November 16, 1961
SAYRE LAND COMPANY, APPELLANT,
PENNSYLVANIA PUBLIC UTILITY COMMISSION.
Appeal, No. 7, March T., 1961, from decree of Court of Common Pleas of Dauphin County, No. 2117 Equity Docket 1954, No. 150 1/2 Commonwealth Docket, 1954, in case of The Sayre Land Company v. Pennsylvania Public Utility Commission. Decree reversed.
James H. Booser, with him Harry H. Frank, and McNees, Wallace & Nurick, for appellant.
Edward Munce, Assistant Counsel, with him Joseph I. Lewis, Chief Counsel, for Pennsylvania Public Utility Commission, appellee.
Before Ervin, Wright, Woodside, Watkins, Montgomery, and Flood, JJ. (rhodes, P.j., absent).
[ 196 Pa. Super. Page 418]
OPINION BY ERVIN, J.
The single question in this appeal is whether the appellant, The Sayre Land Company, is a public utility subject to the Pennsylvania Public Utility Commission's regulatory functions.
By Complaint In Equity For a Final Injunction, filed June 28, 1954, The Sayre Land Company, a corporation of, and doing business in, the Commonwealth of Pennsylvania, hereinafter referred to as "Land Company," filed this complaint,*fn1 seeking a permanent injunction
[ 196 Pa. Super. Page 419]
to compel the Pennsylvania Public Utility Commission, hereinafter referred to as the "Commission," to forthwith dismiss and discontinue all proceedings pending before it in complaints entitled "Borough of Sayre v. The Sayre Land Company" docketed at C. 15700,*fn2 and "Borough of Athens v. The Sayre Land Company," docketed at C. 15701,*fn2 and in an investigation
[ 196 Pa. Super. Page 420]
upon Commission motion entitled "Pennsylvania Public Utility Commission v. The Sayre Land Company," docketed at C. 13907-43.*fn3 The answer of the Commission was filed July 19, 1954. A reply was filed by the Land Company on August 13, 1954.
On January 28, 1960 the court below filed a final decree dismissing the Land Company's bill. Land Company appealed. The court below found that Land Company was a public utility as defined in the Public Utility Law and it follows, of course, that as such Land Company would be subject to all of the laws and regulations governing public utilities.
Substantially all of the facts involved in this controversy appear in the 77 findings of fact made by the court below.
In the years 1870 and 1871, Howard Elmer and Charles F. Anthony and two associates purchased 738 acres of land lying in Athens Township between the Villages of Waverly and Athens in Bradford County, Pennsylvania, and in the latter year laid out the plans and streets of the Village of Sayre and began the erection of commercial and residential buildings. In 1878 R. A. Packer, H. E. Packer, Elisha P. Wilbur and Robert Lockhart purchased a one-half interest in this development from the executors of the estate of Charles F. Anthony. On May 23, 1879, under the provisions of the Act of April 29, 1874, P.L. 73, The Sayre Land Company was incorporated "for the purpose of purchasing and improving real estate and selling the same in lots or parcels."
[ 196 Pa. Super. Page 421]
On August 25, 1881, the Sayre Water Company was incorporated under the provisions of the above mentioned Act of Assembly "for the purpose of supplying water to the public of the Villages of Sayre, Athens and vicinity in the Township of Athens, Bradford County." In furtherance of the real estate development and improvement, Land Company constructed a waterworks and water supply system, together with buildings, fixtures, appurtenances and equipment necessary for the development and improvement of the above mentioned real estate. On May 27, 1885 Land Company executed what the appellant terms a lease and which the appellee terms an agreement, for use by Water Company of the waterworks properties owned by Land Company.*fn4
[ 196 Pa. Super. Page 427]
On May 28, 1896 the Land Company and Water Company entered into a written agreement modifying the rental to be paid under the above mentioned instrument.*fn5
[ 196 Pa. Super. Page 428]
The court below specifically found: "That under the terms of the instrument the Water Company must, and in fact does: (1) keep and maintain the property in good order and condition; (2) punctually pay and satisfy all taxes, charges and assessments upon the property or upon the business carried on by the Water Company; and (3) indemnify and save harmless the Land Company from all liabilities, claims, suits, costs,
[ 196 Pa. Super. Page 429]
damages and expenses resulting from or occasioned by any act or omission of the Water Company in the use, management and control of the premises and property or the business of the Water Company.
"(a) The Sayre Water Company has in the past and does presently comply with these provisions of the instrument between The Sayre Land Company and The Sayre Water Company.
"(b) The Sayre Land Company performs none of the duties imposed upon The Sayre Water Company by the terms of said instrument."
