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PITTSBURGH v. PENNSYLVANIA PUBLIC UTILITY COMMISSION. (11/13/56)

November 13, 1956

PITTSBURGH, APPELLANT,
v.
PENNSYLVANIA PUBLIC UTILITY COMMISSION.



Appeal, No. 20, Apr. T., 1956, from order of Pennsylvania Public Utility Commission, dated October 18, 1955, Complaint Docket No. 15992, in case of City of Pittsburgh v. Pennsylvania Public Utility Commission et al. Order, to extent indicated set aside, and record remanded.

COUNSEL

J. F. McKenna, Jr., City Solicitor, with him David Stahl, Assistant City Solicitor, for City of Pittsburgh, appellant.

Jack F. Aschinger, Assistant Counsel, with him Albert E. Luttrell, Assistant Counsel, and Thomas M. Kerrigan, Acting Counsel, for Public Utility Commission, appellee.

Paul H. Rhoads, with him John P. Egan, Jr., William Anderson, Jr., Howell C. Mette, Walter W. Shearer, and Rhoads, Sinon & Reader, for utility company, intervening appellee.

Irving R. Segal, with him Wm. A. Schnader, and Schnader, Harrison, Segal & Lewis, for consumer, intervening appellee.

Before Rhodes, P.j., Hirt, Gunther, Wright, Woodside, Ervin, and Carr, JJ.

Author: Rhodes

[ 182 Pa. Super. Page 379]

OPINION BY RHODES, P.J.

This is an appeal by the City of Pittsburgh from the order of the Pennsylvania Public Utility Commission of October 18, 1955. The appeal presents to us for review two issues arising in the rate case of The Manufacturers Light and Heat Company - rate of return and rate structure. These issues, inter alia, were previously before us in Pittsburgh v. Pennsylvania Public Utility Commission, 178 Pa. Superior Ct. 46, 72, 112 A.2d 826, allocatur refused, 178 Pa. Superior Ct. xxviii.

The Manufacturers Light and Heat Company, a wholly owned subsidiary of Columbia Gas System, Inc., filed tariff supplements with the commission on October 7 and 8, 1953, providing for a proposed increase in total revenues of over $5,800,000. The supplemental tariffs were to become effective in sixty days. The commission suspended the operation of the proposed supplements for a total of nine months from their effective

[ 182 Pa. Super. Page 380]

    dates; and after hearings the commission, by its order of August 23, 1954, allowed an increase in operating revenues of about $2,900,000.*fn1

Supplement No. 11 to tariff No. 37, and supplement No. 4 to tariff No. 38 were thereupon filed by Manufacturers containing revised rates to produce annual revenues as prescribed by the commission. The City of Pittsburgh and three industrial consumers appealed to this Court, and presented seven issues for our consideration. On five of these we affirmed the action of the commission, but on the remaining two, rate of return and rate structure, we remanded the record to the commission for further hearing and findings. The remand hearing was held before the commission on June 20, 1955, at which Manufacturers presented two witnesses. One testified on the subject of rate of return and the other on the rate structure. Various exhibits were also offered. No evidence was submitted by the City of Pittsburgh or the other complainants. On October 18, 1955, the commission issued its order reaffirming its prior determination on both issues. The City of Pittsburgh then appealed to this Court.*fn2

[ 182 Pa. Super. Page 381]

RATE OF RETURN. In the original proceeding the commission by its order of August 23, 1954, found 6 1/2 per cent to be a fair and reasonable rate of return to be applied to the fair value finding of $80,000,000, resulting in an annual return to Manufacturers of $5,200,000. In making this determination the commission found as a fact that the cost of capital to Manufacturers was identical with the cost of capital to Columbia Gas System, Inc., since Manufacturers is wholly owned by Columbia and obtains all of its capital from Columbia. The cost of capital was found to be within the range of 6.05-6.31 per cent.*fn3 The commission then observed that the current market capital costs were fluctuating, and in fixing the fair rate of return at 6.50 per cent it made an allowance over and above the maximum cost of capital of .19 per cent for "normal risks and uncertainties associated with financing in the capital markets." We rejected this additional amount as it had no foundation in the evidence of record. Besides, the reasons offered for its support were incorporated in the considerations which of necessity entered into the determination of the cost of capital. Thus there would be a double allowance for the same factors. The issue again before us is the propriety of the allowance of .19 per cent above the cost of capital to the utility.

[ 182 Pa. Super. Page 382]

At the remand hearing, Manufacturers' witness, F. H. Crissman, treasurer of Columbia Gas System, Inc., conceded that the actual cost of capital to Manufacturers was identical with the cost to Columbia because the latter supplies the entire debt and equity capital for Manufacturers, its wholly owned subsidiary. The commission again made the capital cost for Columbia applicable to Manufacturers in determining fair rate of return. As all of the capital supplied to Manufacturers comes from Columbia, and as this has been obtained at prime rates in the period under consideration, we find no error in using this evidence in determining the cost of capital to Manufacturers under the circumstances. The advantage in obtaining money which results from this system should enure to the benefit of the consuming public as well as to the utility.

The commission, having again found after the remand hearing that the cost of capital to Manufacturers was 6.18-6.31 per cent, made the further allowance of .19 per cent as a "judgment allowance ... to provide a slight margin for adverse fluctuations in the general market and for deviations from recent typical market conditions that might be experienced by respondent in actually obtaining capital." The evidence in support of this arbitrary allowance was equally general and intangible in substance; and the argument that the commission's finding of the cost of debt capital may have been too low fails to justify an allowance above the over-all cost of capital.

The witness Crissman, at the remand hearing, testified that an allowance over the cost of capital should be made to provide "for uncertainties with respect to financing which are not fully reflected in the cost of capital." This was based on the witness' appraisal of the earnings of Manufacturers in the past few years,

[ 182 Pa. Super. Page 383]

    which, in his opinion, would have necessitated the payment of a higher price for capital than that indicated by the general market. It is manifest that this reason is one which relates solely to the cost of capital and having been once considered affords no basis for an additional allowance. Furthermore, the uncertainties of the market are not necessarily those which would be adverse to the utility; the market fluctuates in both directions. In fact the commission considered these market characteristics in making a downward revision of the cost of capital because the 1953 market was unusually high, returning to the 1952 level early in 1954. Having thus specifically considered this downward trend in determining the cost of capital, the commission could not thereafter nullify this consideration by making an upward adjustment or allowance over the cost of capital based upon future uncertainties. In rationalizing its action, the commission states: "The finding of 6.18 per cent to 6.31 per cent as the current cost of capital was based upon statistical evidence which was factual evidence of the market investor's appraisal of the comparative risks of respondent's natural gas operations under typical market conditions of the recent past, but it made no provision for possible adverse future fluctuations in general market levels or for any adverse deviation from recent typical market conditions that might be experienced by respondent in actually obtaining capital." [Italics supplied.] It is ...


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