion for which is filed simultaneously here-
with. In Keystone the sole issue was whether the PUC
could exclude from the rate base monies paid by Penn-
DOT as damages for the taking of part of the property
of a public utility when the monies received were rein-
vested in plant used and useful in the public service. We
there held that it was error for the PUC to exclude such
plant from the rate base. Everything we said there is
equally applicable here, and there is no need to repeat
the principles upon which we based our holding. If there
is any distinction between Keystone and this case, it is that
this case is stronger since here PG&W was forced to secure
a new source of water supply and expend considerable
sums of money, in addition to the payment made by Penn-
DOT, to provide an equivalent or better source of supply
and facilities for service to its customers. Once again,
referring to the principles we set forth in Keystone, we
summarize our disposition of this issue by stating (1) that
the agreement between PennDOT and PG&W dated Oc-
tober 21, 1969, was legally the payment of damages for
A32 Appendix C
property taken by PennDOT, even though the determina-
tion of those damages was based upon a cost-to-cure basis;
(2) that the damages paid under that agreement and the
facilities built therewith are solely the property of the
stockholders of PG&W in which neither the public nor
PG&W’s customers have any property interest; (3) that
for rate case purposes the source of the funds utilized in
the construction or purchase of plant devoted to the public
service of a public utility is irrelevant, unless such monies
are purely donations, contributions in aid of construction,
or customers’ advances for construction (which the monies
herein question are not); (4) that plant used in the public
service by a public utility obtained and financed by dam-
age payments for property taken to permit highway con-
struction must be included in the rate base; (5) that
annual depreciation must be allowed on such plant; and
(6) that under the facts of this case and the facts of
Keystone and the provisions of the uniform system of
accounts for water utilities, the amount of money received
as damages by PG&W from PennDOT in excess of the
dollars representing the undepreciated property actually
taken should be accounted for by PG&W in account 401
entitled “Miscellaneous Credits to Surplus”. For a com-
plete understanding of our holding on this issue, the reader
is referred to our opinion in Keystone, supra. As a result
of our holdings, this matter must be remanded to the
PUC for a redetermination of the rate base so as to in-
clude the $2,558,634 in original cost and determine the
effect of its inclusion on any other measures of value
utilized by the PUC in determining fair value. In addi-
tion the PUC’s allowance for annual depreciation will
have to be increased accordingly.
At this point we should mention that the complainants
mistakenly contend, in an issue arising from the fair value
determination of the PUC, that somehow the PUC failed
Appendix C A33
to exclude this PennDOT payment from its determination
of fair value. Our careful reading of the PUC’s adjudica-
tion permits us to conclude that the PUC did exclude the
PennDOT payment from all measures of value, including
fair value.
II. Fark VALUE
PG&W presented evidence that its total net original
cost for both divisions amounted to $68,288,857. The PUC
accepted this evidence, with the exception of the so-called
“contributed property” mentioned above. On the basis of
the average of measures of value at depreciated original
cost, and trended original cost depreciated at five-year
average prices, PG&W contended that the fair value of its
plant should be $123,184,391 and, in addition, based upon
its claim for an increase in value based upon the current
inflation, it contended that a fair value of $130,000,000
would be more realistic. Complainants contended that
the maximum fair value should be $91,900,000, and their
contention was based upon a weighting of original cost
and trended original cost at five-year average prices, based
upon the capital structure ratios of PG&W. After discuss-
ing at great length the evidence produced and properly
noting that there was no set formula, to which it was
bound, the PUC set a fair value as of September 30, 1972,
at $102,000,000.
PG&W contends that the fair value set by the PUC is
so low as to constitute a manifest abuse of discretion. It
attempted to prove its point by referring back to a finding
of the PUC on the rate base in a prior case (in 1959) in-
volving PG&W, and then adding only the increase in
original cost (not fair value) to the finding of fair value
in the prior case. From this illustration, PG&W argues
that fair value could not be less than $105,000,000. The
problem with PG&W’s argument is that the Commission’s
responsibility is to determine fair value as of the end of
A34 Appendix C
the test period used in this rate case. What may have been
fair value at another time is not necessarily fair value 15
years later. If PG&W had intended to use this approach
to determine fair value, it should have undertaken the
burden of proving that there have been no changed factual
circumstances occurring subsequent to the prior finding
of fair value. This PG&W did not do. See Baltimore and
Ohio Railroad Company v. Pennsylvania Public Utility
Commission, 135 Pa. Superior Ct. 20, 24, 4 A. 2d 628, 630
(1938) and Cheltenham & Abington Sewerage Company
v. Public Service Commission, 122 Pa. Superior Ct. 252,
264-65, 186 A. 149, 156 (1936). There is evidence in the
record that costs, generally, rose materially since the test
year in the prior case, but all of those factors were taken
into account in the trending processes used by the PUC,
and all of the parties to this case, and, therefore, PG&W’s
contention in this regard is without merit.
PG&W next contends that the weight to be given
trended original cost in the finding of fair value by the
PUC was in error. On the subject of weighting, our courts
have said many times that there is no particular formula
which can be applied to determine fair value. In Duquesne
Light Company v. Pennsylvania Public Utility Commis-
sion, 176 Pa. Superior Ct. 568, 580-81, 107 A. 2d 745,
750-51 (1954), our Superior Court stated:
“Essentially, it would appear that the question in-
volved here is one of the weight to be given the
trended cost evidence. Such evidence is merely a
guide in the determination of fair value. It cannot
be seriously contended that even under the best of
conditions it is free from error, and the fact that it
does contain defects would not justify the Commis-
sion in rejecting it. So long as the evidence is reason-
ably accurate, the weight to be given it is a matter
for the Commission.”
Appendix C A35
In Pittsburgh v. Pennsylvania Public Utility Commission,
187 Pa. Superior Ct. 341, 350-51, 144 A. 2d 648, 654
(1958), the Court said:
“The apparent purpose of the requirement that the
commission exercise its judgment upon all the rele-
vant facts and not confine itself to any one particular
measure of value is to arrive at a rate base which is
fair to both the utility and to the customer. ... To be
fair to both the utility and the customer generally
requires that the commission reject as the predominant
measure of value any particular measure which would
be unreasonably advantageous to one at the expense
of the other of the component interests which the
commission is required to keep in balance in the
public interest.” (Citation omitted. )
PG&W argues that there is support in the law, and
from prior adjudications of the Commission, for the estab-
lishment of fair value at a point near the average of a
depreciated original cost and depreciated trended original
cost at five-year average prices. In Johnstown v. Penn-
sylvania Public Utility Commission, 184 Pa. Superior Ct.
56, 66, 133 A. 2d 246, 251 (1957), our Superior Court
observed that “. . . without approving any formula. . .
the commission has been inclined to establish a definite
finding of fair value, when one is made, at a point near
the average of original cost depreciated and a reproduc-
tion cost depreciated.” If the PUC had applied such a
formula to the statistics in this case, there is no question
but that fair value would have been set at something in
excess of $102,000,000. The fair value found by the
PUC ($102,000,000) is approximately 84 percent of the
amount determined by the averaging method which ap-
parently has been used by the PUC in at least 12 major
water utility rate adjudications since 1971. This is one
A36 Appendix C
of those areas in which our scope of review restrains us
from substituting our judgment for that of the PUC.
While our review of this record would lead us to believe
that the fair value found by the PUC is low when com-
pared with what it found as fair value in other cases, a
fair value which is approximately 150 percent of the net
original cost as found by the PUC, cannot be said to be an
abuse of discretion per se.
The complainants in their appeals raise additional
issues relating to fair value. They contend that (1) the
PUC failed to take into account labor productivity growth,
which they claim is applicable to each and any year of
construction; and (2) the PUC erred in not making suffi-
cient or adequate findings of fact from which they (com-
plainants) could determine the exact weight which the
Commission applied to the original cost figures and to the
trended original cost figures.
The PUC rejected the complainants’ contention on
productivity growth by observing that the trending statis-
tics used reflected to some extent increased productivity
by labor through the use of machines. The PUC also
questioned the credibility of complainants’ witness. Our
review of the record permits us to conclude that the PUC
did not abuse its discretion in its consideration of produc-
tivity growth.
With regard to the weight to be given to the various
factors utilized in arriving at a fair value, the law is quite
clear that there is no magical formula. Section 311 of the
Act, 66 P. S. § 1151, (Supp. 1974-1975), states in pertinent
part:
“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. . . .”
Appendix C A37
The PUC is given some direction in section 1005 of the
Act, 66 P. S. § 1395, which provides:
“After the conclusion of the hearing, the com-
mission shall make and file its findings and order with
its opinion, if any. Its findings shall be in sufficient
detail to enable the court on appeal, to determine the
controverted question presented by the proceeding,
and whether proper weight was given to the evi-
dence... .” (Emphasis added. )
The fair value figure represents a judgment to be made by
the PUC within its discretion, and there is no magical
mathematical formula to which the PUC is bound in deter-
mining fair value. See Pittsburgh v. Pennsylvania Public
Utility Commission, supra; Equitable Gas Company v.
Pennsylvania Public Utility Commission, 160 Pa. Superior
Ct., 458, 51 A. 2d 497 (1947). The PUC must consider
all relevant elements and factors having a bearing on fair
value, including original costs and trended original cost.
