I am unable to agree with the decision of the majority. There is no ground for appellant's averment of confiscation, and none has been shown. The commission has made a finding supported by the record as to the present fair value of appellant's property; I would sustain its order. But the majority opinion requires, in principle and in substance, the granting of appellant's basic demands; it limits the commission in determining fair value largely to the utility's present conception of that term — a fantastic figure upon which the rates must yield a "fair return." *Page 504
Appellant has stated its position as follows:
"Unless there are different estimates of reproduction cost, or unless some part of the estimate is shown to be erroneous or inaccurate, the Commission must take the reproduction cost figure as shown by the evidence and give it weight in determining present fair value. To say that a reproduction cost estimate which is neither contradicted nor shown to be erroneous may be weighted, i.e., revised, in accordance with `common sense,' is to refuse to consider the evidence as shown by the record. . . . ..
"The Commission should have found that the reproduction cost new less accrued depreciation of Respondent's property at December 31, 1938, was $57,695,275 (exclusive of working capital) (Ex. 24, R. 2465a). . . . . .
"The Commission should have found the present fair value of Respondent's property, exclusive of working capital, at December 31, 1938, to be $57,695,275. (See Ex. 24, R. 2465a)."1
Appellant, in its brief, says: "Upon the evidence in the record, it is clear that the present fair value of the Company's property is not less than $40,000,000 and that the rate of return should approximate 7.8%."
Fair value as found by the commission, including $1,566,085 for working capital, is $21,566,085. At the rate of return allowed by the commission — 6 1/2 per cent — there is an annual allowable return of $1,401,796. *Page 505 Appellant demands at least $3,120,000. Appellant is wholly owned by the Standard Oil Company of New Jersey; the latter's investment as found by the commission is $12,744,126 (3563a). On appellant's theory there would be an annual return of nearly 22 per cent on this investment, plus $1,566,085 working capital. The commission's allowance produces a return of 9.79 per cent.
It is obvious the majority opinion insists that depreciated reproduction cost must be not only an element but the sole factor in the determination of fair value in this case. The result of the reasoning which again appears in the majority opinion has been to bring the regulatory process as it relates to rate-making into contempt. The majority opinion says that "the commission may use original cost as a base providing it makes proper adjustments for increases in prices," and that "the original cost figure used by the commission gave no consideration whatever to the uncontradicted evidence that, if the actual cost had been adjusted to reflect the price levels of December 31, 1938, it would have been approximately the same as reproduction cost." As to this the commission said: "We have not given material weight to respondent's evidence of trended original cost for the reason that it reflects no element of value necessary for consideration in arriving at the rate base. It is not the investment, the original cost, the cost to reproduce, the present value, or any other definitive element, but merely a calculation, labeled `trended original cost' which respondent has offered of record for the purpose of indicating the weight to be given reproduction and original costs in arriving at fair value. `Trended original cost' is neither cost nor value."
Although there is a statement in the majority opinion to the effect that the commission may not be bound on rehearing to find the present fair value approximates *Page 506 $40,000,000, by process of elimination and by the charted course which the commission must pursue the result seems predetermined.
I am convinced that the evidence plainly warrants the ultimate findings and order of the commission. And, as I view it, the commission is not bound by every subordinate finding that it makes in such a case, and I do not understand that its finding as to reproduction cost —2 merely indicative of estimates of appellant's witness — must under the law play the part, in the determination of its ultimate finding of fair value, assigned to it by the majority opinion. "There is no requirement that the commission specify the weight given to any item of evidence or fact or disclose mental operations by which its decisions are reached. Useful precision in respect of either would be impossible": Baltimore Ohio R. Co. v. United States,298 U.S. 349, at page 359, 80 L. Ed. 1209, at page 1219. "There is no principle of due process which requires the rate making body to base its decision as to value, or anything else, upon conjectural and unsatisfactory estimates": Railroad Commission of Californiaet al. v. Pacific Gas Electric Co., 302 U.S. 388, at page 397,82 L. Ed. 319, at page 325.
