Baltimore Transit Co. v. Public Service Commission

Hammond, J., delivered the opinion of the Court. The Baltimore Transit Company sought permission from the Public Service Commission to increase its basic fare from seventeen cents to twenty cents, the zone fare ⁵³⁹ from eight cents to ten cents, the student fare from eight cents to ten cents, and the limited stop fare from twenty cents to twenty-three cents. After hearings which extended over sixteen months, the Commission passed its order permitting an increase in the basic fare from seventeen to eighteen cents, keeping the limited stop fare at twenty cents, and raising the two other fares as requested by the Company. The Company asked the Circuit Court of Baltimore to vacate the order and enjoin the Commission from enforcing its provisions.

The People’s Counsel and the Mayor and City Council of Baltimore, jointly, asked the court to forbid any increase in fares. Baltimore County sought the same relief as the People’s Counsel and the City. The three cases were consolidated, and heard together. The court dismissed the three bills of complaint, the effect being to affirm the order of the Commission.

Appeals were entered by the Transit Company, the People’s Counsel and the City, and Baltimore County; they will be referred to hereinafter as “the Company”, “the People”, and “the County”, respectively. The Company’s contention is that the action of the Commission was unreasonable and unlawful and amounted to confiscation of its property. The People’s basic position is that the Company’s service was so bad that no increase in fares was required by law or should have been permitted. The County says that a basic fare of eighteen cents is unwarranted and even if it were warranted, that the zone fare and the student fare should not have been raised more than one cent, so that the same ratio would be maintained between the base fare and the special fares as has previously existed.

On behalf of the Public Service Commission, the appellee, it is argued by its general counsel that the rate base used was fair and the return allowed thereon reasonable under the evidence in the case in which the increase in fares was sought and a companion case, the so-called service case, the record of which was incorporated in the fare case. It says that the evidence and the experience of the Com ⁵⁴⁰ pany combine to show that the fare allowed will provide a reasonable return in relation both to the rate base it determined to be fair and the quality of the service the Company renders, making due allowance for the difficulties under which street railways necessarily now operate, and the diligence and skill of the management, or lack of it, in meeting these difficulties. It suggests earnestly that all of the appellants should await further results under the new fares, both as to return to the Company and service to the public. The background of the service case and the setting in which it and the fare case were conducted are apparent from the record.

The inadequacies of urban mass transportation in Baltimore, as well as elsewhere, are not new. There has been a continuous decline in the number of riders. From 1945 to 1952, the decrease was approximately 41% throughout the country. In Baltimore, it was 89%.

The operators of the transit system say that the decrease in riders induces the decline in service. There are said to be five chief causes of this decline which has been accompanied by a decrease in service and popularity. The public says that the decrease in service and efficiency induces the decline in riding and public goodwill. The first of the five factors is the tremendous increase in the number and use of automobiles.

In the period referred to, automobiles in Baltimore and other cities increased about fifty percent. Nationally and locally, the number of passengers who ride on the lines of urban transit companies has decreased in the ratio that passenger car registrations have increased. The automobiles, which take away the riders from the transit systems, block the streets and, to a considerable extent, cause the conditions which lead to slow and faulty service. The second factor is the widespread acceptance of the five day week in industry and commerce.

The third is the growth of suburban areas. Decentralization of trade and suburban living has increased the use of automobiles and lessened the use of public transportation, as has the development of television. Finally, decreasing ⁵⁴¹ patronage and increasing costs have required numerous increases in fares and each increase adds to the otherwise caused steady decline in riders, a further decline, the size of which is in direct proportion to the change in the rate of fare. In 1947 the Commission conducted a hearing as to the service of the Company, which brought about improvement in some particulars.

In October, 1952, the Commission, on its own motion, ordered a further investigation of the service and facilities of the Company to determine whether it was complying with the mandate of the statute to furnish such as are “safe and adequate and in all respects just and reasonable” (Code 1951, Art. 78, Sec. 27). The service case consisted of extensive investigation by the general counsel of the Commission, testimony and exhibits of civic groups, large department stores, riders generally and the Company. Some months later, the application by the Company for increased fares was filed. Both the fare case and the service case terminated in opinions and orders of the Commission filed July 28, 1954, almost two years after the service case had started.

