# Petition — Pennsylvania Gas & Water Co. v. Pennsylvania Public Utility Commission > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385007_2107%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition - **Published:** January 1, 1981 - **Citation:** 454 U.S. 824 ## Text 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 [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385007_2107%3A1. Public record. Not legal advice.