As said by the United States Supreme Court in West Ohio Gas Co.v. Public Utilities Commission of Ohio (No. 1), 294 U.S. 63, at page 70, 79 L. Ed. 761, at page 768: "Our inquiry in rate cases coming here from the state courts is whether the action of the state officials in the totality of its consequences is consistent with the enjoyment by the regulated utility of a revenue something higher than the line of confiscation. If this level is attained, and attained with suitable opportunity *Page 507 through evidence and argument (Southern R. Co. v. Virginia,290 U.S. 190, 78 L. Ed. 260, 54 S. Ct. 148), to challenge the result, there is no denial of due process, though the proceeding is shot through with irregularity or error."
The assumption that only depreciated reproduction cost, or its equivalent, necessarily determines fair value in the present case is insupportable; moreover, this method would lead to absurd results. In the commission's order nisi and final order it is manifest that the relevant elements have been given due weight; and there has been adherence to the law as embodied in the appellate decisions of this state and of the United States Supreme Court. As to uniformity, see Fidelity-Philadelphia TrustCo. v. Allen et al., 343 Pa. 428, 22 A.2d 896. In its final order the commission said (3725a): "We have not, either in our order or our thinking, ignored reproduction cost or other opinion figures as respondent alleges. We recognize reproduction cost, when properly determined, as an effort to reflect the impact of economic forces upon that intangible thing called value between the time the property was constructed and the present day. But we must also recognize that the reproduction cost is a very imperfect reflection." We said in Solar Electric Co. v.Pennsylvania Public Utility Commission et al., 137 Pa. Super. 325,347, that we had consistently followed the rule of Smythv. Ames, 169 U.S. 466, 42 L. Ed. 819, in the valuation of the property of public utilities. As to the elements of value, Smythv. Ames, 169 U.S. 466, at page 546, stated: "And in order to ascertain that value [fair value of the property being used by the utility for the public convenience], the original cost of construction, the amount expended in permanent improvements, the amount and market value of its bonds and stock, the present as compared with the original cost of construction, the probable earning capacity of the property *Page 508 under particular rates prescribed by statute, and the sum required to meet operating expenses, are all matters for consideration, and are to be given such weight as may be just and right in each case. We do not say that there may not be other matters to be regarded in estimating the value of the property."
In Driscoll et al. v. Edison Light Power Co., 307 U.S. 104,83 L. Ed. 1134, the order of the Pennsylvania Public Utility Commission was upheld by the United States Supreme Court as the commission did not confine itself to one element, original cost less depreciation, in setting the fair value of the utility's property for the purpose of temporary rates, but gave weight to reproduction cost, original cost, going concern value, and the necessity for working capital.
But there is no requirement that the commission adopt any single formula or combination of formulas in determining fair value; and if the commission's order, as applied to the facts before it and viewed in its entirety, produces no arbitrary result, it should be sustained. Federal Power Commission v.Natural Gas Pipeline Co., 315 U.S. 575, 586, 86 L. Ed. 1037,1049. The concurring opinion in the latter case goes on to say: "The rule of Smyth v. Ames [169 U.S. 466, 42 L. Ed. 819] as construed and applied, directs the rate-making body in forming its judgment as to `fair value' to take into consideration various elements — capitalization, book cost, actual cost, prudent investment, reproduction cost. . . . . . But as stated by Mr. Justice BRANDEIS [262 U.S. 295, 296, 67 L. Ed. 988, 989]: `Obviously "value" cannot be a composite of all these elements. Nor can it be arrived at on all these bases. They are very different; and must, when applied in a particular case, lead to widely different results. The rule of Smyth v. Ames, as interpreted and applied, means merely that all must be considered. What, if any, weight shall be given to any one, must practically *Page 509 rest in the judicial discretion of the tribunal which makes the determination.' . . . . . . The havoc raised by insistence on reproduction cost is now a matter of historical record. . . . . . As we read the opinion of the Court, the Commission is now freed from the compulsion of admitting evidence on reproduction cost or of giving any weight to that element of `fair value'":Federal Power Commission v. Natural Gas Pipeline Co., supra,315 U.S. 575, at pages 604, 605, 606, 86 L. Ed. 1037, at pages 1059, 1060. See, also, "Does The Ghost of Smyth v. Ames Still Walk?" by Robert L. Hale, 55 Harvard Law Review 1116, 1140, May, 1942.
In Solar Electric Co. v. Pennsylvania Public Utility Commissionet al., supra, 137 Pa. Super. 325, 364, 9 A.2d 447, 469, this court in making its own determination of fair value said that its "independent judgment" was exercised "after considering the character of respondent's plant, the book cost of invested capital as shown on the company's books, the reproduction cost new and the accrued depreciation."
