In these appeals the controversy relates primarily to the fair value of appellant's property and the allowable rate of return. Operating expenses, rentals, taxes, and annual depreciation as determined by the commission are accepted by appellant.
I am unable to agree with the principles set forth or with the independent findings in the majority opinion. Present fair value is to be determined by the reproduction cost theory,1 because by process of elimination no other element remains. To so construe present fair value is to defeat the very purpose of commission regulation (see Metropolitan Edison Co. v. P.S.C. et al., 127 Pa. Super. 11,20, 191 A. 678), and it invites ultimate public ownership of utilities. There is no legislative mandate — and neither reasonable statutory construction nor judicial interpretation warrants the conclusion — that fair value is to be determined by such a single element. See Federal PowerCommission v. Natural Gas Pipeline Co., 315 U.S. 575, 586,86 L.Ed. 1037, 1049. Although section 311 of the Act of May 28, 1937, P.L. 1053, 66 P. S. § 1151, provides that "The commission *Page 32 may . . . . . . ascertain and fix the fair value . . . . . . of the property of any public utility, in so far as the same is material to the exercise of the jurisdiction of the commission," section 301 of the same act, as amended, 66 P. S. § 1141, prescribes that "Every rate made, demanded, or received by any public utility, . . . . . . shall be just and reasonable, and in conformity with regulations or orders of the commission. . . . . ." It is sufficiently evident that a fair return on an inflated and excessive valuation precludes the establishment of just and reasonable rates.2
The commission found the fair value of appellant's property, used and useful in the public service, to be $77,000,000. This amount includes working capital $2,500,000, cost of financing $2,800,000, and the estimated cost of new equipment which was to be purchased in 1942, $3,325,000. There was an allowance of 6 per cent for rate of return.
The result was the allowance of operating revenues computed as follows:
*Page 336% Return on Fair Value of $77,000,000 $4,620,000 Operating Expenses ................... 28,281,100 Rentals .............................. 2,538,600 Taxes ................................ 3,334,300 Annual Depreciation .................. 3,200,000 ---------- Allowable Operating Revenues ......... $41,974,000
Appellant suggests that the fair value of its property cannot properly be less than $110,000,000, and that the rate of return should be 7 per cent.
This case arises out of the action of appellant in filing two new tariffs which were to become effective on January 15, 1942. Their operation was suspended by the commission. Before their effective date complaint was filed against them by the City of Philadelphia. Consolidation was allowed for the purpose of hearing only. The rates and charges set forth in the new schedules were canceled and the rates and charges set forth in the previous schedules were directed to be re-established. The same order was made applicable in both proceedings. These appeals by appellant are from that order.
Appellant, Philadelphia Transportation Company, began business on January 1, 1940, and was the result of the reorganization of the Philadelphia Rapid Transit Company. Formation of the present appellant company was pursuant to a plan of reorganization proposed in proceedings in the United States District Court for the Eastern District of Pennsylvania commenced on October 1, 1934, under section 77(b) of the National Bankruptcy Act. Before confirmation approval by the Pennsylvania Public Utility Commission was required. Hearings were held on the application, and the commission eventually approved the final plan of reorganization calling for a total of capital securities to be issued and assumed of approximately $85,000,000. The first plan of reorganization contemplated the issuance of capital securities to the extent of $174,000,000. The plan finally approved by the commission on November 22, 1938, provided for the issuance of capital securities *Page 34 in the present amount. The City of Philadelphia gave its approval.3
Appellant argues to the effect that the commission in the reorganization proceedings, having approved the issuance of approximately $85,000,000 of securities, was bound to find a fair value of appellant's property of at least the amount of the securities issued plus an allowance for materials and supplies, working capital, and the additions made during 1942. Appellant in its brief presents its contention as follows: ". . . . . . that the same used and useful property of a Pennsylvania public utility cannot contemporaneously have one value in dollars for the purpose of supporting an aggregate amount of securities to be presently assumed and issued against such property and a lower fair value as the measure of the constitutional protection to which the holders of those securities are entitled in a rate case." The majority opinion says: "Certainly the finding of $85,000,000 for a specific purpose is not res adjudicata here. The commission stated and appellant agreed that the value found should not be binding in any other proceeding or for any other purpose." But the majority opinion goes on to say: "But in the absence of a rational basis for a change of position, the finding as it stands is evidence of the fair value of the property in 1941."4
In the several orders of the commission in connection with the reorganization proceedings it was made clear that the commission had no intention of determining the fair value or establishing a rate base for rate making *Page 35 purposes. For instance, the commission there said:
"Approval by the Commission of any security issue does not imply a guaranty that unjustifiably high rates will be approved in order that these securities may be serviced."