Pittsburgh v. Pennsylvania Public Utility Commission,
supra; Equitable Gas Company v. Pennsylvania Public
Utility Commission, supra. In Pittsburgh v. Pennsylvania
Public Utility Commission, 171 Pa. Superior Ct. 187, 195,
90 A. 2d 607, 612 (1952), our Superior Court stated:
“The weight to be given any particular measure of
value, such as original cost or reproduction cost
[trended original cost], is for the Commission, but its
action must be within the area of its administrative
discretion and supported by the evidence.
Historically, and as approved by the Superior Court
when it had jurisdiction to review utility rate adjudica-
tions, the PUC set and approved determinations of fair
value at a point near the average of the original cost de-
A38 Appendix C
preciated and the trended original cost depreciated. See
Johnstown v. Pennsylvania Public Utility Commission,
supra; Pittsburgh v. Pennsylvania Public Utility Commis-
sion, 174 Pa. Superior Ct. 363, 366, 101 A. 2d 761, 763
(1954); Orlosky v. Pennsylvania Public Utility Commis-
sion, 171 Pa. Superior Ct. 409, 413, 89 A. 2d 903, 906
(1952).
In this case PG&W submitted as evidence the follow-
ing measures of value: (1) an original cost depreciated
measure of value of $68, 288, 857 as of September 30, 1972
(the end of the test period); (2) a trended original cost
depreciated measure of value at December 31, 1971 prices
of $205,513,456; (3) a three-year average trended original
cost depreciated measure of value of $186,789,909; (4) a
five-year average trended original cost depreciated meas-
ure of value of $178,079,925; and (5) « bringdown fair
value of $104,913,694. The complainants presented evi-
dence which, after deducting the approximately two and
a half million dollar payment by PennDOT mentioned
above from the net original cost figures, indicated (1) a
December 31, 1971 price level of $170,757,517; (2) a
three-year average price level (ending December 31,
1971) of $156,487,514; and (3) a five-year average price
level (ending December 31, 1971) of $150,127,913. Our
reading of the record permits us to summarize all of this
by stating that PG&W contended that the fair value could
not be less than $123,000,000 and, after giving effect to
inflation, $130,000,000, while the complainants argued that
the fair value could not be more than $91,900,000. In its
adjudication, the PUC outlined all of the evidence pre-
sented and concluded that, based upon all the credible
evidence, the fair value should be $102,000,000. Com-
plainants contend that the PUC is required to set forth
specifically the weight which it gave to the various valua-
tion factors.
Appendix C A39
The complainants state that the capital structure of
the company should be utilized in determining the weight
to be given the various elements considered in arriving at
fair value. They argue that since the preferred stock-
holders and investors in the debt of the company have
their return fixed by contract, only the common stock-
holders need to be considered in providing sufficient earn-
ings for the company. As a result, they applied 68.3 per-
cent (the percentage of the total capital structure
represented by debt, capital and preferred stock ) to the net
original cost valuation, and the remaining 31.7 percent to
the five-year trended original cost figure. Through this
method, the complainants arrived at a fair value of
$91,900,000. While the complainants’ argument has an
appealing ring to it, and may have been used in other
jurisdictions, the fact remains that this formula can lead to
questionable results. If the PUC would adopt such a for-
mula, what would it do with a public utility whose capital
structure was 100 percent equity? If the complainants’
contention is adopted, the fair value of the rate base of
such a company would be set by the higher trended origi-
nal cost figures. Furthermore, to be consistent, the PUC
would also have to hold that the most current spot prices
would have to be utilized rather than any five-year average
trended price so as to adequately protect the current
stockholders.
While we agree with the complainants that it would
be preferable for the PUC to show in detail in its adjudi-
cation the method it used in arriving at the fair value, we
believe, however, that there is sufficient detail in the
adjudication in this case to permit this Court to conclude
that the PUC did not abuse its discretion. There are no
magical formulae which we can apply to test the reason-
ableness of the fair value set by the PUC. From our read-
ing of the Act, we are certain only that the sole use of
A40 Appendix C
original cost statistics or the sole use of reproduction costs
statistics would violate the legislative intent. We have no
doubt that the Legislature intended an averaging process
somewhere between the two extremes, and, so long as the
fair value set by the PUC is not below or above those two
extremes, or arbitrarily set so close to either extreme that
we can discern a capricious disregard of the evidence or
the law, we will not interfere.
III. Farm Rate or RETURN
In arriving at 7.35 percent as the fair rate of return,
the PUC followed the usual method of determining the
actual capital structure of the company (equity, debt and
preferred stock), determining the cost for each element,
and then computing the weighted cost of each. In arriv-
ing at the fair rate of return, the Commission apparently
used the following statistics:
TABLE 1
Capital Cost Weighted
Item Structure Rate Cost
Debt 57% 5.9% 3.36%
Preferred Stock 11% 4.59% 50%
Common Equity 32% 10.90% 3.49%
Total 7.35%
A. Cost of Equity Capital
This element of the formula is the most speculative, for it
is intended to be the best estimate of what investors would
pay for a current issue of common stock of the public
utility involved. PG&W here claimed a cost of equity in
the amount of 11 percent and the complainants proposed
a range from 9.7 percent to 10 percent. In Lower Paxton
Appendix C A41
Township, supra, we stated that the cost of capital should
be based upon evidence of the company’s recent past
experience:
“The cost of equity determination usually gives con-
sideration to such matters as the demands for the use
of money, the growth in earnings expected by the
investor, earnings—price ratios, dividend yields, the
marketing cost associated with raising common equity
capital and the earnings of comparable companies
with similar risks.” 13 Pa. Commonwealth Ct. at
143-44, 317 A. 2d at 922.
We there noted, once again, that there is no magical
formula we can utilize to test the discretion of the PUC.
The PUC is required to determine the current cost for
common equity in determining fair rate of return, and
current earnings-price ratios are representative of such
costs. Pennsylvania Public Utility Commission v. Peoples
Natural Gas Company, 35 Pa. P. U. C. 61, 84-85 (1957).
The PUC considered earnings-price ratios in this case, as
well as other factors. We have read the record and con-
clude that there is evidence to support the Commission’s
use of 10.9 percent as the cost of equity capital.
B. Cost of Preferred Stock Capital
The PUC found 4.59 percent as the proper cost of
PG&W’s preferred stock capital for rate-making purposes.
This was the actual cost after giving effect to a bond re-
purchase discount (without the discount, the actual cost
was over 6 percent). It is interesting to note that the
record reveals that the expert rate-of-return witnesses for
both PG&W and the complainants adjusted this cost of
preferred stock capital to reflect the estimated cost of a
projected six-million dollar preferred stock issuance, which
increased the cost of preferred stock from 4.59 to 5.72 per-
A42 Appendix C
cent and 5.96 percent (this last percentage having been
recommended by the complainants’ witness). The PUC
did not give any recognition to the proposed increased
cost in their determination of the fair rate of return, in
spite of the fact that it stated in its adjudication that “. . .
this Commission has followed the policy of permitting, in
the allowed rate of return, the weighting of new capital
cost incurred following the end of test year, but known
before the termination of the rate proceedings.” While
this would appear to be a reversible inconsistency which
- lowered the fair rate of return, in reality it was harmless
error because of what the PUC did in its determination of
the cost of debt capital, as follows:
C. Cost of Debt Capital
The Commission found that the cost of debt capital
was 5.9 percent, after reflecting bond repurchase discounts.
The expert rate of return witnesses for both PG&W and the
complainants recommended an embedded cost of long-
term debt at 5.82 percent and 5.86 percent respectively.
While a first reading of the adjudication would seem to
indicate that the PUC allowed a higher cost of debt capital
than either of the experts recommended, still there is evi-
dence in the record which would indicate that the PUC
utilized the actual cost of the long-term debt as 5.97 per-
cent, and adjusted this figure for bond repurchase dis-
counts and arrived at a 5.9 percent judgment figure. While
we might question the PUC’s use of the 5.9 percent figure
in the face of the recommendations found in the expert
testimony, insofar as the cost of debt capital is concerned,
we do not deem this to be reversible error, in light of the
fact that the PUC ignored the increased cost of preferred
stock (as noted above) which these same expert witnesses
both estimated and took into account in their recom-
mended figures for preferred stock capital.
Appendix C A43
A public utility is entitled to an opportunity to earn a
fair rate of return. Riverton Consolidated Water Com-
pany v. Pennsylvania Public Utility Commission, 186 Pa.
Superior Ct. 1, 140 A. 2d 114 (1958); Pittsburgh v. Penn-
sylvania Public Utility Commission, 182 Pa. Superior Ct.
376, 126 A. 2d 777 (1956). Our appellate courts have
stated on many occasions that the following factors, if
shown by the evidence, may be considered in determining
fair rate of return: (1) the amount necessary to assure
confidence in the financial structure of the company and
maintain its credit standing; (2) the payment of dividends
and interest; (3) the amount of the investment, the size
and nature of the utility, its risks, and the circumstances
attending its origin, development and operation; and (4)
the financial structure, the credit standing, dividend, in-
terest, and attendant risks, regulatory lag and wasting
assets. See Riverton Consolidated Water Company, supra;
Pittsburgh v. Pennsylvania Public Utility Commission, 182
Pa. Superior Ct. 376, 126 A. 2d 777 (1956); and Wall v.
