January 19, 1954
CITY OF PHILADELPHIA
PENNSYLVANIA PUBLIC UTILITY COMMISSION ET AL.
Harold E. Kohn, Sp. Deputy to City Sol., William T. Coleman, Jr., Asst. Sp. Deputy, Abraham L. Freedman, City Sol., Philadelphia, for appellant.
Jack F. Aschinger, Mechanicsburg, Clarence M. Freedman, Lloyd S. Benjamin, Harrisburg, for appellee Pennsylvania Public Utility Commission.
Hamilton C. Connor, Jr., Peter Platten, Allen Hunter White, Ballard, Spahr, Andrews & Ingersoll, Philadelphia, for intervening appellee, Philadelphia Transp. Co.
Before Rhodes, P. J., and Hirt, Reno, Ross, Gunther, Wright and Woodside, Jj.
[ 174 Pa. Super. Page 643]
The order of the Pennsylvania Public Utility Commission of December 8, 1953, is affirmed. The opinion of this Court will be filed at a subsequent date.
The order issued by this Court on December 15, 1953, making the appeals a supersedeas of the Commission's order, is vacated, and supersedeas is terminated.
RHODES, President Judge.
These appeals by the City of Philadelphia relate to orders of the Pennsylvania Public Utility Commission granting fare increases under tariffs filed by the Philadelphia Transportation Company.
In City of Philadelphia v. Pennsylvania Public Utility Commission, 173 Pa. Super. 38, 95 A.2d 244, we reviewed an order of the Commission of December 23, 1952, allowing rate increases under tariffs filed February
[ 174 Pa. Super. Page 64429]
, 1952, by the Philadelphia Transportation Company, which provided for the elimination of the token rate of 13 1/3 cents for a single vehicle ride and for the charging of a straight 15 cent fare. We reversed the order and remanded the record to the Commission (page 55 of 173 Pa. Super., page 252 of 95 A.2d) 'for the taking of such additional testimony as may be necessary, and for the making of additional findings to accord with this opinion; and, after the adjustment of the findings upon which the present order is based, to require acceptable tariffs to be filed canceling the tariffs filed on February 29, 1952, and providing for such annual revenues as the Commission may find required to produce the allowed return.' Upon return of the record we directed that the proceedings should be consolidated with any pending proceedings before the Commission bearing on the question of reasonable rates to be charged by the company. The city had taken an appeal to this Court from the order of December 23, 1952, and asked that the appeals act as a supersedeas, which request, after hearing, was denied; the rates went into effect on December 31, 1952.
Pending the disposition of the increase in rates under the tariffs filed February 29, 1952, and approved by the Commission on December 23, 1952, the company, on February 11, 1953, filed new tariffs which were to become effective March 14, 1953. They provided for an increase in the basic charge for single vehicle rides from 15 cents cash to 18 cents cash or two tokens for 35 cents. On March 9, 1953, the Commission suspended the operation of the tariffs for a period of six months until September 14, 1953, and by concurrent order instituted an investigation on its own motion for the purpose of determining the fairness, justness, reasonableness, and lawfulness of the rates and charges for
[ 174 Pa. Super. Page 645]
the transportation services of the company. The investigation was to include consideration of the prescription of temporary rates under the provisions of section 310 of the Public Utility Law of 1937, 66 P.S. § 1150. On August 24, 1953, the Commission extended the suspension period for an additional three months to December 14, 1953.
The City of Philadelphia, on March 2, 1953, filed its complaint against the proposed rates under the tariffs of February 11, 1953, alleging the proposed rates to be unjust and unreasonable except to the extent they would produce increased revenues as would enable the company to provide for increased labor costs.
The Commission by its order of December 8, 1953, dismissed the complaints against the tariffs filed February 11, 1953, and directed that the fares contained in said tariffs become effective on or after midnight December 13, 1953, upon the filing of the proper supplements.
The city appealed on December 10, 1953, from the order of the Commission of December 8, 1953. On December 15, 1953, this Court granted a supersedeas and advanced the argument of the appeals to December 29, 1953.
In our opinion in City of Philadelphia v. Pennsylvania Public Utility Commission, supra, 173 Pa. Super. 38, 95 A.2d 244, we also directed that the Commission find the fair value of the company's transportation system; that it consider the factors which relate to actual and functional obsolescence; that it exclude from the rate base payments representing no property owned by the company and used and useful in the public service, and amounts charged to operating expense; and that market value of securities which had been offered and received in evidence should be considered by the Commission as a measure of value.
[ 174 Pa. Super. Page 646]
The city now contends on the appeals before us that the Commission's fair value finding of $75,000,000 is too high and is not sustained by the evidence in the record; and that the Commission erred in not finding that the new rates would produce an excessive return. The city again questions the Commission's jurisdiction over city-owned high speed lines and facilities which are leased by the city to the company; and it again argues the effect of the agreement of July 1, 1907, entered into between the city and the present company's predecessor.
