Appeals, Nos. 256, 265, 266, 267 and 268, April T., 1954, from order of Pennsylvania Public Utility Commission, August 23, 1954, Complaint Docket Nos. 15992, 16008, 16017, 16009 and 16005, in cases of City of Pittsburgh et al. v. Pennsylvania Public Utility Commission. Order set aside in part and record remanded.
J. Frank McKenna, Jr., City Solicitor, with him David Stahl, Assistant City Solicitor, for City of Pittsburgh, appellant.
Paul H. Rhoads, with him William Anderson, Jr. and Rhoads, Sinon & Reader, for utility company, appellant.
Robert L. Orr, with him Harold F. Reed and Reed, Ewing & Ray, for complainants, appellants.
Thomas C. Buchanan, with him Buchanan, Wallover & Barrickman, for complainant, appellant.
W. Russell Hoerner, Assistant Counsel, with him Albert E. Luttrell, Assistant Counsel, and Lloyd S. Benjamin, Counsel, for Public Utility Commission.
Irvin R. Segal with him Wm. A. Schnader and Schnader, Harrison, Segal & Lewis, for intervenor-appellee.
Before Rhodes, P.j., Hirt, Ross, Gunther, Wright, Woodside and Ervin, JJ.
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OPINION BY RHODES, P.J. Judge GUNTHER joins in this opinion.
The Manufacturers Light & Heat Company filed with the Pennsylvania Public Utility Commission new tariff supplements providing for the following increases:
(1) Industrial rates estimated to yield additional annual revenue of $1,597,907; (2) a rate applicable only to Lukens Steel Company, Coatesville, Pennsylvania, estimated to yield additional annual revenue of $137,967; (3) general service rates applicable to residential and commercial customers in Pennsylvania estimated to yield additional annual revenue of $4,128,765. The total estimated increases amounted to $5,864,639 for the twelve months ending July 31, 1953, adjusted to reflect rates in effect on that date. The first two tariff supplements were to become effective December 8, 1953; the third tariff supplement was to become effective December 9, 1953. All three tariff supplements were suspended by the commission for a total of nine months from their effective dates. Eighteen complaints were filed prior to the effective dates of the proposed supplements; one complaint was withdrawn. The commission on its own motion instituted an investigation for the purpose of determining whether the proposed rates and charges of Manufacturers were fair, reasonable, just, and lawful; such investigation was to include consideration of the lawfulness of the existing rates and the imposition of temporary
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rates. A rate case was presented before the commission; the record including exhibits contains 2,041 pages.
The commission, on August 23, 1954, by its order allowed operating revenues of $39,921,985 in contrast to operating revenues of $42,789,698, which were to be realized from the proposed tariff supplements. Manufacturers was directed to file tariffs designed to produce the operating revenues prescribed by the commission. The commission's order therefore granted about $2,900,000 of the proposed increases of over $5,800,000.
From the commission's order appeals to this Court were taken by the City of Pittsburgh (No. 256, April Term, 1954); Mayer China Company (No. 266, April Term, 1954); Ceramic Color & Chemical Manufacturing Company (No. 267, April Term, 1954); McDanel Refractory Porcelain Company (No. 268, April Term, 1954); and Manufacturers Light & Heat Company (No. 265, April Term, 1954).
The commission disposed of the issues in one order relating to all of the complaints before it. In this opinion we shall consider the questions raised by the various appellants.
The contentions of the appellants on these appeals from the commission's order may be stated as follows:
(1) Did the commission err in determining the amount of accrued depreciation and depletion; (2) did the commission err in determining the amount of annual depreciation and depletion expenses; (3) was it permissible for the commission to reject upward adjustments of test year operating revenues and expenses calculated on basis of ten-year average temperatures; (4) did the commission err in the allocation of property and operating expenses to Pennsylvania retail sales; (5) was it error for the commission to reject proposed upward adjustments of test year expenses
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for increases subsequent to the cut-off date; (6) was the rate structure unreasonably discriminatory; (7) was the commission's finding of 6 1/2 per cent rate of return arbitrary, unreasonable, and unsupported by the evidence.