Pennsylvania Public Utility Commission, 182 Pa. Superior
Ct. 35, 125 A. 2d 630 (1956). Although cost of capital
and fair rate of return are not always synonymous, cost of
capital “is certainly one of the most important bases upon
which a fair rate of return is determined.” Lower Paxton
Township, supra. In Lower Paxton Township, we also
noted that “[b]ecause of these many variables, the cost of
capital is basically a matter of judgment governed by the
evidence presented and the regulatory agency’s expertise.”
13 Pa. Commonwealth Ct. at 141, 317 A. 2d at 921. The
PUC’s judgment must be accepted unless without support
in the record, based upon error of law or unconstitutional.
Lower Paxton Township, supra. Our review of this entire
complicated record permits us to conclude that there is
sufficient substantial evidence to support the PUC’s final
determination pertaining to fair rate of return.
A44 Appendix C
IV. CLAmmMED Loss DuriInG SUSPENSION
As is set forth at the beginning of this opinion, the
proposed rates filed by PG&W were postponed several
times, and by order dated March 14, 1974, the rates which
were then in effect were prescribed as temporary rates
pending the final determination of this matter. By virtue
of the Commission’s final adjudication, dated July 9, 1974,
there was disallowed $628,318 of the $2,656,420 originally
requested by PG&W and not collected under the tempo-
rary rates. In the final order PG&W was ordered to file
new supplements to its tariffs containing acceptable rates
to provide a total annual revenue of $13,491,929. These
new rates were to become effective from July 9, 1974, or
from within 30 days thereafter, at the election of PG&W.
It was also ordered that the public authorities and public
fire protection customers, which had not been included in
the proposed increase, were to be included with the same
overall percentage increase as all other customers, the
increase to be effective for these customers from August 1,
1974. The Commission further permitted the filing of
supplements to its tariff so as to permit a recoupment of
revenues from its customers under the allowable rates for
sales on and after March 15, 1974. PG&W argues that by
virtue of this order it is not permitted to earn the 7.35
percent fair rate of return on its property used and useful
in public service from January 30, 1973 (the date the
company filed its rate increase) to March 15, 1974. In
its brief, it calculated that loss to be $2,720,878, which it
characterizes as a total loss resulting from regulatory lag.
Section 308 of the Act, 66 P. S. § 1148, sets forth the
power of the PUC to suspend proposed rate increases.
Subsection (a) states that no public utility may make any
change in its rates except after 60 days’ notice. Sub-
section (b) states:
Appendix C A45
“(b) Whenever there is filed with the commission by
any public utility any tariff stating a new rate, the
commission may, either upon complaint or upon its
own motion, upon reasonable notice, enter upon a
hearing concerning the lawfulness of such rate, and
pending such hearing and the decision thereon, the
commission, upon filing with such tariff and deliver-
ing to the public utility affected thereby a statement
in writing of its reasons therefor, may, at any time
before it becomes effective, suspend the operation of
such rate for a period not longer than six months
from the time such rate would otherwise become
effective, and an additional period of not more than
three months pending such decision. The rate in
force when the tariff stating the new rate was filed
shall continue in force during the period of suspen-
sion, unless the commission shall establish a tempo-
rary rate as authorized in section three hundred ten
of this act. The commission shall consider the effect
of such suspension in finally determining and pre-
scribing the rates to be thereafter charged and col-
lected by such public utility.” (Footnote omitted. )
(Emphasis added. )
Under section 310 of the Act, 66 P. S. § 1150, we find pro-
visions whereby temporary rates fixed in accordance with
the above provision shall be sufficient to provide a return
of not less than 5 percent upon the original cost, less ac-
crued depreciation of the physical property. Section 310
concludes with the following language:
“(e) Temporary rates so fixed, determined, and pre-
scribed under this section shall be effective until the
final determination of the rate proceeding, unless
terminated sooner by the commission. In every pro-
ceeding in which temporary rates are fixed, deter-
A46 Appendix C
mined, and prescribed under this section, the com-
mission shall consider the effect of such rates in
fixing, determining, and prescribing rates to be there-
after demanded or received by such public utility on
final determination of the rate proceeding. If, upon
final disposition of the issues involved in such pro-
ceeding, the rates as finally determined, are in excess
of the rates prescribed in such temporary order, then
such public utility shall be permitted to amortize and
recover, by means of a temporary increase over and
above the rates finally determined, such sum as shall
represent the difference between the gross income
obtained from the rates prescribed in such temporary
order and the gross income which would have been
obtained under the rates finally determined if applied
during the period such temporary order was in effect.”
(Emphasis added. )
We agree with PG&W that the PUC has a duty to
make allowance for the loss suffered by a public utility
whose rate requests are suspended for the full statutory
period and later sustained by an adjudication. In City of
Pittsburgh v. Pennsylvania Public Utility Commission, 171
Pa. Superior Ct. 187, 217, 90 A. 2d 607, 621 (1952), the
Court stated that it is presumed that the Commission has
considered the effect of the suspension and, therefore, the
burden is upon the public utility to prove the contrary.
PG&W has not met this burden, and, further, under the
facts of this case, we cannot hold that the PUC acted in an
arbitrary or capricious manner. First of all, the PUC per-
mitted approximately one-half of the proposed rate in-
crease to take effect at the end of the 60-day period (plus
12 days during which the effective date was voluntarily
postponed). PG&W, therefore, collected half of the total
increase during the entire period from April 12, 1973.
Another fact which militates against PG&W’s contention
Appendix C A47
is that prior to the end of the nine-month suspension
period, PG&W voluntarily postponed the effective date to
March 15, 1974. On that date, the then effective rates
became temporary rates by order of the Commission dated
March 14, 1974. We have a difficult time understanding
the argument of PG&W that the PUC acted in an arbitrary
manner in suspending these rates to March 15, 1974, when
PG&W voluntarily permitted such suspension. In reach-
ing the conclusion that the PUC did not abuse its discre-
tion or commit an error of law in not permitting a recoup-
ment for the period prior to March 15, 1974, we want to
make clear that under our reading of the Act we believe
it would be an error of law for the Commission to ignore
or refuse to give consideration to the effect of any sus-
pension beyond 60 days from the date of filing. However,
when a public utility voluntarily permits a suspension of
rates beyond the statutory power of the PUC, the PUC
has permitted part of those rates to be collected during
the entire period, and the PUC permits a recoupment back
to the date on which it established temporary rates, no
error of law has been committed. Notwithstanding this,
we must point out that any failure by the PUC to rec-
ognize the effect of the suspension period not only creates
the possibility of the confiscation of the utility’s property,
but could create a situation whereby utilities would be
forced into filing rate increases on a monthly basis so as
to protect their stockholders. The thought of any such
happening (which is certainly conceivable in this day of
the computer printout) would be contrary to what we per-
ceive to be the legislative intent, i.e., reasonable regula-
tion so as to protect both the public and the public utility.
V. PG&W’s Ricut To APPEAL
The PUC contends that by virtue of the fact that
PG&W was disallowed only $628,318 out of a total re-
A48 Appendix C
quest of $4,870,103, it should be denied its right to appeal.
This argument is totally without merit, especially in view
of our discussion of the important issues raised by both
PG&W and the complainants in this case. The cases cited
by the PUC with respect to PG&W’s right to appeal are
totally inapposite.
VI. SUMMARY
In summary, we hold that the PUC committed an
error of law in excluding the $2,558,643 payment for dam-
ages by PennDOT to PG&W for property taken, whether
those damages were determined on the valuation of prop-
erty taken before and after the condemnation, or whether
determined by the “cost-to-cure” basis, where the money
received was invested in plant used and useful in the
public service. The PUC will be directed upon remand
to include the amount it excluded from both the net
original cost, valuation figures and any other trended
original cost statistics needed to arrive at a fair value
figure. Annual depreciation likewise will have to be ad-
justed to include an amount appropriate for the property
which this PennDOT money purchased. Our review of
this long record permits us to conclude that there is suf-
ficient substantial evidence to support all of the Commis-
sion’s findings on fair value with, of course, the exception
of the PennDOT payment problem mentioned above.
Likewise, there is sufficient substantial evidence to support
the final determination of the Commission on rate of re-
turn. While we recognize that the PUC must give con-
sideration to any losses incurred by the public utility dur-
ing any suspension period beyond the 60-day filing period
requirement, PG&W did not prove that the PUC did not
give such consideration, especially in the light of the fact
that the PUC suspended only part of the increased rates
filed.
Appendix C A49
In closing, we should take note that under the cost
of service accounting methods used by all utility regula-
tory bodies, any time a public utility realizes a rate in-
crease, government itself receives an increase in tax rev-
enues. This should not be overlooked. In this day when
all citizens are feeling the terrible pinch of spiraling infla-
tion, public utility bills seem to be increasing with each
receipt of a bill for the past month’s service. We believe
it to be of great importance to highlight the fact that gov-
ernment receives a windfall from public utility rate in-
creases through increased tax revenues. In this case, for
instance, as a result of the Commission’s adjudication,
PG&W was entitled to file supplements to its tariff so as
to permit it to recover annual operating revenues of
$13,491,929. Of that amount, over $2,800,000 or about 20
percent will be paid to the federal, state, and local govern-
ments. We have included here the $373,284 for the public
utility realty tax (part of which will be received by the
local municipalities in the service area of PG&W) and
$124,200 for capital stock tax, both of which are paid by
PG&W’s customers through the state tax adjustment sur-
charge. In reality PG&W is forced to become a tax col-
lector for government to recover what may be deemed to
be hidden taxes which the consumers do not realize they
are paying. In this case, of the approximately four and a
half million dollar rate increase, almost one million dollars
represents increased taxes which the consumers must pay.