The Water Company also has been and is now operating the water supply property and rendering the service of supplying the public with water for compensation. It is and has also been making, demanding and receiving all rates or other compensation from the public for the water supplied. Eighty per cent to ninety per cent of the original cost of plant facilities used and useful in rendering water service to the public for compensation is owned by Land Company but leased to Water Company. The extensions of and additions to facilities which are necessary to convey water up to and including the curb well and curb cock have in the past been made and are presently made by the Land Company and have been and are presently paid for by Land Company and have been and are presently owned by Land Company.
The following officers and directors of the two companies are identical. These include the following: George M. West, director of both the Water Company and the Land Company and president of both Water Company and Land Company; Howard E. Bishop, director of both Water Company and Land Company and vice-president of both Water Company and Land company; Eldridge P. Wilbur, director of both Water Company and Land Company and second vice-president of both Water Company and Land Company; David C.
[ 196 Pa. Super. Page 430]
Meyer, director of both Water Company and Land Company, general Manager of both companies, secretary of both companies, and treasurer of both companies; Albert E. Theetge, director of both Water Company and Land Company and assistant treasurer of both Water Company and Land Company.
The five individuals above mentioned own stock in both companies but own less than 1/2 of the shares of Water Company and own 12 1/2 per cent of the shares of Land Company. The offices of both companies are located in the same building in Sayre and the stockholders and directors of each company meet there on the same date but at a different hour.
The two companies share the services of some employees but such individuals are paid separately by each company for the work performed for that company.
The great majority of stockholders in Land Company are not stockholders in Water Company. Water Company owns no stock of Land Company and Land Company owns no stock of Water Company.
Water Company has a general manager and a number of persons are employed solely by it. These employees include a chemist, office clerk, a number of meter readers, two meter repairmen and two pumping station operators. It keeps its own books and records and issues its own annual reports. It pays its own capital stock tax and its own corporate net income tax. It owns and maintains the equipment, meters, fixtures, trucks, tools and office equipment used in operating the waterworks and furnishing water to the public. It maintains all property used in its business, including the property leased from Land Company, and pays all taxes thereon. It has possession and control of the water property. It receives and decides on applications for extension of service. It pays the operating and general expenses in connection with the operating
[ 196 Pa. Super. Page 431]
and maintaining of all the water properties used in supplying water to the public. It bills consumers and receives payment for water furnished in accordance with tariffs it regularly files with the Commission at rates determined by Water Company subject to commission approval. Water Company has at all times operated said water supply property. Land Company has never operated the water supply property.
Water Company has at all times been subject to the jurisdiction and regulation of the Pennsylvania Public Utility Commission and its predecessor, Public Service Commission. It pays annual assessments for the operation and expenses of the Commission. It files the annual reports required of public utilities; it regularly files tariffs for water service. The Commission has fully determined the reasonableness of the rates of Water Company. Land Company has not considered itself a public utility and has filed no tariffs or annual reports and has paid no Commission assessments.
Water Company has at all times been in full compliance with the regulations and orders of the Commission. There is no evidence and there is no finding of fact establishing any inadequacy of service or any service complaints nor is there any contention that the rates are too high.
The court below concluded that Land Company was a public utility because (1) it owned a substantial proportion of the plant and equipment used by Water Company and (2) that Land Company operated the plant and equipment through Water Company as its agent.
We will first consider the question of whether Land Company did own the plant and equipment within the meaning as expressed in the Public Utility Law of this Commonwealth.
Section 2(17) of the Public Utility Law, Act of May 28, 1937, P.L. 1053, 66 PS § 1102(17), defines the term "public utility" as follows: "(17) 'Public Utility'
[ 196 Pa. Super. Page 432]
means persons or corporations now or hereafter owning or operating in this Commonwealth equipment, or facilities for: ... (b) Diverting, developing, pumping, impounding, distributing, or furnishing water to or for the public for compensation; ...."
In § 2(10) of the Public Utility Law, 66 PS § 1102(10), "facilities" is defined as follows: "(10) 'Facilities' means all the plant and equipment of a public utility, including all tangible and intangible real and personal property without limitation, and any and all means and instrumentalities in any manner owned, operated, leased, licensed, used, controlled, furnished, or supplied for, by, or in connection with, the business of any public utility: ...."
From the above it will be seen that the word "facilities" as used in § 2(17) to describe the property to which the term "owning" refers, is fully defined in § 2(10). The reasoning of the court below as to the word "owning" is dound in the following language: "To follow the plaintiff's reasoning, we must overlook the significance of the change in approach by the legislature between the Public Service Company Law and the Public Utility Law. The former Act was the Act of July 26, 1913, P.L. 1374, while the latter Act is the Act of May 28, 1937, P.L. 1053. Clearly the latter act was passed to take the place of the former act. There is a vast difference in the definition of the term 'public utility,' in the two acts.
