Berner v. Pennsylvania Public Utility Commission

Opinion by

Gunther, J.,

On November 12, 1952, Commonwealth Telephone Company (hereinafter called Commonwealth) filed proposed new tariffs providing for rate increases for local exchange service. On January 5, 1953, the Pennsylvania Public Utility Commission suspended operation of the proposed rates for a period of six months and instituted an investigation to determine fairness of proposed rates. On June 30, 1953, the suspension was again extended to October 11, 1953, and later, by agreement, extended further to November 10, 1953. Complaints against the rate increases were filed by Clyde E. Berner et al., at C 15845, Cadwallader Evans, Jr., at C 15852; Bryan A. Breish et al., at C 15858; Jerome B. Marshall at C 15860; Henry L. Jones 2d. at C 15861; C. A. Woodruff at C 15862. The complaints were consolidated for the purpose of the case. Hearings were held between March 10, 1953 and October 16, 1953. Briefs, exhibits and transcript were filed with the Commission on January 9, 1954. After argument, an order was issued approving the proposed rates. This appeal is from the order of the Commission.

Operating revenues under proposed rates.

Does the evidence substantiate the findings of the Commission? Are additional operating revenues under proposed rates properly estimated and justified? The Commission so found. The question before the Court is whether the record supports the Commission’s system of estimating the amount to be produced by the proposed higher rates. It is specifically pointed out that the Commission ignored or failed to take into consideration the enormous increase that took place in the number of new subscribers after September 30, 1952, the cut-off date in this ease.

It is argued that had the Commission considered this increase the receipts would have resulted in the amount of $1,630,098.00 or $89,000.00 more than the amount actually received by the Commonwealth during the year ending September 30, 1952. It is contended that this was an error of law and that the Commission should have taken account of the increasing number of Commonwealth’s subscribers and made a future prediction. The Commission, however, did not ask for a projected estimate by the Commonwealth of increased subscribers and use because that would also have required an estimate of the increased costs, taxes, etc. In order to annualize the effect of growth of subscribers during the test year, corresponding adjustments should be made for expenses involved in handling the increase.

We see no error in the Commission’s methods, which were based on actual experience and geared to the known costs and income. As long as the Commission uses methods reasonably calculated to produce accurate findings, we shall not override its judgment. It may use its judgment in adopting what it considers most reliable, practical, and realistic bases for determining revenues and expenses for rate purposes.

We do not believe that the evidence supports appellants’ point that the estimated annual revenues under the proposed rates should be increased by $89,-000.00 over and above the amount actually received during the year ending September 30, 1952.

Operating expenses:

Appellants complain that the operating expenses allowed by the Commission are unreasonable and improper. Should the Commission have disallowed additional expenses? The Commonwealth originally claimed expenses amounting to $933,217.00 but the Commission, in its order, allowed $909,978.00. Appellants object to Commission’s allowance of certain payments made by Commonwealth to its affiliated interests. It is pointed out that Sterling Farms, an affiliated company received $3,543.00 for administrative expenses and $2,273.00 as Contractor’s profit over and above hourly wage of its farm workers. There is no evidence that the amounts are excessive or unreasonable. Appellants argue that the above amounts of administrative cost should have been disallowed by reason of the fact that another affiliate, the Public Service of Pennsylvania Inc., was receiving a management fee for this very type of service. The record, however, discloses that the amounts in question were for trimming trees, whereas payments to Public Service were for executive salaries. The Commonwealth otherwise would have to maintain its own tree trimming crew, which is not the practice among utilities, or employ somebody to do the trimming.

Original cost:

Appellants contended that the Commission used wrong basis in arriving at the measure of value of original cost. What is the basis used by the Commission? It took into consideration the original cost of Commonwealth’s plant as of December 31, 1946, the date of its reclassification; it examined the Bradford County Telephone Company’s original cost as of December 31, 1947; and Luzerne Telephone Company’s original cost as of December 31, 1947 (the three companies were merged in September 1950). To the resulting dollar amounts the Commission added plant addition and deducted plant retirements to bring the cost basis up to the cut-off date, September 30, 1952.

The appellants maintain that the telephone original cost orders promulgated by the Commission for each of Commonwealth’s three predecessors are an inadequate basis for determining original cost, because they were not findings of value at the time they were proclaimed but accounting orders only. The answer to this particular assignment of error is, that although these T.O.C. orders were not findings of value by the Commission, they resulted from a system of accounting instituted some years ago by the Commission. One of the main purposes of this accounting system was to make available data as to original cost of utilities. See Scranton-Spring Brook Water Service Company v. Pa. P. U. C., 165 Pa. Superior Court 286; 67 A. 2d 735. The T.O.C. orders, therefore, provide a good basis for the Commission’s determination of original cost as a measure of value. No evidence was introduced by appellants to refute Commission’s measure of original cost. There is, on the other hand, adequate evidence which the Commission could consider and use as basis for its original measure of value. Was the use of T.O.C. order a violation of the statute? The Public Utility Law prescribes a system of accounts, whereby the plant account of a utility may be reclassified to show a picture of original cost. The underlying reason for using the system is to arrive at a figure that would reflect the cost of the property when first put to use for public service. The original costs considered by the Commission in determining fair value is a lawful and reasonable measure.