Perhaps it is time to take another look at indirect taxation
through consumers of public utilities. While some may
advocate that there should be no taxes on public utilities,
we take no position. That is a legislative matter entirely.
Because of the tone of the dissenting opinion of one
of the PUC commissioners in this case, we feel constrained
to add a few additional words on the role of the PUC
Commissioners, their counsel and intervenors (or “con-
sumer advocates” ).
A50 Appendix C
As this opinion is written, this Court has before it
several cases where government attorneys, often charac-
terized as “consumer advocates”, are opposing public
utility rate increases. As we read the law, and as we have
stated in another case involving another regulatory agency,
any person who finds himself in a judicial or quasi-judicial
position with the responsibility of passing upon the rights
of fellow citizens, should be an advocate of nothing ex-
cept justice. Nationwide Mutual Insurance Company v.
Commonwealth of Pennsylvania, 15 Pa. Commonwealth
Ct. 24, 42, 324 A. 2d 878, 886 (1974).
The duty of a PUC commissioner is to carry out the
legislative intent, a part of which is for the PUC to es-
tablish rates which are as equally fair, just and reasonable
as possible to the consumer, the public utility and the pub-
lic. Any partiality by a commissioner in any direction is
a violation of the law and reversible error. While the
courts grant wide latitude in the area of regulatory dis-
cretion, courts may not approve any unreasonable, arbi-
trary or capricious acts which result in an abuse of that
discretion. Counsel for the PUC has a duty to assist the
PUC in carrying out its duty to comply with the legisla-
tive intent. Obviously, where there is no one representing
the consumers in a given public utility rate case, what
may be deemed to be an additional responsibility falls
upon counsel for the PUC (and also the staff of the PUC)
to make certain that the interests of the consumers are
fully protected. Whether or not this can be categorized as
the position of “consumer advocate” is a matter of degree,
for even here, as we perceive counsel's duties, if counsel
goes beyond the bounds of the legislative intent, counsel
acts improperly. On appeal, counsel has a duty to rep-
resent the PUC and support its adjudication; counsel may
not take an independent position. See York v. Public
Utility Commission, 3 Pa. Commonwealth Ct. 270, 281
Appendix C A51
A. 2d 261 (1971), affd. 449 Pa. 136, 295 A. 2d 825 (1972)
and Liquor Control Board v. Kusic, 7 Pa. Commonwealth
Ct. 274, 299 A. 2d 53 (1972). There is a practical need
for a “consumer’s advocate” in these complicated cases,
and the statute permits such intervention. Whether “con-
sumer advocates” are specially authorized statewide (as
now appears to be an accomplished fact in this state), or
appear through specific intervention (as the solicitors for
the complainants did in this case), their sole duty obvi-
ously is to protect the interests of the consumers or the
public, and to highlight any errors made by either the
PUC or the public utility, within the framework of the
law. Even where “consumer advocates” intervene, coun-
sel for the PUC has the same duty to carry out the legis-
lative intent to equally protect the consumers, the public
utility, and the public. We hope that these additional
thoughts will clear the air on the various roles of the parties
involved.
Order
Anp Now, this 27th day cf May, 1975, based upon
the above opinion, the motion of Pennsylvania Gas and
Water Company to dismiss the petition to intervene filed
by the Carbondale Area School District is hereby granted;
and it is ordered that this entire matter be remanded to
the Pennsylvania Public Utility Commission for the pur-
pose of amending its adjudication dated July 9, 1974, so
as to amend its rate-based calculations, both for net origi-
nal cost and fair value, by including the appropriate
amount of money representing the payment by the Penn-
sylvania Department of Transportation to Pennsylvania
Gas and Water Company under the agreement dated Oc-
tober 21, 1969, to amend its findings with regard to annual
depreciation to be allowed on the said property involved
in the rate-base adjustment mentioned immediately here-
A52 Appendix C
inbefore, and to make any other cost of service adjustments
which may be necessary as a result thereof and not incon-
sistent with anything set forth in the above opinion; and
it is also ordered that Pennsylvania Gas and Water Com-
pany shall be permitted to file supplements to its various
tariffs affected hereby so as to recover the total amount of
revenue permitted by the Pennsylvania Public Utility
Commission under its adjudication dated July 9, 1974, as
adjusted by virtue of this order, so that increased rates may
be recovered from its customers from March 15, 1974 and
to permit the collection of increased rates from the public
authorities and public fire protection customers as ordered
in the Pennsylvania Public Utility Commission’s order of
July 9, 1974; and it is further ordered that, to the extent
the order of the Pennsylvania Public Utility Commission,
dated July 9, 1974, is inconsistent herewith, it is reversed;
and insofar as it is not inconsistent herewith, it is affirmed.
/s/ Harry A, KrRaMer
Harry A. Kramer, Judge
Judge Wilkinson concurs in the result only.
Appendix C A53
IN THE
COMMONWEALTH COURT OF PENNSYLVANIA
No. 1095 C, D. 1974
PENNSYLVANIA PUBLIC UTILITY COMMISSION
OF THE COMMONWEALTH OF PENNSYLVANIA,
Appellee
v,
PENNSYLVANIA GAS AND WATER COMPANY
(WATER DIVISION )
Appellant
No, 1122 C, D. 1974
COMMONWEALTH OF PENNSYLVANIA,
PENNSYLVANIA PUBLIC UTILITY COMMISSION,
Appellee
v.
CITY OF SCRANTON,
Appellant
PENNSYLVANIA GAS & WATER CO.,
Intervening Appellee
CARBONDALE AREA SCHOOL DISTRICT,
Intervening Appellant
No, 1123 C, D. 1974
A54 Appendix C
COMMONWEALTH OF PENNSYLVANIA,
PENNSYLVANIA PUBLIC UTILITY COMMISSION,
Appellee
v.
COUNTY OF LACKAWANNA
Appellant
PENNSYLVANIA GAS & WATER CO.,
Intervening Appellee
CARBONDALE AREA SCHOOL DISTRICT,
Intervening Appellant
BEFORE:
HonoraBe JAMEs S. Bowman, President Judge
HonoraB_e JAMEs C, CruMuisi, Jr., Judge
HonoraB_e Hanry A. KraMer, Judge
HoNnoRABLE Roy WILKINSON, JRr., Judge
HonoraB_eE GLENN E. MENCER, Judge
HonoraB_e THEopore O. Rocers, Judge
HonoraB_e GENEVIEVE BLATT, Judge
Arcuep: February 3, 1975
Dissenting Opinion
DissENTING OPINION By JupGE BLATT
Fitep: May 27, 1975
For the reasons set forth in my dissenting opinion in
Keystone Water Company, White Deer District v. Penn-
Appendix C A55
sylvania Public Utility Commission, 19 Pa. Commonwealth
Ct. 292, 339 A. 2d 873, (No. 633 C. D. 1974, filed May 27,
1975) I must respectfully dissent to that portion of the
. majority opinion which holds that the Public Utility Com-
mission improperly excluded from the rate base that
amount of the condemnation award paid by the Pennsyl-
vania Department of Transportation, to provide that a
functional substitute would be constructed to insure the
continued availability of a water supply to the affected
consumers of the Pennsylvania Gas and Water Company.
I believe that such exclusions are both constitutional and
just and reasonable under the laws of the Commonwealth.
/s/ GeNEvIEVE BLATT
Genevieve Blatt, Judge
A56 Appendix D
APPENDIX D.
PENNSYLVANIA PUBLIC UTILITY COMMISSION
RATE INVESTIGATION Docket No. 72,
Comp.Laint Docket No. 19850, ET AL.
R. I. D. 72—Pennsylvania Public Utility Commission
C. 19850 —City of Scranton
C. 19868 —County of Lackawanna
C. 19874 —Wilkes-Barre Township
C. 19891 —County of Luzerne
C. 19893 —Plains Township
C. 19894 —City of Wilkes-Barre
C. 19898 —Carbondale Area School District
C. 19904 —Ervin Hohensee and Gene Basalyga
C. 19911 —vValley View School District
C. 19912 —Borough of Olyphant
C. 19913 —Polish National Union of America
C. 19915 —Borough of Dickson City and Borough of
Throop
C. 19918 —Borough of Jermyn
C. 19920 —Borough of Blakely
C. 19921 —Borough of Moosic
C. 19922 —Borough of Jessup
C. 19924 —Borough of Dunmore
C. 19942 —Sandvik Steel, Inc.
C. 19954 —Borough of Archbald
C. 19970 —Jaunty Fabric Corporation
v.
Pennsylvania Gas and Water Company
(Water Division)
July 9, 1974
[EXCERPT]
Appendix D A57
Contributed Property
On October 21, 1969, the Commonwealth of Penn-
sylvania, acting through the Department of Highways
(now the Department of Transportation) and respondent
entered into an agreement which resulted in a payment of
$2,754,753.56 by the Commonwealth to respondent. The
payment was for construction of plant to replace the exist-
ing Dunmore No. 7 Reservoir and Nay Aug Well System,
located at the Dunmore No. 7 Reservoir, all within re-
spondent’s Roaring Brook watershed area.
