Anne X. Alpern, City Solicitor, John M. Marshall, Asst. City Solicitor, Pittsburgh, M. H. Goldstein, Philadelphia, for Pennsylvania Industrial Union Council, intervening appellant.
Joseph R. Rose, Philadelphia, for appellant.
John B. King, Philadelphia, William B. Rafferty, Baltimore, Md., E. Everett Mather, Jr., Philadelphia, Clarence W. Miles, Baltimore, Md., Paul Maloney, Philadelphia, for intervening appellee.
Arthur J. Diskin, Asst. Counsel, Lloyd S. Benjamin, Asst. Counsel, Charles E. Thomas, Harrisburg, Counsel, for Pennsylvania Public Utility Commission.
Before Rhodes, P. J., and Hirt, Reno, Dithrich, Ross, Arnold and Gunther, JJ. Rhodes, P. J., and Reno and Ross, JJ., concur in part and dissent in part. Reno and Ross, JJ., join in this dissent.
[ 169 Pa. Super. Page 403]
This case involves the intrastate rates of the Bell Telephone Company of Pennsylvania (hereinafter called Bell) as fixed by the Public Utility Commission. The tariffs originally filed were suspended by the Commission, and after extended hearings the Commission rendered its report and opinion on October 17, 1949. Bell filed appropriate tariffs according to that order, and the city of Pittsburgh and others appealed. The appeals were argued before us, and on our own motion we directed a reargument. The figures used herein are rounded off.
All the shares of stock of Bell are owned by the American Telephone & Telegraph Company, and the latter also owns 99.8% of the shares of Western Electric Company and 50% of the shares of Bell Laboratories (the remaining portion being owned by Western Electric Company). A. T. & T. operates in 45 states what is known as the 'Bell System.' Its balance sheet for 1948 shows capital, surplus and undivided profits of $3,092,000,000.*fn1 In 1950 the same item showed $3,872,000,000. Its net income was in excess of $207,000,000 for 1948, and for 1950 was $286,802,000.
[ 169 Pa. Super. Page 404]
Bell, its wholly owned subsidiary, is a corporation, the capital, surplus and undivided profits of which for the year 1948 amounted to $229,000,000.*fn2 Its net income for 1948 was in excess of $12,000,000. Its gross revenues from all sources were $155,480,000 for that year, and the gross operating revenues were $154,876,000.*fn3
The Commission made an allocation between interstate and intrastate property and revenues and expense. It found as of December 31, 1948, that the fair value of its physical property used and useful in Bell's intrastate service as $410,000,000, including 6,200,000 for cash working capital.*fn4 In determining reproduction cost the Commission considered only 26-month average prices, where previously it had used 5 or 10 year averages. The Commission made an allocation between interstate and intrastate expenses, and on the latter found the operating expense of Bell to be $107,000,000. Of this sum, $6,000,000 was allowed for the expense of pensions, which will be hereinafter discussed.
It must be recognized that there is always the desire of the utility to get as large a return as possible; and that likewise there is a desire on the part of the ratepayer to buy as cheaply as possible. Only the Commission can stand between the public and the utility. It is almost the only protection which the public has. And we make this observation because the testimony of Bell was that its cost to prepare this rate case was $975,000, -- and this exclusive of the salaries of its regular employes. The Commission allowed $458,000 as intrastate expense for preparing the case. No protestant
[ 169 Pa. Super. Page 405]
can possibly bear a similar outlay to prepare its case before the Commission.
By the Act of 1937, 66 P.S. § 1437, this Court is bound by the findings of fact of the Commission if there is evidence to support them. It is only where the utility appeals on the ground of confiscation that we may make independent findings; and confiscation is not involved here. We cannot reverse except for errors of law.
We do not propose to go into all the questions raised on this appeal, but treat only those which we consider merit discussion in the light of the factual findings (by which we are found). In other respects than noted herein, the Commission is sustained.
Under Equitable Gas Company v. Pennsylvania Public Utility Commission, 160 Pa. Super. 458, 463 et seq., 51 A.2d 497, 500, and the cases therein cited, the Commission must consider 'reproduction costs of the property, based upon the fair average price of materials, property and labor * * *.' This reproduction cost is merely one of six elements entering into the determination of the fair value of the physical property. It is solely for the Commission what formula it shall use in determining fair average prices. The Commission determined that a 26-month average price should be applied. Inevitably it is influenced by whether the future holds an increase or decrease in prices. If prices were on a constant level, the reproduction cost would be at current or spot prices, less depreciation. Where the levels are inconstant the judgment of the Commission governs and we cannot substitute our discretion for it: Blue Mountain Telephone & Telegraph Company v. Pennsylvania Public Utility Commission, 165 Pa. Super. 320,
[ 169 Pa. Super. Page 40667]
A.2d 441. Cf. Equitable Gas Company v. Pennsylvania Public Utility Commission, supra, at pages 464 et seq.
Adding $6,200,000 to the Fair Value of Bell's Property as Cash Working Capital.
The Commission added to the present rate base $6,200,000 as cash working capital. By this allowance the utility had neither more nor less cash than before, for the fair value, or the rate base, concerns only the physical assets of the corporation; that is, neither cash nor current assets are considered. When the cash working capital allowed is added to the physical valuation of the utility, the result is that the utility is permitted to earn 6% on what is but a hypothetical amount, and this without regard to the cash position of the utility.
The whole question of including working capital in a public utility rate base needs to be reexamined. One of the earliest cases in Pennsylvania is Cheltenham & Abington Sewerage Company v. Public Service Commission, 122 Pa. Super. 252, 186 A. 149, where a sewage disposal business was allowed working capital of $2,500 to be added into the rate base of $197,000. This practice has been followed in a number of other cases, in some of which the doctrine was probably extended farther than if should have been.
As time went on, there grew up a regular practice by the Commission always to allow a fund for cash working capital and to include this in the rate base. Primarily this was to take care of the needs of current expenditures over the period of any time lag; but in ...