There is no purpose in sending this case back to the commission; if we have sufficient reason to disagree with the commission on the fundamentals, we should determine the facts and terminate this litigation. See Solar Electric Co. v. PennsylvaniaPublic Utility Commission et al., supra, 137 Pa. Super. 325,353, 354, 9 A.2d 447. It has been going on for years, and we should proceed to end it. Appellant very properly suggested such final action by this court upon its own independent judgment as to both the law and the facts. Otherwise by protracted litigation the commission may be worn down and the patience and resources of the public exhausted. The advantage of prolonged litigation lies with the party able to bear heavy expenses.Crowell v. Benson, 285 U.S. 22, 94, 76 L. Ed. 598, 637. Usually, in rate cases, the public eventually pays the utility's litigation expense. But the commission's order *Page 510 appeals to me as being eminently fair to appellant and to its owner, the Standard Oil Company of New Jersey; and as applied to the facts the order certainly produces no arbitrary result.
In 1939, during the pendency of the commission's inquiry into then existing rates, appellant filed its tariff No. 19, which provided for increased rates. These new rates, effective July 1, 1940, are now in effect. The commission, by its order, has allowed $1,401,796 annually for return in addition to taxes, annual depreciation, and all other operating expenses. Notwithstanding what is said in the majority opinion, it is a matter for observation and comment that this allowable return is nearly double appellant's expected return of $708,295.04. There was, as stated by the commission, no restriction whatever upon appellant when it calculated its own proposed increased rates, and therefore it is reasonable to assume it calculated the rates to produce an acceptable annual return. On a 7.8 per cent rate of return now claimed by appellant we would have a rate base of $9,081,989 to produce the net income of $708,295.04. This return anticipated by appellant under tariff No. 19 represents only 1.77 per cent of appellant's presently claimed minimum fair value of $40,000,000. It is significant that the commission's allowable return presents the following results when applied to the stated bases, each of which includes $1,566,085 for working capital:
Base
1. Fair value as found by the
Commission ..................... $21,566,085 6.50%
2. Total invested capital3
($12,744,126) .................. 14,310,211 9.79%
*Page 511
3. Capital stock ($13,200,000) 14,766,085 9.49%
4. Book cost ($39,283,989) less
reserves for depreciation
($29,414,196)4 — ($9,869,793) 11,435,878 12.25%
5. Depreciated original cost
($22,095,839) .................. 23,762,924 5.89%
6. Depreciated reproduction
cost ($35,573,183) ............. 37,139,268 3.77%
Moreover, the return allowable by the commission is nearly $400,000 in excess of appellant's average net earnings for the ten-year period which ended December 31, 1939, and if we adopt appellant's consolidated earnings computation the average net earnings for the years 1932-1939, inclusive, are almost $600,000 below the commission's return allowance.
If, under this state of affairs, the commission is impotent to act to produce a result fair and reasonable to both investor and consumer in a rate case, unwanted and unnecessary solutions of such regulatory problems may eventually follow.5 *Page 512
In Dayton Power Light Co. v. Public Utilities Commission ofOhio, 292 U.S. 290, at pages 311, 312, 78 L. Ed. 1267, at pages 1281, 1282, the United States Supreme Court, in an opinion by Justice CARDOZO, said: "Under the earlier schedule the revenue was even less . . . . . . the valuations [submitted by the utility] are discredited by the teachings of experience. Men do not transact business without protest at confiscatory rates, at all events in the absence of extraordinary circumstances making submission to the loss expedient. If such circumstances exist, the appellant has not proved them. Nothing in the record lays the basis for a belief that the natural gas business . . . . . . is unable to pay its way. That being so, what the public utility has done belies what it has said. We shall hardly go astray if we prefer the test of conduct."
The commission based its accrued depreciation6 upon straight line age-life computations made by its technical staff on the basis of record evidence and in accordance with the expression of this court in Peoples Natural Gas Co. v. Pennsylvania PublicUtility Commission, 141 Pa. Super. 5, 14 A.2d 133. We there said (page 14): "If the commission was of opinion that the theoretical age-life method was preferable, there was nothing to prevent it from making, through its bureaus, its own estimate of accrued and annual depreciation." See, also, Scranton-SpringBrook Water Service Co. et al. v. Public Service Commission,119 Pa. Super. 117, 181 A. 77.