The proper treatment of this payment, for public
utility accounting and rate making purposes, is one of the
principal issues in these proceedings. Respondent con-
tends it should be included in its claimed measures of
value. Complainants consider the payment as one in the
nature of a contribution in aid of construction and contend
it should be excluded from measures of value.
The full agreement has been made a part of this
record. The purpose of the agreement and other pertinent
facts are here quoted directly from the agreement, as
follows:
“Wuereas, Commonwealth proposes to undertake, by
contract, with Federal-aid participation, the construc-
tion and improvement of Sections 10, 12, 13 and 14
of Legislative Route 1002, as part of Interstate Route
81-E, and of Sections 1A, 1B, 1C, and 2 of Legis-
lative Route 1012, as part of Interstate Route 84,
within the Roaring Brook watershed area of Lacka-
wanna and Wayne Counties, Pennsylvania... , and
“Wuereas, Company owns and operates certain water
supply facilities which include a dam and reservoir,
known as Reservoir No. 7, within the said Roaring
Brook watershed area, the water supply for which
may be affected adversely by the aforesaid State
highway construction and improvement project, in
A58 Appendix D
that the turbidity and impurity of the water derived
from the springs and tributary streams of the affected
watershed area may be increased to the extent that
their use as a source of water supply for public con-
sumers would be impaired; and
“Wuereas, to best minimize and remedy the antic-
ipated adverse effect of the said construction and
improvement project on the turbidity and purity of
the water derived from the said watershed area, it
has been determined that the Company will have to:
“(A) Replace its said Dam and Reservoir No. 7
through the construction and operation of a
new dam and reservoir at Hollister, Covington
Township, Lackawanna County, Pennsylvania
“(B) Construct a thirty (30”) inch pipeline from the
Company's present Elmhurst Dam and Res-
ervoir, in Roaring Brook Township, Lacka-
wanna County, Pennsylvania, for a distance of
approximately thirty-two thousand (32,000)
feet to a certain point beyond the said Dam
and Reservoir No. 7, as generally shown on
Exhibit “S”, so that the effluent from Com-
pany’s said Elmhurst Dam and Reservoir will
be protected from increased turbidity and im-
purity anticipated to result from the con-
struction and maintenance of the proposed
State highway construction and improvement
project;”
The agreement further states:
“Wuereas, in order to facilitate and expedite the
commencement of the proposed State highway con-
struction and improvement project, Commonwealth
is willing to...:
Appendix D A59
“(C) under certain conditions, hereinafter set forth,
assist the Company financially in making pro-
visions for adequate protection of its water
supply system by contributing the sum of Two
Million Seven Hundred Fifty-four Thousand
Seven Hundred Fifty-three and 56/100
($2,754,753.56) Dollars toward the Construc-
tion of the New Dam and Reservoir and the
thirty (30”) inch pipe line.” (Emphasis
added )
The agreement also sets forth that the total payment
of $2,754,753.56 is comprised of $1,703,103.56, the total
agreed upon contribution toward the cost of construction
of the pipeline facilities, and $1,051,650.00, the total
agreed upon contribution toward the cost of construction
of the new dam and reservoir as a substitute and replace-
ment facility for the existing dam and Reservoir No. 7.
From the record, it was the purpose and intent of the
parties to the agreement to anticipate any potentially ad-
verse effects from the proposed highway construction and
to preclude or forestall them. Accordingly, the agreement
was concluded before the c: amencement of the highway
construction; and, before highway construction began,
new facilities were constructed, per the agreement, to re-
place the former facilities. This was done before there
were any adverse effects on the turbidity and purity of the
water. As a result of the corrective measures taken in
anticipation of the highway construction, service defi-
ciencies were precluded. The Roaring Brook water supply
was at all times fully available for use, without significant
adverse effects, before, during and after the highway con-
struction. Respondent showed no loss of revenues nor
any other adverse effects as a result of the highway
construction.
A60 Appendix D
Respondent accepted the agreement costs of
$1,703,103.56 for the 30-inch pipeline and $1,051,650.00
for the replacement of capacity of the replaced reservoir.
We find that it was unnecessary for respondent to have
expended any of its own funds for the adjustment of facili-
ties to assure a continued potable water supply source.
Any excess of funds expended in this transaction by re-
spondent over the agreement payment apparently was for
the additional capacity of water impounded by the Hollis-
ter Dam and Reservoir which respondent chose to build
instead of a reservoir with the same capacity as Dunmore
No. 7.
It is contended by respondent that the aforesaid
agreement payment was not a donation or contribution,
but on the contrary, was compensation for damages, and
therefore, should not be credited to Account No. 265,
ConTrRIBUTIONS IN Arp oF CONSTRUCTION, but instead
should be credited to the earned surplus account with con-
current charges to the fixed capital and depreciation re-
serve accounts for the retirement of the property replaced.
Respondent further contends that it should be permitted
to earn a return on all of the property financed by the
$2,754,753.56 payment received from the Commonwealth.
At present, the agreement payment is reflected by re-
spondent in Account No. 242, Other Deferred Credits.
Complainants contend that respondent has unduly
complicated the issue and that the language of the agree-
ment is clear wherein the agreement provides that the
Commonwealth:
“is willing to . . . assist the company financially in
making provisions for adequate protection of its water
supply system by contributing $2,754,753.56 toward
the construction of the New Dam and Reservoir and
the thirty (30”) inch pipeline.”
Appendix D A61
Complainants contend that respondent has accepted a
contribution from the Commonwealth to build certain
specific plant; and since such capital was not supplied by
the investors, the payment should be excluded from rate
base after allowance for the unrecovered portion of origi-
nal cost of the facilities that were replaced as a result of
the agreement. By this treatment, for public utility ac-
counting and rate making purposes, neither the respondent
nor the rate payers will have suffered any adverse effects
as a result of the highway construction and the agreement
related thereto.
It should be noted that respondent’s valuation engi-
neer in his studies of this project labeled the Dunmore
No. 7 Reservoir and Nay Aug Well System as plant held
for future use. This classification, rather than a retire-
ment of plant, was made when he transferred this plant
from used and useful property as a result of the replace-
ment by facilities paid for by the Commonwealth con-
tribution. This Commission’s order of December 1, 1969,
relating to the approval of the aforesaid agreement at
A. 95621, stated that the damage to the watershed, while
not permanent, may be over 15 years duration. The rec-
ord indicates that the replaced facilities have not been
physically removed. This is an indication that respondent
may in the future reinstate these properties to a used and
useful status to the benefit of the stockholders.
A prime purpose and intention of the parties to the
October 21, 1969 agreement was to anticipate and elimi-
nate, preclude or neutralize any potentially adverse ef-
fects of highway construction on the public utility service
being furnished by respondent. This was accomplished.
Because of the construction of the pipeline facility and
the new dam and reservoir neither respondent’s ability to
serve nor respondent’s potable water supply was adversely
effected by the highway construction, and respondent's fi-
A62 Appendix D
nancial standing was in no way impaired thereby. As a
result of the entire transaction, respondent was left with
equivalent or better facilities than it had had prior thereto,
at no cost to respondent's stockholders. The problem is
how this $2,754,753.56 shall be treated for public utility
accounting and rate making purposes under the aforesaid
facts and circumstances.
For public utility accounting and rate making pur-
poses we must reject respondent's contention. Property,
which is used or useful in rendering a public utility service
and which has been a part of a public utility’s rate base
is dedicated to a public use, and is impressed with a public
trust. It (or the proceeds or accruals therefrom) is sub-
ject to regulation by the properly designated regulatory
body and remains subject to that regulation until such
time as that regulatory body duly finds it in the public
interest to approve its release from public service. Such
property must be regulated in the interest of the public
no less than in the interest of the utility. Equities must
be balanced and justice must be done to all concerned.
Accordingly, when a utility suffers extraordinary losses in
service value of utility property abandoned or otherwise
retired from service, or suffers unforeseen damages to
property which damages could not reasonably be antici-
pated, and where the utility has not otherwise recovered
its investment, this Commission can and, where equities
require, does permit the utility to recover from the rate-
payers, as a proper and necessary expense of rendering the
public service, the necessary amount to make the utility
whole. On the other hand, where, as here, the utility re-
covers an amount or sum as a result of compensation for
particular property and the potential consequential injury
to the service of the ratepayers for whom that property
was dedicated to the public use, the Commission, where
the equities dictate, may require that amount received by
Appendix D A63
the utility to be treated, for public utility accounting and
rate making purposes, in such manner as will place the
utility and the ratepayers in the same position, insofar as
reasonably possible, as they were before the extraordinary
event or transaction which gave rise to the sum or amount
in question. :
For rate making purposes, we cannot permit respond-
ent to receive all the salutary effects of the agreement and
pass them on to the stockholders as a windfall while pass-
ing on to the ratepayers only the increased rates that would
become necessary had there been no agreement and con-
tribution. Clearly, the payment in question resulted and
stemmed from consideration of the property’s dedication
to public use as a water utility, and recognition of the po-
tential injury to the interests and service of the water utility
customers. In situations and circumstances such as this,
the customers of a utility are in the nature of third party
beneficiaries whose interest in the utility service must be
protected. The essence of public utility regulation is the
protection of the public and the assurance of adequate
service to them at reasonable rates on the one hand, and,
on the other, a fair opportunity to the utility to secure a
reasonable rate and no windfall from such services. To
reflect equitably and meaningfully the near restoration of,
or equitable substitution for, the pre-agreement status quo,
both the utility and its customers must be made whole
insofar as reasonably possible. This we shall do. As a re-
sult of our treatment of the highway transaction, the
customer's rates remain unchanged by the highway trans-
action and respondent's financial status and stability and
its ability to serve also remain unchanged.
