Baltimore Gas & Electric Co. v. McQuaid

Hammond, J., delivered the opinion of the Court. The Baltimore Gas and Electric Company, on January 15, 1958, filed with the Public Service Commission proposed revision of its electric, gas and steam service tariffs designed to increase gas and electric revenues each by 6f4%, and steam revenues by 10%, estimated by the Company to produce net operating income of $4,683,000 (an actual return of 6.33% in the case of electricity, 6.07% in the case of gas, and 4.52% in the case of steam) or an overall return of 6.25%. The Com ³⁷⁶ mission suspended the proposed increases, as it is authorized to do by Code (1957), Art. 78, Sec. 70, and after an extensive hearing, entered an order on July 11, 1958, authorizing a maximum return of 6.25% which was calculated to actually produce net operating income of $4,442,000 (a return of 6.25% in the case of electricity, 6.07% in the case of gas, and 4.52% in the case of steam), or an overall return of 6.20%. The Commission found that the fair value of the Company’s property (in round figures) used and useful in the public service was $423,855,000, arrived at by adding to $391,655,000, the rate base as of December 31, 1957, the sum of $32,200,000, which the Commission found would be the value of net additions to plant in 1958.

The People’s Counsel and Baltimore City appealed to the Circuit Court No. 2, and Baltimore County and the General Services Administration of the Federal Government intervened (all four had opposed the increases sought before the Commission). The trial judge held that the statute authorized the Commission to include in the rate base only property in actual use at the time of the filing of the inquiry; and, therefore, the inclusion of prospective capital additions was erroneous as a matter of law, even though the testimony before the Commission had indicated that the nature and amount of the additions were known, and their use imminent. tion of the Commission of July 11, 1958, “to the extent that On April 1, 1959, the lower court ordered: 1. that the ac-it allows the defendant, Baltimore Gas and Electric Company the sum of $32,200,000 of projected plant in its Rate Base”, be vacated; 2. that the Commission be enjoined permanently from fixing the fair value of the property of the Company for rate making purposes in this proceeding in excess of $391,-673,457 (its value as of December 31, 1957); 3. that the Company be enjoined from collecting any rates predicated upon “the illegal inclusion in its Rate Base of the aforesaid $32,-200,000”; 4. that the Company refund to its customers all monies collected which represent rates for services predicated upon “the illegal inclusion in its Rate Base of the said $32,-200,000” (some $2,000,000). The appeal is by the Company from that order. ³⁷⁷ The testimony before the Commission permitted, almost compelled, findings that the cost of the Company’s services has remained virtually unchanged since 1930 despite the halving of the purchasing power of the dollar, the trebling of the Company’s wage rates and the doubling of its taxes per dollar of revenue, that the rates set by the Commission have failed during the twelve post-war years to produce the anticipated rate of return, and in nine of these years, if a year end rate base is used, and in six of these years, if an average rate base is used, the minimum return authorized has not been earned. Using year end rate bases, the unrecoverable revenue deficiencies below the allowed máximums amounted to $19,700,000 and below the allowed mínimums, $6,200,000, even though during the same period the Company had increased its efficiencies in utilization of labor, consumption of fuel, utilization of system intercommunication, and otherwise.

As a result there has been a definite, nationwide deterioration in investors’ regard for the Company’s common stock, which has failed to progress as compared to the stock of representative utilities throughout the country and as compared to those of the seven surrounding public utilities in Maryland, Delaware, Pennsylvania, the District of Columbia, and Virginia. Informed and experienced investors often had sold or not added to their holdings of the Company’s common stock because they could do better in other utilities. Despite this history of inadequate earnings and lessened regard by the investors, the Company must spend some $270,000,000 in the next five years to provide service for those who will call for it. This could not be done reasonably and practicably unless adequate earnings were authorized, and the Company proved it could translate authorization into realization and materially improve its earnings per share.