Fair Value -- Rate Base: The Commission in finding the fair value of the company's physical property used and useful in the public service at $75,000,000 had before it for consideration several measures of value. The measures submitted by the company were as follows: (1) Original Cost; (2) estimated reproduction cost at the spot prices of December 31, 1952; (3) estimated reproduction cost at the average prices for the five years 1948-1952. The company's original cost figure at December 31, 1952, was $120,984,402; reproduction cost based on spot prices was $314,874,000; and reproduction cost at the average prices for five years was $284,262,000. The Commission adjusted undepreciated original cost to $109,171,040. It disallowed franchise paving in an amount of $8,201,412, direct overheads in an amount of $1,831,950, and indirect overheads in an amount of $1,780,000 or a total of $11,813,362. The Commission adjusted reproduction cost based on spot prices to $298,342,000, and at average prices for five years to $268,420,000. On these measures of value the accrued depreciation was fixed at $53,113,000, $163,567,000, and $146,811,000, respectively. Adding work in progress of $492,500 to the two reproduction cost estimates and $3,000,000 for materials and supplies to the three estimates
[ 174 Pa. Super. Page 647]
left for consideration by the Commission the following: Depreciated original cost, $59,058,040; depreciated reproduction cost based on spot prices, $138,267,500; depreciated reproduction cost at average prices for five years, $125,101,500. The company's claims for cash working capital and the cost of financing were excluded. The market value of securities was found to be at December 31, 1951, $52,017,885, and at August 31, 1952, $41,154.284. The Commission found that the company was entitled on a finding of fair value of $75,000,000 to a return of $4,875,000, which is 6 1/2 per cent on the fair value.
From these four measures of value which the Commission had before it for consideration, it does not appear that the Commission abused its administrative discretion in finding the fair value of the company's system at $75,000,000. As we have so often said, the weight to be given any measure of value in evidence is for the Commission, although its action must be within the area of its administrative discretion and supported by the evidence. It is not bound by any formula in considering the various relevant factors for the determination of a rate base. City of Pittsburgh v. Pennsylvania Public Utility Commission, 171 Pa. Super. 187, 195, 90 A.2d 607: City of Pittsburgh v. Pennsylvania Public Utility Commission, 168 Pa. Super. 95, 106, 78 A.2d 35. A fair and equitable result depends largely on the proper exercise of the Commission's discretionary power.
Original Cost: The city initially contends that there can be no finding of fair value as there is no original cost study or evidence of depreciated original cost of the company's property, and that, as the company has the burden of proof, this failure required the Commission to deny the increased rates. If the company was unable to show accurately original cost
[ 174 Pa. Super. Page 648]
from its records, it would not be the end of the company's case as the city says; although the weight to be given to that measure would necessarily be affected by the circumstances. The consolidated record in this rate case, consisting of nearly 10,000 pages of transcript, shows, in our opinion, that the Commission gave extended consideration to the allocation of the questioned items to capital or expense. The weight to be given such evidence, especially where it pertains to the detail and accuracy of disputed accounting practices, was clearly a matter for the Commission. The city also alleges that in any event the Commission's original cost determination of $59,058,040 is excessive. We are unable to find any error of law in this respect. This was a factual matter to be determined by the Commission in the exercise of its discretionary powers, and of course we are not at liberty to substitute our own judgment or discretion for that of the Commission. In finding original cost the Commission deducted $11,813,362 from the company's claim. The city's argument that this was insufficient raises a factual and not a legal issue. The Commission was not obliged to require or make a new original cost study, and we can ascertain no abuse of discretion upon the part of the Commission in accepting original cost determinations in prior proceedings as a basis for additions and adjustments.
Functional Obsolescence -- Reproduction Cost: Consideration of the extent of functional obsolescence, which is necessarily a material factor in the ultimate determination of fair value of the company's system, was likewise for the Commission. See City of Pittsburgh v. Pennsylvania Public Utility Commission, 165 Pa. Super. 519, 527, 69 A.2d 844; City of Pittsburgh v. Pennsylvania Public Utility Commission, 174 Pa. Super. 224, 232, 101 A.2d 127. We made reference
[ 174 Pa. Super. Page 649]
in our opinion (City of Philadelphia v. Pennsylvania Public Utility Commission, 173 Pa. Super. 38, 52, 95 A.2d 244) to certain factors to be considered in relation to obsolescence of a street transportation system. The Commission accordingly reviewed the question of functional obsolescence, and gave consideration to reproduction cost in determining fair value. However, it is apparent that the Commission in fixing fair value at $75,000,000 did not give controlling or even considerable weight to reproduction cost. The Commission obviously made allowance for obsolescence of the company's system, although possibly not to the permissible extent. In this we think the Commission has complied substantially with our previous order.