It should be further noted that this Commission, as
a matter of longstanding policy, has consistently deducted
recorded contributions in aid of construction and cus-
tomer’s advances for construction from all measures of
A64 Appendix D
value in determining rate base; and respondent, in these
proceedings and heretofore, has eliminated these items
as recorded on its books from the claimed measures of
value. Similarly, the Commonwealth's payment at issue
herein must be deducted from all measures of value at a
net amount after giving consideration to respondent's un-
recovered balance of the plant replaced. We find this rea-
sonable and necessary, inter alia, for the following reasons:
(1) the stockholders would otherwise benefit unjustly and
unnecessarily at the expense of the customers, (2) the
funds were not provided by respondent and respondent is
not injured, (3) governmental funds were used, indicat-
ing a compound of payments by the customers, (4) re-
spondent has not suffered any loss of income through
interruption of service by reason of the replacement facili-
ties, (5) it was unnecessary for respondent to develop any
new source of supply, (6) respondent has the option to
maintain the Dunmore No. 7 Reservoir in a future use cate-
gory for future storage upon the Roaring Brook open chan-
nel when the watershed becomes stable.
We shall order the Commonwealth's payment herein
to be treated for accounting and ratemaking purposes as
a contribution in aid of construction to reflect equitably
the interests of the public as well as the interests of
respondent.
Based on all of the foregoing, we will disallow from
the original cost measure of value $2,558,634 which repre-
sents the net of the Commonwealth payment of $2,754,754,
less respondent's unrecovered investment in the plant
replaced at Dunmore No. 7 Reservoir and Nay Aug Well
System of $196,120. In addition, we will give considera-
tion for rate making purposes to the unrecovered invest-
ment in our determination of fair value.
Appendix D A65
Ir Is OnDERED:
1, That the complaints listed in the caption of this
Order be and are hereby sustained to the extent indi-
cated by the disallowance of $628,318 of the proposed
rate increase.
2. That forthwith respondent file, effective for service
rendered on and after the date of this Order or within 30
days thereafter, as respondent may elect, tariffs or tariff
supplements containing acceptable rates to provide total
annual revenues of $13,491,929 (Spring Brook Division
$7,917,989 and Scranton Division $5,573,940, both exclu-
sive of revenues from the State Tax Adjustment Surcharge )
as computed herein at the level of operations at September
30, 1972.
3. That detailed calculations be filed with said tariffs
or tariff supplements demonstrating that the rates do in
fact comply with the requirements set forth in this order.
4. That the new tariffs or tariff supplements give ef-
fect to the comments in this order that the Public Authori-
ties and Public Fire Protection customers shall be
increased the same percent overall as all other customers.
The increase to the Municipal Customers and for Public
Fire Protection customers will be effective August 1, 1974.
Furthermore, as outlined in this order under contributed
property, respondent will correct its accounting entry which
credited Other Deferred Credits in the amount of
$2,754,754 and will, instead, credit Contributions in Aid
of Construction in an amount of $2,558,634 the net pro-
ceeds contributed plant in order to properly reflect pay-
ment by Pennsylvania Department of Highways (now
Pennsylvania Department of Transporation) to Pennsyl-
vania Gas and Water Company for a reservoir and trans-
mission line.
A66 Appendix D
5. That with the filing of said tariffs or tariff supple-
ments respondent may, if it so elects, also file a detailed
plan of recoupment of revenues from the application of
the allowable rates for water sales rendered on and after
March 15, 1974, (as per our temporary rate order) to the
date the increased rates approved herein are applied. If
respondent elects full or partial recoupment, it may apply
the rates filed in compliance with this order to billings
rendered after the date of this order or within 30 days
thereafter. However, in no case, can these billings be
applied to service prior to March 15, 1974.
6. That the surcharge authorized by our State Tax
Adjustment Surcharge order of March 10, 1970, be re-
computed and revised in accordance with Section B, para-
graph 2, of that order.
7. That upon filing the tariffs or tariff supplements,
our investigation and inquiry at R. I. D. No. 72 be and
is hereby terminated and the record marked closed.
PENNSYLVANIA Pusuic UTILITY
CoMMISSION
(signed) George I. Bloom
Chairman
ATTEST:
Secretary
Commissioner Carter reserved decision.
Orpver Apoptep: JuLy 9, 1974.
Orpver ENTERED: JuLy 16, 1974
Appendix E A67
APPENDIX E.
IN THE
COMMONWEALTH COURT OF PENNSYLVANIA
No. 633 C. D, 1974
KEYSTONE WATER COMPANY,
WHITE DEER DISTRICT,
Appellant
v.
PENNSYLVANIA PUBLIC UTILITY
COMMISSION,
Appellee
BEFORE:
HonoRABLE JAMES S. BowMan, President Judge
HonoRABLE JAMEs C. CruM.isu, JR., Judge
HonoraB_e Harry A. KraMer, Judge
HonoraBLE Roy WILKINSON, JR., Judge
HoNnoRABLE GLENN E. MENCER, Judge
HonoraB_eE THEOvORE O. Rocers, Judge
HonorABLE GENEVIEVE BLATT, Judge
Argued: January 7, 1975
Opinion
Opinion BY JUDGE KRAMER Fitep: May 27, 1975
This is an appeal filed by Keystone Water Company—
White Deer District (formerly and during the entire rec-
ord inade herein known us White Deer Mountain Water
A68 Appendix E
Company, hereinafter referred to as Keystone) from an
order of the Pennsylvania Public Utility Commission
(PUC), dated April 17, 1974, setting forth findings of fact
and conclusions of law concerning a proposed rate in-
crease by Keystone. The Commission’s order contains
complicated facts, statistics, and data such as are normally
involved in a public utility rate case.
This case had its genesis on April 29, 1969, when
Keystone filed an amendment to its tariff providing for
increases in all metered water rates, except public fire
protection. After hearings the PUC issued its long-form
order, dated September 28, 1971, which order was ap-
pealed by Keystone to this Court at Nos. 934 and 941
C. D. 1971, apparently because the PUC had excluded
from its findings of fair value the cost of a new filtration
plant (the same issue which is the subject of the instant
appeal). Upon request of the PUC, the case was re-
manded for the purpose of taking further evidence. At
the subsequent hearing it was agreed among all the par-
ties that the record should have incorporated into it the
entire record made in the prior proceedings. As a result
of these developments, on August 31, 1972, Keystone filed
a further supplement to its tariff proposing certain changes
under which it proposed to increase its annual operating
revenues by $415,477, approximately a 48 percent in-
crease, based upon the level of its operations for the test
year ending April 30, 1972. The PUC suspended the
effective date of the proposed changes to August 22, 1973,
after which time Keystone collected under the proposed
rates as temporary rates subject to refund. Because of
the very narrow issue presented by this case, we need not
go into all the details of the PUC’s adjudication except to
note that the final order permits a total annual increase in
revenues of $365,450 from Keystone’s 7,400 customers in
Union and Northumberland counties.
Appendix E A69
To understand the narrow issue involved in this case,
it is necessary to describe Keystone’s operation. For al-
most 75 years, one of the three sources of water for Key-
stone was the White Deer Creek watershed (watershed ).
The area of the watershed above Keystone’s intake point
is approximately 37 square miles. The watershed was
almost entirely forest land and Keystone owned about
1,300 acres in fee. Approximately 10 percent of the water-
shed is owned by the Commonwealth and is maintained
as state forest land. For the remaining 90 percent, Key-
stone holds deeds granting water rights dating back to
about 1902, wherein it is stated that Keystone has the
complete control and use of all the waters and even the
right to enter upon the lands at all times for the purpose
of maintaining its supply of water. This water was so
pure that it required no treatment other than the minimal
chlorination required by the Department of Health for all
public water companies. In 1959 Keystone became aware
that the Commonwealth proposed to construct Interstate
Highway I-80 through the valley of the White Deer Creek.’
Keystone advised the Pennsylvania Department of Trans-
portation (PennDOT) of the danger to its water supply
but was unsuccessful in attempting to have I-80 rerouted
so as not to touch the watershed. As a result of long, in-
volved negotiations with PennDOT concerning Keystone’s
condemnation rights, an understanding was reached and
reduced to a written agreement dated July 18, 1966. It is
well to note at this point that the PUC was not in any way
involved in these negotiations.
The July 18, 1966 agreement includes the following
provisions:
1. We know from prior cases that if a private individual had
intended to pollute a watershed such as this, the Commonwealth
of Pennsylvania probably would have enjoined him.
A70 Appendix E
“Wuenreas, the construction and improvement of
Sections 74, 75 and 76 of said State highway will re-
quire the taking by Commonwealth for highway pur-
poses of approximately one hundred thirty (130)
acres of the said lands belonging to the Company and
will seriously impair the water rights over the balance
of the Company's land in said watershed area required
for the protection of the waters of White Deer Creek;
and,
“WueEreas, it has been agreed between Common-
wealth and the Company that the just compensation,
to which Company is entitled by reason of said taking
of its land, the impairment of its water rights as afore-
said and the cost to insure the continuance of the
supply of potable water to the said communities which
Company serves, is one million three hundred thou-
sand ($1,300,000.00) dollars, which is to be made pay-
able in accordance with the terms and conditions
hereinafter set forth in this agreement.” (Emphasis
added. )
The ‘agreement sets forth that the Commonwealth
would acquire by deed 130 acres of land owned by
Keystone.”
