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April 22, 1952


Appeals, Nos. 78 and 80, March T., 1952, from order of Superior Court, April T., 1950, Nos. 13 to 17, inclusive, reversing in part the order of the Pennsylvania Public Utility Commission, Complaint Docket Nos. 14497, 14499, 14502, 14561 and 14562, in case of City of Pittsburgh et al. v. Pennsylvania Public Utility Commission et al. Order affirmed in part and reversed in part.


W. James MacIntosh, with him Ernest R. von Starke, Paul Maloney, John B. King, Clarence W. Miles, Wm. Clarke Mason and Morgan, Lewis & Bockius, for Bell Telephone Company of Pennsylvania, appellant.

William J. Grove, with him Jack F. Aschinger and Lloyd S. Benjamin, for Pennsylvania Public Utility Commission, appellant.

Anne X. Alpern, City Solicitor, with her John M. Marshall, Assistant City Solicitor, for City of Pittsburgh, appellee.

M. H. Goldstein and Joseph R. Rose, for Pennsylvania Industrial Union Council.

Before Drew, C.j., Stern, Stearne, Bell, Chidsey and Musmanno, JJ.

Author: Chidsey

[ 370 Pa. Page 307]


Claiming that substantial increases in the cost of both labor and materials had resulted in an increase in the cost of furnishing telephone service considerably greater than the growth in revenue resulting from a larger volume of business, the Bell Telephone Company of Pennsylvania on November 19, 1948, filed tariff revisions proposed to become effective January 21, 1949. These tariffs sought increased revenue in the amount

[ 370 Pa. Page 308]

    of $24,600,000. They affected rates and charges of the Company for the rendition of intrastate telephone service other than intrastate toll service, rates for which were not changed. The Commission suspended the effective date of the proposed tariff revisions and on its own motion instituted an investigation to determine the reasonableness thereof. Formal complaints were filed by the City of Pittsburgh, the Pennsylvania Industrial Union Council and others. Additional parties were allowed to intervene as complainants. After extensive hearings resulting in a record of 3,352 pages and 109 exhibits, the Commission handed down an order on October 17, 1949, which permitted Bell to increase its intrastate operating revenues by $17,963,090. The Company immediately revised its rates to comply therewith and they are now in effect.

The City of Pittsburgh and the Union Council appealed to the Superior Court, raising numerous issues. On July 19, 1951, the Superior Court handed down its decision sustaining the order of the Commission in all but two respects, namely, the allowance by the Commission of a sum of $6,200,000 as cash working capital as an element of fair value in fixing the rate base and the inclusion by the Commission of certain pension costs in operating expenses. Following petitions by the Company, the Commission, and the City of Pittsburgh joined in by the Union Council, raising various questions, this Court allowed an appeal, restricted, however, to the action of the Superior Court with respect to cash working capital and with respect to the inclusion in operating expenses of pension fund requirements.

After separating the Company's property, revenues and expenses employed in rendering interstate service from that employed in intrastate service, the Commission fixed the fair value of its property used in the

[ 370 Pa. Page 309]

    latter service for rate making purposes at $410,000,000. Included in this amount was the sum of $6,200,000 allowed by the Commission as cash working capital.

Cash working capital ordinarily is the amount of cash required to operate a utility during the interim between the rendition of service and the receipt of payment therefor. It is the blood stream that gives life to the physical plant and facilities of the enterprise. It can readily be seen that initially, at the commencement of operation, capital supplied by investors must, in order that the Company can function, include such working cash in addition to the amount required for physical plant and facilities. Its allowance as an element of fair value for rate making purposes has been approved by decisions of both the Superior and Supreme Courts of this State and of the appellate courts of other jurisdictions. Almost invariably, however, its allowance has been determined by the actual necessity therefor existent when disputed rates of an established and going concern are before the Commission. The determination of the dollar amount of cash working capital is based on the time lag between the service rendered and the payment therefor by the consumer.

The fair value of a utility for rate making purposes is the value fixed at the time rates are established. To the extent that the customers are providing revenues before the utility pays its costs, the investors are not supplying the funds to carry on. Whether cash working capital should be allowed as an element in determining the fair value of a utility's used and useful property as a rate base, and if allowed, the extent of such allowance, depends upon the factual situation in each case. If the financial situation of an operating company shows that sufficient funds are readily available to bridge the gap between rendition of and payment

[ 370 Pa. Page 310]

    for services, no cash working capital is required and none should be allowed by the Commission.

The Bell Company sought intrastate revenues under its proposed rates of $168,741,000. Its intrastate revenues prior to the filing of its new tariff amounted to $143,036,000. The Commission allowed revenues in the amount of $160,999,090. The evidence disclosed that the Company's bills for telephone service are rendered monthly in advance for local monthly charges and similar items comprising about 53% of total revenues. Bills for toll service and local message charges totaling about 38% of revenues are rendered monthly in arrears. The remaining 9% of revenues is obtained from coin box collections. Amounts billed in advance are not paid on the average until after the services involved have been rendered. Collection experience showed an average lag of 11 1/2 days between the time service is rendered and the time payment is made for the local exchange service which is billed in advance, a lag of 41 1/2 days for toll service, and a lag of 24 days for coin box collections.*fn1 The over-all weighted average interval between the time service is rendered and the time that payment is made is a period of 24 days.

On the other hand, there was testimony of a lag averaging 30 days in the Company's payments to Western Electric Company from which it purchased equipment. In 1948 sales by Western Electric Company to Bell amounted to $52,497,000. There was also a 10-day lag in the monthly payments of license fee to American Telephone & Telegraph Company. In 1948 Bell paid American Telephone & Telegraph Company under the license contract $1,942,242. There were other substantial lags in the Company's payments for goods and

[ 370 Pa. Page 311]

    services rendered it. However, the Company claimed as a very substantial offset its payment in advance of the costs of telephone directories. It was estimated that the cost thereof was met 138 days in advance of their utilization. A weighted average of the costs of the directories paid in the year prior to their use was taken, and the service rendered by these directories for a 12-month period was averaged as the middle of the period and this was taken as the date of utilization in the estimate made. With consideration given to this estimate of 138 days of prepayment for directories, an exhibit was introduced by the Company based on a study of the last 6 months of 1947 which showed a weighted average lag of 4.81 days in the payment by the Company for goods and services received.

The evidence also disclosed that Bell accumulates an unsegregated fund in excess of $13,000,000 for federal and state income tax purposes.*fn2 An examination of the financial situation of Bell may show other reserves and accumulations readily available. Considering the evidence relating to income taxes, an average of 13 months elapses between the time this amount has been collected in revenues and the time the taxes are paid to the federal and state governments. The fund is set up as a bookkeeping reserve but is commingled with other funds of the Company.

The Company claimed allowance of $9,300,000 as cash working capital for total operations, based on requirements for one month's operating expenses, exclusive of all taxes, depreciation and net wiring loss. The Commission fixed the amount at $7,000,000 ...

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