In its opinion in the service case, the Commission set forth that the first report of the general counsel had shown the Company to lack a sincere desire to provide good service, that schedules were unrealistic, that there was an ever present eagerness to blame inadequacies on traffic conditions, and that the program of cutting maintenance expenses had been carried to unreasonable limits. It found that traffic conditions were responsible for much of the bunching and slowness of movement of vehicles, both fixed wheel and free wheel, that some of this could be avoided by diligent and adequate supervising, and that a new peak load formula for controlling the number of passengers allowed on a vehicle should be required. It further found: “That with respect to the service now being rendered by the Company, while the service on an overall basis has improved since the investigation was ordered by this Commission, yet there remains considerable room for further improve ⁵⁴² ment * * * there has been an improvement during the past year, nevertheless, there remains much to be accomplished. It is the plain duty of the Company to improve its service and to maintain the same at a proper standard.

The Commission will insist that the Company take such steps as may be necessary to accomplish this end.” An appropriate order was entered. In the fare case, the Commission recognized, as do the parties here, that under the Maryland statutes and decisions, a regulated utility must be allowed a reasonable return on the fair value of the property used and useful in the public service. Since the decision in Federal Power Commission v. Hope Natural Gas Co., 320 U. S. 591 , 88 L. Ed. 333 , the courts of some States have felt free to abandon the fair value test. See, for example, Utah Power & Light Co. v. Public Service Commission, 152 P. 2d 542 .

This Court, in C. & P. Phone Co. v. Pub. Serv. Comm., 201 Md 170, the latest case on the subject, reached a contrary conclusion We decided there that the fair value test is explicit in the Maryland statutes, as the earlier decisions had made plain, so the ghost of Smyth v. Ames, 169 U. S. 466 , 42 L. Ed. 819 , still walks in Maryland. This being so, a finding of a fair rate báse and the setting of a reasonable return thereon are requisite.

Both the Company and the Commission took rather oblique approaches to these tasks, particularly the establishment of the fair value of the Company’s property. It may be said that while both paid due respect to the Maryland rule, actually the philosophy of the Hope case exerted its influence in that both were interested mainly in the end result. The Company seemingly had decided as a starting point that annual net operating income of $2,000,000 was needed to maintain the corporate style to which it would like to be accustomed. To show how the twenty cent fare would produce this, it exhibited pro forma statements for years ending June 30, 1954 and January 31, 1955.

These are arrived at by taking the known passenger totals, reducing them by the steady “economic decline” from factors ⁵⁴³ independent of rate of fare, estimated by one expert at 3% and by another at 4.3% a year, and again reducing them by the “resistance factor”, that is, the decline in riders which result from each one per cent increase in fare, set at from .29% to .33% by the experts. The estimated number of passengers is multiplied by the applicable fare. Next, the passenger volume is translated into vehicle miles. Finally, from the number of vehicle miles is determined the expenses of operation.

The difference between gross revenues and costs obviously is that number of revenue dollars expected to be realized from the fares as increased. Having shown by its figures that some $2,000,000 net would be produced each year by a twenty cent fare, the Company says any one of several rate bases would be agreeable to it, and at a reasonable rate of return, would support that much net income. Its book value, less book depreciation reserve, is $31,-842.000 (its book value and that used by the Commission are identical—the Commission deducts some $7,000,-000 more in accrued depreciation to reach its figure of fair value) and 6.3% on this, the lowest rate base suggested by the Company, would produce the income it asks for. Another suggested rate base would result from the deduction of $17,557,000—what an expert witness estimated to be actual existing depreciation—from book value.

This gives a rate base of $39,000,000, which would require a return of only 5% to produce the revenue sought. A third suggestion is to credit the Company’s book reserve of $25,264,000 at January 1, 1953 with $7,394,000, added to the depreciation reserve by a donation of the stockholders,—and not paid for by the public —according to the claim of the Company. This was done by a capital readjustment, whereby capital was reduced and capital surplus increased some $14,798,000 by reducing the par value of the preferred stock from $100 to $50 a share and the stated value of the common stock by about $3,000,000. On the Company’s theory, only $17,-870.000 could be deducted from book value, since the rest of the approximately $25,000,000 of the book reserve ⁵⁴⁴ has been contributed by the stockholders. ■ This process would produce approximately the same result as the second formula.