Our review of this agreement permits us to conclude
that PennDOT was negotiating a settlement under con-
demnation principles. In the agreement Keystone agreed
2. The record contains a PennDOT memorandum, concerning
items to be covered in the agreement, which contains the following
paragraph:
“6. The damages are to be $1,300,000, which include, cost to
cure on the stream, and the taking of approximately 130 acres
of the Water Company land.
Note: The District Office appraisal on the land damages is
$3,900.”
Appendix E A71
“at its own cost and expense” to commence the prepara-
tion of plans and designs for construction of necessary
filtration facilities to insure the continued purity of the
water in White Deer Creek. The filtration plant was to
be constructed within about 15 months. The Common-
wealth of Pennsylvania was to pay Keystone the
$1,300,000, immediately upon receipt of the executed deed
for the 130 acres of land and notice that Keystone had
awarded a contract for the construction of the filtration
facilities. PennDOT agreed that it would not commence
construction of the highway, so as to affect the watershed,
until the filtration plant was in operation. After settle-
ment, which was made March 30, 1967, the company
signed a “Receipt and Acquittance” in which it acknowl-
edged receipt of the money “for the taking” of the land,
“for the impairment of its water rights within the water-
shed area”, and “for insuring the continuance of the supply
of potable water to the communities served by it.”
The new filtration plant went into service in the spring
of 1968, and its final construction cost was $1,100,000.
The record indicates that there were additional costs, but
these were not specifically stated. In any event, both the
PUC and Keystone agree in their argument that $1,300,000
was utilized by Keystone for this purpose and so we will
accept that figure. The record also shows that the annual
operating expense of this plant amounts to approximately
$50,000 a year. There was no provision in the agreement
between Keystone and PennDOT concerning the operat-
ing expenses.
This bit of background is necessary for the reason
that in the rate case adjudication (both September 28,
1971 and April 17, 1974) the PUC excluded $1,292,347
from the fair original cost and fair value of Keystone’s
plant which amount represents the $1,300,000 less the
PUC’s allowance of $2,609 representing its finding of the
A72 Appendix E
value of the 130 acres taken, plus $5,044 of other expenses.
In other words, the PUC removed $1,292,347 from the
rate base of Keystone for ratemaking purposes. We note
that although the PUC, in its adjudication, states that it
removed this amount from the fair value, technically that
is not correct. They, in effect, removed it from original
cost, which is only one of several criteria utilized for de-
termining fair value. As a result of this adjustment, the
PUC also disallowed approximately $12,000 a year in an-
nual depreciation based upon the original cost of the
filtration plant in question.
The Commission’s reasoning was that, based upon
equitable principles, it could not “permit . . . [Keystone]
to receive all of the salutary effects of the land condem-
nation and pass them on to the stockholders while pass-
ing on all of the deleterious effects of the condemnation to
the rate-payers.” The PUC garnered from the terms of
the agreement of July 18, 1966 an intent on the part of
PennDOT to benefit the consumers of Keystone. The
PUC stated:
“Indeed, it is obvious from the terms of the agree-
ment... that the major consideration was the need
to insure the potability of . . . [Keystone’s] White
Deer Creek source of supply.”
It concluded that with the exception of the minimal
amount of dollars represented by the value of the land
(which is non-depreciable for accounting or rate-making
purposes) and minimal expenses, the balance of the
$1,300,000 was for “consequential damages to the rate-
payer's service”. While counsel for the PUC makes an
appealing argument that the rate payers are asked to pay
twice for this property, once through the condemnation
settlement and once through rates, upon complete analysis,
Appendix E A73
the argument cannot be supported legally and, therefore,
we believe the order of the PUC must be reversed.
We have stated many times that this Court’s scope of
review is limited both by statute and prior case law. Sec-
tion 1107 of the Public Utility Law (Act), Act of May 28,
1937, P. L. 1053, as amended, 66 P. S. § 1437, provides in
pertinent part:
“The order of the commission shall not be vacated or
set aside, either in whole or in part, except for error
of law or lack of evidence to support the finding, de-
termination, or order of the commission, or violation
of constitutional rights. . . .”
See Lower Paxton Township v. Pennsylvania Public Utility
Commission, 13 Pa. Commonwealth Ct. 135, 317 A. 2d
917 (1974); Pennsylvania Power & Light Co. v. Pennsyl-
vania Public Utility Commission, 10 Pa. Commonwealth
Ct. 328, 311 A. 2d 151 (1973) and Philadelphia Suburban
Transportation Company v. Public Utility Commission, 3
Pa. Commonwealth Ct. 184, 281 A. 2d 179 (1971).
The basic and narrow issue confronting us is whether
the dollars representing the investment in the new infiltra-
tion plant should be included in Keystone’s rate base for
rate-making purposes. We hold that it should be included.
We should immediately emphasize that this is not a
condemnation case such as was involved in Pennsylvania
Gas & Water Company v. Pennsylvania Turnpike Com-
mission, 428 Pa. 74, 236 A. 2d 112 (1967). That case,
however, is noteworthy and has been cited by both parties,
because our Supreme Court held that due to “somewhat
unique circumstances” a departure from the traditional
test of utilizing fair market value before and after the
taking by government would be permitted, in which event
the “replacement value or repair test” could be used as a
measure of damages. In that case, the government con-
AT74 Appendix E
demned a portion of property which had been held for
many years in reserve for the use of a water reservoir. The
portion which was taken was that portion where the dam
had been planned to be built. In effect, the majority of
our Supreme Court permitted a recovery of damages based
upon construction costs to build the reservoir as it was
intended prior to the taking. The instant case is a rate
case, and not a condemnation case.
Sections 301-313 of the Act, 66 P. S. §§ 1141-1153,
give directions to the PUC to be used in the establishment
of just and reasonable rates, but none of these sections
specifically states what is to be included within the term
“fair value”. We are guided, however, by the pronounce-
ments of our Supreme Court in Scranton v. Scranton
Steam Heat Company, 405 Pa. 397, 176 A. 2d 86 (1961),
the facts of which are analogous to this case. There the
Scranton Steam Heat Company had purchased the steam
heat service facilities of a combination electric and steam
utility for $250,000. Although the facilities purchased
had an original cost of $2,200.00, they had a much greater
reproduction cost. The PUC in that case rejected both
the original cost and reproduction cost statistics presented
and fixed its fair value on the acquisition cost alone. Our
Supreme Court, in sustaining the Superior Court’s reversal
of the PUC, stated:
“Acquisition cost is not and never has been in Penn-
sylvania the criterion of ‘fair value’ or a substitute for
either or both the factors of original cost of construc-
tion or reproduction cost...” (Citations omitted. )
405 Pa. At 402-403, 176 A. 2d at 89.
The Scranton Court also stated:
“More than half a century ago it was held that
‘the basis of all calculations as to the reasonableness
of rates to be charged . . . must be the the fair value of
Appendix E A75
the property being used by it for the convenience of
the public. . . . What the company is entitled to
ask is a fair return upon the value of that which it
employs for the public convenience’. . . .” (Cita-
tions omitted.) 405 Pa. at 401, 176 A. 2d at 88.
The Court then went on and noted that fair value for rate-
making purposes has a connotation peculiar to rate pro-
ceedings, and that there is no precise formula by which
the Commission is bound in fixing the rate base. The
question before us in this case, however, is not whether
the value allowed for rate-making purposes by the PUC
was one of several possible valuations, but rather, whether
the PUC’s action in entirely eliminating this piece of
property from the rate base was proper.
At the very root of this issue there are certain funda-
mental constitutional rights involved. Both the Fifth and
Fourteenth Amendments to the United States Constitution
and Article I, sections 9 and 10 of the Pennsylvania Con-
stitution of 1968 provide that no person may be deprived
of his property without due process of law and that private
property may not be taken or applied to the public use
without just compensation. These principles are as old
as the Magna Charta. Our Pennsylvania Supreme Court
has affirmed these principles at every opportunity. Andress
v. Zoning Board of Adjustment, 410 Pa. 77, 188 A. 2d 709
(1963); Lord Appeal, 368 Pa. 121, 81 A. 2d 533 (1951);
and White’s Appeal, 287 Pa. 259, 134 A. 409 (1926). In
applying these constitutional principles to public utility
regulation, the appellate courts of this Commonwealth
have stated over and over again that the rates set by the
Commission must not be confiscatory. It has been held
that confiscation results when the order of the Commission
refuses the utility company an opportunity to earn a fair
return upon the fair value of its property devoted to the
A76 Appendix E
public service. See Ben Avon Borough v. Ohio Valley
Water Co., 271 Pa. 346, 114 A. 369 (1921); Pittsburgh v.
Pennsylvania Public Utility Commission, 182 Pa. Superior
Ct. 551, 128 A. 2d 372 (1956); Solar Electric Co. v. Penn-
sylvania Public Utility Commission, 137 Pa. Superior Ct.
325, 9 A. 2d 447 (1939); and Beaver Valley Water Co. v.
The Public Service Commission, 76 Pa. Superior Ct. 255
(1921), aff'd. 271 Pa. 358, 114 A. 373 (1921). In this case
Keystone is a public utility and is required by law to pro-
vide adequate and continuous water service to its cus-
tomers. To explain our conclusion that the Commission
violated these basic principles and thereby committed an
error of law, we turn now to a discussion of what the
Commission did in this case.
