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decided: December 12, 1979.


Appeal from the Orders of the Pennsylvania Public Utility Commission in case of Pennsylvania Public Utility Commission v. The Bell Telephone Company of Pennsylvania, R.I.D. No. 367.


Irving R. Segal, with him Gerard J. St. John; Schnader, Harrison, Segal & Lewis; Donald F. Clarke ; and Raymond F. Scully, for petitioner.

Charles F. Hoffman, Assistant Counsel, with him Daniel F. Joella, Deputy Chief Counsel, and George M. Kashi, Acting Chief Counsel, for respondent.

Selma A. Aloff, intervenor, for herself.

Mark P. Widoff, with him David L. Kurtz, for intervenor, Consumer Advocate.

President Judge Bowman and Judges Crumlish, Jr., Wilkinson, Jr., Rogers, Blatt, DiSalle and Craig. Judges Mencer and MacPhail did not participate. Opinion by Judge Crumlish, Jr.

Author: Crumlish

[ 47 Pa. Commw. Page 617]

The Pennsylvania Public Utility Commission, by its order of April 4, 1978, granted an increase in the annual revenues of The Bell Telephone Company of Pennsylvania amounting to $48 million. The Bell Telephone Company has appealed. The Consumer Advocate has intervened as Appellee.*fn1

The Bell Telephone Company of Pennsylvania (Bell) filed proposed tariff revisions with the Pennsylvania Public Utility Commission (Commission) on November 5, 1976, calculated to produce $137.6 million in additional earnings and $10.6 million from expense savings, at June 30, 1977 level of operations.*fn2 On November 22, 1976, on its own motion, the Commission suspended operation of the proposed revisions until July 4, 1977, and instituted investigation R.I.D. 367 to determine their lawfulness. The suspension was subsequently extended until October 4, 1977.

Hearing was set before the Administrative Law Judge (ALJ); the Commission investigation (R.I.D. 367) and certain private formal complaints were consolidated for purposes of hearing and disposition.

On September 6, 1977, after two pre-trial conferences, 12 days of non-evidentiary hearings, 43 days of evidentiary hearings, and three days of oral argument, the ALJ issued his decision recommending a tariff revision of $80.6 million of which approximately $70 million was to come from increased rates and $10.6 million from expense savings. Exceptions to the ALJ's recommendation were filed with the Commission.

[ 47 Pa. Commw. Page 618]

Oral argument on the proposed tariff revision was set by the Commission for October 7, 1977, and public meetings were held December 15 and 21, 1977, to consider the ALJ's recommendation and the exceptions filed thereto by the parties. The Commission, upon review of the record, concluded that Bell had demonstrated need for an additional pre-tax return of $38.5 million. A "short form order" outlining the Commission's findings and rate design directives was issued on December 28, 1977, the final order being entered April 4, 1978. On May 11, 1978, the Commission amended its final order and allowed an additional $9.4 million in revenues finding its original calculations in error. In sum, the Commission found Bell's need for additional pre-tax return to be $48 million, of which $38 million was to come from increased revenues and $10.6 million from expense savings. In so doing, the Commission denied $100 million of the original proposed increase.

Bell filed this appeal contesting the disallowance of $16.5 million of the $100 million.

Bell is entitled by statute to earn a fair rate of return on its investment and a rate structure which denies Bell this return is confiscatory and in violation of the Pennsylvania and Federal Constitutions. Here, the Commission has determined a rate of return of 9.65% to be fair. This is not contested by Bell; rather, it argues that the rates set by the Commission fail to provide a return of 9.65% and are thus unlawful.

The making of public utility rates requires four basic determinations:

1. The company's gross utility revenues under the rate structure examined.

2. The operating expenses including all taxes appropriately incurred to produce gross revenues.

[ 47 Pa. Commw. Page 6193]

. The rate base, which is all property which actually provides the service for which rates are charged and represents the base on which a return should be earned.

4. The rate of return, a percentage figure applied to the rate base which yields the return to which investors in the utility are reasonably entitled.

The controversy in the instant case revolves around the second and third of these determinations. With regard to operating expenses, Bell alleges four errors, each of which pro tanto would deny it a fair rate of return:

1. The Commission's disallowance of $1,714,000 of actual tax expense by the imputation to Bell of interest expense on a portion of its parent's debt.

2. The Commission's use of a three-year average of intrastate expense separation factors rather than separation factors based on test year expenses.

3. The Commission's disallowance of Bell's levelization adjustment to wage expenses.

4. The Commission's disallowance of employee discounts on local telephone service.

Regarding calculation of its rate base, Bell argues that the Commission erroneously excluded a portion of the cost of construction work in progress (CWIP) thereby grossly underestimating the investment upon which its investors are permitted a return of 9.65%.

For simplicity, each issue will be met separately. The position of the Consumer Advocate, Appellee, will be ...

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