"This report and order should not be construed as requiring the Commission in any proceeding brought before it under the Public Utility Law of the Commonwealth of Pennsylvania for any purpose to fix a valuation which shall be equal to the total of the securities proposed under the applicant's plan, or to approve or prescribe a rate which shall be sufficient to yield a return on said securities." See Public Utility Law of May 28, 1937, P.L. 1053, §§ 603, 918, 66 P. S. § 1243, 1368.
In its order of October 3, 1938, in the reorganization proceedings, the commission recommended a capitalization comprising security issues in an amount approximating $75,000,000. In that order the commission said: "We do not now determine the fair value of the property to be acquired for any purpose other than to consider whether the proposed Plan of Reorganization should be approved. For such purpose the fair value of the physical assets is $105,419,769, less accrued depreciation of $31,000,000 as of October 1, 1937."5 It may *Page 36 be said, as pointed out by the commission, that the difference between the $75,000,000 of securities recommended by the commission and the amount that was finally issued of $85,000,000 is largely a result of appellant's adherence to placing an arbitrary par value of $20 per share on an issue of preferred stock and a stated value of $10 per share on the issue of common stock. In this connection the commission said: "It is a matter of common knowledge that par or stated values of common stock do not fix the actual investment of a holder in a company whose stock he holds."
"The fiction of giving a [$10] stated value to the common stock of the proposed company, cannot give real value to nonexistent equities." Order nisi, October 3, 1938.
The equity represented by preferred and common stock is variable, and there is no reason to believe that the commission indicated that the respective shares had an actual value equivalent to the par or stated value. The commission, in its order nisi, in the present proceedings, said:
"It should be emphasized at this point that the plan of reorganization as finally approved was primarily a compromise between many divergent interests. The reorganization proceedings were begun in 1934, but the plan of reorganization proposed at that time, and various others formulated thereafter, were not acceptable to all the interested parties. The plan as approved involved the merger of Philadelphia Rapid Transit Company and sixty-four so-called underliers, many of which had outstanding stocks, stock trust certificates, *Page 37 collateral bonds, and mortgage bonds, in the hands of the public, and the holders of each group of such securities had to be reckoned with before the plan could become operative. . . . . . . The Commission's approval, therefore, should not be construed as ratification of various values involved in the reorganization proceedings, but rather as a frank recognition that the public interest could be best served by acquiescing in a plan which, with one exception, had the approval of all groups, and thus open the way for normal operations after four years of contention, litigation and bankruptcy."