"In the Public Service Company Law, the legislature defined the term by stating in Section 1 that certain types of corporations - or persons engaged in certain types of businesses - were public service companies. The term was defined to include 'water corporations.' 'Owners' of public utility property were not included within the definition of the term 'public service company,' as found in the Public Service Company Law.
[ 196 Pa. Super. Page 433]
"In the Public Utility Law, however, the legislature broadened the definition to include not only corporations or persons engaged in certain types of activities as 'operators' but also corporations or persons owning facilities designated as used for certain purposes. Certainly the legislature intended to accomplish some legitimate objective in broadening the definition of the term 'public utility.' An Examination of the cases cited before the passage of the Public Utility Law will clearly demonstrate that there was a vacuum or a hiatus so far as regulatory power existed under the former law so far as 'owners' of property were concerned. When the legislature passed the Public Utility Law, the gap in the law was filled."
The court below did not refer to any cases in connection with this subject. It has been given consideration by our own appellate courts.
In the case of Citizens' Passenger Railway Co. v. Public Service Commission, 75 Pa. Superior Ct. 238, the lessee, Philadelphia Rapid Transit Co., was the sole operating company in the City of Philadelphia. It had leased numerous street passenger railway companies originally operating under separate charters, each limited to a specific route of travel. While the Commission was investigating the service and fares of P.R.T., it received complaints that P.R.T. was unable to render adequate service at reasonable rates because, under the leases through which it obtained possession and control of the property it operated, P.R.T. was compelled to pay exorbitant rentals. The complainants asked the Commission to determine the fair value of the leased property, to fix fair rates, and, if necessary, to reduce the rentals provided in said leases. The lessors' demurrers to the complaints were overruled by the Commission and it directed lessors to file answers. In the demurrers the lessors had averred that the Commission did not have jurisdiction over them. The lessors
[ 196 Pa. Super. Page 434]
appealed and we reversed. In an opinion written by Judge HEAD, at p. 252, it is said: "If the commission may lawfully proceed to compel the present possessor of that property in lawful control of it, to respond to the just demands of the public, whence the necessity to go back along the chain of title and bring in, at the expenditure of much time, money and effort, every company which has previously owned or controlled the same property? The interest of the public, which the Public Service Law sought to maintain and uphold, was the right to have adequate transportation, at reasonable rates, over the lines in the City of Philadelphia devoted to the service, without regard to the question of the ultimate ownership of that property." The Supreme Court (while holding as a matter of procedure that the Commission had not entered a final, appealable order), agreed, 271 Pa. 39, 54, 114 A. 642, that "the main point in the case ... was correctly decided by the Superior Court." At page 55, in an opinion written by Mr. Justice SIMPSON, it was said: "Hence where, as here, under legislative authority, such a corporation has transferred its franchises and assets and has ceased to function, the commission has no jurisdiction over it, since the company has no rates to make or collect, no service to render the public, and no facilities to furnish or extend. This conclusion alone defeats the intervening complaints before the commission, for they are directed rected against nonfunctioning corporations only. If it be true, as argued by appellants, that there is a residue of powers remaining in the underlying companies, notwithstanding the leases, doubtless the statute, if applicable, will be duly applied when, if ever, they attempt to exercise those powers; in these complaints nothing is alleged on this subject." The complainants, as appellants before the Supreme Court, had argued that "The public service they are rendering is the continued owning of the property devoted to public use." The
[ 196 Pa. Super. Page 435]
Commission in its brief also relied upon the term "owning" as conferring jurisdiction over the lessors. The paper book of the Commission specifically called to the attention of the Supreme Court that art. I, § 1 of the Public Service Company Law, Act of 1913, P.L. 1374, at p. 1376, provides, inter alia: "The term 'Street Railway Corporation,' as used in this act, includes every corporation owning, leasing, operating, or managing or controlling, any street railway within this Commonwealth." (Emphasis supplied)
The Public Utility Law of 1937 broadened the definition of a public utility to include not only corporations or persons engaged in certain types of activity as "operators" but also persons or corporations owning facilities. The old Public Service Company Law of 1913, likewise, as related to street railway corporations, included corporations "owning ... or controlling any street railway within this Commonwealth." It is clear from the Citizens' Passenger Railway Co. cases that both of our appellate courts have expressed the thought that the words "owner" or "owning" in the Public Utility Law do not automatically make the owner a public utility where the lessee of the owner is the actual operator of the facilities. The Citizens' Passenger Railway Co. case presents a stronger set of facts for the Commission's position than do the facts in the present case because in that case the lessors had been chartered, and for years had operated, as public service corporations, themselves devoting their property to a public service. In the present case the Land Company had never operated as a public service corporation nor had it directly devoted its property to a public service.