Market Value of Securities: We also directed the Commission, in our previous order, to consider market value of securities as, under our law, that was established as one of the measures or factors, if made a part of the record, entering into a determination of fair value. City of Philadelphia v. Pennsylvania Public Utility Commission, supra, 173 Pa. Super. 38, 54, 55, 95 A.2d 244. We have made it clear that the weight to be given to it, as to any other measure of value, necessarily varies according to the circumstances. In such matters the Commission has the duty to exercise its sound discretion on the facts before it. Although it may not be a primary measure of value, it has some significance and is relevant for the Commission's consideration until a change has been made in the Public Utility Law by the Legislature. In compliance with our order the Commission expressly gave recognition to market value of securities.
Accrued Depreciation: It is recognized that accrued depreciation is essentially a judgment figure. City of Pittsburgh v. Pennsylvania Public Utility Commission, 174 Pa. Super. 4, 8, 9, 98 A.2d 249; City of
[ 174 Pa. Super. Page 650]
Pittsburgh v. Pennsylvania Public Utility Commission, supra, 168 Pa. Super. 95, 108, 78 A.2d 35; Blue Mountain Telephone & Telegraph Co. v. Pennsylvania Public Utility Commission, 165 Pa. Super. 320, 326, 67 A.2d 441. The Commission found accrued depreciation of $53,113,000 applicable to an original cost finding of $109,171,040.*fn1 The company claimed for this item the sum of $43,187,364; and the city contended that the accrued depreciation on original cost should be $63,648,955, consisting of the Commission's 1941 finding of $47,000,000 plus net additions to book reserve of $16,648,955. See Philadelphia Transportation Co. v. Pennsylvania Public Utility Commission, 155 Pa. Super. 9, 25, 37 A.2d 138. The Commission rejected the claim of the company that its book reserve reflected the proper accrued depreciation, and was critical of a recent age-life depreciation study submitted by the company. The city takes the position that, in the absence of a proper accrued depreciation study, there is nothing in the record to support the Commission's finding on accrued depreciation applicable to original cost. The Commission arrived at 52 per cent for depreciation applicable to original cost (less land) by taking the book reserve at December 31, 1952, of $39,717,549, and by adding thereto a deficiency of $6,386,800, making a total accrued depreciation as of December 31, 1952, of $46,104,349, exclusive of track. In recomputing the track depreciation the Commission, by using the company's ages, lives, and salvage properly reflected, found a reserve requirement of $9,279,779 and an annual accrual of $601,228. The final figure, therefore, was approximately
[ 174 Pa. Super. Page 65152]
per cent of book cost of plant, less land, franchise paving, work in progress, acquisition adjustments, and cost of financing.
The Commission used the depreciation factor of 56 per cent for reproduction cost. This percentage apparently was based upon the finding of original cost, a study of the trended reproduction cost components, and a study of price indices data of record. See City of Pittsburgh v. Pennsylvania Public Utility Commission, supra, 171 Pa. Super. 187, 206, 90 A.2d 607. There is substantial evidence in the record to support the Commission's accrued depreciation findings.
Revenues, Expenses and Net Income: The Commission in the present proceeding based its findings as to revenues and expenses on the base year ending December 31, 1952, or upon the most recent actual experience figures available. In 1952 the company's net income before interest and income taxes was $2,377,876, including non-rate case items. For the base year operating revenues were $71,050,552 and total operating expenses were $68,672,676. The Commission accepted the company's estimate of passenger revenues at the December 31, 1952 tariff rates in the amount of $73,800,000 for the calendar year 1953, an increase of $4,162,292 over the passenger revenues collected in 1952. The Commission found that the proposed tariffs of February 11, 1953, would yield additional revenues of $3,386,000 which added to the base year receipts, as adjusted, of $73,800,000 would produce passenger revenues of $77,156,700, after adjustment for route abandonments of $29,300. With other revenues of $1,416,932 the total annual adjusted operating revenues would be $78,573,632. The Commission thereupon found that the annual net income available for return from the proposed tariffs of February 11, 1953,
[ 174 Pa. Super. Page 652]
would be $3,967,620,*fn2 which is less than 6 1/2 per cent on the fair value finding of $75,000,000. This result
[ 174 Pa. Super. Page 653]
follows from the deduction of total operating expenses of $74,606,012 from the total operating revenues. The operating expenses include taxes and an annual allowance for depreciation of $2,788,398. In arriving at the above estimates the Commission accepted the evidence presented by the company showing an estimated downward trend in riding levels generally, as well as evidence showing a reduction in passenger traffic at a fixed ratio due to the resistance of the proposed increase in rates.
