# Opposition Brief — Potomac Electric Power Co. v. Public Utilities Commission

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 1947
- **Citation:** 331 U.S. 816

## Text

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No. 1135 | CHALES ELMORE ¢ au
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IN THE SUPREME COURT OF THE UNITED STATES

October Term, 1946

Unirep States or AMERICA, Petitioner,
v.

Pustic UTILITIES COMMISSION OF THE DISTRICT OF
CoLuMBIA, ET AL., Respondents.

BRIEF OF RESPONDENT, PUBLIC UTILITIES COMMIS-
SION, IN OPPOSITION TO PETITION FOR
WRIT OF CERTIORARI

; VERNON E. WEst, General Counsel,
J Luoyp B. Harrison, Counsel,
Attorneys for Respondent,
Public Utilities Commission,
District Building,
Washington 4, D. C.

DIVISION OF PRINTING AND PUBLICATIONS—GOVERNMENT OF THE DISTRICT OF COLUMBIA

INDEX
PAGE
Suspsecr INDEX
Counter Statement 1
Summary of Argument 12
Argument —__- 13
I. Undistibuted Earnings Invested in Used Assets Constitute Invested
Capital, and Property so Acquired Is Part of the Rate Base ______ 13
Il. The Sliding-Scale Arrangement Is a Reasonable and Lawful Method
of Rate Adjustment 22
III. No Good Reason Is Advanced for Issuing a Writ of Certiorari____- 24
CARRIES pe ocean ne eebeheneiapeademiditadenaenuntanaraskeiaaedbbiceinmnpioeiaaaiamminiies 25

Statutory REFERENCES

Act Creating the Public Utilities Commission (37 Stat. 974, Section 43-101

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Paragraph 7 _ SN eee ae ee RIES. 4, 18
Paragraph 16 __ . cscs pasiaeanie cometh 21, 22
Sg SNES Geen a Ee” Sut Sai per ee emT aD ay eRe re 2

Cases CiTep
Bailey v.N. Y.C. & H.R. R. Co., 89 U. S. 604, 22 L. ed. 840 _._.-._____. 20
Board of Commissioners v. New York Telephone Co., 271 U. 8. 23 ~----- 16
City of Cincinnati v. Public Utilities Commission, 148 N. E. 817, 113 Ohio
aR ID scientist laine ancestries ttl cbiniseiricsictacaidiptanediaiataiionitien 17
City of Minnpoike 0. Rand, BO) FG. Bae is nok inne 16
Clark’s Ferry Bridge Co. v. Public Service Comminion, 291 U. So ae

Dayton Power & Light Co. v. Public Utilities Commission, 292 U.S. 290. 19
Eaton v. English & Mersick Co, 7 F. (2d) 54
Riemer ¢. Gene, SBR 0. GOD an nes i cee 18
Fall River Gas Works Co. v. Board of Gas & Electric Light Commis-
stoners, 102 N. E. 475, 480, 214 Mass. 529
Federal Power Commission v. Natural Gar Pipeline Co., 315 U. S. 575__-- 21
OR i ete neti iene 16
Payee wv. Hans Bet 2D F.0d BU SEE x52 1k ce 16
Garden City v. Garden City Telephone, Light & Manufacturing Co.,.-__ 16
Galveston Electric Co. v. Galveston, 258 U. S. 388 _--------..----------- 16

i

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i IN DEX-—-Coniinued

Geo. Feick & Son Co. v. Blair, 58 App. D. C. 168, 26 F. (2d) 540, 541______ 17
Gibbons v. Mahon, 136 U.S. 549, 34 L. ed. 525 -....---.----_.-...______. 18
Grafton Electric Light & Power Co. v. State, 94 A. 193, 195, 77 N.

SS ee ee ees SIE Bena 8, 9 17
Los Angeles Gas & Electric Corporation v. Railroad Commission, 289... 16
ROTEL, IN Sh, WI Ss neritic tin nn enced 18

I sac a tn dee enn pec cence 16
apres HONE, Cle ic he ai ash, iil oasasiecinnd a
Martindell v. Fiduciary Counsel, 30 A. (2d) 281, 133 N. J. ‘Eq. 408 hua 20, 21
‘Michigan Public Utilities Commission v. Michigan State Telephone Co.

SE UT, I a sin ma ain amp nearin 17
pe ee ee. Se . eee 20
Newton v. Consolidated Gas Co., 258 U.S. 165 . 16
Naa WBE, TNE UD, Gh, Te aan re npn spon ane 16
People ex Rel Fraser v. Great W. Sugar Co., 29 F. (2d) 810 —_-_ -------____ 21
Peoples Natural Gas Co. v. Pennsylvania Public Utilities Commission,

Oe ee ee ee ee 17
Smith v. Illinois Bell Telephone Co., 282 U.S. 133 ----~---..----------... 16
Siate v. Hampton Water Works Co. 18 A. (2d) 765, 91 N. H. 278 -_----__ 17
Vinson v. Washington Gas Light Company, 321 U.S. 489 _._--_--.__4, 24, 25
Washington Gas Light Company vy. Byrnes, 78 U. S. App. D. C. 107,

TOE RR OR a oa hehe niki bn Seiten 21, 24

Oruer REFERENCES

Potomac Electric Power Co., 8 S. E. C. 30, 36 ----------------- --------... 18
“The Economics of Public Utility Regulation”, Barnes --------------- a
“Financial and Operating Ratios in Management”, Bliss ---------------- 20
“Public Utility Finance”, Lagerquist ----------------------------------- 20

“Public Utility Regulation and the So-Called Sliding Scale”, Bussing .--. 23

IN THE SUPREME COURT OF THE UNITED STATES

October Term, 1946
No. 1135

UNITED States or AMERICA, Petitioner,
Vv.

Pusuic UTILITIES COMMISSION OF THE DISTRICT OF
CoLuMBIA, ET AL., Respondents.

i=
BRIEF OF RESPONDENT, PUBLIC UTILITIES COMMIS-
SION, IN OPPOSITION TO PETITION FOR
WRIT OF CERTIORARI

COUNTER STATEMENT

The Public Utilities Commission of the District of Colum-
bia (Commission) instituted an investigation to determine
whether the sliding-scale arrangement should be abandoned
or modified, and if to be modified in what particulars. This
investigation was consolidated with the annual rate investi-
gation under the plan for the year 1943.