Other jurisdictions have wrestled with the problem we are here considering. In Baltimore & Ohio Railroad Co. v. Walker, 45 Ohio St. 577, 587, 16 N.E. 475, the Ohio legislation provided that "'When the tracks of two railroads cross each other ... the crossing shall
[ 196 Pa. Super. Page 436]
be made and kept in repair, and watchmen maintained thereat, at the joint expense of the companies owning the tracks. ...'" In this case it was held that the lessee, as the owner for the time being, was the party responsible for performance of the duties enjoined by the legislation. In that case the Supreme Court of Ohio said: "Lessee companies having the possession and control of the roads, and operating them as such ... are companies 'owning the tracks' of the roads operated by them, in the sense in which that phrase is used in the statute."
A similar result was arrived at in the case of Proctor v. Hann. & St. Joe. R.R. Co., 64 Mo. 112, 124, where the court said: "... the owner for the time being, the corporation for the time being, operating, controlling, and managing the defective road...." was responsible for carrying out the duties enjoined by the legislature. At p. 126 that court further said: "The word 'owner' in this section is used in the sense of proprietor, operator or owner at the time when the injury is received." See also Stewart v. The Chicago and Northwestern R.R. Co., 27 Iowa 282, 285; Illinois Central Railroad Co. v. Kanouse, 39 Ill. 272, 278; Indianapolis & St. Louis Railway Co. v. People, 32 Ill.App. 286, 288; State v. Corbett, 57 Minn. 345, 353, 59 N.W. 317, 320; Kentucky & Indiana Bridge Co. v. Louisville & Nashville Railroad Co., 37 F. 567, appeal dismissed by the Supreme Court in 149 U.S. 777, 13 S.Ct. 1048. In Schott v. Harvey, 105 Pa. 222, 228, Mr. Justice PAXSON said: "... a tenant in possession. For all practical purposes he is the owner until the end of his term ... the reversioner ... has practically parted with all control of the property ... the owner at the time of the injury was contemplated without regard to the quantity or duration of his estate." In New Street Bridge Co. v. P.S.C., 271 Pa. 19, 28, 114 A. 378, our Supreme Court said: "A lessee-operating company ... owns for
[ 196 Pa. Super. Page 437]
a given time ... property of ... the lessor company. ..."
In Chippewa Power Co. v. Railroad Commission, 188 Wis. 246, 250, 205 N.W. 900, 902, where Wisconsin-Minnesota Light & Power Co. had leased a dam at Jim Falls and an electric transmission line constructed but never operated by Chippewa Power Co., the lessor, the term "own" in the Wisconsin Public Utility Law was held inapplicable to a lessor as such, the Commission was enjoined from exercising jurisdiction over lessor as a public utility, and the Supreme Court of Wisconsin ruled that "As long as the lessee performs the covenants and conditions of the lease, it is, to all intents and purposes, the owner of such plant. ..."
In Ellis v. Interstate Commerce Commission, 237 U.S. 434, 443-444, 35 S.Ct. 645, 646, 647, the Supreme Court of the United States, in an opinion delivered by Mr. Justice HOLMES, ruled that: "The Armour Car Lines ... owns ... and ... lets these cars to the railroad. ... It is true that the Definition of transportation in § 1 of the act includes such instrumentalities as the Armour Car Lines lets to the railroads. But the definition is a preliminary to a requirement that the carriers shall furnish them upon reasonable request, not that the owners and builders shall be regarded as carriers, contrary to the truth. The control of the Commission over private cars, is to be effected by its control over the railroads that are subject to the act. ... But the only relation that is subject to the Commission is that between the railroads and the shippers. It does not matter to the responsibility of the roads, whether they own or simply control the facilities, or whether they pay a greater or less price to their lessor."
In General American Tank Car Corp. v. El Dorado Terminal Co., 308 U.S. 422, 428-429, 60 S.Ct. 325, 329, Mr. Justice ROBERTS said: "The lessor ... is not itself
[ 196 Pa. Super. Page 438]
... engaged in any public service. Therefore its practices lie without the realm of the Commission's competence."
In Central Trust Co. v. Calumet Co., 260 Ill.App. 410, 416, it was said: "It is the company which in fact offers its facilities to the public that is conducting a public utilities business and not necessarily the landlord owner of the premises."