I think the expensed items were properly excluded from the rate base.7 I agree with the holding in City of *Page 513 Wheeling v. Natural Gas Co. of West Virginia, 175 S.E. 339, to the effect that where consumers, due to bookkeeping methods, have paid for items of alleged capital under the guise of operating expenses, deduction should be made for such items in determining the fair value of the utility's property for rate making purposes. "It seems clear that it is not proper to build up operating expenses and get the advantage of a rate authorized to cover them, and later change the method of accounting to include such excess items as a part of the investment of the company, when, in reality, the money has been furnished by the customers of the company": Peoples Gas Light Coke Co. v. Slattery et al.,373 Ill. 31, 25 N.E.2d 482, at page 493. See, also, FederalPower Commission v. Natural Gas Pipeline Co., supra,315 U.S. 575, 590, 591; dissenting opinion in Hope Natural Gas Co. v.Federal Power Commission et al., 134 F.2d 287, 312.
The other matters, including depreciation,8 to which reference is made in the majority opinion, require no discussion, as they have been fully considered in the commission's reports and orders, and no substantial error has been disclosed. The question now raised by appellant as to refunds was not raised before the commission, nor is this alleged error specifically assigned. Appellant not having been deprived of either opportunity, the commission should not be reversed on this ground now. *Page 514
The commission's order is a well-considered determination of a complex problem; it constitutes a reasonable judgment based on a consideration of the relevant facts.
The commission's order should be affirmed.
1 The commission in its final order said: "In brief, respondent demands acceptance of its figures at face value, irrespective of whether they represent fact or opinion, and insists that, in fixing fair value, we must close our minds to all factual evidence and select that one figure, based exclusively upon opinion, which respondent selects. It is not surprising to find that this figure (depreciated reproduction cost) is the highest of all the rate base elements. The formula thus prescribed for us by respondent is clearly a formula for indirect but complete control by the utility of its own rates — the very antithesis of the regulatory concept." 3724a
2 According to Solar Electric Co. v. Pennsylvania Public UtilityCommission et al., 137 Pa. Super. 325, 351, 9 A.2d 447, it would seem that it was necessary for the commission to make a finding relative to reproduction cost, but it does not follow that the commission was obliged to accept the amount in its determination of fair value.
3 "Although we will not consider invested capital as being a direct factor in fair value determination, it does perform a very important function by showing us at what point a fair value finding would work a hardship upon respondent's owners." Order nisi, 3581a.
4 "It is sometimes said, and usually correctly, that assets represented by the depreciation reserve are plant assets. Such assets belong to the utility and, if used and useful in the public service, they are properly includible in the rate base. When it is argued that the depreciation reserve should be deducted in computing the rate base, it is not argued that the assets which it represents should be excluded from the base. It is argued, merely, that the depreciation reserve, when properly computed, represents, the actual depreciation in those properties which are included in the base. . . . . .
"The deduction of the depreciation reserve, or its equivalent, obviates all harmful inconsistencies. The depreciation reserve shows the results to date of the effective depreciation factors. It harmonizes depreciation expense and actual existing depreciation": Report of Committee on Depreciation, National Association of Railroad and Utilities Commissioners, 1943, pp. 168, 169.
5 If anyone has reason to complain it is the domestic consumer whose rate for gas has been increased from 63 cents to $1.45 for the first 1,000 cubic feet. Any schedule of rates should be made nondiscriminatory before approval.
6 During 1908 the depreciation reserve of $2,840,006.20 was transferred to surplus which was thus increased to $5,993,134.46. Dividends were then paid in the amount of $5,440,000. The commission made no adjustment for this.
7 The commission included the disputed amount in original cost. The question is whether or not the commission properly gave consideration in fair value determination to the choice by appellant's management that the consumers should reimburse the utility immediately rather than through depreciation accruals. See, also, order nisi, 3580a.
8 In a recent publication — "Report of Committee on Depreciation, National Association of Railroad and Utilities Commissioners, 1943" — is found an exhaustive and pertinent discussion of the subject of depreciation in public utility regulation. It appears that representatives of leading utility organizations assisted the committee in the collection of data and were afforded an opportunity for advance review of and comment on the tentative draft of the report.