The average gross additions to property used and useful in the public service for each of the last five years (1953-1957) was $38,000,000. The Company proposed to spend $45,000,-000 gross in 1958. In 1954 the Commission had set a new rate base, using book value less depreciation, with working capital eliminated and material and supplies and work under construction added. A comparison of the rate base at the end ³⁷⁸ of June, 1956, and that of each subsequent month of the year, with that a year earlier, showed an average yearly increase in rate base of $31,600,000.

A similar comparison using the end of each of the months in 1957 showed an average yearly increase in rate base of $28,500,000. The rate base of approximately $391,655,000 as of December 31, 1957, was 2% above the bare depreciated cost of the property. There was expert testimony that the minimum fair value of the Company’s property as of December 31, 1957, was $575,000,000. After Judge Carter had handed down his opinion, but before the order appealed from of April 1, 1959, was issued, the Company, relying on Code (1957), Art. 78, Sec. 96 (“Any party may introduce new evidence on judicial review”), proffered testimony: (a) that during 1958 construction expenditures were made at a substantially uniform rate and up to June 30, 1958, (eleven days before the Commission’s order of July 11, 1958), it had spent $21,553,238; (b) that during 1958 the Company expended $39,946,936 on new utility plant ; (c) that the result was a 1958 year end rate base, without projection and calculated strictly in accordance with the Commission’s 1954 formula, of $418,581,854, which is only 1.2% less than the projected rate base determined by the Commission in its order of July 11, 1958, and the rate of return in fact earned in 1958 on the actual rate base was within three one-hundredths of 1% of what the Company testified before the Commission it would be; (d) that the Company’s rate base at June 30, 1958, determined without projection was $405,-937,963; (e) and that as has been true for the past thirty-five years the actual year end rate base for 1957 and 1958 included “construction work in progress”—$17,925,399 for 1957 and $26,587,036 for 1958.

Judge Carter refused to consider the proffered testimony on the ground that it was immaterial to the only issue presented as he saw it—whether the rate base set by the Commission was illegal to the extent of $32,200,000. In deciding that the rate base was illegal, the trial judge gave the words of Code (1957), Art. 78, Secs. 68 and 69, a literal, rigid and completely inelastic meaning. Section 68 says that the Commission “shall have the power to determine ³⁷⁹ just and reasonable rates of public service companies”. Section 69 provides that “ ‘Just and reasonable rates’ means rates which are not in violation of any of the provisions of this article * * * yielding * * * a reasonable return upon the fair value of the company’s property used and useful in rendering service to the public.” It was the view of the lower court that unless property was actually in service at the time of the Company’s application for rate revision, it was not “used and useful in rendering service to the public.” This narrow construction of the statute is unwarranted.

Section 69 came into the law expressly in 1955 when the legislature adopted the recommendation of the Commission to Revise and Recodify the Taws Concerning the Public Service Commission. The committee’s report of February 28, 1955, said: “Changes in phraseology of the present law are not intended to effect any change in meaning unless such intention is specifically stated in the explanatory notes” or “clear language inescapably compels a contrary conclusion.” The explanatory note to what is now Sec. 69 of Art. 78 says in part: “The text sets out explicitly and in its logical place in the statute the fundamental rate making procedure, which it has been necessary for courts to imply, under the present law, from sections on ‘valuation’ and ‘temporary rates.’ ” The legislature passed the section as the revision Commission proposed it. In Hagerstown v. Public Service Commission, 217 Md. 101, 111-112 , we noted that the provisions of Sec. 69 had been implicit in the law of Maryland before 1955 and said: “There is no indication that what is now Section 69 of Art. 78 and the closely related Sections 68 and 72 were intended to establish any new or revoluntionary method of rate-making.” (Section 72 authorizes the Commission to ascertain at any time “the fair value of the property of any public service company used and useful in rendering service to the public”.) The meaning and the concept of the words “used and useful in rendering service to the public” have been held to have a certain elasticity since the phrase first came into use. Although monies used to construct additions to plant do not actually and immediately render service to the public, interest on such monies during the period of construction long has been capi ³⁸⁰ talized and added to the rate base with approval of the courts and regulatory commissions.