The PUC stated in its adjudication that the result of
its elimination of any value for the filtration plant from the
rate base equitably establishes “the pre-condemnation
status quo, [that is that] both the utility and its customers
must be made whole insofar as reasonably possible.” But
the facts of the case do not support that conclusion. Prior
to the taking by PennDOT, Keystone had acquired deeded
rights to the pure water in almost all of this 37-square-mile
watershed. Those rights had value. True enough, those
rights were carried on the books of Keystone at what ap-
pears to be nominal evaluation because the value was set
in 1902 when a dollar purchased much more than it does
today. Under accounting principles, the value of these
rights was required to be carried on the books at original
cost. That does not say that whatever property rights
Keystone had actually had a fair value for condemnation
purposes of only the nominal amounts carried on books.
On March 30, 1967, when PennDOT and Keystone made
settlement under their agreement, property which had
value was taken from Keystone and its stockholders, so
that what remained had less value to the stockholders than
Appendix E AT77
what had existed prior thereto. No matter what reasons
PennDOT may have had in reaching the dollar settlement,
it is apparent that under the reasoning of Pennsylvania
Gas & Water Company, supra, Keystone was entitled to
the “repair or replacement value” of that which was taken
from it. In this case, what was taken from it were its
water rights and some of its property rights in the water-
shed which would be polluted by the construction of 1-80.
In its brief the PUC argued that the purpose of the pay-
ment of $1,300,000 was to protect the rights of Keystone’s
customers to a continuing supply of potable water, but the
,record just does not support that contention. First of all,
we can find nothing in the law which would authorize
PennDOT to contribute or donate money to anyone, and
the PUC cites no such authority. We do find specifically
that PennDOT may pay “damages”. For example, section
8 of the Pennsylvania Limited Access Highways Act, Act
of May 29, 1945, P. L. 1108, as amended, 36 P. S. § 2391.8,
reads in pertinent part as follows:
“For the purpose of constructing limited access high-
ways ... the Secretary of Highways is hereby em-
powered to take property and pay damages therefor
as herein provided.”
Secondly, the record proves beyond cavil that in addition
to the cost of constructing the filtration plant, therewill
be a continuing annual expense of at least $50,000 per
year to operate that plant. If the government's intention
was to continue a supply of potable water, then why also
did it not include payment of $50,000 a year to run the
plant. If it had included such payment, then some cre-
dence could be given to the PUC’s argument.
Throughout its argument, the PUC says that the
money PennDOT paid was based upon a “cost to cure”
measure of damages, and that somehow this theory of
A78 Appendix E
condemnation can be transformed into a principle of rate
making. We can find no support for this contention in
the law applicable to rate cases.
Another contention of the PUC is that its adjudica-
tion in no way affects Keystone’s ownership of the filtra-
tion plant or the interest of its stockholders therein. Once
again, the record does not support such a contention. Two
sentences found in the PUC’s brief prove our point:
“In such a transaction such stockholders would, indis-
putably, be free to ask whatever price they should
choose for the property of respondent, including the
filter plant. In determining such price they would
be equally free to set the value of the filter plant at
whatever they may wish and should a purchaser sub-
sequently be willing to pay such asking price the
stockholders and not the rate paying customers would
be entitled to receive it.” (Emphasis in original. )
We agree with these statements, and they support the
proposition that the stockholders own the filtration plant.
Keystone’s ratepayers do not own it in any fashion. Coun-
sel for the PUC quite frankly admitted that if Keystone
had dissolved its corporate existence on the day after it
received the $1,300,000 that money would have gone to its
creditors and any balance to its stockholders. The rate-
payers would not have received one dollar of that amount.
One of the leading constitutional cases in this field is the
decision of the United States Supreme Court in Board of
Public Utility Commissioners v. New York Telephone Co.,
271 U. S. 23 (1926) where the Court enunciated the prin-
ciple that the utility plant of a privately-owned utility
belongs to its stockholders not to its ratepayers. The Court
stated:
“Customers pay for service, not for the property
used to render it... . By paying bills for service they
Appendix E A79
do not acquire any interest, legal or equitable, in the
property user for their convenience or in the funds of
the company.” 271 U. S. at 32.
The Court further noted that a utility is entitled to a rea-
sonable return on the value of the property used for public
service regardless of the source of the money used to con-
struct the property. In this connection it stated:
“The just compensation safeguarded to the utility
by the Fourteenth Amendment is a reasonable re-
turn on the value of the property used at the time that
it is being used for the public service, and rates not
sufficient to yield that return are confiscatory . . .
Constitutional protection against confiscation does not
depend on the source of the money used to purchase
the property. It is enough that it is used to render
the service.” (Citations omitted) 271 U. S. at 31.
These same principles must apply to the PUC’s elimi-
nation of the annual depreciation applicable to the filtra-
tion plant. The company claimed $62,743 for annual
depreciation on the original cost of its plant in service on
April 30, 1972. Because of the disallowance of the filtra-
tion plant, the Commission allowed only $50,669 for total
annual depreciation. The difference then is $12,074,
which would appear to be the annual depreciation charge
attributable to the filtration plant. In this connection our
Superior Court in Penn Sheraton Hotel v. Pennsylvania
Public Utility Commission, 198 Pa. Superior Ct. 618, 627,
134 A. 2d 324, 328-329 (1962), stated:
“Annual depreciation is an operating expense
representing the consumption of assets in rendering
service. A utility is entitled under the law to re-
cover from the rate payers the original cost of con-
struction of its depreciable plant.”
A80 Appendix E
This principle was restated by our Court in Pennsylvania
Power & Light Company v. Pennsylvania Public Utility
Commission, 10 Pa. Commonwealth Ct. 328, 311 A. 2d
151 (1973). The PUC takes the attitude that somehow
the rights of Keystone and its stockholders are protected
by its adjudication despite the elimination of the deprecia-
tion applicable to the filtration plant. Nothing could be
further from the truth. If we assume this filtration plant
had, for instance, a ten-year life, then five years from the
day it went into operation, if the company was sold or
dissolved, it can be assumed that the selling price would
be something substantially less than 100 percent of the
value determined on the day it went into service. Under
these facts, how could the stockholders of Keystone pos-
sibly be protected? They have lost whatever value their
company had in that portion of the 37 square mile water-
shed area which was polluted or taken by virtue of I-80,
and they are left with a plant worth less than the amount
which had been determined to be the appropriate dam-
ages under the condemnation agreement. A failure to
recognize this is clearly an error of law because the PUC’s
adjudication results in a taking of Keystone’s property.
There is no way that the PUC can support its conclusion
that the $1,300,000 payment by PennDOT became the
property of the rate payers. If further proof were needed,
we point out the fact that if this filtration plant had cost
$2,000,000 rather than $1,300,000, can there be any ques-
tion even under the PUC’s reasoning that $700,000 would
have to be placed in the rate base in this case. That
being so, does that mean that the rate payer would have
some right against PennDOT or against Keystone for not
computing sufficient damages? We know of no such
right.
The PUC’s bases its approach to this case on the
alleged inequity of taxpayers paying money damages to
Appendix E A81
Keystone which are utilized in the construction of a filtra-
tion plant and thereafter the rate payers paying a second
time through depreciation and earnings on the value of
that plant. Although it does not negate the PUC equity
argument, we should not lose sight of the fact that ap-
parently 90 percent of the state’s payment of these dam-
ages was paid by the federal government. We also should
not lose sight of the fact that it was for the benefit of the
public I-80 was constructed. So all of the people in the
area, including the consumers of Keystone, obtain the
benefit of the use of the new public super highway. Be
that as it may, the PUC has advanced the novel theory
that a privately-owned public utility may be forced to
operate a plant representing 20 percent of its net invest-
ments in total plant without any earnings whatsoever.
The PUC, under its adjudication, of course, permits Key-
stone to recover the expenses involved in operating this
filtration plant, but under the cost of service rate-making
process a utility earns nothing on expenses. A utility
earns only on the net fair value of its plant. In other
words, if a person would receive as a gift or through in-
heritance a public utility, according to the PUC adjudica-
tion that person would be under a duty to operate the
plant for the benefit of the consumers without the pos-
sibility of earning any profit. That kind of reasoning flies
in the face of our Supreme Court’s holding in Scranton,
supra. In Peoples Natural Gas Company v. Pennsylvania
Public Utility Commission, 153 Pa. Superior Ct. 475, 34
A. 2d 375 (1943), it was argued that if a utility had ac-
cumulated a depreciation reserve while consistently earn-
ing and paying liberal dividends, that the consumers or
rate payers should become the real owners of the property
bought with the depreciation funds and ought not to pay
a return on it. The Superior Court answered that argu-
ment as follows:
A82 Appendix E
“But this ought-not argument can be disposed of by
pointing out that, under the existing law, the only
test is present fair value of the property used and use-
ful in rendering the service. That appellant [the
utility] owns the property and is using it in the serv-
ice is unquestioned. And, so long as present fair value
is the test, it makes no difference whether appellant
bought it, received it as a gift, or won it in a lottery.”
153 Pa. Superior Ct. 486, 34 A. 2d at 381.
Our appellate courts have consistently held that the
source of the funds used to finance the construction of
the property used in the public service by a public utility
must be include
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