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RIVERTON CONSOLIDATED WATER COMPANY v. PENNSYLVANIA PUBLIC UTILITY COMMISSION. (03/24/58)

March 24, 1958

RIVERTON CONSOLIDATED WATER COMPANY, APPELLANT,
v.
PENNSYLVANIA PUBLIC UTILITY COMMISSION.



Appeals, Nos. 25, 26, 27, 28, 29, 30, 31, 62, Oct. T., 1957, from order of Pennsylvania Public Utility Commission, Dockets Nos. 16537, 16520, 16536, 16533, 16534, 16535, 16532, respectively, in case of Riverton Consolidated Water Company et al. v. Pennsylvania Public Utility Commission. Order set aside to extent indicated and record remanded.

COUNSEL

Ernest R. von Starck and Robert H. Young, with them Morgan, Lewis & Bockius, for water company, appellant.

Arthur H. Fribourg, with him Melvin Richter, Attorneys, Department of Justice, Harold K. Wood, United States Attorney, Geo. S. Leonard, Acting Assistant Attorney General, Henry P. Sullivan, Assistant United States Attorney, and Lawrence E. Masoner, Attorney, Department of the Army, for United States, appellant.

Edward Munce, Assistant Counsel, with him Thomas M. Kerrigan, Acting Counsel, for Pennsylvania Public Utility Commission, appellee.

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

Author: Rhodes

[ 186 Pa. Super. Page 5]

OPINION BY RHODES, P.J.

The Riverton Consolidated Water Company and the United States of America (Departments of the Army and the Navy) appeal from an order of the Pennsylvania Public Utility Commission prescribing rates for water service. Riverton supplies water to army and navy installations.

[ 186 Pa. Super. Page 6]

Riverton is a wholly owned subsidiary of Northeastern Water Company. It renders service in an area encompassing portions of Cumberland and York Counties, and provides water for the New Cumberland General Depot of the Department of the Army and for the Mechanicsburg Naval Supply Depot of the Department of the Navy. Riverton was incorporated on February 17, 1904, and by merger acquired several operating water companies and water company franchises. It subsequently acquired franchises and assets from other water companies in the area.

On September 14, 1955, Riverton filed Supplement No. 5 to Tariff Water - Pa. P.U.C. No. 8, and Supplement No. 1 to Tariff Water - Pa. P.U.C. No. 7, to become effective November 15, 1955. Tariff No. 8 covers service provided to 10,522 customers. Supplement No. 5 thereto proposed an increase of 25 per cent in the metered rates and in the charges for private fire protection. No change was proposed for public fire protection. Based on the level of operations of June 30, 1955, the proposed increase was estimated by Riverton to amount to $81,279.

Tariff No. 7 applies only to service provided for the Mechanicsburg Naval Supply Depot. Supplement No. 1 thereto proposed a rate schedule identical with that proposed in supplement No. 5 to tariff No. 8, and would have increased the revenues from this one customer by approximately $641, or 11.14 per cent.

The total increase of $81,920 proposed by both supplements would have been a composite increase in annual charges of 23.92 per cent of the operating revenues of $342,470 under the existing rates at the level of operations at June 30, 1955.

On November 14, 1955, the commission suspended the operation of the supplements for a period of six months and concurrently ordered an investigation on

[ 186 Pa. Super. Page 7]

    its own motion for the purpose of determining the fairness, reasonableness, justness and lawfulness of the proposed rates, charges, rules, and regulations, the investigation to include consideration of the lawfulness of existing rates, rules, and regulations, and of the imposition of temporary rates. On April 30, 1956, the operation of the proposed supplements was further suspended until August 15, 1956. Six complaints were filed, one of which was filed by the United States. All the complaints were consolidated with the commission's investigation for the purpose of hearing. Hearings were held on six occasions from January 5, 1956, to June 4, 1956. Briefs were filed but no oral argument was had. On August 7, 1956, the commission filed its order in which it sustained, to a certain extent, three of the complaints not involved in these appeals, and in which it ordered the cancellation of tariffs Nos. 7 and 8 and all supplements thereto and their replacement by tariffs Nos. 9 and 10, respectively, containing the rates prescribed by the commission. The commission found that the existing rates at June 30, 1955, were producing $344,470 annual operating revenues; that the proposed rates would have produced $426,390; and that the prescribed rates would produce allowable operating revenues of $382,301.

Riverton questions only the commission's finding that a consolidated tax saving of 45 per cent should be applied in determining the allowance for federal income taxes.

The United States has appealed on behalf of the Departments of the Army and the Navy, and has set forth numerous complaints to the action of the commission in general and as it relates to their respective installations.

