Chesapeake & Potomac Telephone Co. v. Public Service Commission

Hammond, J., delivered the opinion of the Court. Chesapeake and Potomac Telephone Company of Maryland seeks to reverse the order of court which affirmed the determination of the Public Service Commission that (a) the fair value of the Company’s assets used and useful in rendering intrastate service to the public, as of December 31, 1960, was the value the Commission had determined in the previous rate case in 1958, plus net additions in the interval, and (b) the Company needed increases in rates calculated to produce an income of 6.3% of the amount of the rate base. ³⁹⁸ The Commission’s action gave the Company less income than it sought, but it does not presently challenge the end result. Rather, it says that there was error because, in arriving at fair value, the Commission gave no weight to the testimony of the current monetary measure of its property. It seeks to have the case returned to the Commission with directions to give the Company’s evidence of fair value proper (although unspecified) weight.

The Company has a subsidiary complaint that the Commission, in calculating net operating income for rate making purposes, erred by disallowing two deductions claimed as operating expenses. It refused to give full credit for federal income tax paid by the Company since the amount paid was greater than the Company’s proportionate share of the total tax payable under a consolidated return filed by its parent corporation, American Telephone and Telegraph Company, and the Company and other subsidiaries; and it disallowed charitable contributions made by the Company. On February 11, 1958, the Commission filed its opinion and order in Case No. 5537 (the predecessor case to that now under review), allowing the Company to charge rates which would result in an increase of not more than $6,048,900 in gross annual revenues. On April 8, 1959, the People’s Counsel, alleging that the Company’s income was producing a return larger than that authorized by the order, filed a petition asking the Commission to reopen the 1958 case to determine the excess income, and to order refunds and set a revised schedule of rates.

Perhaps on the theory that the best defense is a good offense, the Company, two days later, filed a petition asking the Commission to determine the earnings necessary to provide a reasonable return on the fair value of its property. As a result, the Commission ordered that the requested investigation be instituted in Case No. 5625, the instant proceeding, and made the petition of the People’s Counsel and that of the Company a part of those proceedings. On February 25, 1960, the Commission dismissed the petition of the People’s Counsel to reopen Case No. 5537 (the 1958 case) and to recluiré the refund of any excess income. At the Company’s request formal hearings on its application for the fixing of its ³⁹⁹ rate base were not commenced until March 23, 1960.

Almost thirteen months later, on April 6, 1961, the Commission, after hearing extensive expert testimony from both sides, set the Company’s intrastate rate base at $321,185,305 as of December 31. 1960, and allowed a return thereon of 6.3%. There was authorized an amended schedule of rates which would produce an increase to the Company of not more than $458,000 in gross annual revenues. The Company filed its appeal in the Circuit Court No. 2 of Baltimore City pursuant to then Maryland Rule 1101 (now Rule B), limiting the issues on appeal to whether the Commission erred (a) in its finding of fair value, (b) in reducing the amount of income tax to be allowed as an operating expense, and (c) in disallowing the amount paid out as charitable contributions. Judge Allen resolved all issues against the Company.

The testimony offered by the Company was that the fair value of its property used in rendering intrastate service (net plant, materials and supplies), as of May 31, 1960, was $338,885,965. The appraisals were predicated on the theory that the plant was built as it actually had been over the years at wage levels, labor productivity and other cost factors prevailing in 1958. Several techniques were used. Book cost was applied to rights-of-way, plant under construction and property held for future use.

Most of the land was appraised. The price trend index method was applied to buildings, central office equipment, large private branch exchanges and underground conduits. Station apparatus and station connections were priced direct. The predominant unit method was applied to the remaining property.

The last three classes of property made up forty-five, seventeen, and thirty-six per cent, respectively (a total of ninety-eight per cent), of total value. The Company’s appraisal resulted from ten months’ study by its experienced engineers and accountants, assisted by outstanding experts, some of whom testified. The Dean of the School of Engineering of the Johns Hopkins University testified that the calculations which produced the Company’s ⁴⁰⁰ figures represented sound accounting, engineering and economic concepts and that the resulting figure indicated “conservative fair value.” The People’s Counsel produced testimony from an accountant who had specialized in utility and regulatory commission procedures (he had long experience with the Public Utilities Commission of the District of Columbia and the Public Service Commission of Maryland, and had served as consultant to other Commissions). His testimony was that the fair value rate base should be “that figure which the Commission thinks is fair, after considering all of the evidence as to original cost, reproduction cost and any other matters having a bearing on the subject.

It is purely a matter of Commission judgment. There is no formula that I am aware of with which to compute fair value.” His estimate was that the fair value of the Company’s property at December 31, 1960, was $292,481,788. He did not think the Company needed an increase in rates because “Every test shows the earnings to be more than generous. The securities of this Company are given the highest rating * * * [Dividends have been increased so that the effects of inflation have been compensated for, as they affect the stockholders, which in this case is A. T. & T.” The United States, an intervenor, offered the testimony of a qualified economist that a fair and reasonable rate of return on a measurement of net book value would be 5.85%.