1

“=

eg

2

The Public Buildings Administration of the Federal Works
Agency and the Procurement Division of the Treasury
Department intervened in the proceedings before the Com-
mission, both in the name of the United States. Both agencies
took contrary positions on all issues involved. The Public
Buildings Administration contended that pursuant to a de-
sign and conspiracy, the sliding-scale arrangement was adopted
as a device by which excessive, unlawful and unreasonable
rates were to be extracted from consumers (R. 505, 507), and
urged that the arrangement be abandoned. The Procurement
Division urged that the principles of the sliding-scale plan
be preserved but that ic be modified in certain particulars
(R. 10).

The only witness called by the Public Buildings Adminis-
tration was Charles W. Smith, Chief of the Bureau of Ac-
counts, Finances and Rates of the Federal Power Commis-
sion, who testified that he envied the sliding-scale arrange-
ment because it has benefits to the public as compared to the
typical fair-value procedure (R. 396). He pointed out the
benefits of the plan (R. 378, 379, 398). Professor James C.
Bonbright of New York City, Economist, Professor of Fi-
nance of the Business School in Columbia University and
specialist in public utility matters, was called as a witness
by the Procurement Division and recommended certain modi-
fications of the sliding-scale arrangement. He testified “that
the sliding-scale plan deserves substantial credit, both for
the promptness and for the amount of the reductions in resi-
dential rates” (R. 408).

The sliding-scale plan was adopted in a Consent Decree of
the Supreme Court of the District of Columbia (now the
District Court) on December 31, 1924 (R. 57-62), after seven
years of litigation (R. 3). The Court found the plan was “fair
and reasonable” (R. 60). Paragraph 18 of the Act (37 Stat.
980) provides that no sliding-scale arrangement shall be law-
ful until it shall be found by the Commission “after investi-

3

gation, to be reasonable and just and not inconsistent with
the purposes” of the Act.

In the court below the Petitioner argued that the sliding-
scale plan was illegal from its inception and has resulted in
the extraction from the consumers of illegal and unlawful
rates. It said the arrangement was “unlawful in its inception,
and has always been unlawful in its administration” (R. 660,
Note 27). The lower court said “The foundation upon which
all the argument of the United States rests is its contention
that, throughout the many years during which the sliding
scale arrangement has been in effect, the rates have been ex-
cessive and illegal” (R. 662).

Under the arrangement, rates have been reduced each year
since the plan was adopted except for the year 1942 when no
rate adjustment was required (R. 6). While the company has
earned, from 1925 to 1942, $16,130,385.49 above the basic
rate of return used as a measure for rate adjustments, the
consumers have, during the same period, had cumulative sav-
ings of more than $86,000,000 without giving consideration
to the additional savings applicable to increased consumption
in each of the years (R. 8).

Two different People’s Counsel, appointed by the President
and confirmed by the Senate, speaking for the consumers, have
opposed the contentions made by the Petitioner in the instant
proceeding.’

The Petitioner contended in the courts below and contends
here, that the sliding-scale arrangement was illegal in its in-
ception and was illegally applied, and that rates in effect since
1925 have been illegal and unlawful. Based upon this er-
roneous conclusion the Petitioner says the surplus and part
of the depreciation reserve of the Potomac Electric Power
Company (Company or Pepco) are illegal and that the Com-

1 When there was no People’s Counsel to speak for the consumers, the Fed-
eration of Citizens Association intervened in the District Court and filed a
brief as amicus curiae in this Court in opposition to the same general con-
tentions raised by the same Petitioner in another proceeding. Vinson v.
Washington Gas Light Co., 321 U. S. 489.

4

mission should “recapture” (Pages 6, 18, Note 15) for the
consumers, all of the company’s assets which have been ac-
quired from undistributed earnings. The Petitioner contended
below that $29,000,000 should be excluded from the rate base
for this reason (R. 659). It seeks to recapture from the com-
pany approximately 36% of the actual cost of the property
devoted to public service. It seeks a rate base representing
approximately 64% of the actual original cost of the prop-
erty used in the public service. Neither the statute nor the
sliding-seale plan authorizes the Commission to “recapture”
any part of a utility’s property. Paragraph 7 of the Act (37
Stat. 978) requires the Commission to value the property of
every public utility “actually used and useful for the con-
venience of the public at the fair value thereof at the time
of said valuation”.

Both the Public Buildings Administration and the Procure-
ment Division filed applications for reconsideration of the
Commission’s Order No. 2796. The Procurement Division
contended before the Commission that the company’s rate
base as of December 31, 1943, “did not exceed $67,000,000”
(R. 15 and 228). The Public Buildings Administration called
as its only witness Charles W. Smith, Chief of the Bureau of
Accounts, Finance and Rates of the Federal Power Commis-
sion, who testified that the prudent investment rate base was
$82,749,207 (R. 423, 604). In disregard of this evidence of
its witness, the Public Buildings Administration contended
the rate base should not exceed $53,459,000 (R. 16).

In its application for reconsideration, the Procurement Di-
vision contended that the rate reduction should be “not less
than $3,000,000” (R. 227). The Public Buildings Adminis-
tration contended that the rate reduction should be “at least
$3,860,000 (R. 235). But its witness testified that the excess
over the return was $2,030,530 (R. 605), which on the sliding-
scale principle would allow a rate reduction of only $1,015,265.
The Commission fixed the rate reduction in the amount of
$1,037,189 (R. 43, 45).

ee res

5

Witness Charles W. Smith for the Public Buildings Adminis-
tration, testified that the reserve for depreciation to be de-
ducted from original cost of property was $17,782,057 (R. 423,
604). In disregard of this testimony, the Public Buildings
Administration contended the accrued depreciation to be de-
ducted from the original cost of property was $17,071,000 (R.
16). Mr. Smith testified that the book reserve for depreciation
was the proper amount to be used in establishing a rate base
(R. 368, 369, 395, 397). In its application for reconsideration,
the Public Buildings Administration contended that the Com-
mission “erred in accepting a book depreciation reserve” (R.
234).

