Harold F. Reed (of Reed, Ewing & Ray), Beaver, Robert H. Grisswold (of McNees, Wallace & Nurick), Harrisburg, for Crucible Steel Co. of America.
J. Alfred Wilner, Asst. City Sol., Anne X. Alpern, for City of Pittsburgh.
Thomas J. Munsch, Jr., Henry G. Wasson, Jr., C. K. Robinson, Charles E. Kenworthey, Pittsburgh, David Dunlap, Harrisburg, Reed, Smith, Shaw & McClay, Pittsburgh, for Duquesne Light Co.
John E. Fullerton, Asst. Counsel, Pittsburgh, William J. Grove, Asst. Counsel, Lloyd S. Benjamin, Acting Counsel, Harrisburg, for Pennsylvania Public Utility Commission.
Before Rhodes, P. J., and Hirt, Reno, Dithrich, Ross, Arnold and Gunther, JJ.
[ 171 Pa. Super. Page 192]
This is a rate case which had its inception on February 6, 1950, when Duquesne Light Company filed a new tariff (No. 10) with the Pennsylvania Public Utility Commission. The effective date was to be April 10, 1950. It was estimated that the effect of the proposed tariff would be an increase in annual revenue of $7,720,612. Complaints against the proposed tariff were filed by the City of Pittsburgh, Borough of Oakmont, City of McKeesport, City of Clarion, Vanadium Corporation of America, Universal-Cyclops Steel Corporation, St. Joseph Lead Company, and Crucible Steel Company of America. Complainants alleged that the proposed rate increases were discriminatory, unreasonable, and unlawful, and they asked that the new rates be suspended pending final action by the Commission.
On April 3, 1950, the Commission initiated an investigation on its own motion for the purpose of determining the fairness, reasonableness, justness, and lawfulness of the rates and charges of Duquesne under the tariff filed February 6, 1950. At the same time, the
[ 171 Pa. Super. Page 193]
Commission by its order suspended the operation of the proposed tariff for a period of six months, or to October 10, 1950. On October 2, 1950, the Commission again postponed the effective date of the said tariff for a period of three months, or until January 10, 1951. On that date the new rates under tariff No. 10 became effective by operation of law. All of the complaints were consolidated for the purpose of hearing. Hearings were held by the Commission between May 10, 1950, and December 8, 1950; and the transcript totaled 3,380 pages. Thereafter, on December 13 and 16, 1950, petitions were filed by the City of Pittsburgh and the industrial complainants (hereinafter called Industries) requesting that the existing rates of Duquesne be prescribed by the Commission as temporary rates. The Commission, by order of January 8, 1951, denied the prayer of the petitions, two commissioners dissenting.
In its final order of August 29, 1951, the Commission found that the rates in tariff No. 10 were unjust, unreasonable, and unlawful, and disallowed the proposed increase of $7,720,612. The Commission found, however, that Duquesne was entitled to an increase of $3,556,924, and ordered the utility to file an acceptable tariff which, together with other electric revenues of $675,518, would produce annual operating revenues totaling $60,574,238 based upon the 1949 level of operations. In this order provision was likewise made for refunds. Commissioner Houck filed a dissent in which he concurred with the majority on all questions except that he would direct Duquesne in its new tariff to modify the fuel cost adjustment clause, which was based on a fixed thermal efficiency factor and applied to industrial customers, so as to reflect actual thermal efficiency.
The City of Pittsburgh appealed (No. 179, April Term, 1951) to this Court from the Commission's order.
[ 171 Pa. Super. Page 194]
Duquesne appealed (Nos. 1 to 9, inclusive, April Term, 1952) from the order, claiming that the Commission erred in not allowing the full increase under tariff No. 10. St. Joseph Lead Company and Crucible Steel Company of America, the Industries, also appealed (Nos. 10 and 11, April Term, 1952). The City and the Industries contend that the increase which was allowed by the Commission is excessive, and that the rates are discriminatory and unreasonable. The petition of Duquesne for supersedeas was denied by this Court.
In this opinion we shall consider the contentions according to topic or subject matter, and we shall accordingly dispose of the questions raised by the respective parties in all appeals.
Rate Base -- Measures of Value: The Commission found the fair value of Duquesne's property, used and useful in the public service, to be $215,000,000 as of December 31, 1949. Duquesne submitted four measures of value as follows: (1) Original cost; (2) original cost trended to spot prices of January 1, 1950; (3) estimated reproduction cost at the spot prices of December 31, 1949; and (4) estimated reproduction cost at the average prices for the three years 1947-1949. Duquesne's depreciated original cost figure, including construction work in progress, was $178,362,927; original cost trended to spot prices of January 1, 1950, undepreciated, was $378,399,253; depreciated reproduction cost based on spot prices as of December 31, 1949, was $311,065,917; depreciated reproduction cost at the average prices for the three years 1947-1949 was $293,469,196. With respect to measures of value, the Commission, after deducting accrued depreciation and depletion, made five findings: Original cost $169,831,025; reproduction cost at spot prices of December 31, 1949, $267,647,769; original cost trended to spot prices of January 1, 1950, $269,154,778; original
[ 171 Pa. Super. Page 195]
cost trended to the three year price level of 1947-1949, $252,779,955; original cost trended to the five year level of 1945-1949, $229,395,523.
