Appeal from the Order of the Pennsylvania Public Utility Commission in the case of Pennsylvania Public Utility Commission v. Philadelphia Suburban Water Company, No. R-79040824.
Alan L. Reed, with him Thomas P. Gadsden, Morgan, Lewis & Bockius, for petitioner.
John A. Levin, with him Gilbert L. Hamberg, Assistant Counsel, Steven A. McClaren, Deputy Chief Counsel, and Joseph J. Malatesta, Jr., Chief Counsel, for respondent.
Philip McClelland, Assistant Consumer Advocate, with him Walter W. Cohen, Consumer Advocate, for intervenor.
President Judge Crumlish and Judges Wilkinson, Jr., Blatt, MacPhail, Williams, Jr. and Palladino. Judges Mencer, Rogers and Craig did not participate. Opinion by President Judge Crumlish. Judge Wilkinson, Jr., concurs in the result only. This decision was reached prior to the expiration of the term of Judge Wilkinson, Jr.
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Philadelphia Suburban Water Company (PSWC), a regulated Pennsylvania Public Utility and wholly owned subsidiary of Philadelphia Suburban Corporation
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(Parent), filed suit in this Court asking us to set aside an order of the Pennsylvania Public Utility commission entered on February 1, 1980, disallowing $2,794,314 of a requested $4,124,940 increase designed to produce annual operating revenues of $36,757,992 for water services. Included in that disallowance is the gain realized from the disposition of two parcels of watershed property. We reverse and remand.
In the late 1920's, PSWC began the planning and later construction of the Geist Reservoir in Delaware County. The two parcels of land here in question were part of the watershed area of the reservoir,*fn1 and subsequently were included in rate base calculations which provided a return to shareholders. However, after a determination by PSWC's management that the parcels were no longer needed to provide service,*fn2 PSWC's Board of Directors declared a property dividend of the parcels and subsequently conveyed them by deed to the parent company.*fn3
In this case of first impression, we are asked to determine whether the gain received from the sale of non-depreciable watershed property deemed to be no longer used or useful in providing utility service should inure to the benefit of the ratepayer or the shareholder. In essence, we must determine whether
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the $847,500 difference between the appraised value and the original cost and transfer costs,*fn4 should be considered utility income or earned surplus for rate-making purposes. If the gain realized by PSWC's conveyance to its parent is placed "above the line" into utility income, then revenues will be increased and the rate payer will benefit from the corresponding reduced rates. Alternatively, if placed "below the line" into the utility's earned surplus, the gain will be used to either pay dividends to shareholders or invest in additional assets. Although placing these gains "below the line" will not reduce revenue requirements for ratepayers, we must conclude that the benefit, if any, would belong to the utility's shareholders.
The Commission maintains that PSWC's total operating revenue requirements have fairly and properly been determined. By adding $84,700 to PSWC's annual revenues for ten years, the Commission did not dispute that the gain on this transaction belonged to the shareholders. Rather, the Commission sought to treat the gain on the distribution of property no differently than either the utility's actual claimed losses or conceptually speaking, proposed extraordinary losses. Within these parameters, the Commission classified the gain derived ...