Appellant is for present purposes a new corporation which has acquired its assets from many independent sources, and issued securities therefor. Its present fair value would seem to be the principal issue, although largely academic, and this, in my judgment, does not involve much that transpired prior to the reorganization which created appellant company. It is conceded that the total amount of securities did not represent an adjudicated value which the commission was thereafter bound to find as a minimum fair value of appellant's used and useful property. In my opinion, the reorganization proceedings are under the circumstances in no way material, or controlling of the present proceedings. The reorganization proceedings were the result of applicant's inability to meet dividend and interest requirements. I think ordinarily the valuation for reorganization should not be disturbed for a reasonable period. But a new capitalization that continued the original situation in any degree would be unjustified. The commission's approval in the manner made may have been ill advised, and thus productive of the results which have followed. "The basic question in a valuation for reorganization purposes is how much the enterprise in all probability can earn": Institutional Investors v. Chicago, M. St.P. P., 318 U.S. 523, 540, *Page 38 87 L. Ed. 959, 994. In Consolidated Rock Products Co. v. Du Bois,312 U.S. 510, 525, 85 L. Ed. 982, it was said: "Whether or not the earnings may reasonably be expected to meet the interest and dividend requirements of the new securities is a sine qua non to a determination of the integrity and practicability of the new capital structure."
RATE BASE The commission in determining the fair value of appellant's used and useful property considered the following elements: Original cost depreciated, reproduction cost depreciated, book cost less depreciation reserve as adjusted, and the par or stated value and the market value of the securities. See Smyth v. Ames,169 U.S. 466, 42 L. Ed. 819; Solar Electric Co. v. Pa. P.U.C. etal., 137 Pa. Super. 325, 347, 9 A.2d 447. All of the elements as found by the commission may be summarized as follows (56a):
Original Cost Depreciated .................. $65,819,000
Reproduction Cost Depreciated .............. 98,276,000 Book Cost less depreciation reserve, as adjusted ................................. 82,749,000
Bonds, stock and surplus: At par and stated values ................. 87,569,000 At market values ......................... 52,522,000
The commission said that upon consideration of these elements and all other facts of record which might be considered as relevant thereto it found and determined that the fair value of appellant's used and useful property as a going concern based on evidence as of December 31, 1941, was $77,000,000, including working capital, cost of financing, and the estimated cost of equipment to be purchased in 1942.
I think the finding of the commission in this respect represents a reasonable appraisal of the evidence. The result, if material, does not indicate confiscation, unfairness, or unreasonableness. The nature of appellant's *Page 39 business would not warrant a present fair value approximating depreciated reproduction cost. Obsolescence is a material factor. There has been a marked change in the past in transportation methods, and the evolutionary process is not complete. "Reproduction cost as the cost of building a replica of an obsolescent plant is not of real significance."
There may be some merit in criticising the market value of securities as an important, although relevant, element in the determination of fair value. The commission in its final order as to this said: "Securities were considered with the other elements but were not given predominant weight, either as to their par or stated value or as to their market value." But in contrast to the reproduction cost theory of the majority, appellant submits that investment valuation, original cost undepreciated, original cost depreciated, and reproduction cost depreciated are the principal indices6 of fair value from the consideration of which the judgment figure of fair value should have been determined by the commission.
One of the principal contentions of appellant is that original cost less accrued depreciation was the basis of the commission's action in the reorganization proceedings and was determined in the order of October 3, *Page 40 1938, to be $70,642,769 [$74,419,769 less $2,800,000 cost of financing, and $977,000 for Willow Grove Park], and that, with more and better7 physical property today, the original cost less accrued depreciation cannot now be only $57,194,000. This difference is principally in the depreciation item. In the commission's order of October 3, 1938, in the reorganization proceedings, the commission considered the total physical assets undepreciated of the value of $105,419,769 less accrued depreciation of $31,000,000; this made the depreciated assets $74,419,769. In the present proceedings the commission determined the original cost of appellant's property to be $104,194,000 as of December 31, 1941. This less accrued depreciation of $47,000,000 made the original cost less accrued depreciation $57,194,000. To this sum is added working capital $2,500,000, cost of financing $2,800,000, and cost of new equipment to be purchased in 1942, $3,325,000, or a total of $65,819,000. If to the commission's finding of fair value of $77,000,000 is added the depreciation difference of $16,000,000 we have a figure of $93,000,000, which approximates the *Page 41 figure of $92,679,031,8 which appellant contends is the index of minimum fair value of its property in the light of the reorganization proceedings and in conformity with the principle laid down by the commission in Peoples Natural Gas Co. v. Pa.P.U.C., 153 Pa. Super. 475, 34 A.2d 375. In the PeoplesNatural Gas Company case the commission merely said that the investment was an "important index of the minimum fair value." This court, in reversing the commission (153 Pa. Super. 475,486, 34 A.2d 375), said, in effect, that invested capital found as representing Peoples' capitalization bore no direct relationship to value.