The People’s Counsel produced a recognized expert in the field of utility regulation, whose elaborate, painstaking and detailed analysis made him conclude that a return of from 6% to 6.25% on a rate base that was essentially determined from original cost less depreciation would be sound and proper to allow. This witness disagreed with the technical interpretation of statistics and data of the Dean of the Johns Hopkins School of Engineering and with his conclusions. Code (1957), Art. 78, Secs. 68, 69 and 72, articulate what the decisions of this Court have previously determined. This is that the Commission in a rate case must fix “the fair value of the property of any public service company used and useful in rendering service to the public” and allow a just rate of ⁴⁰¹ return thereon, that is to say, a return which will result in as much net operating income as will yield a reasonable return on the rate base fixed.

C. & P. Telephone Co. v. Public Service Commission, 201 Md. 170 ; Baltimore Transit Co. v. Public Service Commission, 206 Md. 533 ; Hagerstown v. Public Service Commission, 217 Md. 101 ; Baltimore Gas Co. v. McQuaid, 220 Md. 373 . Section 85 (a) requires that every decision and order of the Commission in any contested proceeding shall be in writing and shall state concisely the grounds for the Commission’s conclusions. Section 97 provides that every final decision of the Commission prima facie shall be correct and shall be affirmed on appeal to the courts unless shown to be unconstitutional, or without statutory authority or made upon unlawful procedure, or arbitrary or capricious, or unsupported by substantial evidence on the record considered as a whole, or is affected by other error of law. The Company contends that the Commission totally ignored the only evidence of current value in the record and relied on net original cost plus an increment value determined on a record made ten years before which, perhaps, was reasonable then but now was no more than the use of a rubber stamp, and that this makes the Commission’s action unsupported by substantial evidence and affected by error of law.

A brief review of the prior rate cases in which the Company has been involved is necessary for a proper understanding and consideration of this contention. On March 16, 1950, the Commission decided a bitterly contested rate case (No. 4968) by finding a fair value of the Company’s property to exceed its net original cost by $2,136,172. Less than fifteen months later, the Company filed a new rate application (No. 5176) which was tried largely upon the record made in the earlier case. After weighing all of the new evidence and considering the change in the economy which had taken place since its decision was rendered in No. 4968, the Commission in 1952 determined fair value by adding $3,060,139 to net original cost.

The 1952 case came to this Court on appeal. The Company argued that the Commission had not given sufficient weight to the evidence of reproduction costs which had been ⁴⁰² presented to the Commission. This Court affirmed the Commission and sustained its use of the $3,060,139 increment to net original cost in determining fair value. At pages 182-183 of 201 Md., we said: “We come, then, to the heart of the question presented by the Company’s appeal, whether the Commission failed to give to reproduction cost the consideration required by the concept of fair value * * *.

The Company argues that its estimate of reproduction cost was. conservative and designed to meet the objections raised in the prior hearings. * * * Estimates of reproduction costs are conjectural at best, not merely because they rest on opinion, but for the obvious reason that probably no plant would ever be reproduced in its present form. Even the physical structures to replace the old would be designed, so far as possible, to compensate in efficiency and convenience for the higher construction costs. * * * In regard to plant equipment, the increased cost of reproduction would likewise be measurably offset by the technological improvements constantly discovered and introduced to meet the rising costs of labor and materials. One result is that equipment becomes obsolete before it wears out. * * * There can be no doubt that the Commission took these factors into account. In its earlier opinion, reaffirmed in the opinion filed in 1951, it said: '* * * In short, it is a theoretical reproduction of something which, as a practical matter if it did not exist, would not be produced in its present form and locations.

As this highly theoretical process has questionable probative value in times of normal and stable economy, it has even less value at the present time. * * * 'As heretofore mentioned, the Company is engaged in a major transition from manual to dial equipment. * * * These enormous changes strongly indicate that ⁴⁰³ there would be very little reality involved in undertaking to determine value from an estimate of the current cost of reproducing the entire plant.’ ” This Court went on to find the record did not justify the conclusion that the Commission had failed to give proper consideration to the evidence of reproduction costs. In the 1952 proceeding, historical cost less depreciation showed a value for the Company’s intrastate plant of approximately $115,000,000' the Company’s evidence that it was approximately $145,000,000, or 26% above historical cost, and the Commission found fair value to be some $118,000,000, which was $3,060,139, or 2.7% above historical cost. After this Court had affirmed the Commission’s action, a new application was made by the Company in 1953. 1 The Commission then found fair value by taking the fair value found in the previous year (which included $3,060,139 above net historical cost) and adding to it the net investment in plant in the interim. Similarly, in 1954, 2 the Company agreed by stipulation to accept as the fair value of its property the value determined by the Commission in 1953 plus the book value of net additions.