We are, therefore, of the opinion that the 1937 Public Utility Law of this Commonwealth did not make Land Company a public utility merely because it owned property which it had leased to Water Company as an operating utility.
We will next consider whether Land Company operated the plant and equipment through Water Company as its agent. In this connection the court below said: "Now, how does The Sayre Water Company operate? We believe, and so find in this case, that The Sayre Water Company is acting as the agent of The Sayre Land Company. The rule of law is that whenever parties by express words or tacit conduct indicate that one acts on behalf of the other, an agency is created. See Brock et al., Exrs. v. Real Estate-Land Title and Trust Company, 318 Pa. 49, 178 A. 146; Restatement of Agency, § 1." The Brock case had nothing to do with the creation of an agency relation and dealt with the question of determining the scope of authority of an individual who for years occupied the relation of agent to his principal.
In Restatement (2d), Agency, § 1, agency is defined as follows: "(1) Agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act. (2) The one for whom action is to be taken is the principal. (3) The one who is to act is the agent." In § 33, comment a of the Restatement (2d), Agency, it
[ 196 Pa. Super. Page 439]
is stated that "The agency relation is normally the result of a contract and is always the result of an agreement between the parties. ... The implicit, basic understanding of the parties to the agency relation is that the agent is to act only in accordance with the principal's desires as manifested to him."
It will, therefore, be necessary for us to first consider the written agreement between Land Company and Water Company to determine whether an agency relation was created by that agreement. The original agreement and amendment in this case create simply a lessor and lessee relationship.
The lease was subject to a mortgage dated May 1, 1885 in the sum of $75,000.00 from Land Company to the Girard Life Insurance Annuity and Trust Company. The lease contained numerous covenants by lessee Water Company relating to payments of rent, maintenance, payment of taxes, subletting, indemnification of lessor by lessee in connection with lessee's use of the property, deposit of capital stock of Water Company with Land Company as collateral security and remedies of lessor on default by lessee. The agreement recognizes the complete responsibility of Water Company as lessee in the "use, management and control of the hereinbefore demised premises and property in the business of the Lessee connected therewith. ..." Even though the rents are measured by net profits, this fact does not create an agency relationship. For over 60 years the rental provision in the 1896 amendment has provided no more than fair compensation for the use of the property leased to Water Company. The annual rentals received in evidence for the years 1951, 1952 and 1953 were respectively $21,496.41, $9,699.61 and $17,617.79. The valuation of the property for which this rental was received is approximately one million dollars.
[ 196 Pa. Super. Page 440]
In Handbook of the Law of Partnership, by Crane, at pages 58 and 59, in § 17, the cases are collected on the subject of profit sharing as rent to a landlord. It is there said: "If the owner of premises in which another is to carry on a business is to receive as rent, not a share in the gross product of income, but a share in net profits, it is not partnership, if only a landlord and tenant relation is intended and not a jointly operated business. It is sometimes difficult to classify the relation where the owner is, for his better protection, given some share in control of a business .... In such situations the question of partnership or not turns upon the degree of control and participation in management on the part of the landlord or owner." More than receipt as rent of net profits of lessee is required before an inference can be drawn that a lessor has control. Professor Crane illustrates the incidents of control that must be given the lessor before this question of degree reaches the point where it may legitimately be inferred that the lessor has such control as to constitute the lessor a principal and a partner. It must also be remembered that the rentals were not taken into consideration by the Commission in the three rate cases involving this utility. In each case the leased property was treated as part of Water Company's rate base, thereby automatically eliminating from consideration the propriety of rentals paid by Water Company to Land Company for the leased property.
The lease involved in this case does not give the lessor the right to control the property leased to the lessee. On the contrary, it is made the duty of the lessee to do many things which are inconsistent with control by the lessor. This lease is not an operating agreement, as was the case in Wilson v. P.S.C., 116 Pa. Superior Ct. 72, 176 A. 510. The interpretation of the lease by the parties themselves for a period of more than 60 years is some evidence as to whether the parties
[ 196 Pa. Super. Page 441]
considered themselves as principal and agent or merely as lessor and lessee. The Water Company for this long period of time has been in complete control of the operation. Water Company has at all times complied with the provisions of the Public Service Company Law and of the Public Utility Law. Land Company has never applied for a certificate of public convenience or filed reports. Everything that a public utility should do, Water Company has done. If we go beyond the terms of the lease and examine the evidence in this case we find nothing to warrant the inference that Land Company controls Water Company.