The Procurement Division contended in its application for
reconsideration, that the Commission erred in failing to find
the depreciation reserve to be $21,600,000 (R. 228). In the
complaint in the District Court, the Petitioner alleged that
$14,000,000 should “be added to the depreciation reserve and
so included in the amount to be deducted from the gross rate
base” (R. 52).

When the Petitioner filed its complaint below on behalf of
the two Federal agencies, it did not allege what amount the
rate base should be nor what the depreciation reserve to be
deducted from original cost should be, nor by what amount the
rates should be reduced (R. 47-56).

Both here and below, the Petitioner contended that the
entire surplus be excluded from the rate base (R. 15, 16, 659,
661). The only witness presented by the Petitioner on the
subject of the value of the property, testified that the rate
base should consist of the original cost of the property used
less the book reserve for depreciation (R. 422, 423, 604). The
witness included in his Exhibit No. 45, reproduced on Record
page 604, all of the property acquired from undistributed
earnings. The Petitioner also contended that the entire surplus
should be excluded from the statement of the invested capital
(R. 16, 55, 232). Arthur E. Lundvall, Chief Accountant for
the Federal Trade Commission, was presented as a witness

ee

—

6

for the Procurement Division (R. 334), and testified that the
original investment and undistributed earnings invested in as-
sets constituted the invested capital and was part of the com-
mon stock equity (R. 390-392). Professor Bonbright, another
witness for the Procurement Division, testified that earnings
should be calculated on the common stock equity (R. 412).

The original sliding-scale arrangement provided for a rate
base as of January 1, 1925, of $32,500,000 and a depreciation
reserve as of December 31, 1924, of approximately $4,000,000.
It provided that the rates for the year 1925 were to be based
upon a return of 714% on the value so stated plus estimated
cost of additions undepreciated and weighted. The plan pro-
vided that on the depreciation reserve “interest will be accrued
on a 4 percent basis and as an accretion to the reserve, les-
sening the amount of depreciation to be included as an ex-
pense of operation” (R. 58). Under the sliding-scale plan, all
additions to property have been included in the rate base,
weighted, at the actual cost of the property, so that as exist-
ing property was retired the rate base would become the actual
cost of the property. The rate base established under the
plan before it was modified by Order No. 2796 was approxi-
mately 95 percent original cost (R. 19). Thus, the rate of
return of 6 percent prior to the reduction in the rate of re-
turn in Order No. 2796 was applied to a weighted rate base
approximating 95 percent of the actual cost of the property
used.

The original plan provided that “if the rates hereafter yield
more than a 7% percent return” on the rate base “during a
period of any one year, one-half of said excess shal! be used
in a reduction of rates to be charged the public for electric
service thereafter” thereby providing a sliding-scale of rates
“advantageous to the public and company alike; that is to
say, by way of example, if the return for any one year should
amount to $100,000 over and above 71 percent on the base
ascertained as aforesaid then the rates for the succeeding year
to be charged the public shall be automatically reduced by the

7

filing of new rate schedules to absorb $50,000 of such excess
during such year” (R. 58-59).

The plan also provided for rate increases “If the average
return for any consecutive 5-year period” falls below 714
percent, or if the average return “for any consecutive 3-year
period” falls below 7 per cent, or if the average return “for
any consecutive 12-month period” falls below 614 per cent on
the rate base (R. 59).

The basic rate of return was reduced by the Commission in
1931, 1935, and 1937, and upon each modification the per-
centage steps for rate adjustments, up or down, were like-
wise modified to conform to the new basic rate of return
(R. 4).

During the period 1925 to 1930 inclusive “when the basic
rate of return allowed was 714%, the average rate of return
actually earned over this period was 10.03% per annum; during
the years 1931 to 1934, inclusive, during which period the basic
rate of return allowed was 7%, the actual average rate of re-
turn was 8.46%; during the 2 years 1935 and 1936, when the
basic rate of return was 614%, the actual return was 7.42%
and 7.91% for each of these respective years (R. 7). From
1937 to 1942, inclusive, during which period the basic rate
of return established was 6%, the actual return earned ranged
from 7.95%, down to 5.99% or an average of 6.91%” (R. 7).
During the period from 1937 through 1943 when the basic rate
of return was 6% “the actual return, on the average, was but
.91 of 1% in excess thereof” (R. 7).

In 1924, before the sliding-scale plan was adopted, the cost
of 100 kwh consumption for residential service in the District
of Columbia was $9.24, as compared with an average cost of
$6.18 in 150 cities having a population of 50,000 or more (R.
5, Table between R. 566 and 567). For the year 1942, the cost
for 100 kwh for residential service in the District of Colum-
bia was $2.56, as compared with an average cost of $3.80 for
all cities having a population of 50,000 or more (R. 6).

“=

8

In the first year of the operation of the sliding-scale plan
the cost of 100 kwh was reduced from $9.24 to $7.02. Since
1930 the cost of 100 kwh for residential service in the District
of Columbia has steadily declined below the cost of cities hav-
ing 50,000 or more population (Table between R. 566 and
567). The billing cost of 100 kwh for residential consumption
in the District of Columbia has declined to 27.7 per cent of
the 1924 cost while the average cost of seven comparable elec-
tric utilities has declined to 69.5 per cent of the 1924 cost
(R. 566).

In 1924, before the sliding-scale was adopted, the monthly
bills for 25 kwh for residential consumption in the District
of Columbia was $2.50, while the average cost of 25 kwh for
residential consumption of seven comparable electric utilities
was $1.93. In 1942, the billing cost of 25 kwh for residential
consumption in the District of Columbia had declined to $0.98,
while the average for the same seven comparable electric utili-
ties was $1.38. The cost of 25 kwh for residential consump-
tio:: in the District of Columbia has steadily declined below
the billing cost in the seven companies so that the cost in
1942 was 39.2% of the 1924 cost, while the average cost of
the same seven companies was 71.5% of the 1924 cost (R. 564).