It seems to me that any upward adjustment of the rate base from that found by the commission depends largely upon three disputed matters, to wit, paving, accrued depreciation, and working cash capital.
PAVING Appellant claims an allowance of approximately $15,000,000 for paving. On its books as of January 1, 1940 (and in the item of transportation property in statement in footnote 8) paving is carried in the amount of $7,498,150. Undoubtedly much paving was installed in accordance with franchise requirements by appellant's predecessors, but I am unable to see how this *Page 42 factor enters into the present fair value. A history of this expenditure indicates to me that it is not even a factor at the present time. However, the commission has allowed the value of the paving as of the time of the commission's determination of fair value in this proceeding. This amount, $3,151,000, represents the total paving laid by appellant and its predecessors, as is still in existence. I think this is the maximum allowance that should be made. It does not appear that any capital funds of appellant or its predecessors have been expended for paving maintenance or repairing since 1907. The cost of paving has been merged into an annual payment under the agreement of 1907 beginning with $500,000 and increasing $50,000 every ten years until it has reached the sum of $650,000. The items claimed as part of fair value consist principally of money spent for paving prior to 1907. (Under the ninth paragraph of the agreement of 1907 the commission has also allowed the city $300,000 per annum.) The commission in its order nisi (25a) aptly said: "There can be no justification for requiring the rate-payer to pay an annual charge imposed on the company in full satisfaction of a previous obligation and at the same time require payment of a return on the prior investment in that obligation." If appellant had paid $50,000,000 for franchise rights years ago, I do not think any one would contend that such sum must necessarily be included in fair value today. Present fair value is not to be determined on any theory of estoppel.
ACCRUED DEPRECIATION Appellant contends with respect to accrued depreciation that the findings of the commission in the reorganization proceedings relative thereto are binding in this case, as the question of depreciation has there been determined and cannot be disturbed by different findings in the present proceedings. In the reorganization proceedings the accrued depreciation was fixed at $31,000,000, *Page 43 while in the present proceedings it was fixed at $47,000,000 on property having an original cost as asserted by the commission of $104,194,000. Without entering into a detailed discussion and assuming that the commission was not bound by the finding in the reorganization proceedings, I think depreciation in the amount of $47,000,000 is not unreasonable when you consider the type of property involved. The commission used a straight line age-life method in computing the depreciation, and I think the record upon examination supports the commission's view. Under the circumstances (see order nisi 33a-46a) the use of the straight line age-life method was proper. In the reorganization proceedings the commission accepted one of applicant's estimates of accrued depreciation (found to be $30,395,000) which used the lives of the property as estimated by the commission's staff and assumed a return of 4 per cent on the investment of the sums set aside as depreciation reserve. In fixing the amount of $31,000,000 the commission said: "We do not accept this method of determining accrued depreciation as proper, and the result reached in this case is not to be considered a precedent therefor. Nevertheless, the sum represents one estimate of accrued depreciation in the record and approaches an average between the estimate of the Commission staff and applicant's estimated reserve requirement." In that proceeding there was testimony offered by the commission that the accrued depreciation based on the straight line age-life method amounted to $48,000,000. The commission now contends that appellant "in taking the position that the measure of accrued depreciation is foreclosed because of the reorganization proceeding, makes no distinction between actual depreciation accrued and depreciation reserve."