Land Company is not a holding company because Land Company owns no stock of Water Company. If Land Company were a holding company it would have power as principal stockholder to elect directors of Water Company and thus control Water Company. The great majority of stockholders in Land Company are not stockholders in Water Company. This is not a case of one man control of two corporations, as was the case in Armour Transportation Co. v. Pa. P.U.C., 154 Pa. Superior Ct. 21, 34 A.2d 821, or of control of two corporations by a group of common stockholders.
There is no good reason in this case for making an exception to the basic doctrine of corporate entity. The Commission has for many years effectively regulated the Water Company as a separate corporate entity.See Pa. P.U.C. v. Sayre Water Company, 31 Pa. P.U.C. 1; Pa. P.U.C. v. Sayre Water Company, 34 Pa.P.U.C. 229; Pa. P.U.C. v. Sayre Water Company, 37 Pa.P.U.C. 455. The Commission has been able to properly regulate Water Company and see that proper rates are charged for the service which it renders. In the rate proceedings of Water Company heretofore disposed of by the Commission the original cost of the plant and equipment leased by Land Company to Water Company was available. The rules heretofore
[ 196 Pa. Super. Page 442]
in effect do not require Water Company to produce the original cost figures. This, however, may easily be remedied by the adoption of additional regulations to cover the situation. Furthermore, the burden is upon the Water Company to establish all of the basic facts necessary for consideration by the Commission when it seeks a rate increase: Phila. v. Pa. P.U.C., 173 Pa. Superior Ct. 38, 48, 95 A.2d 244. If Water Company should fail to produce the original cost figures of the leased property it would not meet the burden thus imposed upon it and the Commission could, for this reason alone, deny any increase in rates. It seems to us that this gives the Commission adequate power to properly control the matter. Land Company and Water Company are affiliated interests under art. VII of the Public Utility Law, 66 PS §§ 1271-1276. If the Commission had had jurisdiction over the affiliated corporations as themselves public utilities because of their control over operating utilities, there would have been no point to enacting art. VII. Article VII was predicated upon the lack of Commission jurisdiction over the affiliated or controlling corporations.
It might also be argued that Land Company could terminate the lease. If this were to happen Water Company, being a public utility, through the right of eminent domain could acquire the leased property. While it may not, under the terms of the lease, issue new capital stock without the consent of the lessor, it could undoubtedly raise the necessary capital for the acquisition by the sale of bonds.
The court below found that the predominant portion of the business of the Land Company consists of real estate operations other than the leasing of property to Water Company. In 1951 72 per cent of the revenue of the Land Company was derived from real estate operations other than the leasing of property to the Water Company; in 1952 95.5 per cent was derived
[ 196 Pa. Super. Page 443]
from such other real estate operations; in 1953 65.2 per cent was derived from such other real estate operations. The business of Land Company was not affected with a public interest and could not be regulated as a public utility without violating both the Federal and State Constitutions: Hertz Drivurself Stations, Inc. v. Siggins, 359 Pa. 25, 58 A.2d 464.
The court below also found: "That for the year of 1953, real estate taxes for school, county and borough purposes, in the total amount of $1,395.00 were assessed and levied on the real estate owned by The Sayre Land Company and leased to The Sayre Water Company. Such assessment and levy were upheld by the Court of Common Pleas of Bradford County, by its opinion and order handed down on March 22, 1954, at No. 11 September Term, 1953, in the appeal taken from said assessment, entitled 'In re Appeal of The Sayre Land Company,' on the ground that The Sayre Land Company is not a public utility and therefore not exempt from the payment of said real estate taxes." If Land Company should now be declared to be a public utility, would the leased property and all of its other real estate be exempt from local taxation? This and other complications may be avoided by having Land Company remain a private corporation and not a public utility. The great portion of Land Company's business, which is the rental and sale of real estate, could not be properly regulated by the Commission. To attempt such regulation would, in our opinion, constitute an unconstitutional exercise of power. To declare Land Company a public utility is utterly unnecessary in order to secure to the public protection from improper operation of the Water Company as a utility. The public may be entirely protected by the regulation of Water Company alone.
We are, therefore, of the opinion that Water Company was not an agent of Land Company and Land
[ 196 Pa. Super. Page 444]
Company did not operate it. If the time should ever come that Land Company does actually operate this utility business, the Commission has ample power to impose its regulatory functions to properly protect the public.
Decree reversed and the case is remanded with instructions to the court below to enter a proper decree as prayed for in the complaint.
