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PENNSYLVANIA PUBLIC UTILITY COMMISSION COMMONWEALTH PENNSYLVANIA v. PENNSYLVANIA GAS AND WATER COMPANY (WATER DIVISION) (05/27/75)

decided: May 27, 1975.

PENNSYLVANIA PUBLIC UTILITY COMMISSION OF THE COMMONWEALTH OF PENNSYLVANIA, APPELLEE,
v.
PENNSYLVANIA GAS AND WATER COMPANY (WATER DIVISION), APPELLANT. COMMONWEALTH OF PENNSYLVANIA, PENNSYLVANIA PUBLIC UTILITY COMMISSION, APPELLEE, V. CITY OF SCRANTON, APPELLANT, PENNSYLVANIA GAS & WATER CO., INTERVENING APPELLEE, CARBONDALE AREA SCHOOL DISTRICT, INTERVENING APPELLANT. COMMONWEALTH OF PENNSYLVANIA, PENNSYLVANIA PUBLIC UTILITY COMMISSION, APPELLEE, V. COUNTY OF LACKAWANNA, APPELLANT, PENNSYLVANIA GAS & WATER CO., INTERVENING APPELLEE, CARBONDALE AREA SCHOOL DISTRICT, INTERVENING APPELLANT



Appeal from the Orders of the Pennsylvania Public Utility Commission in case of Pennsylvania Public Utility Commission v. Pennsylvania Gas and Water Company, Water Division, Rate Investigation Docket No. 72; City of Scranton v. Pennsylvania Gas and Water Company -- Scranton Water Division, Complaint Docket No. 19850; and County of Lackawanna v. Pennsylvania Gas and Water Company -- Scranton Water Division, Complaint Docket No. 19868.

COUNSEL

Charles E. Thomas, with him D. Mark Thomas, Jack F. Aschinger, and, of counsel Metzger, Hafer, Keefer, Thomas and Wood, for appellant-intervening appellee, Pennsylvania Gas and Water Company.

Dominic J. Ferraro, Assistant Counsel, with him Edward Munce, Acting Counsel, for appellee.

W. Boyd Hughes, Assistant Solicitor, City of Scranton, with him James J. Ligi, Solicitor, Lackawanna County, and William J. Purcell, for appellants, City of Scranton, and County of Lackawanna, and for intervening appellant, Carbondale Area School District.

President Judge Bowman and Judges Crumlish, Jr., Kramer, Wilkinson, Jr., Mencer, Rogers and Blatt. Opinion by Judge Kramer. Judge Wilkinson concurs in the result only. Dissenting Opinion by Judge Blatt.

Author: Kramer

[ 19 Pa. Commw. Page 217]

This opinion involves three appeals taken from a long-form order, dated July 9, 1974, issued by the Pennsylvania Public Utility Commission (PUC). The PUC order is typical of the extensive, complicated, and technical adjudication usually involved in a public utility rate case. The pertinent procedural and factual aspects of the case, together with the parties involved in this appeal, will be described hereinafter.

The public utility involved is the Pennsylvania Gas and Water Company (PG&W). It is a combination public utility*fn1 rendering both natural gas service and water service. At the end of the test year, September 30, 1972, it rendered public utility water service to 145,726 consuming units, in a 165 square mile area, stretching from Forest City in Susquehanna County on the north, to Glen Lyon in Luzerne County 70 miles to the south. Its water service area incudes 60 municipalities, including Scranton and Wilkes-Barre. Its service area is divided into two divisions, viz., Spring Brook Division, and Scranton Division, which, for all practical purposes, are

[ 19 Pa. Commw. Page 218]

    not interconnected. It supplies water service from over 60 reservoirs and various water wells situated in mountainous regions, and operates for the most part on a gravity-flow basis, with a storage capacity of over 21 billion gallons. PG&W transmits its water through 1,600 miles of water mains.

This case had its beginning on January 30, 1973, when PG&W filed various supplements to its tariffs under which it proposed to increase its water rates so as to produce a total annual increase in revenue of $4,870,103, or approximately a 50 percent increase over the then existing rates, exclusive of the state tax adjustment surcharge.*fn2 All of the filed supplements were to become effective April 1, 1973, but they were subsequently and voluntarily postponed, to become effective April 12, 1973. The increased rates were to affect all of its customers, except municipalities and public fire-protection consuming units. Some of the supplements, calculated to produce $2,213,683 of additional revenue, were permitted to become effective April 12, 1973. The remainder of the supplements were suspended by the PUC for the full statutory suspension periods of nine months, to January 12, 1974. PG&W voluntarily extended the suspension period

[ 19 Pa. Commw. Page 219]

    to March 15, 1974. On March 14, 1974, the PUC fixed the then effective rates of that date as temporary rates, until final order.