Fair Value. The last preceding rate increase for Riverton became effective early in 1951. Riverton indicated

[ 186 Pa. Super. Page 8]

    that thereafter it had undergone a substantial growth in territory which necessitated major expenditures for improvements and additions to its plant to the extent of $1,675,000. It had retirements of only $38,760; the prior original cost of its plant was $1,346,405. The proposed increases were sought to provide a return on the recent substantial additions to its plant, and to provide an operating income commensurate with a fair return. In its proofs Riverton submitted five measures of value of its plant as of June 30, 1955, based on (1) book cost, (2) original cost, (3) reproduction cost estimates at spot prices of December 31, 1954, at the average price level of the three years 1952-1954, and at the average price level of the five years 1950-1954.*fn1 The commission gave no consideration to the submitted book cost in arriving at a fair value of the property of Riverton. Adjustments were made to the original cost and reproduction cost estimates by eliminating certain equipment found not to be used and useful in the public service and by deducting unrefunded portions of customers' advances for construction. Construction work in progress of approximately $60,000 was also deducted. After deducting accrued depreciation based on the 4 per cent compound interest method and adding $56,800 for materials and supplies, the commission arrived at the following measures of value: Original cost $2,146,585; reproduction

[ 186 Pa. Super. Page 9]

    cost at spot prices of December 31, 1954, $3,403,270; reproduction cost at the average price level of 1952-1954, $3,269,440; and reproduction cost at the average price level of 1950-1954, $3,125,272. The fair value of Riverton's property used and useful in the public service was then determined by the commission to be $2,700,000 at June 30, 1955.

It is contended by the United States that at this stage of the proceeding the commission erred in accepting the unit costs at the spot prices of December 31, 1954, and in accepting the trending procedures used in transposing the spot price estimates to the three-year and five-year average price levels; in accepting the 4 per cent compound interest method to ascertain accrued depreciation; and in determining the fair value of Riverton's property to be $2,700,000. The United States would have the original cost depreciated accepted as fair value.

The commission found that the unit costs at spot prices of December 31, 1954, and the trending methods used "do not appear unreasonable." The United States contends that a more positive finding should have been made. Before arriving at this finding the commission discussed the unit costs and trending methods, noting that the unit costs were computed from prices obtained from local suppliers where possible, and otherwise from manufacturers; that special discounts were considered; that labor costs were based on local union labor rates; that the indices used for trending were either published indices or indices developed for items of property from quotations of manufacturers or suppliers. The record indicates the method by which some of the indices were developed. The reproduction cost estimates were based on a complete inventory and appraisal of Riverton's property prepared by an engineering firm qualified to do this work. An

[ 186 Pa. Super. Page 10]

    expert from the firm testified in detail as to the recognized methods of trending used. The order of the commission indicates that the commission gave adequate consideration to the reproduction cost evidence which it found to be reliable. "There was substantial evidence of reproduction cost based upon pricing methods used by the company's expert. The validity of the method used and the weight of the testimony on this phase of the case were for the Commission and not for us." Pittsburgh v. Pennsylvania Public Utility Commission, 174 Pa. Superior Ct. 363, 373, 101 A.2d 761, 766.

The use of the 4 per cent compound interest method was likewise a matter for the consideration of the commission in determining the actual depreciation of the property at the cut-off date. The commission fully considered the evidence submitted by Riverton, which consisted of book depreciation and depreciation based on the 4 per cent compound interest method. It found that book depreciation was defective and rejected it. Adjustments were made to the depreciation computed by the 4 per cent compound interest method and the adjusted figure was accepted. We find no error in the method or the conclusion which would require reversal. See Pittsburgh v. Pennsylvania Public Utility Commission, supra, 174 Pa. Superior Ct. 363, 367-371, 101 A.2d 761; Johnstown v. Pennsylvania Public Utility Commission, 184 Pa. Superior Ct. 56, 72, 133 A.2d 246.

The commission allowed $56,800 for materials and supplies. This was computed by rounding the five-year average of the balances in this account. The United States contends it was error to allow this sum because a witness for Riverton testified that some of the materials and supplies could be used for construction work as well as for maintenance. The witness did

[ 186 Pa. Super. Page 11]

    not state the respective amounts because both future repairs and future construction could not be precisely determined. Riverton was entitled to a reasonable allowance in its rate base for materials and supplies on hand to meet normal repair requirements. Matters of this nature depend largely upon the judgment of the commission properly exercised on the evidence submitted. See Wall v. Pennsylvania Public Utility Commission, 182 Pa. Superior Ct. 35, 50, 51, 125 A.2d 630. The amount allowed was less than the amount actually on hand at the cut-off date; it was an average of that account for the preceding five years which supports its validity.

The commission's finding of a fair value of $2,700,000 is within the evidence submitted and the commission's determination of the respective measures of value derived therefrom. The fact that much of Riverton's plant is of recent origin would not prevent the commission from considering the reproduction cost evidence in addition to the original cost so long as the reproduction cost evidence was reasonably accurate and reliable as proof thereof. As we have said, a utility is entitled to a fair return on the fair value of its property used and useful in the public service at the time the rates are established or at the time the value is in issue, which is usually the cut-off date. Citizens Water Company v. Pennsylvania Public Utility Commission, 181 Pa. Superior Ct. 301, 306, 124 A.2d 123. The commission in arriving at fair value may consider a number of measures of value as well as the original cost; the commission is not bound by any particular ...


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