In 1958, the Company, again seeking an increase in income, offered evidence based upon a reproduction appraisal that the fair value of its plant was some $43,000,000 (or 17.67%) above the book value shown by the Company’s records. The Commission found fair value to be $3,060,139 above book value. 3 Thus the same method and procedure has been followed in 1952, 1953, 1954 and 1958, in that fair value has been determined to be net book value plus an increment of $3,060,139. The Company acquiesced in the determinations of fair value made in 1953, 1954, and 1958. The Company says now that this Court in 1952 justified the Commission’s use of $3,060,139 as an increment to net book cost bv deciding that the Commission had exercised its discretion to give some weight to reproduction cost, but that in ⁴⁰⁴ the present case there is nothing to show why the same figure of $3,060,139 was used and that this indicates that no weight was given by the Commission to any evidence of value except original cost.

It says that what was a judgment figure ten years ago in the 1952 proceeding today amounts to no more than an effort by the Commission to impose an original cost basis upon the Company contrary to the requirements of the statutes that fair value must be determined by the consideration and weighing of all relevant factors. We do not agree with the Company’s contention. In determining fair value the Commission is not bound to accept any one factor or method, or any particular combination of these or to accept any particular kind of evidence. Its finding of fair value must only 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,” as was said at page 547 of 206 Md. in Baltimore Transit Co. v. Public Service Commission, supra.

The Commission in the present case did acknowledge the evidence of the Company as to the value of its property in present day dollars, as is -shown by its actions in adding an increment to net book value and in increasing the rate base by using the end of the year as a test point. It chose to give no greater weight than it did to the Company appraisal of current value for the reasons which impelled it to largely reject similar testimony in 1952, an action which this Court found justified. In its opinion in the present case, the Commission said that the use of a predominantly net original cost base gave a factually determinable constant and necessitated but one variable, the proper rate of return, but if a rate base were determined by “current appraisal” or “reproduction cost” or “trended cost” which change with the impact of recessions, booms, deflation or inflation or other economic trends, two variables would be involved. The Commission went on to say that in 1958 in Case No. 5537 the Company sought to have its rate base increased by giving evidence of cost indices indicating a current value derived from “trended original cost.” The Commission then quoted its reasons for largely rejecting that evidence in the 1958 case as follows: ⁴⁰⁵ “In our opinion the determination of a rate base arrived at by the use of either ‘trended costs’ or ‘reproduction costs’ would, in today’s economy, allow the company to reap a return on dollars never invested in plant and would require customers to pay for dollars never spent.

In a reverse situation, with prices and cost declining, it could be argued that it would be equally unfair to Company to use either of these methods to establish a rate base, the result of which would be to deny the Company a return on dollars actually invested in plant. In point of fact the Company itself most vigorously opposed the use of price indices by the Commission when, some years ago, in a period of falling prices, the Commission attempted to arrive at a rate base by the trending method. The matter went to the Supreme Court of the United States and the position of the Company was sustained by the Court ( 295 U. S. 622 ) Vol. XLIX, 1958, P.S.C. of Md. Report, p. 42.” It then went on to say it had in various applications of various utilities consistently sought to offset adverse inflationary effects by its determination of a proper rate of return and by using a terminal, or year end, rate base, and that it would do so in the instant case.

The Commission then concluded its views on a fair rate base in the present case by saying: “Upon consideration of all of the evidence presented in this case we must find that the use of the rate base formerly used by the Commission in its determination of rates for this Company have produced results that have been fair and adequate insofar as the Company and its investors are concerned, and, if the results have been fair and adequate we assume that the means by which these results were accomplished were proper and reasonable. Having produced these results by the use of an original cost terminal rate base, plus the $3,060,139 increment added in 1951, it is our ⁴⁰⁶ opinion that such a base, represents the ‘fair value’ of Company’s property for rate making purposes.” The opinion of the Commission shows it gave consideration to the Company’s evidence of fair value by its discussion of the weaknesses of such evidence, its statement that there had been reliance on consideration of all the evidence in arriving at fair value and by the inferences drawn in it that previous similar rejections in large part of similar testimony had produced fair and reasonable results. The fact that the Commission gave the same dollar weight to the Company’s evidence of value—by again adding $3,060,-139 to net original cost—does not show that consideration and judgment had not preceded the use of this amount. It is scarcely arguable that actual original cost, less depreciation, is not the best evidence of the fair value of newly constructed plant and equipment, and for such new property reproduction cost (or “current appraisal”) and book value tend to coincide.

The Company has spent very large amounts in additions to its plant and equipment over the past ten years, and the proportion of new property and equipment in relation to the total thereof has constantly increased. In the 1952 case, the net “reproduction cost” of plant exceeded net original cost by over 26%, while in this case “current appraisal” exceeds net original cost by only 13%. The increment of $3,060,139 is a substantially