Before the sliding-scale was adopted the billing cost of 40
kwh for residential consumption in the District of Columbia
was $4.00, while the average cost of seven comparable elec-
tric utilities was $2.87. From the first year of the operation
of the sliding-scale plan, the cost for 40 kwh for residential
consumption in the District of Columbia has steadily declined.
In 1942 the cost of 40 kwh for residential consumption in the
District of Columbia was $1.48, while the average cost for
the same seven comparable companies was $2.04. The cost
of 40 kwh in the District of Columbia has declined to 37% of
the 1924 cost, while that for the seven comparable companies
has declined to only 71.1% of the 1924 cost (R. 565).

The Petitioner argues that Pepco’s depreciation reserve is
excessive and constitutes, in part, unjust contributions by con-

em

9

sumers. In 1942 the depreciation deduction of Pepco was
10.3% of its revenue, while the average depreciation deduction
of ten comparable electric utilities was 10.6% of their revenue
(R. 557). Pepco’s charge for depreciation in 1942 was 2.2%
of its electric plant, while the average of the same ten com-
parable companies was 2.6% of their electric plant (R. 557).
On December 31, 1942, the ratio of Pepco’s depreciation re-
serve tq the cost of its electric plant was 17.29% while the
average ratio of ten comparable electric utilities was 17.84%
(R. 560). The reserve for depreciation of the electric plant
of Pepco December 31, 1942, was $16,667,162, while the aver-
age depreciation reserve for electric plant of the ten compar-
able companies was $17,511,135 (R. 560). Pepco’s investment
in electric plant on that date was $96,421,616, while the aver-
age investment in electric plant of the ten companies was
$98,148,320 (R. 560).

The Petitioner argues that the Commission should deduct
from Pepco’s common stock equity $29,000,000 because, as it
alleges, the surplus was built up by unlawful and illegal rates.
The total common stock equity of Pepco, December 31, 1942,
was $37,841,987 while the average common stock equity of ten
comparable electric utilities was $40,381,008 (R. 560).

The capitalization ratios of Pepco, December 31, 1942, were
47.15% for long-term debt, 8.25% for preferred stock, and
44.60% for common stock equity, while the average of the
ten comparable electric utilities were 47.39% for long-term
debt, 13.54% for preferred stock, and 39.07% for com-
mon stock equity (R. 561).

The rate base established by the Commission in Order No.
2796 is the original cost of the property, less the depreciation
reserve (R. 19, 21). The Commission found that the original
cost of the electric plant on December 31, 1943, weighted,
amounted to $98,633,399.89 (R. 19, 21). After deducting con-
tributions in aid of construction and deposits for extension,
and adding materials and supplies, the Commission found the
gross rate base on December 31, 1943, weighted, to be $98,615,-

10

839.52 (R. 21, 42). From the weighted gross rate base, the
Commission deducted the depreciation reserve adjusted and
weighted for the year 1943 in the amount of $17,844,120.81
and found a weighted depreciated original cost rate base for
the year 1943 of $80,771,719.04 (R. 42). It was upon this
rate base that the Commission applied the new basic rate of
return of 544% to determine the amount of the rate reduc-
tion (R. 42-43). Giving effect to the rate reduction of $1,037,-
189, and to the estimated savings in Federal income and excess
profits taxes, the Commission found the company’s pro forma
net income for the year 1943 would amount to $3,645,093.89.
After providing for preferred stock dividends it would leave
$3,250,058.78 to provide a return of 8.91% on the company’s
common stock equity at December 31, 1943. The rate of re-
turn stated on page 10 of the Petition is the rate of return
only for the year 1943.

The various statements in the Petition that the basic rate
provided in the sliding-scale arrangement is the “established
rate” are not correct. The sliding-scale plan permits the com-
pany to earn more or less than the basic rate which is used
as a measure to determine rate adjustments (R. 40, 58, 59,
372). The rate of return referred to on page 9 of the Peti-
tion is “the allowed return” under the provisions of the slid-
ing-scale arrangement and is the return only for the year 1943.
The Commission’s finding points out “that the return at the
basic rate of 54% of the rate base is not the actual return
allowed the Company before any reduction is made in rates
for the ensuing rate year, but is that amount plus a portion
of the earnings in excess of such return. During the year
under consideration, the allowed return is therefore 5.827%”
(R. 40). This is what the lower court called the “permissible
rate of return” (R. 659).

On page 5 of the Petition, it is said the sliding-scale ar-
rangement originally provided that the rates were to yield
71/)% return. The original sliding-scale plan (R. 58-59) did
not provide that the rates were “to yield” a rate of return of

11

74%. That rate was the basic rate of return to be used in
adjustment of rates. The plan provided that additions to
property should be included in the rate base at the actual cost
(R. 58), so that as property was retired the rate base ap-
proached original cost of property. In 1943, the rate base
under the sliding-scale plan before it was amended approxi-
mated 95% original cost of property (R. 18-19). The Com-
mission reduced the basic rate of return to 544% which was
applied to the depreciated original cost of property, weighted,
for the year 1943 (R. 38, 42).

On page 7 of the Petition the Petitioner says that under its
construction of the sliding-scale arrangement the Commission
“in adjusting rates for each year, has sought to fix rates which
would yield the established return plus one-half of the ex-
cess of the past year.” This statement is misleading. The
plan itself provided the formula for adjustment of rates. That
formula has been strictly followed by the Commission in every
rate adjustment (R. 41). The actual rate reductions made
each year under the plan is set out on Record page 6. The
net amount available for return in each of the years is shown
on Record page 8, and shows the actual rate of return allowed
by the plan as well as the basic rate of return used for the
purpose of making rate adjustments. The basic rate of re-
turn applied to the net amount available for return shows
that the actual rate reductions made are in exact accordance
with the sliding-scale arrangement (R. 6, 8).

