that the order is invalid for the reason that it is confiscatory.
The final report of the commission and the briefs of the parties contain many analyses and a mass of figures which it is difficult for one not a certified public accountant or technical engineer to understand. Some of the figures may be unimportant, but others are important. The commission found that the rate base or fair value of the company's property for the purpose of prescribing temporary rates is $5,250,000. Another important fact is that the operating revenue received by the company for the year ended September 30, 1937, was $2,202,329. In order to determine the net profit, the expenses incurred in operation, the taxes as adjusted and the amount the commission ordered to be deducted from the revenue must be subtracted from this sum. According to the commission these items aggregate $1,817.829, which subtracted from $2,202,329 leaves a net profit of $384,500. But the company contends that in addition to the items allowed by the commission, the following allowances should be made: $178,375, rate case expenses; $20,593 increased salary expenses to officers and employees as provided by its board of directors; $15,089 realized by the company on sale of electric energy to York Railways Company which was included in the operating revenue. According to the contention of the company, therefore, the expenses etc. which should have been allowed amount to $2,010,680, which subtracted from the income leaves a net profit of $191,649. Should these additional expenses be allowed?
As to the rate case expense of $178,375, the suit was started by the commission which required the company to produce much of the evidence necessitating the expense for which allowance is sought. There is no contention that the expense was unreasonable or in any manner inflated. The commission disallowed this expense on the ground, in part, at least, that the company in the past received excessive rates, but this position is untenable, Board of Public Utility Commissioners v. New York Telephone Co., 271 U.S. 23, 31, 46 S. Ct. 363, 70 L. Ed. 808, and on the further ground that part of the expense was incurred under the Public Service Company law, 66 P.S.Pa. § 1 et seq., which was superseded by the Public Utility Act, effective June 1, 1937, 66 P.S.Pa. § 1101 et seq. The former law included no provision for assessment of the costs of investigation or general regulatory expenses against public utilities. The evidence produced under the predecessor of the Pennsylvania Public Utility Commission was used by the latter.In any event the company did not ask the allowance of the expense on the ground that the commission has the right to assess the costs, but on the ground that it was a reasonable expense honestly and necessarily incurred, actually paid and, therefore, ought to be allowed in fixing a fair return. It is the policy of the courts to allow rate case expenses if the complaint of the utility is not unfounded and if the cost of the proceedings have not been swollen by untenable objections. In determining what the rate of return on the property of a utility shall be, "the commission must give heed to all legitimate expenses that will be charges upon income during the term of regulation, and in such a reckoning the expenses of the controversy engendered by the ordinance must have a place like any others". In speaking of the allowance of expenses of the rate litigation, the Supreme Court further said: "We think they must be included among the costs of operation in the computation of a fair return." West Ohio Gas Co. v. Public Utilities Commission, 294 U.S. 63, 73, 74, 55 S. Ct. 316, 321, 322, 79 L. Ed. 761.
Increased salary expenses required to be paid by the company to its officers and employees pursuant to a resolution by its board of directors, if reasonable, should be allowed. The evidence does not show these increases to be unreasonable or exorbitant. A commission may regulate but not manage a utility. It "is not empowered to substitute its judgment for that of the directors of the corporation". Missouri ex rel. Southwestern Bell Telephone Co. v. Public Service Commission, 262 U.S. 276, 289, 43 S. Ct. 544, 547, 67 L. Ed. 981, 31 A.L.R. 807.
We think that the loss of $20,593 included in the revenue to the company on the sale of energy to the York Railway Company at and upon the abandonment of that company should have been allowed by the commission. As we understand it the abandonment is certain and is not denied.
The other item in dispute grows out of the adjustment of taxes because of the reduction in revenue of $435,000 ordered by the commission. The original amount of taxes paid by the company was $333,649 and the commission allowed a reduction of $127,249 leaving a balance of $206,400 to be paid by the company. The company, on the other hand, says that $148,455 should have been allowed, leaving a balance of $185,194 to be paid. It is not clear just how this difference of $21,206 between them arose, but it does not have a decisive bearing on the case, for the reason that if the contention of the company is correct, it decreases the expense, increases the profit and the rate of return.
If these allowances are made, as we think they should be, the return, as above stated, on the fair value of $5,250,000 found by the commission is 3.65%. If $5,866,081 is taken as the rate base, the return allowed is 3.27%. Either, under the facts of this case, is confiscatory.
The commission, however, says that if the rate case expense is allowed and amortized over a period of five years, the profit of operation would be greater and the return would not be confiscatory. But however that might be, it was not allowed in any form, for a single year or amortized, and we must pronounce upon the order as made.
It follows that the company is entitled to a permanent injunction restraining the commission from enforcing the temporary rates prescribed in accordance with the prayer of the bill.
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