[ 174 Pa. Super. Page 654]
the 1952 rate case the company claimed $2,356,697 for annual depreciation on all property including track; this was based on age-life concept for property other than track. The Commission has allowed annual depreciation as claimed by the company in the amount of $2,187,161, exclusive of track. The Commission treated the track properties as depreciable and therefore increased the annual provision for depreciation.*fn3 The Commission having disallowed $369,811 of track renewal expense, the company's operating expenses were increased by only $86,917. As previously indicated there was in the record a depreciation study based on straight line age-life method introduced by the company which the Commission rejected. However, there was substantial evidence in the record of accrued depreciation of the company's property, including a bring-down of previous depreciation studies. It is not improper for the Commission to compute accrued and annual depreciation on similar bases as allowances for annual depreciation should be reasonably consistent with allowances for accrued depreciation. Schuylkill Valley Lines, Inc. v. Pennsylvania Public Utility Commission, 165 Pa. Super. 393, 402, 68 A.2d 448. The city argues that an allowance for track depreciation plus allowances for track renewals permit the company to have a double recovery for its track cost. There is apparently no double recovery as these
[ 174 Pa. Super. Page 656]
items relate to distinct property and, as applied by the Commission, were for distinct purposes. The allowances are not shown to be improper, and the Commission's disposition of annual depreciation is supported by the record except to a negligible extent.
Snow and Ice Removal Expense. There is also no ground for the complaint of the city relative to allowance for snow and ice removal. The allowance was computed on the basis of a five-year average of such cost, as adjusted for current cost of labor and material. This, like the other adjustments, was within the discretionary power of the Commission to make.
Increased Labor Costs. There seems to be no difference of opinion as to the material effect of increased labor costs in the amount of $4,538,000 through 1954 on the company's operating expenses.
Coin Boxes. The city again questions the failure of the company to use coin boxes in the collection of fares. The installation of coin boxes is, in the first instance, for the company to determine, and secondly for the Commission to consider whether the failure to do so constitutes an abuse of managerial discretion.
Jurisdiction -- The City-Company Agreement of 1907: The city attempts to reargue the question of the jurisdiction of the Commission over city-owned high speed lines and facilities leased to the company, and the city's right under the 1907 lease agreement to require its consent to fare increases. We think our ruling on these two matters in the prior appeals sufficiently disposes of the issues raised, and we shall not review them again. See City of Philadelphia v. Pennsylvania Public Utility Commission, supra, 173 Pa. Super. 38, 43-47, 95 A.2d 244.*fn4
[ 174 Pa. Super. Page 657]
Review: Principles applicable to this rate case have been recognized previously. In City of Pittsburgh v. Pennsylvania Public Utility Commission, supra, 168 Pa. Super. 95, 106, 78 A.2d 35, 40 we said: 'In forecasting probable future revenues under a given tariff, the Commission must necessarily have the power to exercise its own judgment 'upon a view of all the relevant circumstances.' And, again, in City of Pittsburgh v. Pennsylvania Public Utility Commission, supra, 171 Pa. Super. 187, 210, 90 A.2d 607, 618, we said: 'The Commission is given discretionary power to make necessary adjustments to all estimates. But the adjustments must be based on evidence, and cannot be unfairly weighted in favor of either the utility or the consumer.'
We may not be unmindful that rate-making is an exercise of the legislative power, and necessarily implies a range of legislative discretion. The function has been delegated by the Legislature to the Commission which, as an administrative body equipped with a staff of investigators, accountants, engineers, and experts, is peculiarly fitted for the task. Consequently, if not confiscatory, the reasonableness of rates is an administrative question for the Commission, and the Commission's findings, if supported by the evidence, may not be disturbed by us. Sheets v. Pennsylvania Public Utility Commission, 171 Pa. Super. 151, 155, 90 A.2d 633.
This rate case has been exhaustively contested. Weaknesses in the company's evidence have been noted by the Commission. Counsel for the city has disclosed contradictions and inconsistencies. The Commission in its order has analyzed the massive record, and made its findings of fact. We think the Commission is fully aware of its duty to require this utility to provide adequate service at reasonable rates. There may be differences
[ 174 Pa. Super. Page 658]
of opinion as to what extent this has been accomplished. But we find no error of law or lack of evidence requiring a reversal of the Commission's order. No question of confiscation is involved nor is any violation of constitutional rights of the city established, and consequently our power to interfere with the order of the Commission is limited to errors of law or lack of evidence to support the Commission's findings. City of Pittsburgh v. Pennsylvania Public Utility Commission, supra, 168 Pa. Super. 95, 106, 78 A.2d 35; City of Pittsburgh v. Pennsylvania Public Utility Commission, supra, 174 Pa. Super. 224, 230, 101 A.2d 127.
We have affirmed on January 19, 1954, the order of the Commission of December 8, 1953.