The application for reconsideration filed by the Public
Buildings Administration contended that the Commission
erred in failing to cause the cancellation of watered stock of
Pepco (R. 233), and that the Commission erred in failing to
exclude such watered stock from the invested capital in the
cost-of-capital computation of the rate of return (R. 233).
The Commission’s findings show that no part of the so-called
“watered stock” was included in the statement of the common
stock equity (R. 16). At the time of the reclassification of
the fixed capital accounts of Pepco, in accordance with orders

12

issued by the Federal Power Commission and by the Public
Utilities Commission, “all differences between original cost
and the book cost of property were eliminated from the plant
account of Pepco, with corresponding charges against earned
surplus and other appropriate accounts. Thus, no inflationary
or improper amounts are reflected in the equity capital as
presently constituted and used in this study of cost of invested
capital” (R. 35, 36).

SUMMARY OF ARGUMENT

1. The Commission found as a matter of fact that the com-
pany’s surplus or undistributed earnings was invested in assets
used in public service. It found as a fact that this investment
constitued part of the invested capital and that property repre-
senting such investment was a part of the rate base. The Courts
have universally held that funds invested, from whatever source,
are part of “invested capital” and that property acquired from
undistributed earnings or depreciation reserve is as much a part
of the rate base as property acquired from proceeds from the sale
of securities.

The Petitioner’s contention that surplus invested in used assets
should be excluded from the rate base and from a statement of
invested capital is contrary to the testimony of its own witnesses
and all other evidence of record. The contention is based upon
argument without support that rates in effect since January |,
1925, have been illegal. The exclusion from the rate base of all
property acquired from undistributed earnings would be a clear
violation of the statute and of the Constitution.

2. The contention that the sliding-scale resulted from a con-
spiracy to establish a device to extract from consumers unlawful
and unreasonable rates is disproved by the record of the rate
reductions. The statement is contrary to testimony of witnesses
called by the Petitioner. It is contrary to the belief expressed by

consumers.

13

3. The decision below is not in conflict with the decisions of
this Court nor with that of any Circuit Court of Appeals. It is
in accord with principles announced by this and other courts.
This Court has reviewed the statute involved and held contrary
to one of the positions taken by the Petitioner. This Court has
approved a sliding-scale arrangement adopted under the statute
involved. No valid reason has been advanced in the Petition
for granting a writ of certiorari.

ARGUMENT
I

Undistributed Earnings Invested in Used Assets Constitute
Invested Capital, and Property So Acquired Is Part of the
Rate Base.

On page 13 of the petition, the Petitioner says that the
Commission acted, and the court below affirmed that action,
on the erroneous assumption that “as a matter of law, exclu-
sion of the surplus could not be sustained.” On page 15 it
said the Commission and the court below held that the Com-
mision is “without power to exclude from the rate base and
the common stock equity” the company’s surplus. Neither
the Commission nor the court decided that question on the
narrow ground stated by the Petitioner. The Commission
found upon undisputed evidence that the surplus referred to
was invested in property used in the public service and that
such property constituted property of the company as much
as property acquired from any other source of funds. There
is no testimony in the record that property acquired from un-
distributed earnings or surplus is not used in the public serv-
ice. There is no testimony in the record that the surplus is
illegal and unlawful. The Petitioner’s contention is based
upon argument that is contrary to the evidence. The lower
court said:

14

“The foundation upon which all the argument of
the United States rests is its contention that, through-
out the many years during which the sliding scale
arrangement has been in effect, the rates have been
excessive and illegal” (R. 662).

The Commission said the elimination of earned surplus or
undistributed earnings from invested capital “finds no sup-
port in reason or in law” (R. 15). It said that it is univers-
ally recognized by both courts and regulatory authorities thai
undistributed earnings invested in the assets of a corporation
“are just as much a part of invested capital as are the dollars
obtained by the sale of securities” (R. 16). The Commission
rejected the contentions “on the grounds that their adoption
would be unsound, without merit, inequitable, and at com-
plete variance with established law” (R. 17).

Mr. Lundvall, who is Chief Accountant of the Federal Trade
Commission (R. 334) testified as a witness for the Procure-
ment Division that the investment in the business is not
merely the amount invested in capital stock but that amount
and what has been “left in the business of the company” (R.
390). He said the amount paid for capital stock is not the
only investment, but it is that amount “plus whatever was
left in the business from year to year” (R. 391). This wit-
ness for the Petitioner did not agree with the contentions of
his counsel.

Mr. Charles W. Smith, Chief of the Bureau of Accounts,
Finances and Rates of the Federal Power Commission, testi-
fied as a witness for the Public Buildings Administration and
introduced Exhibit No. 45 which is reproduced at Record
page 604. He testified that his exhibit showed “the cost of
utility plant at the end of 1942”, and that this figure “reflects
the book cost of the plant” with “the average net additions
for 1943” (R. 422). The witness testified that the gross in-
vestment “is the investment in the plant used and useful,
averaged for the year 1943” (R. 423). After deducting con-

15

tributions in aid of construction “representing amounts which
have not been furnished by stockholders and are other than
investments by the company itself”, with working capital,
gives “a prudent investment rate base for 1943 of $82,740,000”
(R. 423). Mr. Smith testified that “the prudent investment
method is by far the best method of determining the rate base
in my opinion” (R. 419). Mr. Smith included in his prudent
investment rate base all of the property acquired from sur-
plus or undistributed earnings (R. 604).

The Petitioner’s statement on pages 13 and 15 of its pe-
tition that the Commission and the Court of Appeals refused
to exclude from the rate base property acquired from earned
surplus or undistributed earnings because of lack of power or
because such action could not be sustained as a matter of
law, is only one reason why the contention was rejected. It
is not the principle reason for which the Commission and the
court below rejected the unsupported argument. The Com-
mission found as a matter of fact that the surplus was invested
in assets used in the public service.

That the earned surplus is invested in used and useful
property is not dened. The Petitioner has not contradicted
this fact. It merely seeks by argument to show that because
the company has had a record of good earnings, ipso facto,
the rates have been ‘llegal and unlawful.