Finally, the Company offered the testimony of expert witnesses to show that the present value of its property, if book value be multiplied by appropriate cost- indices, would be from $56,000,000 to $70,000,000, which would necessitate returns of 3.6% and 2.8%,-re-spectively, to produce $2,000,000 a year. The Commission’s findings as to a fair rate base and reasonable return are largely, if not entirely, to be found in two passages of its opinion in the fare case.. It said that its auditor, “ * * * in computing the rate of return being earned by the Company, used the figure of $24,728,000 which he termed the Commission’s rate base brought down to July 31, 1953. The starting point was the minimum rate base as of December 31, 1948 mentioned by the Commission in its decision of December 21, 1948 in Case No. 4930, with adjustments for subsequent changes in the property, and, by the same method, the figures as of December 31, 1953, would be .$24,218,000.

In each instance cash working capital of $500,000, the same amount as previously allowed by the Commission, is included and allowance is made for the actual materials and supplies on hand.” The Commission then said that the establishment of fares for the applicant is not merely a matter of determining a rate base and fixing a rate of return but of keeping it in business and giving the public transportation, and finally it concluded that the fares which it allowed, * * based on the year ended May 3.1, 1954, which is the latest period for which figures are available in the records of the Commission, would have produced a return of slightly under 6% on the ‘minimum rate base’ found by the Commission in the 1948 fare case, brought down to date, which includes an allowance of $500,000 for cash working capital * * *. This computation allows for the decline in riding which results from the increase in fare * * * and if we make allowance for the economic decline as well, a return of 5% should be realized.” We take it, and the parties ⁵⁴⁵ seem to have proceeded on the same theory, that the Commission found the fair, value of the Company’s property to have been $24,728,000 as of July 31, 1953 and $24,218,000 as of December 31, 1953 (and that it would be $23,443,000 as of May 31, 1954)—a memorandum showing these figures was submitted to the lower court— and that a return on that rate base of between five and six per cent would be reasonable. Each of these bases, as has been noted, started with the minimum rate base found as of December 31, 1948 of $32,330,056. We think the language of the Supreme Court in a similar situation truly reflects the situation here. “The findings of the Commission in this regard leave much to be desired since they are quite summary and incorporate by reference the Commission’s staff’s exhibits on allocation of cost.

But the path which it followed can be discerned. And we do not believe its finding are so vague and obscure as to make the judicial review contemplated by the Act a perfunctory process.” Colorado Interstate Gas Co. v. Federal Power Commission, 324 U. S. 581 , 89 L. Ed. 1206, 1219 . The Company’s chief complaints as to the rate base are two: first, that the Commission ignored present value and relied only on historical value, and second, that it erred in its use of excessive depreciation of the rail properties. We think that a number of reasons point to the conclusion that the Commission did not act unlawully or unreasonably in following the course it did on both points.

In 1948, a sharp issue between the Company and the People’s Counsel was whether the rate base should be fair value or cost figured by indices. In 1926, the Commission, after an investigation it says was “most searching and complete” found that the fair value of the Company’s property as of December 31, 1923 was $75,000,-000, of which $5,000,000 represented value of easements and $12,500,000 overheads. Its determination was largely on the basis of reproduction cost new as of December ⁵⁴⁶ 31, 1923. The records of the Company and the Commission show subsequent additions and retirements of property.

Using these actual figures, the Commission determined a 1948 minimum rate base of $32,330,056. It found that of the rail property valued at $70,000,000, as of 1923, there remained before depreciation, property of the 1923 value of $46,191,000. This was held to be subject to depreciation of 60%. The value of that which remained, plus the bus and rail property at book value, less book reserve for depreciation, together with an allowance for materials and supplies and $500,000 cash working capital, gave the figure set by the Commission as fair value in 1948.

It expressly repudiated cost only as the basis of fair value. Reports of the P.S.C., Vol. XXXIX, p. 164. The Company acquiesced then in the rate base so found.

It now vigorously attacks the finding of the Commission that the value of the remaining rail property was only 40% of its 1923 reproduction costs. In the 1948 case, the Company produced from the same nationally known engineering and valuation firm, whose experts were relied on in the pending case, an engineer who testified that proper depreciation for rail property should be 50%. The Commission in the 1948 case said: “His reasons for his conclusion were given in detail. Although he suggests an overall allowance of 50% depreciation, a careful reading of his testimony discloses that some of the items included in the total number comprised in the rail property accounts are assigned a rate of depreciation greater than 50%.