Inter-Company transactions:

The appellants question a number of charges paid by Commonwealth for plant additions to other companies in which Senator Sordoni has an interest. Solar Electric Company v. Pa. P. U. C., 137 Pa. Superior Ct. 325, 9 A. 2d 447, is cited as authority for appellant’s objection to this system of inter company relationship. We do not uphold this objection. The Supreme Court of Pennsylvania passed upon this system in Bell Telephone Company of Pennsylvania v. Driscoll, 343 Pa. 109, 21 A. 2d 912. The record in this case is devoid of any facts that distinguish the system used by Commonwealth from the system used by Bell of Pennsylvania. The gist of the objections is that Commonwealth’s construction work was done by a Company owned and controlled by Senator Sordoni who also owns most of Commonwealth’s stock. Except in the case of a few minor items, which are de minimis, appellants are unable to present adequate competent evidence that the plant additions were improper, unnecessary or too costly. The fact that the work was done and a profit made by an affiliate raises only the necessity of close scrutiny of the transactions which, in the absence of evidence, we can presume was given by the Commission.

Montrose Inn Exchange Facilities:

To the same effect are appellants’ objections to the allowance for operating expenses, a great part of which represents payments to affiliates for various services. The Montrose Inn account represents an expenditure of $34,000.00 for alterations. Space in the Montrose Inn for the operation of a telephone exchange is under lease to the Commonwealth for a period of ten years. Appellants insist that the $34,000.00 should have been expended the year in which the alterations were made and not reflected as cost in the plant account. The Commission however, considered the improvements and alterations of Montrose Inn as capital addition and set it up on an amortization basis for the life of the lease.

Motor vehicles:

The sum involved in the motor vehicles purchased is $55,529.00 and was also paid to an affiliate interest. Appellants interpret the law as requiring a utility to obtain approval of the Commission whereby transactions of this kind are made and the cost is incorporated in the plant account. We, however, agree with the Commission that a utility need not obtain approval for purchase of material from an affiliate unless the property involved in the transaction had been previously used in public service. The vehicles were not used in public service prior to the transaction and therefore, it was proper to consider their cost as part of the plant account as an original cost measure of value.

$lfl5,000.00 allowance for materials:

The Commonwealth sought $513,426.00 for materials and supplies. The Commission allowed $475,-000.00 after deduction of $38,426.00. Was the amount of $475,000.00 reasonable and proper? We believe that under the circumstances the Commission committed no error in concluding that an allowance of $475,-000.00 for material and inventories for operation was reasonable. New construction, dial conversion and general expansion, as supported by the record, required large supplies of materials to carry out Commonwealth’s program. There is no evidence of over stocking or unreasonable time within which the materials were left unused. The Commission has the right to use its own judgment to decide whether four or five months of supplies of cable and switchboards constitute a reasonable inventory. The record shows that Commonwealth’s business has been expanding tremendously in recent years; and, in order to provide sufficient service for new customers, the Commonwealth has embarked on new construction and expansion of old facilities. Much of this allowance is to cover the expansion as well as current maintenance requirements. Such a purpose is a justifiable basis for the Commission’s findings. Where there has been no error of law and where the findings are supported by competent evidence, we will not disturb an allowance for materials and supplies which is necessarily a judgment figure. Pittsburgh v. Pa. P. U. C., 174 Pa. Superior Ct. 363, 101 A. 2d 761. This Court will not go into the question of inventories or supplies where evidence of flagrant disregard of reason in stocking of materials is absent. That is the function of the Commission.

Rate of return:

In our scope of review the question of rate of return affords an interesting subject in rate cases. The Commonwealth and appellants, as well as the Commission, present reasonable arguments in support of their respective theories. Price of money or worth of capital, as often called, are controversial matters in view of world economic changes. Interest rates, as a cost of money, fluctuate depending on international affairs and political outlook. Under these circumstances and the unique position of Commonwealth, the question of whether 6.87% is a fair return is in order. Commonwealth, basing its requirement upon cost of capital and existing lag between increased costs and additional revenues, attempted to justify 7.5% as a fair return. The Commission made its own independent findings of capital costs for debt, preferred and common stocks. Applying the above findings to the Commonwealth’s financial status, the Commission found 6.66% as the cost of capital in the instant case. The fair rate of return to the Commonwealth was set by the Commission at 6.8%. This figure was arrived at by relating its findings to the actual relative weight of Commonwealth’s capital structure. It is quite true that the rate set is somewhat higher than the finding but we are aware that our Appellate Courts have recognized the validity of similar actions in similar cases. Philadelphia Transportation Company v. Pa. P. U. C., 155 Superior Ct. 9, 37 A. 2d 138; City of Pittsburgh v. Pa. P. U. C., 171 Pa. Superior Ct. 187, 90 A. 2d 607; Pittsburgh v. Pa. P. U. C., 174 Pa. Superior Ct 363, 101 A. 2d 761. The Commission may exercise its own judgment in arriving at a composite cost of capital where evidence on rate of return exists and is substantial. We find no error in Commission’s finding that 6.8 per cent is a fair return. As long as the Commission uses methods reasonably calculated to produce accurate findings, we shall not disturb its judgment.

Order affirmed.