Hartman, Fair Value (1920) points out that funds employed in construction draw no return prior to the date of operation and that the interest foregone during the construction period is a necessary and legitimate part of the construction expense, and at page 168 says: “Such charges represent an actual investment, used and useful in the utility business. * * * and the State Commissions, without exception, hold that within reason interest during construction is properly included in the valuation.” The cases make it clear that usually there will be included as part of the rate base either capitalization of interest during construction or the value of plant under construction, but not both since this would mean a duplication. In New England Tel. and Tel. Co. v. State (N. H.), 64 A. 2d 9, 18, 19 , the Commission in setting net book cost investment had excluded plant under construction. On appeal the Court said: “The issue presented is essentially one of fact for the commission’s determination. * * * It also appeared that interest upon unfinished construction is capitalized by the company.

In this situation, by almost universal rule, exclusion from the rate base is held proper to prevent a double return.” See also Northern States Power Co. v. Public Service Commission (N. D.), 13 N. W. 2d 779 ; Ohio Bell Telephone Co. v. Public Utilities Commission (Ohio), 3 N. E. 2d 475, 493 ; Petition of Central Vermont Public Service Corp. (Vt.), 71 A. 2d 576, 580 ; Petition of New England Tel. & Tel. Co. (Vt.), 66 A. 2d 135, 142 . Another established usage which shows that the phrase “used and useful in rendering service to the public” historically does not rigidly and literally bind the rate setting body to that which has occurred at the time of the hearing is the inclusion in the rate base of property acquired and held in anticipation of reasonable future needs but not actually in service. Such property may be included in the rate base if the regulatory body determines that its acquisition was reasonably necessary and its use may be anticipated with reasonable precision, or if, it has sometimes been held, the property is likely to be placed in service within the period for which the rates are fixed.

Pacific ³⁸¹ Tel. & Tel. Co. v. Wallace (Ore.), 75 P. 2d 942, 952 ; Southern Bell Tel. & Tel. Co. v. Railroad Comm. of S. C., 5 F. 2d 77, 94-95 (E.D.S.C.); Indianapolis Water Co. v. McCart, 89 F. 2d 522 (7th Cir.) ; New England Tel. & Tel. Co. v. State, supra (at page 19 of 64 A. 2d); Wisconsin Telephone Co. v. Public Service Commission (Wis.), 287 N. W. 122 , 156-157.

In Columbus Gas Co. v. Public Utilities Commission, 292 U. S. 398, 406 , 78 L. Ed. 1327, 1332 , Mr. Justice Cardozo made an observation which has been often referred to or quoted. He said: “There will be no need in the computation of the rate base to include the market or the book value of fields not presently in use, unless the time for using them is so near that they may be said, at least by analogy, to have the quality of working capital,” and added: “The arrival of that time * * * must be determined for every producer by the triers of the facts in the light of all the circumstances.” Conditions in recent years have persuaded regulatory agencies throughout the country to include in the rate base, as used and useful in the public service, property estimated to be in service by the end of the test year. This is on the same theory that supports inclusion in the rate base of the amount of the capitalization of interest during construction or the value of property under construction, or property owned but not in service. The conditions that have prompted this practice are inflation, attrition and regulatory lag.

Since the end of the last World War, rates designed to give a certain return did so only for a short period and then became inadequate as rising prices, wages and taxes took their toll. “Attrition” is the term applied to the reduction in the rate of earnings resulting from additions to plant at costs higher than the value of similar items in the rate base, so that the relation between rate base and rate of return deteriorates from the company’s point of view. When plant must expand rapidly and substantially to meet demands for service, as is now true in the case of the Company, and generally, the diminishing effect upon the overall rate of return is great. The