ING OPINION BY WRIGHT, J.:
It is my view that we should look through the veil of corporate structure to consider the realities of the instant factual situation. While the Land Company is merely the owner from a technical standpoint, it is actually the operator, receiving all of the earnings in excess of $300.00 per year. Apparently the arrangement between the two corporations is being used as a means of frustrating acquisition of the facilities by the boroughs involved. I respectfully submit that, on this record, regulation by the Commission is in the public interest and its jurisdiction should be sustained.
ING OPINION BY FLOOD, J.:
I join in Judge WRIGHT's dissent. A number of considerations compel me to this conclusion.
1. None of the cases cited by the majority indicates that an owner of public utility property is not itself a public utility when it owns practically all of the facilities used or useful in the service being rendered to the public and transfers such property only on a year to year basis to another company which receives merely a fixed nominal sum for operating the facilities, all profits its
[ 196 Pa. Super. Page 445]
over and above such sum being retained by the owner.
2. We do not have here a situation like that in Citizens' Passenger Railway Co. v. Public Service Commission, 75 Pa. Superior Ct. 238 (1920), reversed, 271 Pa. 39, 114 A. 642 (1921), where the company owning the facilities had leased them for a fixed rental for a long term. This contrasts strongly with the year to year lease to the Water Company here, with the lessor getting, not a fixed rental, but all of the profits.
3. In the Citizens' Passenger case the lessor, having parted with its property and franchises for a long term for a fixed annual rental, retained no control over the operations, either expressly or by implication.
4. As the Supreme Court said in the Citizens' Passenger case the lessor company there had "no rates to make or collect, no service to render to the public and no facilities to furnish or extend". 271 Pa., at p. 55. This is not so here.
5. In this case the facts in the record lead inescapably to the lower court's conclusion that the ratemaking function is exercised by the Water Company as the agent of the Land Company which alone benefits or is injured as a result of higher or lower rates. The Water Company stockholders have no more interest than if they were Land Company bondholders entitled to a return sufficient to pay the sum of $300 annually which is equal to six per cent upon their original investment.
6. When it is necessary to extend facilities of the Water supply system, this extension is made either out of Land Company's funds or out of receipts from operations which would otherwise go to the Land Company as profits. It is unrealistic to say that these extensions under these circumstances are not made by the Water Company as agent for the Land Company.
[ 196 Pa. Super. Page 4467]
. It may be true, as the majority says, that the word "owning" in the Public Utility Code does not automatically make the owner of facilities used to furnish water to the public a public utility. Yet even where the lessee is the actual operator of the facilities, it cannot be overlooked that this court in the Citizens' Passenger Railway Co. case, supra, said (at pages 251-252, 75 Pa. Superior Ct.):
"We are not prepared to accept as sound, the broad proposition advanced by counsel for the appellants, that the Public Service Commission has no jurisdiction over the underlying companies, the present appellants. They are existing corporations under the laws of the State of Pennsylvania. They are the final owners of a vast property, which for years has been devoted to a public service and which is today being operated as a public service company engaged in a service vital to the vast population which constitutes the City of Philadelphia. They were chartered as public service companies, and so long as they live and move and have their being under and by virtue of those charters, they must remain public service companies."
8. The fact that the lessors in the Citizens' Passenger Railway Co. case had been chartered and had for years operated as a public service corporation does not render the above statement of this court inapplicable to the lessor here. If the Land Company acts, by itself or through an agent, as a public utility it will be held subject to regulation as a utility irrespective of its charter right so to act. Pa. Chautauqua v. Public Service Commission, 105 Pa. Superior Ct. 160, 160 A. 225 (1932).
9. Even though the relation between two companies is in form a lease, it will be construed to be an agency relationship if that is in fact what it is. Wilson v. Public Service Commission, 116 Pa. Superior Ct. 72, 176 A. 510 (1935). In this case there is more power
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of control retained by the lessor than there was by the lessor in the Wilson case.
10. It is true the Land Company is not the owner of the stock of Water Company and the majority in number of stockholders in the Land Company are not stockholders in the Water Company. On the other hand, the record does not support the statement of the majority that this is not a case of control of two corporations by a group of common stockholders. The record shows that twelve shareholders of the Land Company, who own seventy-three per cent of that company's stock, own all of the stock of the Water Company. There is therefore effective power to control the two companies by a group of twelve shareholders or less. The history of the two companies, as set forth in the record, indicates that those shareholders and their predecessors have been acting harmoniously over many years.
11. It should be noted that under the terms of this lease the Water Company received $300 annually for operating this public utility in the first year following the modification of the lease in 1896, and is still receiving $300 annually for operating it sixty-five years later in spite of the great intervening increase in the cost of management of such an enterprise. It is hard to see how the Water Company is doing anything other than acting exclusively or almost exclusively for the Land Company's interest in this operation.
