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T.W. PHILLIPS GAS & OIL CO. v. PENNSYLVANIA PUBLIC UTILITY COMMISSION (03/21/80)

decided: March 21, 1980.

T.W. PHILLIPS GAS & OIL CO., PETITIONER
v.
PENNSYLVANIA PUBLIC UTILITY COMMISSION, RESPONDENT



Appeal from the Order of the Pennsylvania Public Utility Commission in case of T.W. Phillips Gas & Oil Co. v. Pennsylvania Public Utility Commission, R.I.D. No. 351.

COUNSEL

W. Russell Hoerner, with him Vincent Butler, of Morgan, Lewis & Bockius, for petitioner.

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

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

Author: Rogers

[ 50 Pa. Commw. Page 219]

T.W. Phillips Gas and Oil Company (Phillips), a utility which furnishes gas service to the public of western Pennsylvania and which sells gas to other gas utilities for resale, has appealed from an order of the Pennsylvania Public Utility Commission allowing Phillips an increase in annual operating revenues of $2,350,000, an amount $2,565,046 less than that proposed by Phillips.

On July 1, 1976, Phillips filed Supplements No. 39 and No. 40 to Tariff Gas -- Pa. P.U.C. No. 1 and Supplements No. 17 and No. 18 to Tariff Gas -- Pa. P.U.C. No. 2, proposing increases and changes in existing rates which would yield additional annual revenues of $4,915,046. On August 26, 1976, the Commission suspended the effective dates of the proposed rates until March 1, 1977 and instituted an investigation to determine the fairness, reasonableness, justness and lawfulness of the existing and proposed rates. The test year was the twelve months ending March 31, 1976. On March 1, 1977, the Commission extended the suspension for an additional three months until June 1, 1977. On June 1, 1977, the Commission allowed Phillips to file temporary rates calculated to increase its annual operating revenues by $2,000,000. The temporary rates became effective June 2, 1977.

After seven days of hearings, the Commission concluded on September 21, 1978 that Phillips was entitled to annual operating revenues of $350,000 in excess of those which would result from the temporary rates. It therefore disallowed the proposed revenue increase of $4,915,046 and authorized Phillips to file tariff supplements which would yield an increase of $2,350,000 in annual operating revenues, an amount $2,565,046 less than Phillips had proposed. In reaching this decision, the Commission concluded, inter alia, (1) that the fair value of Phillips' property was $55,600,000

[ 50 Pa. Commw. Page 220]

    as compared with a value of $76,000,000 claimed by Phillips, (2) that a fair rate of return on such property was 9.75% as compared with a rate of 10.8% claimed by Phillips, and (3) that the amount of income tax expenses claimed by Phillips should be reduced by $547,267 to reflect the amount of taxes which would have been payable if Phillips' actual capital structure included the amount of debt considered by the Commission to be appropriate for a utility of Phillips' size. Phillips has filed a petition for review, challenging these conclusions.

Fair Value

The adjusted original cost measure of value of Phillips' properties used and useful in serving the public was $49,181,864; and the adjusted five-year trended original cost measure of value was $77,353,141. The Commission decided that the fair value rate base of the company's property was $55,600,097. The Commission reached its determination of fair value by weighting original cost and trended original cost by percentages corresponding to the percentage of debt and the percentage of equity, respectively, in the capital structure. It did not, however, use Phillips' actual debt ratio of 34.8% or its actual equity ratio of 65.2%, the use of which would have produced a fair value figure much closer to the five-year trended cost than to original cost; the Commission instead used a hypothetical debt ratio of 55% and a hypothetical equity ratio of 45%. It then made further calculations, in which the amount of original cost was factored twice but five-year trended cost factored only once, to arrive at its final determination of fair value, which happens to be 113% of original cost. The Commission's thesis for the method used is, we gather, that to the extent that the utility's properties have been funded by the issuance of securities bearing fixed interest

[ 50 Pa. Commw. Page 221]

    rates, consideration need not be given to the effect of inflation in determining interest fair value, and that a means of eliminating the effect of inflation is to weight original cost by the debt ratio. Phillips complains of the use of the weighting method, the Commission's double weighting of original cost and its use of hypothetical instead of actual debt and equity ratios.

Indeed, one might wonder why original cost should be twice factored into the calculations; or why it is appropriate to employ capital structure components in the determination of fair value where they are also used in determining rate of return; or why indeed capital structure is relevant to an inquiry into property values. None of these speculations furnish proper grounds for disturbing the Commission's determination. In Pennsylvania Public Utility Commission v. Pennsylvania Gas & Water Co., Pa. , , A.2d , (filed February 1, 1980), the Pennsylvania Supreme Court declared that where the Commission has not valued the utility's properties below their original cost or at figures in excess of their reproduction costs, but has fixed on values between these extremes, "the question is one of policy for the regulatory body concerning which the judicial branch is not warranted in interposing economic theories. Unless the PUC's decision does not bear a real and substantial relationship to the regulatory objects sought to be obtained by it, that judgment must prevail." Since the Commission has here valued the utility's properties between the forbidden extremes we may not overturn its decision because we may disagree with the theories which it believes supports its action. The ultimate regulatory objects sought here to be obtained are just and reasonable rates. We cannot say that a fair value equal to 113% of original cost and about 21% of the difference between original

[ 50 Pa. Commw. Page 222]

    and five-year trended cost does not bear a real and substantial relationship to the regulatory objects sought to be obtained and must therefore defer to the Commission's judgment.

Rate of Return

The Commission found that Phillips should be allowed a rate of return of 9.75% on the fair value of its property. It made this finding, using a ...


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