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decided: May 27, 1975.


Appeal from the Order of the Pennsylvania Public Utility Commission in case of In Re: Pennsylvania Public Utility Commission v. White Deer Mountain Water Company, R.I.D. 34.


Ernest R. vonStarck, with him, of counsel, Morgan, Lewis & Bockius, for appellant.

Philip R. Mann, Assistant Counsel, with him Edward Munce, Acting Counsel, for appellee.

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 294]

This is an appeal filed by Keystone Water Company -- White Deer District (formerly and during the entire record made herein known as White Deer Mountain

[ 19 Pa. Commw. Page 295]

Water Company, hereinafter referred to as Keystone) from an order of the Pennsylvania Public Utility Commission (PUC), dated April 17, 1974, setting forth findings of fact and conclusions of law concerning a proposed rate increase by Keystone. The Commission's order contains complicated facts, statistics, and data such as are normally involved in a public utility rate case.

This case had its genesis on April 29, 1969, when Keystone filed an amendment to its tariff providing for increases in all metered water rates, except public fire protection. After hearings the PUC issued its long-form order, dated September 28, 1971, which order was appealed by Keystone to this Court at Nos. 934 and 941 C.D. 1971, apparently because the PUC had excluded from its findings of fair value the cost of a new filtration plant (the same issue which is the subject of the instant appeal). Upon request of the PUC, the case was remanded for the purpose of taking further evidence. At the subsequent hearing it was agreed among all the parties that the record should have incorporated into it the entire record made in the prior proceedings. As a result of these developments, on August 31, 1972, Keystone filed a further supplement to its tariff proposing certain changes under which it proposed to increase its annual operating revenues by $415,477, approximately a 48 percent increase, based upon the level of its operations for the test year ending April 30, 1972. The PUC suspended the effective date of the proposed changes to August 22, 1973, after which time Keystone collected under the proposed rates as temporary rates subject to refund. Because of the very narrow issue presented by this case, we need not go into all the details of the PUC's adjudication except to note that the final order permits a total annual increase in revenues of $365,450 from Keystone's 7,400 customers in Union and Northumberland counties.

To understand the narrow issue involved in this case, it is necessary to describe Keystone's operation. For almost

[ 19 Pa. Commw. Page 29675]

years, one of the three sources of water for Keystone was the White Deer Creek watershed (watershed). The area of the watershed above Keystone's intake point is approximately 37 square miles. The watershed was almost entirely forest land and Keystone owned about 1,300 acres in fee. Approximately 10 percent of the watershed is owned by the Commonwealth and is maintained as state forest land. For the remaining 90 percent, Keystone holds deeds granting water rights dating back to about 1902, wherein it is stated that Keystone has the complete control and use of all the waters and even the right to enter upon the lands at all times for the purpose of maintaining its supply of water. This water was so pure that it required no treatment other than the minimal chlorination required by the Department of Health for all public water companies. In 1959 Keystone became aware that the Commonwealth proposed to construct Interstate Highway I-80 through the valley of the White Deer Creek.*fn1 Keystone advised the Pennsylvania Department of Transportation (PennDOT) of the danger to its water supply but was unsuccessful in attempting to have I-80 rerouted so as not to touch the watershed. As a result of long, involved negotiations with PennDOT concerning Keystone's condemnation rights, an understanding was reached and reduced to a written agreement dated July 18, 1966. It is well to note at this point that the PUC was not in any way involved in these negotiations.

The July 18, 1966 agreement includes the following provisions:

"Whereas, the construction and improvement of Sections 74, 75 and 76 of said State highway will require the taking by Commonwealth for highway purposes of approximately one hundred thirty (130)

[ 19 Pa. Commw. Page 297]

    acres of the said lands belonging to the Company and will seriously impair the water rights over the balance of the Company's land in said watershed area required for the protection of the waters of White Deer Creek ; and,

"Whereas, it has been agreed between Commonwealth and the Company that the just compensation, to which Company is entitled by reason of said taking of its land, the impairment of its water rights as aforesaid and the cost to insure the continuance of the supply of potable water to the said communities which Company serves, is one million three hundred thousand ($1,300,000.00) dollars, which is to be made payable in accordance with the terms and conditions hereinafter set forth in this agreement." (Emphasis added.)