12. I see nothing in the law or the record to indicate that the commission by merely changing its rules or regulations may compel the Water Company to produce the books or records of the Land Company if the Land Company is not a public utility. The commission argues that it has not been able to get all information it needs. If it cannot get it directly from the Land Company I do not see how it can force the Water Company to compel the Land Company to produce it for the commission's
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benefit. Nothing that I can discover in the language of the Public Utility Code gives the Public Utility Commission authority to make rules and regulations to govern anyone other than a utility.
13. Cooperation by the Land Company in making information available when an increase of rates is sought by the Water Company on its behalf is to be expected. This does not assure the commission of such cooperation in other circumstances.
14. To say that the Water Company, being a public utility company, could acquire the leased property through the right of eminent domain is beside the question in my opinion. Its failure heretofore to do this or to do any other act contrary to the interest of Land Company tends to confirm the existence of a tacit understanding or agreement that Water Company shall act as agent for Land Company.
15. The argument that the Public Utility Commission cannot regulate the Land Company because its income is to a major extent derived from real estate operations is also not determinative of the question. It may nevertheless be regulated insofar as it is carrying on the business of a public utility. Cf. Pa. Chautauqua v. Public Service Commission, supra.
16. The majority suggests that a decision holding the Land Company to be a public utility might result in the exemption of these facilities from real estate taxes and that this would be an unfortunate result for the local municipalities. As a matter of fact, it appears that for many years prior to 1953, the Land Company did get such an exemption because of the confusion created by the two functions which it performed. This does not seem to me to furnish a sound argument for refusing to hold that it is performing the functions of a public utility.
17. In its able and exhaustive brief, the appellant argues that an agency relation cannot be found unless
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"there has been a manifestation by the principal to the agent that the agent may act on his account, and consent by the agent so to act." Restatement (2d), Agency, § 15. But like any other facts such manifestation by the principal and such consent by the agent may be inferred from the circumstances. In other words, "... authority to do an act can be created [not only] by written or spoken words ... [but by] other conduct of the principal which, reasonably interpreted, causes the agent to believe that the principal desires him so to act on the principal's account." Restatement (2d), Agency, § 26. I agree with the lower court that the parties' conduct in this case leads to the inevitable inference that the Water Company is acting as the agent of the Land Company and that there is at least a tacit agreement or understanding between them that this should be done.
18. The fact that the Public Utility Commission or its predecessor, the Public Service Commission, has not hitherto sought to regulate the Land Company is no proof that it has not been performing public utility functions. The commission may not have thought such regulation necessary in the earlier period. The Land Company's primary interest is to develop real estate and it may have felt and may still feel that the way to attract homeowners and industries to the area is to keep the rates for water as low as possible. It may therefore have been to the Land Company's interest to keep the water rates at the minimum sufficient to maintain the service efficiently, and it may, indeed, have done so. But this does not prevent the commission from regulating it now. The Commonwealth cannot be held estopped by non-action on its part.
19. Finally, I regard as the controlling authority in this situation, not the Citizens' Passenger Railway Co. case, supra, relied upon by the majority, but Wilson v. Public Service Commission, supra, where the lease
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was held to be in reality an operating agreement, and the lessee the agent of the city which owned the facilities. This was held to be an agency agreement instead of a lease despite the facts that (1) the lease could be terminated only at the end of a ten year period; (2) the rate-making authority was not retained expressly or inferentially by the city, the owner of the facilities but by a commission of three of which the city appointed one member, the operator a second, and these two chose a third; (3) the city, as owner of the facilities, was to receive a fixed rent, not profits, whereas the operating company's fee was to vary depending upon the efficiency of management as reflected in the cost of gas and the growth of the business to be calculated according to a prescribed formula; and (4) while the contract provided for certain standards of operation, the city could not enforce these standards by directly terminating the lease or other direct action, but only through court action for liquidated damages or forfeiture upon proof of failure of the operator to comply with the standards.
There were fewer factors present in the Wilson case than are present in the case before us to warrant the finding of agency. Yet this court said, speaking through Judge KELLER: "The City of Philadelphia is still the owner of its gas plant. The plant is being operated under the contract by an agent which receives a limited compensation proportioned to its efficiency, but with a fixed maximum ..." 116 Pa. Superior Ct., at page 80. "[The] contract was ... really an operating agreement, and ... limits the compensation of the operating company to a fixed annual fee, with a limited extra payment based on its efficiency in management, and turns back all profits over and above that fee to the city either by improvements to the works or by lowering the price of gas to the public ..." Id., at page 81.
I would affirm the judgment of the court below.