The property acquired from earned surplus is included in
the “Original cost ¢f electric plant 12/31/43” shown in the
table on Record page 21. In its finding of the rate base, the
Commission said it “finds that the electric plant component
of the gross rate bas¢ Shall be the original cost of property used
and useful in public service as at December 31, 1943, or $102,-
434,682.29 (unweigtted), and $98,633,399.89 (weighted)” (R.
19). These are th? figures shown in the table on Record
page 21.

The Commission having found as a fact that the earned
surplus was invested in property used in service, held that
both upon the facts and the law, property so acquired should

16

not and cannot be excluded from the value of the property.
The Court of Appeals sustained the Commission’s action by
saying there is a clear line of authority holding that surplus
invested in business is part of the “invested capital” and that
it had been unable to find any contrary authority (R. 661).

Both the District Court and the Court of Appeals rejected
the unsupported argument of the’ United States.

This court has never held directly or indirectly that prop-
erty acquired from undistributed earnings should be excluded
in the determination of a rate base. To the contrary, every
time this Court has spoken on the subject it has held that
property paid for out of revenue for services belongs to the
company, just as does that purchased out of proceeds of bonds
and stock. Some of such decisions are: Board of Commis-
sioners v. New York Telephone Co., 271 U.S. 23; Los Angeles
Gas & Electric Corporation v. Railroad Commission, 289 U. S.
287; Clark’s Ferry Bridge Co. v. Public Service Commission,
291 U. 8. 227; Newton v. Consolidated Gas Co., 258 U. S. 165;
Galveston Electric Co. v. Galveston, 258 U. S. 388; Smith v.
Illinois Bell Telephone Co., 282 U. S. 133; Lynch v. Hornsby,
247 U. S. 339; Peabody v. Eisner, 247 U.S. 347.

There is not a decision of a Circuit Court of Appea!s that
sustains the argument of the Petitioner that earned surplus
invested in property is not a part of the invested capital.
In City of Minneapolis v. Rand, 285 Fed. 818, and in Garden
City v. Garden City Telephone, Light & Manufacturing Co.,
236 Fed. 693, the Eighth Circuit Court of Appeals said that
it cannot be said that the utility is not entitled to the profits
it has made and that it could not stop to inquire how the utility
acquired title to the money invested.

In Flynn v. Haas Bros., 20 F. (2d) 510, 511, the Eighth
Circuit Court of Appeals said invested capital means “* is
and (3) paid in or earned surplus and undivided profits used
or employed in the business; * * *.”

In Eaton v. English & Mersick Co., 7 F. (2d) 54, the Second
Circuit Court of Appeals said that surplus used in the busi-
ness is “invested capital”.

17

The ground upon which the United States asks this Court
to grant a writ of certiorari is directly contrary to the posi-
tion taken by the Assistant Attorney General before the
Court of Appeals for the District of Columbia and that court’s
decision in Geo. Feick & Son Co. v. Blair, 58 App. D. C. 168,
26 F. (2d) 540, 541, where it was conceded that the amount
of accumulated dividends should not be excluded from in-
vested capital (Page 541). The court held in that case that
the surplus remained as property of the corporation to be
used in its business “and as such is part of its invested capital”
(Page 542).

The State Courts have held contrary to the argument made
by the Petitioner. Peoples Natural Gas Co. v. Pennsylvania
Public Utilities Commission, 34 A. (2d) 375, 153 Pa. Super,
475; State v. Hampton Water Works Co., 18 A. (2d) 765, 91
N. H. 278; City of Cincinnati v. Public Utilities Commission,
148 N. E. 817, 113 Ohio St. 259; Michigan Public Utilities
Commission v. Michigan State Telephone Co., 200 N. W. 749,
228 Mich. 658.

In Fall River Gas Works Co. v. Board of Gas & Electric
Light Commissioners, 102 N. E. 475, 480, 214 Mass. 529, the
court said when a utility has surplus earnings they belong to
the corporation and not to the public.

In Grafton Electric Light & Power Co. v. State, 94 A. 193,
195, 77 N. H. 539, counsel for the Public Utilities Commission
of the State of New Hampshire made the same argument
that the Petitioner made in the court below and is making
here, because, as he contended, the public had some vague
interest in the utility’s surplus which had been accumulated.
The court said:

“Since it is their property, it cannot be taken from
them directly, nor can they be deprived of it indi-
rectly, either in whole or in part, by denying to its
owners the right to use it as they could use their own
property.” :

ee,

18

In Gibbons v. Mahon, 135 U. S. 549, 34 L. ed. 525, this Court
said that reserved and a:cumulated earnings held and in-
vested by the corporation were a part of the corporate prop-
erty, and that whether pnfits should be invested or distrib-
uted is a matter to be dtermined by the corporation. In
Eisner v. Macomber, 252 J. S. 189 (which the United States
in Helvering v. Griffiths, 318 U. S. 371, asked this Court to
reconsider and over-rule, which request was denied) this
Court said every dollar of original investment, together with
whatever accretions and accumulations have resulted from
employment of money, still remains property of the corpor-
ation.

In footnote 13 on page (6 of the petition, it is said that the
Securities and Exchange Sommission assumed in Re: Poto-
mac Electric Power Co., 83. E. C. 30, 36, that it was discussing
surplus accumulated from fair and reasonable rates. The Se-
curities and Exchange Commission was discussing the same
surplus that the United States discussed in its petition. In
that proceeding before the Securities and Exchange Commis-
sion, the United States mide substantially the same argumen:
that it made in the court below and is making here. The Se-
curities and Exchange Commission did not agree with the
contention.

The exclusion from therate base of property acquired from
undistributed earnings wauld be a clear violation of Paragraph
7 of the Act (37 Stat. 978) that the Commission shall value
the property “actually ued and useful for the convenience of
the public at the fair value thereof at the time of said valu-
ation”. Such exclusion would be a clear violation of the Fed-
eral Constitution.

The Petitioner has molified its argument by now contend-
ing that the Commission should have excluded all of the sur-
plus “or a portion thereo”” (Pages 3 and 10). The Petitioner
apparently now takes th? position that if it cannot have all,
there is no harm in askirg for less.