For instance, he testified that the track accounts, representing $10,862,000 of book costs, or about 23% of the depreciable property, indicate a reserve requirement of about 58%, and that the shops and carhouses, representing $5,113,000 of book cost, or about 11% of depreciable property, indicate a 75% reserve requirement. With respect to substation equipment, representing $2,-935,000 of book cost, he testified that an age-life calculation, resting solely upon the dates of installation of the individual units and the 50-year average life equivalent ⁵⁴⁷ to the 2% rate which he adopted for accrual purposes, indicated a reserve requirement of 62%. Rates under 50% were assigned to some of the items of depreciable property. A composite rate of 50% was, however, in his opinion, the proper allowance for depreciation.” The expert for the People’s Counsel in 1948 testified that the bulk of surviving property was railway and that: “* * * its doubtful future and its economical status as affected by competing forms of transportation, together with the obsolescence and deterioration apparent in much of the property, it seems reasonable to estimate more than sixty percent accrued depreciation.” The Commission said that after considering this question of depreciation at length and after analyzing testimony of the experts: “* * * the Commission finds that depreciation should be computed on the basis of 60%.

It must be borne in mind that much of the rail property is old and antiquated and that the usefulness of some of it will soon cease to exist, that portions of it will be converted to bus lines and that some of the property represents double facilities.” It is to be remembered that while a regulatory body must consider all relevant facts and factors in determining fair value, it is not bound to accept or use any given formula or combination of formulas. C. & P. Phone Co. v. Pub. Ser. Comm., 201 Md. 170 , supra, so held, as it did that controlling effect need not be given reproduction cost or theoretical present day values of old assets.

Many cases have held that determination of fair value must reflect the reasonable judgment of the Commission, based on all relevant facts of which several only, or indeed but one, may prove to be controlling. In re N. J. Power & Light Co., 89 A. 2d 26 ; Atlantic City Sewerage Co. v. Board of Public Util. Commissioners (N. J.), 26 A. 2d 71 , affd. 29 A. 2d 850 . In New England Tel. & Tel.

Co. v. State (N. H.), 97 A 2d 213, 219, the Court adopted the language of Federal Power Com. v. Nat. Gas Pipeline Co., 315 U. S. 574, 586 , 86 L. Ed. 1037, 1050 , that: ⁵⁴⁸ “Agencies to whom this legislative power of rate-making has been delegated are free, within the ambit of their statutory authority, to make pragmatic adjustments which may be called for by particular circumstances.” See also Chicopee Mfg. Co. v. P. S. C. (N. H.), 98 A. 2d 820 ; New England Tel. & Tel.

Co. v. State (N. H.), 64 A. 2d 9 ; Georgia Rwy. & Power Co. v. Railroad Commission of Ga., 262 U. S. 625 , 67 L. Ed. 1144 ; Los Angeles Gas & Elec. Corp. v. R. R. Comm., 289 U. S. 287 , 77 L. Ed 1180; Railroad Commission of Calif. v. Pacific Gas & Elec. Co., 302 U. S. 388 , 82 L. Ed. 319 ; Panhandle Eastern Pipe Line Co. v. Federal Power Comm,., 324 U. S. 635 , 89 L. Ed. 1241, 1251 ; Colorado Interstate Gas Co. v. Federal Power Comm., 324 U. S. 581 , 89 L Ed. 1206; Market St. Rwy. v. Railroad Commission of Calif., 324 U. S. 548 , 89 L. Ed. 1171 . Much of the rate base is not seriously disputed.

It consisted of the value of buses and other fairly recent acquisitions, the cost of which reflected current values. The remaining rail property is viewed by the Company as an asset to be valued at reproduction cost today—cost today figured theoretically by indices. The Commission takes a dim view of that value, and for this there seems to be justification. Since 1948, retirements have exceeded additions.

After the fare case started a very considerable part of the rail property was given up and buses substituted. The starting point in value in 1923 for what now remains of the rail property, was then reproduction cost new, plus overheads. Some $3,000,000 of such overheads are still represented in the remaining rail property account. The Commission could have concluded from these two circumstances that the account was somewhat inflated in relation to present value.

The 1948 figures were accepted by the Company 'without appeal. Code, 1951, Art. 78, Sec. 55 (c) provides that: “All final valuations by the Commission shall be prima facie evidence of the value of said property in proceedings had in pursuance of this Article.” This is not to say that its failure to protest the 1948 value would bind or estop ⁵⁴⁹ the Company but certainly, its acquiescence in the rate base found and used by the' Commission in 1948 must be put on the scale when there is