The agreement sets forth that the Commonwealth would acquire by deed 130 acres of land owned by Keystone.*fn2

Our review of this agreement permits us to conclude that PennDOT was negotiating a settlement under condemnation principles. In the agreement Keystone agreed "at its own cost and expense" to commence the preparation of plans and designs for construction of necessary filtration facilities to insure the continued purity of the water in White Deer Creek. The filtration plant was to be constructed within about 15 months. The Commonwealth of Pennsylvania was to pay Keystone the $1,300,000, immediately upon receipt of the executed deed for

[ 19 Pa. Commw. Page 298]

    the 130 acres of land and notice that Keystone had awarded a contract for the construction of the filtration facilities. PennDOT agreed that it would not commence construction of the highway, so as to affect the watershed, until the filtration plant was in operation. After settlement, which was made March 30, 1967, the company signed a "Receipt and Acquittance" in which it acknowledged receipt of the money "for the taking" of the land, "for the impairment of its water rights within the water shed area," and "for insuring the continuance of the supply of potable water to the communities served by it."

The new filtration plant went into service in the spring of 1968, and its final construction cost was $1,100,000. The record indicates that there were additional costs, but these were not specifically stated. In any event, both the PUC and Keystone agree in their argument that $1,300,000 was utilized by Keystone for this purpose and so we will accept that figure. The record also shows that the annual operating expense of this plant amounts to approximately $50,000 a year. There was no provision in the agreement between Keystone and PennDOT concerning the operating expenses.

This bit of background is necessary for the reason that in the rate case adjudication (both September 28, 1971 and April 17, 1974) the PUC excluded $1,292,347 from the fair original cost and fair value of Keystone's plant which amount represents the $1,300,000 less the PUC's allowance of $2,609 representing its finding of the value of the 130 acres taken, plus $5,044 of other expenses. In other words, the PUC removed $1,292,347 from the rate base of Keystone for ratemaking purposes. We note that although the PUC, in its adjudication, states that it removed this amount from the fair value, technically that is not correct. They, in effect, removed it from original cost, which is only one of several criteria utilized for determining fair value. As a result of this adjustment, the PUC also disallowed approximately

[ 19 Pa. Commw. Page 299]

$12,000 a year in annual depreciation based upon the original cost of the filtration plant in question.

The Commission's reasoning was that, based upon equitable principles, it could not "permit . . . [Keystone] to receive all of the salutary effects of the land condemnation and pass them on to the stockholders while passing on all of the deleterious effects of the condemnation to the rate-payers." The PUC garnered from the terms of the agreement of July 18, 1966 an intent on the part of PennDOT to benefit the consumers of Keystone. The PUC stated:

"Indeed, it is obvious from the terms of the agreement . . . that the major consideration was the need to insure the potability of . . . [Keystone's] White Deer Creek source of supply."

It concluded that with the exception of the minimal amount of dollars represented by the value of the land (which is non-depreciable for accounting or rate-making purposes) and minimal expenses, the balance of the $1,300,000 was for "consequential damages to the ratepayer's service." While counsel for the PUC makes an appealing argument that the rate payers are asked to pay twice for this property, once through the condemnation settlement and once through rates, upon complete analysis, the argument cannot be supported legally and, therefore, we believe the order of the PUC must be reversed.

We have stated many times that this Court's scope of review is limited both by statute and prior case law. Section 1107 of the Public Utility Law (Act), Act of May 28, 1937, P.L. 1053, as amended, 66 P.S. ยง 1437, provides in pertinent part:

"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 finding, determination, or order of the ...

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