Twenty-three formal complaints were filed, all of which were consolidated for the purpose of the hearings. Three of the complaints were withdrawn or dismissed. From a reading of the record we can state that in reality only the City of Scranton and the County of Lackawanna (hereinafter referred to as complainants) actively participated at the hearings. After 13 days of hearings (over 1,300 pages of testimony and 32 exhibits), the PUC issued its long-form order from which came these appeals.

In its adjudication, the PUC found a fair value of $102,000,000 and a fair rate of return of 7.35 percent, thus providing income available for return in the amount of $7,497,000. This return, together with the PUC's findings on operating expenses, depreciation, taxes, and other adjustments set forth in the adjudication, led the PUC to conclude that the allowable annual revenues were $13,491,929, or $628,318 less than the total revenues sought by PG&W in its filings of the various supplements to its tariff mentioned above.

PG&W, the City of Scranton and the County of Lackawanna filed separate appeals to this Court. PG&W filed a petition to intervene in the appeals of the City and the County which was granted by this Court, after which all of the appeals were consolidated for disposition. On September 11, 1974, the Carbondale Area School District filed a petition to intervene, which was granted on that same date. However, PG&W filed a motion to quash the intervention by the school district as an appellant for the reason that the school district had not filed a timely appeal. Argument on the motion to quash was listed at the consolidated argument. Preliminarily, we will dispose of the motion to quash by stating that a party to an administrative proceeding with the right to appeal may not utilize a petition to intervene to obviate the statutory

[ 19 Pa. Commw. Page 220]

    time limit on appeal, and this Court is powerless to extend the mandatory statutory provisions. See Pittsburgh v. Pennsylvania Public Utility Commission and Duquesne Light Company, 3 Pa. Commonwealth Ct. 546, 284 A.2d 808 (1971) and Smith v. Pennsylvania Public Utility Commission, 174 Pa. Superior Ct. 252, 101 A.2d 435 (1953). Therefore, we must grant the motion to quash.

Because these three appeals have been consolidated, we will deal with each of the issues raised in the various appeals under appropriate subtitles hereinafter.

Our scope of review is limited by statute. In section 1107 of the Public Utility Law (Act), Act of May 28, 1937, P.L. 1053, as amended, 66 P.S. ยง 1437, we find:

"The order of the commission shall not be vacated or set aside, either in whole or in part, except for error of law or lack of evidence to support the findings, determination, or order of the commission, or violation of constitutional rights."

We have stated in a recent opinion that this section of the statute means that the appellate courts cannot conceive an independent judgment from the record, and substitute it for the judgment of the PUC. We may not indulge in the process of weighing evidence and resolving conflicts in testimony. The PUC's discretionary findings and conclusions must be accepted unless they are totally without support in the record, are based on error of law, or are unconstitutional. See Lower Paxton Township v. Commonwealth of Pennsylvania, Public Utility Commission, 13 Pa. Commonwealth Ct. 135, 317 A.2d 917 (1974) and Johnstown-Pittsburgh Express, Inc. v. Public Utility Commission, 5 Pa. Commonwealth Ct. 521, 291 A.2d 545 (1972). With these guidelines in mind, we now turn to the specific issues raised in these three appeals.

I. RATE BASE EXCLUSION

To understand the issue involved here, it is necessary to set forth some pertinent facts. At some time prior to

[ 19 Pa. Commw. Page 2211969]

the Commonwealth of Pennsylvania, acting through its Department of Highways (now known as the Pennsylvania Department of Transportation and hereinafter referred to as PennDOT), proposed to construct portions of Interstate Route 81-E and Interstate Route 84 through a portion of PG&W's service area, rendering "useless" one of PG&W's reservoirs and the Roaring Brook watershed. The proposed action directly affected approximately 13 square miles of watershed used to deliver water to PG&W's customers. The effect of PennDOT's construction would have destroyed, for all practical purposes, the water supply then existing for the City of Scranton. As a result of years of negotiations between PennDOT and PG&W, on October 21, 1969, they entered into an agreement setting forth a compromise on the reimbursement by PennDOT to PG&W for the expected damages to its water supply system. Under this agreement PG&W was paid $2,754,753.56. The determination of the damages paid was based upon what is known as a "cost-to-cure" method, i.e., the estimated cost to replace the company's water supply facilities rendered useless as a result of the proposed highway construction. The agreement specifically set forth that $1,703,103.56 represented the cost of the construction of pipeline facilities and $1,051,650 for the cost of construction of a new dam and reservoir to substitute and replace the facilities taken by the proposed highway construction. The record indicates that PG&W constructed 32,000 feet of 30-inch pipeline, and a 1.3 billion gallon capacity reservoir, and that these new facilities created additional supply capacity over and above the capacity of the facilities actually rendered useless by the PennDOT construction. PG&W invested an additional $243,202 in the pipeline construction, and $4,122,290 additional funds for the new reservoir. In other words, PG&W used all of the monies paid under the agreement by PennDOT for new facilities, and as a result of the entire transaction, spent substantial additional sums.