19

The difficulty with the position of trying “to settle for less”
is, that there is no basis in the record for half measures. When
the Petitioner was before the Commission through two
agencies, and before the lower courts, it contended that all
of the surplus was “illegal” (R. 16, 55, 659, 661). But it of-
fered no evidence that any part of the surplus was illegal.
Before the Commission it contended there should be excluded
from the rate base “an amount of property equal to Pepco’s
earned surplus” (R. 15, 16, 232). It made the same argument
before the Court of Appeals (R. 659, 661). This fact was
noted by the Court of Appeals in footnote 33, Record page
662. Perhaps this is the reason the Petitioner now is willing
to settle for less.

The reasons advanced in the petition for the granting of a
writ of certiorari are based solely upon argument that is con-
trary to the evidence in the record. It is contrary to the testi-
mony of witnesses for the United States; it is contrary to
witnesses of the Commission; and is contrary to the findings
of fact of the Commission. It is contrary to the decisions of
the District Court and of the United States Court of Appeals.
The Petitioner’s position is not even based upon opinion tes-
timony. In Dayton Power & Light Co. v. Public Utilities
Commission, 292 U. S. 290, this Court said that opinion testi-
mony had evidentual value but nothing more. It has no such
commanding quality as to apply coercion to the judgment
of the appointed triers of the facts. If opinion evidence has
no such commanding quality, is pure “argument”, based upon
erroneous conclusions, sufficient to coerce the judgment of a
regulatory body?

In footnote 11 on page 14 of the petition, the Petitioner
says the company’s “actual investment” was $2,245,000 from
1925 to 1942, and $5,245,000, thereafter. Elsewhere in the
petition, these amounts are referred to as the “actual invest-
ment”. This statement is contrary to the evidence. It is
contrary to the testimony of witness Charles W. Smith for the
United States (R. 422, 423, 604); it is contrary to the testi-

Pe

a

20

mony of the Commission’s Executive Accountant and Auditor
(R. 290, 291, 589); it is contrary to the testimony of Mr.
Arthur E. Lundvall, Chief Accountant for the Federal Trade
Commission who appeared as a witness for the Procurement
Division of the Treasury (R. 390, 391, 392); it is contrary
to the Commission’s finding of fact (R. 9, 19, 21, 35).

From this misstatement of the actual investment, the Pe-
titioner draws erroneous conclusions about the earnings under
the sliding-scale arrangement. These conclusions are con-
trary to Petitioner’s witnesses Smith and Lundvall and its
witness Professor Bonbright (R. 412). It constructs from
these erroneous conclusions the tables in Appendix “A” of
the petition.

The conclusions stated by the Petitioner on page 14 and
subsequent pages and in Appendix “A” are contrary to the
decision of the Court of Appeals when it was discussing the
same contention below, and said:

“However, this analysis provides but one of the types
of information which the Commission must take into
account in arriving at a ‘reasonable’ rate. These earn-
ings, in percentages, are meaningful only when they
are related to the Company’s total capital structure”
(R. 661).

The argument made by the Petitioner and the erroneous
conclusions it draws concerning the relationship of earnings
to par value of common stock are contrary to decisions of
regulatory bodies generally, and contrary to authorities on
the subject.”

Courts have universally held that proceeds from surplus
or depreciation reserve or any other source invested in assets
constitute part of invested capital. Cases cited, supra, and
Miles v. Safe Deposit Co., 259 U. S. 247; Bailey v.N. Y.C.&
H.R. R. Co., 89 U. S. 604, 22 L. ed. 840; Martindell v. Fidu-

2“The Economics of Public Utility Regulation”, Barnes, Page 265; “Financial
and Operating Ratios in Management”, Bliss, Pages 58, 75; “Public Utility
Finance”, Lagerquist, Page 567.

————

geaimmatai

21

ciary Counsel, 30 A. (2d) 281, 133 N. J. Eq. 408; People Ex
rel Fraser v. Great W. Sugar Co., 29 F. (2d) 810.

On page 17 of its petition, the Petitioner says that Pepco’s
surplus “represents amounts accumulated as the result of
illegal and improper depreciation practices and of exorbitant
earnings”. On the intervening pages and again on page 21,
the Petitioner makes the same unwarranted statement.

On pages 19 and 20, the Petitioner quotes only a part of
Paragraph 16 of the Act and from that argues that the sliding-
scale plan and the Commission’s application of it “violated the
basic depreciation principles established in Pargraph 16”.

In Washington Gas Light Company v. Byrnes, 78 U.S. App.
D. C. 107, 137 F. (2d) 547, and in Vinson v. Washington Gas
Light Company, 321 U. S. 489, the United States made pre-
cisely the same argument where the sliding-scale there in-
volved provided, as does the one here involved, for accrual of
4% interest on the depreciation reserve as an accretion there-
to, and thereby a lessening of the amount of depreciation to be
included in the annual expenses of operation. As pointed out
by both the Court of Appeals and this Court, the argument
in that case was premised primarily upon Federal Power Com-
mission Vv. Natural Gas Pipeline Co., 315 U. S. 575. Both
Courts rejected that argument. This Court said the argu-
ment was “unsupported by our cases”’.

The assumptions upon which the Petitioner bases its argu-
ment that the Commission has violated the provisions of Para-
graph 16 are contrary to evidence of record. Charles W. Smith,-
who testified as a witness for the Commission on the subject
of depreciation and depreciation charges, and later as a wit-
ness for the Public Buildings Administration upon a prudent
rate base, testified that the practice of the Commission under
the sliding-scale plan did not permit the company to accrue
a sufficient depreciation reserve (R. 368, 397). He did not
agree with the position taken by the Petitioner as to the ap-
plicability and meaning of Paragraph 16 (R. 368, 374, 377,
380, 397). As a witness for the Public Buildings Administra-

sn

22

tion, Mr. Smith testified that the average reserve for deprecia-
tion in 1943, which he deducted from the gross base to deter-
mine the prudent investment rate base, was $17,782,057 (R.
604). While Mr. Smith testified that the sliding-scale plan
had not provided a sufficient reserve requirement, he recom-
mended that the book reserve be deducted in determining the
rate base (R. 368, 369, 397).*

In spite of the assertion on pages 17 and 21 of the petition
that the Company’s surplus represents amounts accumulated
as the result of illegal and improper depreciation practices,
the Petitioner alleged in its complaint in the District Court
that Paragraph 16 of the Act “requires that $14,000,000 be
added to the depreciation reserve and so included in the
amount to be deducted from the gross rate base in arriving
at the base on which a return was to be allowed” (R. 52).

