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decided: December 31, 1980.


Appeal from the Order of the Pennsylvania Public Utility Commission in the case of Pennsylvania Public Utility Commission et al. v. Dauphin Consolidated Water Supply Company, Docket No. R-78050616.


William J. LeBuhn, with him Walton F. Hill, for petitioner.

John A. Levin, Assistant Counsel, with him Steven A. McClaren, Deputy Chief Counsel, and Joseph J. Malatesta, Jr., Chief Counsel, for respondent.

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

Author: Crumlish

[ 55 Pa. Commw. Page 626]

Dauphin Consolidated Water Supply Company*fn1 (Dauphin) appeals from a rate-making determination by the Pennsylvania Public Utility Commission (Commission) disallowing approximately 67% of a proposed $537,630 increase in annual operating revenues for water service. We affirm in part and remand in part.

After extensive evidentiary hearings before the Administrative Law Judge (ALJ), the Commission concluded that the test year ending January 31, 1978 necessitated a fair value finding of $12,500,000 for Dauphin's property devoted to public service and a

[ 55 Pa. Commw. Page 627]

    corresponding 7.32% fair rate of return. With a $914,939 income available for return or "fair return on fair value" and allowed operating revenue deductions of $1,853,601, including annual depreciation and tax expenses, the Commission directed Dauphin to file tariff revisions providing annual operating revenues of $2,768,540, an increase of $180,000 over existing revenues, but $357,630 less than proposed and $211,153 lower than the ALJ's recommendation.*fn2

Dauphin's appeal ranges from an attack on the Commission's fair value and fair rate of return determinations to a challenge of the operating expense findings of unaccounted-for water, purchased power, and labor-wage increases. Dauphin claims that the Commission's order is unsupported by substantial evidence and principles of law, amounts to a manifest abuse of administrative discretion, and results in an unconstitutional confiscation of property without due process of law by not allowing the company to earn a fair return on the fair value of its property.*fn3

Fair Value

Dauphin argues that the Commission's decision serves to invalidate the traditional fair value standard rate computations, ignores the impact and effects of inflation, and thereby amounts to an improper and unreasonably low valuation of utility property. We cannot agree.

[ 55 Pa. Commw. Page 628]

For public utility valuation purposes, our Supreme Court's decision in Pennsylvania Gas & Water Co. v. Page 628} Pennsylvania Public Utility Commission (P.G.&W.), Pa. , 424 A.2d 1213 (1980), sets several controlling regulatory standards. The thrust of the decision was to dispel any assumption of a constitutionally-mandated nexus between fair value and cost of reproduction or trended original cost figures. Id. at , 424 A.2d at 1221. However, P.G.& W.'s functional effect was to put the economic theories and policies underlying public utility property valuations strictly in the hands of the Commission so long as fair value was set somewhere between original cost and trended original cost. Id.

The record clearly reveals that the Commission's $12,500,000 fair value finding not only contemplated trended costs in its valuation of used and useful property but begrudgingly rejected a staff estimate based solely on the $9,218,559 original cost of plant. In fact, the Commission expressly recognized the then-judicially mandated requirement that valuation reflects trended cost methods which consider the economic impact of inflation.

Upon careful review of the record and considering the latitude now given the Commission, we conclude that the fair value set by the Commission bears "a real and substantial relationship to the regulatory objects sought to be obtained," namely, the fixing of just and reasonable value figures and corresponding rates.*fn4

Fair Rate of Return

Dauphin argues that the Commission's 7.32% fair rate of return finding is based upon an erroneous determination of the cost of common equity capital. We

[ 55 Pa. Commw. Page 629]

    must remand for an explanation of the Commission's conclusion.

Dauphin is a wholly-owned subsidiary of General Waterworks Corporation, which in turn, is a wholly-owned holding company subsidiary of I.U. International. General Waterworks supplies all of the capital requirements of Dauphin which issues only capital stock to its parent. Although no market data on Dauphin is available for this reason and the General Waterworks capital structure must serve as determinative, we stress the fact that I.U. International is the only member of the system that issues publicly traded common stock. Hence, a determination of either Dauphin's fair rate of return or common equity cost is logically based on the system's 57% debt and 43% common equity capital structure.

In evaluating the integral cost of common equity, the Commission evaluated the expert testimony taken before the ALJ on the fair rate of return components. Dauphin recommended a common equity cost rate of 13.60% and an overall 10.4% fair rate of return when applied to the "fair value rate base." On the other hand, the Commission staff advocated an 11.62% to 12.53% equity cost with an overall rate of return of 9.56% to 9.95% while the Consumer Advocate proposed an 11% to 11.5% equity cost rate with a 9.51% rate of return, both based upon an "original cost rate base." The ALJ then found a 14% cost of common equity capital with an overall 10.58% rate of return as ...

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