[ 19 Pa. Commw. Page 222]

Based generally upon equitable principles, the PUC termed the payment by PennDOT as a contribution or "contributed property" and concluded that it would disallow from the original cost measure of value $2,558,634, which is the amount deemed to be the net figure, after deducting PG&W's unrecovered investment in plant resulting from the transaction. The end results of this deduction from the rate base were (1) that PG&W was not permitted to earn anything on the dollars of investment in plant, used and useful in the public service, which the PUC characterized as having been "contributed" by PennDOT; and (2) the incomprehensible inclusion in the rate base of $196,120, representing the unrecovered investment in plant no longer in service. Annual depreciation allowance was likewise affected.

PG&W, in its appeal to this Court, contends that the PUC erred in excluding this investment in plant from both the company's original cost measure of value and the fair value determination, and in ordering such part-payment of PennDOT to be accounted for as a contribution in aid of construction for accounting and rate-making purposes.

This very same issue was presented to this Court in Keystone Water Company, White Deer District v. Pennsylvania Public Utility Commission, 19 Pa. Commonwealth Ct. 292, 339 A.2d 873 (1975), the opinion for which is filed simultaneously herewith. In Keystone the sole issue was whether the PUC could exclude from the rate base monies paid by PennDOT as damages for the taking of part of the property of a public utility when the monies received were reinvested in plant used and useful in the public service. We there held that it was error for the PUC to exclude such plant from the rate base. Everything we said there is equally applicable here, and there is no need to repeat the principles upon which we based our holding. If there is any distinction between Keystone and this case, it is that this case is stronger since here PG&W

[ 19 Pa. Commw. Page 223]

    was forced to secure a new source of water supply and expend considerable sums of money, in addition to the payment made by PennDOT, to provide an equivalent or better source of supply and facilities for service to its customers. Once again, referring to the principles we set forth in Keystone, we summarize our disposition of this issue by stating (1) that the agreement between PennDOT and PG&W dated October 21, 1969, was legally the payment of damages for property taken by PennDOT, even though the determination of those damages was based upon a cost-to-cure basis; (2) that the damages paid under that agreement and the facilities built therewith are solely the property of the stockholders of PG&W in which neither the public nor PG&W's customers have any property interest; (3) that for rate case purposes the source of the funds utilized in the construction or purchase of plant devoted to the public service of a public utility is irrelevant, unless such monies are purely donations, contributions in aid of construction, or customers' advances for construction (which the monies here in question are not); (4) that plant used in the public service by a public utility obtained and financed by damage payments for property taken to permit highway construction must be included in the rate base; (5) that annual depreciation must be allowed on such plant; and (6) that under the facts of this case and the facts of Keystone and the provisions of the uniform system of accounts for water utilities, the amount of money received as damages by PG&W from PennDOT in excess of the dollars representing the undepreciated property actually taken should be accounted for by PG&W in account 401 entitled "Miscellaneous Credits to Surplus." For a complete understanding of our holding on this issue, the reader is referred to our opinion in Keystone, supra. As a result of our holdings, this matter must be remanded to the PUC for a redetermination of the rate base so as to include the $2,558,634 in original cost, and

[ 19 Pa. Commw. Page 224]

    determine the effect of its inclusion on any other measures of value utilized by the PUC in determining fair value. In addition the PUC's allowance for annual depreciation will have to be increased accordingly.

At this point we should mention that the complainants mistakenly contend, in an issue arising from the fair value determination of the PUC, that somehow the PUC failed to exclude this PennDOT payment from its determination of fair value. Our careful reading of the PUC's adjudication permits us to conclude that the PUC did exclude the PennDOT payment from all measures of value, including fair value.

II. FAIR VALUE

PG&W presented evidence that its total net original cost for both divisions amounted to $68,288,857. The PUC accepted this evidence, with the exception of the so-called "contributed property" mentioned above. On the basis of the average of measures of value at depreciated original cost, and trended original cost depreciated at five-year average prices, PG&W contended that the fair value of its plant should be $123,184,391 and, in addition, based upon its claim for an increase in value based upon the current inflation, it contended that a fair value of $130,000,000 would be more realistic. Complainants contended that the maximum fair value should be $91,900,000, and their contention was based upon a weighting of original cost and trended original cost at five-year average prices, based upon the capital structure ...


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