The commission determined the fair value of the utility's property used and useful in the public service allocated to Pennsylvania retail sales to be $80,000,000, at July 31, 1953, upon consideration of original cost and reproduction cost [or trended original cost], the latter at the fair average price of materials, property, and labor. As to such measures of value the commission made the following findings: Original cost $62,845,024; original cost trended to average price level of 1952, $100,809,036, to average price level of 1951-52, $99,408,318, to average price level of 1950-52, $96,837,895, to average price level of 1948-52, $91,919,727. In arriving at these amounts, accrued depreciation and depletion premised upon the reserve requirement study were deducted. From original cost there was deducted $16,173,536 (23.60%). From original cost trended the following deductions were made: One-year price level, $43,370,350 (32.40%), two-year price level, $42,650,925 (32.37%), three-year price level, $41,451,110 (32.38%), five-year price level, $39,139,838 (32.37%).
The commission did not use the utility's book reserve*fn1 for depreciation and depletion and the corresponding trended amounts, but concluded that the reserve requirement study which was made at the commission's direction was a reasonable reflection of the utility's retirement experience with respect to both annual and accrued depreciation and of the extent of depletion.
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It is generally recognized that depreciation is the loss not restored by current maintenance which is due to all the factors causing the ultimate retirement of a utility's property. These factors embrace wear and tear, decay, inadequacy, and obsolescence. Lindheimer v. Illinois Bell Telephone Company, 292 U.S. 151, 167, 54 S. Ct. 658, 78 L. Ed. 1182, 1192. Naturally, a utility's depreciation reserve could represent the actual accrued depreciation in the utility's properties. This is seldom, if ever, the case, as the book reserve representing a historical accumulation may be accumulated by various methods which may or may not reflect the mortality which actually has occurred in the utility's properties. To determine fair value, accrued depreciation must be deducted from the various measures of value which have been properly presented, while annual depreciation is an allowance to be made each year as an operating expense.
A properly determined reserve requirement study may be the best practical measure of depreciation. Such study is an analysis of the utility's recent experience in retiring from service its units of property for various causes; it is based on present-day knowledge and judgment concerning lives of property. A reserve requirement study should present a true current annual depreciation expense chargeable to present cost of service. Using the reserve requirement study to calculate accrued depreciation should disclose the consumption of property to date. The same is true as to depletion which is the exhaustion of natural resources; the term "depreciation" is usually limited to exhaustion of artificial resources.
ACCRUED DEPRECIATION AND DEPLETION: The book reserve offered in evidence by the utility showed higher depreciation and depletion than that shown by the reserve requirement study. Thus the book reserve for
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depreciation and depletion amounted to 32.2 per cent of depreciable and depletable property allocated to Pennsylvania retail sales at the original cost measure of value, or $22,182,836, prior to necessary adjustments. The city argues that the commission was bound to accept the higher book reserve as a measure of accrued depreciation and depletion particularly since the city and the utility relied upon such book reserve.
The commission concluded that the utility's book reserve was not reliable and that it did not afford a proper basis for the calculation of accrued depreciation and depletion. With reference to the record, the commission pointed out its reasons for rejecting the book reserve in determining accrued depreciation and depletion as of July 31, 1953. The reserve for depreciation and depletion was first established by the utility in 1910. In the intervening forty-three years there were twenty-three revisions made in the annual accrual rates. Since 1948 depreciation has been accrued on a service-life basis by plant accounts, and depletion has been determined on a unit of production basis. The commission further pointed out that the estimates of service-lives were not based on actuarial studies of the utility's retirement experience but rather on the judgment of the management and of the operating personnel, and that, no matter how accurate the estimates may have been from time to time in previous years, only by coincidence would the book reserve for depreciation and depletion be a reliable measure of accrued depreciation and depletion at a later date.
It further appears from the record that the utility and its predecessor companies made depreciation accruals regardless of earnings. There is no countervailing evidence in the record that past rate payers were overcharged or that management abused ...