It is the commission's position that the figure urged by appellant in the reorganization proceeding was *Page 44 simply an estimate of depreciation reserve determined by the application of 4 per cent sinking fund method to the ages and lives as used by the commission's engineers in determination of accrued depreciation of $48,000,000 by the straight line method. As to depreciation, see Lindheimer v. Illinois Bell TelephoneCo., 292 U.S. 151, 173, 54 S. Ct. 658, 78 L. Ed. 1182, 1196;Federal Power Commission v. Natural Gas Pipeline Co., supra,315 U.S. 575, 86 L. Ed. 1037; Federal Power Commission v. HopeNatural Gas Co., 320 U.S. 591, 88 L. Ed. 276.
WORKING CAPITAL Appellant claims $2,700,000 as working cash capital. The commission allowed $1,000,000. There was also allowed $1,500,000 for material and supplies. I think the allowance provides an adequate margin of safety.
RATE OF RETURN Appellant's position is that it is entitled to a return of 7 per cent. The commission's finding of a return of 6 per cent is supported by the record and is not confiscatory. I find no reason to disturb the finding. See Peoples Natural Gas Co. v. Pa.P.U.C., supra, 153 Pa. Super. 475, 494, 34 A.2d 375.
PRESENT RATES The commission found that appellant's present rates are reasonable, and that its proposed rates were unreasonable, and would yield an excessive income (see order nisi, 92a, and final order, 152a). This court has said that while the Act of May 28, 1937, P.L. 1053, § 311, 66 P. S. § 1151, authorizes the commission to find fair value of the property of a public utility, it does not require such finding except where the commission finds the rates of the utility to be unjust and unreasonable. PerkasieSewer Co. v. Pa. P.U.C., 142 Pa. Super. 262, 16 A.2d 158. As to valuation, see, also, City of Philadelphia et al. v.P.S.C., 83 Pa. Super. 8, 11, 12; New Street Bridge Co. v.P.S.C., 271 Pa. 19, *Page 45 38, 114 A. 378. But it does not appear that a determination of present fair value of appellant's property was a prerequisite to the finding as to rates in the present case. In the course of the hearings before the commission, as stated in the majority opinion, "it developed that higher fares were not necessary because of increases in earnings after the tariffs were filed." The question of value was, under the circumstances, subordinate to the finding that the present rates are fair and reasonable. The majority opinion does not disturb the existing schedule of charges; whether higher fares may be necessary at some time in the future will depend on future events. I question the advisability of adopting a rate base under these conditions. With the approval of the present rates the question of value could very well have been held in abeyance. But this court, in the majority opinion, has added $16,000,000 to the finding of the commission, making the rate base $93,000,000 with a return thereon at 6 1/2 per cent per annum. (A public statement by appellant estimated that approximately 1,125,000,000 passengers would be carried during 1943. This is 158,500,000 higher than the previous record established in 1926, and 67 per cent higher than the number carried in 1940.) A rate base which may only be used at some future time, if at all, for a change in rates, and which is the result of spot reproduction cost estimates is an anomaly.
The factual determinations of the commission are in conformity with present legal standards.
1 Mr. Justice STONE (now Mr. Chief Justice) in his dissenting opinion in West v. Chesapeake Potomac Telephone Company,295 U.S. 662, 689, 79 L. Ed. 1640, 1656, said: "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 speculative undertaking imposed upon them in the entire history of English jurisprudence. . . . . . Public utility properties are not thus created full fledged at a single stroke. If it were to be presently rebuilt in its entirety, in all probability it would not be constructed in its present form. When we arrive at a theoretical value based upon such uncertain and fugitive data we gain at best only an illusory certainty."