The rate base in this Commonwealth is fair value. Solar Electric Co. v. Pennsylvania Public Utility Commission, 137 Pa. Super. 325, 9 A.2d 447; Peoples Natural Gas Co. v. Pennsylvania Public Utility Commission, 153 Pa. Super. 475, 34 A.2d 375; Equitable Gas Co. v. Pennsylvania Public Utility Commission, 160 Pa. Super. 458, 463, 51 A.2d 497. The measures of value -- that is, the ways in which the elements of value (the various units of a utility's assets) are to be valued -- upon which the determination of fair value is to be made have been described by decision and statute in this state. Among the measures of value to be considered are original cost and reproduction cost based upon the fair average price of materials, property and labor. We have said that the Commission is not bound by any formula in fixing the rate base but shall consider all facts which have a relevant bearing on fair value. Equitable Gas Co. v. Pennsylvania Public Utility Commission, supra, 160 Pa. Super. 458, 464, 465, 51 A.2d 497. The weight to be given any particular measure of value, such as original cost or reproduction cost, is for the Commission, but its action must be within the area of its administrative discretion and supported by the evidence. Original cost is not necessarily fair value, and such cost does not ordinarily represent a proper rate base; and the Commission is not obliged, as the City contends, to give predominant weight to original cost in its finding of fair value. It is argued on this appeal in behalf of Duquesne that the Commission gave undue weight to original cost in its finding of fair value, and failed to give proper weight to reproduction cost which, it is contended, should under present economic conditions
[ 171 Pa. Super. Page 196]
be synonymous with fair value. We reject here, as we did in Equitable Gas Co. v. Pennsylvania Public Utility Commission, supra, 160 Pa. Super. 458, 51 A.2d 497, the contention that reproduction cost must be given controlling weight by the Commission in rate cases. If the Commission gave more weight to original cost in its finding of fair value than it did to reproduction cost, this would not invalidate such finding. Original cost trended to spot prices of January 1, 1950, and to three and five year price levels and then depreciated was virtually equivalent to reproduction cost depreciated based on similar averages. See Equitable Gas Co. v. Pennsylvania Public Utility Commission, supra, 160 Pa. Super. 458, 469, 51 A.2d 497. Such difference as there may be between original cost trended and reproduction cost arises principally from the use of piecemeal construction figures and mass production estimates.
In addition to findings of original cost and reproduction cost at spot price level of December 31, 1949, the Commission made three findings on original cost trended: (1) At spot prices of January 1, 1950; (2) to the three year price level of 1947-1949; and (3) to the five year price level of 1945-1949. As likewise submitted by its staff, the Commission had before it original cost trended to the ten year average price level for the period 1940-1949, but it unqualifiedly rejected consideration of any measure of value based on ten year average prices.*fn1 In so doing the Commission stated: 'In the determination of the issues involved in these proceedings, we will give no further consideration to
[ 171 Pa. Super. Page 197]
ten-year average prices for the reason that prices have not leveled off onto a plateau, but rather have continued to increase steadily in the past with no foreseeable prospect of decline in the relatively near future. Moreover, the record shows that respondent is serving a highly industrialized area, as a result of which it is faced with a demand for substantial sums of new capital to meet its plant expansion program. Ten-year average prices are, accordingly, not properly usable in this case.'
Our law requires that reproduction cost estimates be based upon the 'fair average price of materials, property and labor'. Equitable Gas Co. v. Pennsylvania Public Utility Commission, supra, 160 Pa. Super. 458, 463, 466, 51 A.2d 497, 500; City of Pittsburgh v. Pennsylvania Public Utility Commission, 165 Pa. Super. 519, 525, 69 A.2d 844; Blue Mountain Telephone & Telegraph Co. v. Pennsylvania Public Utility Commission, 165 Pa. Super. 320, 67 A.2d 441; City of Pittsburgh v. Pennsylvania Public Utility Commission, 169 Pa. Super. 400, 405, 82 A.2d 515. The obvious purpose of the requirement of 'fair average prices' is to avoid the use of the high or the low prices over a given period, and in this way to arrive at a valuation that is fair to all interests, both to the utility and to the consumer or customer. And an average having a broad base will rest on a more solid foundation than a short term average or a cost based on spot prices. In cases involving reproduction cost estimates a five or ten year average has generally been used, and in Equitable Gas Co. v. ...