Before the plan was modified, depreciation reserve was
treated by the Commission as a source of funds (R. 22, 589).
The 4% interest credit to that reserve was considered by the
Commission as a part of the cost of funds and was, therefore,
given its proper weight in the determination of a proper rate
of return. The Commission found that “By using an unde-
preciated rate base and deducting interest on the reserve bal-
ance from the depreciation accruals, and giving effect to the
interest rate applied to the reserve in fixing the rate of re-
turn, the result obtained is the same as that arrived at by the
use of a depreciated rate base” (R. 22). Since the result is
the same under either method, it follows that Petitioner’s
contention is wholly without merit.

II

The Sliding-Scale Arrangement Is a Reasonable and Lawful
Method of Rate Adjustment

The assertion by the Public Buildings Administration that
the sliding-scale arrangement was adopted pursuant to a de-

3 Professor Bonbright who was also a witness for the United States testified
that the depreciation reserve accumulated under the sliding-scale plan was
inadequate (Page 2200 of the Transcript).

—

23

sign and conspiracy to establish a device to extract unlawful
and unreasonable rates and was so tolerated by the members
of the Commission, (R. 505 and 507) is disproved by the rec-
ord of achievment under the plan. The undisputed record
of reductions in rates and the lessening in the cost of electric
service, noted on page 7 and 8, supra, speak a denial of the
assertions of this agency.

The charge made is contrary to the testimony of the only
witness called by the Public Buildings Administration (R.
378, 379, 395, 396). It is also contrary to the testimony of
Professor Bonbright (R. 408). It is contrary to the belief
expressed by the consumers through the Federation of Citi-
zens Associations (R. 10) and the People’s Counsel.

In the Preface to his “Public Utility Regulations and the
So-Called Sliding Scale”, Mr. Bussing said that before the
adoption of the sliding-scale arrangement, electric prices in
the District of Columbia “were among the highest in the
country; within eight years they were among the lowest.”
On page 126 he said that while the company’s earnings have re-
mained consistently above the basic rate, notwithstanding the
fact the price to consumers has dropped from among the high-
est in the United States to one of the lowest. On pages 137
and 138 Mr. Bussing shows cumulative savings under the slid-
ing-scale plan from 1925 to 1935, inclusive, of $37,020,372.
Mr. Bussing stated that the actual savings to the consumers
have been greater than these figures indicate, for the latter
are based on the assumption that consumption in the ensuing
year would be no greater than it was in the previous period.

On page 18 of the Petition, the Petitioner says the actual
excess earnings to the company are many millions of dollars
greater than the $16,000,000 stated by the Commission on
Record page 8 because under the Commission’s practice ex-
cess earnings “was immediately added to the rate base”.

This statement is not true. From the time the plan was
adopted, to the initial rate base each year “there has been
added the actual cost of subsequent net additions” (R. 12,

a

24

18). Under the sliding-scale arrangement for the determina-
tion of gas rates where the identical method of determining
the rate base is employed, the Court of Appeals in Washington
Gas Gas Light Co. v. Byrnes, 78 U. S. App. D. C. 107, 109,
137 F. 2d 547; and this Court in Vinson v. Washington Gas
Light Co., 321 U. S. 489, 492, said that the sliding-scale plan
requires the rate base to be adjusted annually by adding net
property additions at cost. ,

Contrary to the contention of the Public Buildings Admin-
istration that the sliding-scale arrangement was a device to
extract from consumers unjust rates (R. 505), its witness,
Mr. Smith, said, “I envy the sliding-scale arrangement be-
cause it has benefits to the public as compared to the typical
fair-value procedure.” (R. 396). The witness narrated some
of the benefits of the sliding-scale arrangement (R. 378, 379,
398).

Professor James C. Bonbright of New York City, Economist,
Professor of Finance in the Business School of Columbia Uni-
versity and specialist in public utility matters, who was called
as a witness by the Procurement Division of the Treasury (R.
406), recommended certain modifications of the sliding-scale
arrangement and stated “that the sliding-scale plan deserves
substantial credit, both for the promptness and for the amount
of the reductions in residential rates” (R. 408).

Il

No Good Reason Is Advanced for Issuing a Writ of Certiorari

The Petitioner seeks a review of the decision below on noth-
ing more than its argument that rates charged for electric
service since January 1, 1925, have been illegal. The lower
court said it is only by saying retroactively that the rates ex-
tracted in former years were not just and reasonable, that it
could conclude that the surplus or undistributed earnings was
an unlawful accumulation (R.659). All of the evidence shows

25

that surplus is actually invested in property used in the public
service.

The decision of the lower court is not in conflict with any de-
cision of this Court. Indeed, it is in accord with this Court’s
decision in Vinson v. Washington Gas Light Co., supra. The
decision is not in conflict with that of any other Circuit Court
of Appeals.

This is not a case of reviewing the statute for the first time.
This Court construed paragraph 16 of the statute here in-
volved in Vinson v. Washington Gas Light Co., supra, against
the same attack that is made against it in the instant Petition.
This Court also construed a sliding-scale plan adopted under
the same paragraph of the Act as the one here involved.

No sufficient reason is advanced for granting a Writ of Certi-
orari.

CONCLUSION

It is respectfully submitted that the Petition for Writ of
Certiorari should be denied.

VERNON E. WEstT, General Counsel,

Lioyp B. Harrison, Counsel,
Attorneys for Respondent,
Public Utilities Commission,
District Building,

Washington 4, D. C.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386416_1068%3A4. Public record. Not legal advice.