2 "Rate-making is indeed but one species of price-fixing. Munn v.Illinois, 94 U.S. 113, 134, 24 L. ed. 77, 87. The fixing of prices, like other applications of the police power, may reduce the value of the property which is being regulated. But the fact that the value is reduced does not mean that the regulation is invalid.Block v. Hirsh, 256 U.S. 135, 155-157, 65 L. ed. 865, 870, 871,41 S. Ct. 458, 16 ALR 165; Nebbia v. New York, 291 U.S. 502, 523-539,78 L. ed. 940, 948, 958, 54 S. Ct. 505, 89 ALR 1469, and cases cited. It does, however, indicate that `fair value' is the end product of the process of rate-making not the starting point as the Circuit Court of Appeals held. The heart of the matter is that rates cannot be made to depend upon `fair value' when the value of the going enterprise depends on earnings under whatever rates may be anticipated": Federal Power Commission v. HopeNatural Gas Co., 320 U.S. 591, 88 L. Ed. 276, 282.
3 The city under its option may purchase all of appellant's property for about $85,000,000 with adjustments.
4 "Moreover the commission approved a valuation of $85,000,000 wholly upon its finding of original cost depreciated, including cash and net assets other than fixed property. . . . . . . The finding [original cost depreciated] is ineffective in determining value for the reason that the costs were not trended to reflect current prices of labor and materials on that date [Dec. 31, 1941.]." Majority opinion pages 17 21.
5 "On October 3, 1938, the Commission issued an order disapproving the plan of reorganization then under review. On November 17, 1938, a petition for reconsideration was filed and on November 22, 1938, an order was issued granting approval. In the petition for reconsideration, Philadelphia Rapid Transit Company, applicant, suggested certain adjustments in the accounts, to the end that a total capitalization of $85,000,000 would result, instead of the capitalization of $99,000,000 which was disapproved in the order of October 3, 1938. Without passing specifically upon each adjustment suggested, approval was granted in the order of November 22, 1938. It should be noted, however, that in the order of October 3, 1938, the Commission made a determination of the value of respondent's physical assets depreciated in the amount of $73,442,769, excluding property not used or useful and the Willow Grove Park property. If we add thereto our allowance in this case for working capital and materials and supplies in the aggregate amount of $2,500,000, a total of $75,942,769 is derived. The order of November 22, 1938, did not alter the value found in the preceding order, nor was any indication given that it should be altered." Final Order of October 13, 1942.
6 Appellant's brief (p. 132) shows in parallel columns the elements set forth by the commission in the order nisi (56a), and the elements which appellant asserts must under the law and the evidence be considered:
Appellant's Order Nisi Contentions "Original Cost, Undepreciated .. (not considered) $127,480,573 Original Cost Depreciated ...... $65,819,000 100,910,164 Reproduction Cost Depreciated 98,276,000 144,299,093 Book Cost less depreciation reserve, as adjusted ........... 82,749,000 92,679,031 Bonds, stock and surplus: At par and stated values ... 87,569,000 91,284,784 At market values ........... 52,522,000 (not relevant)"
7 In the dissenting opinion of Commissioner Buchanan, the following comment appears (167a):
"The company contends that it has now `more and better' property than in 1938 meaning, of course, the new street cars, trolley buses and motor buses, and therefore, it argues, an increased valuation over the 1938 figure is proper. But under the equipment obligations it does not hold title to a single wheel or unit of any of the new equipment, the credit of the company was not required to obtain it, and therefore it has no capitalizable rights in the new rolling stock whatsoever. Its interest is merely a lease arrangement with the rentals chargeable to operating expense and the vehicles thereby becoming fully depreciated if and when title is acquired. Likewise the `more and better' equipment includes some 400 or more street railway cars (the record is somewhat confused as to the number) restored to service from storage (fully depreciated) which the requirements of war transportation have demanded."
8 Appellant makes up this amount as follows:
Transportation Property at 12/31/41 ...................... $111,724,347 Less accrued depreciation Transportation property 12/31/41 ........... 26,570,409 ----------- $85,153,938
Add: Working Capital, Materials and Supplies ...... 1,500,000 Working Capital, Cash ........................ 2,700,000 1942 Equipment Purchases ..................... 3,325,093 ----------- $92,679,031