City of Hagerstown v. Public Service Commission

Bruñe, C. J., delivered the opinion of the Court. The City of Hagerstown (the “City”) appeals from an order of the Circuit Court for Washington County entered on July 29, 1957, which denied in part a petition for review of rates fixed by an order of the Public Service Commission of Maryland (the “Commission”) dated July 10, 1957, revising to some extent a previous order dated September 6, 1956, for ¹⁰⁵ water furnished by the City to consumers outside of its corporate limits. Two questions are presented: first, was it legally permissible for the Commission to exclude from the rate base certain property of the City used or useful in the public service on the ground that such property had been donated to the City in whole or in part and should therefore be treated as contributions in aid of construction; and second, did the Commission fail to give adequate weight to the cost of reproduction new, less depreciation, in finding the fair value of the City’s property allocable to furnishing water to consumers outside of the City limits? The factual background out of which this case arises is the familiar one of the development of industry and of the growth of residential communities in suburban areas.

Demand for an adequate supply of water fit for human consumption is one of the inevitable concomitants of such development and growth. Some pertinent historical facts are set forth below. In 1878 the voters of the City declined to authorize a bond issue for the purpose of constructing a municipally owned public water supply system. Soon thereafter a corporation known as the Washington County Water Company was formed.

On May 31, 1881, it entered into a contract with the City to furnish water to the City and its inhabitants and the race between population growth and water supply went on for years, resulting in substantial increases in water supply storage capacity and in the distribution system. In 1918, pursuant to Chapter 58 of the Acts of that year (the “Enabling Act”), the City acquired the properties and contracts of the Water Company. It also acquired the problem of meeting demands for water, and the increase of the water supply and distribution facilities to meet expanding demand, of course, continued. In about 1940 or 1941 the City made its first major extension of service into a portion of Washington County lying outside the City limits.

Other county extensions have followed and in 1955 the City found itself faced with the need of making considerable further increases in its supply and distribution facilities, primarily to meet the increased suburban or county demand. The Enabling Act ¹⁰⁶ authorized the City to furnish water to any person, firm, corporation or municipality in Washington County outside of the City’s corporate limits. From the time when it took over the system from the Water Company the City has fixed the rates to be paid by consumers, whether within or outside of its corporate limits. It has consistently maintained a differential between the two, charging a higher rate to county than to city consumers.

The original Public Service Commission Law of Maryland, enacted in 1910, did not confer jurisdiction upon the Commission with regard to publicly owned water systems. Jurisdiction was conferred upon the Commission by Chapter 181 of the Acts of 1922, to fix or alter rates charged by a public body for water service supplied beyond its own boundaries, but only upon the written request of the public authorities of the other jurisdiction. Substantially the same provisions are contained in the 1957 Code, Article 78, Section 55, the first sentence of which reads as follows: “Upon written application of any county, sanitary district, or municipal corporation of this State, the Commission shall fix or alter the rates (and only the rates) for water supplied within the boundaries of the applicant by any other county or municipal corporation, as if the supplying subdivision were a water company.” (The second sentence of this Section set forth exceptions not here relevant.) These proceedings were initiated before the Commission pursuant to this Section by the County Commissioners of Washington County, and three municipalities within that County, and various individuals and corporations receiving water service in the County from the City of Hagerstown intervened. In or about November, 1955, the City proposed to increase its maximum rate to consumers outside the City limits from 36^ to 60^ per 1,000 gallons of water, but did not propose to change the maximum charge of 30^ per 1,000 gallons to customers within the City. ' (The Commission has no jurisdiction over rates charged to City consumers.) The Commission’s first order limited the increased county rate to 43^; but as a result of an order of the Circuit Court for Washington County requiring the Commission to take into con ¹⁰⁷ sideration in fixing rates the cost of certain projects (useful to county consumers) actually or substantially completed, a maximum county rate of 45 ^ was authorized by the Commission by its order dated July 10, 1957.

This order also made a corresponding revision of the Commission’s valuation of the City’s water supply and distribution system allocable to its county service, and fixed that valuation as of December 31, 1956, at $1,228,465. This was a relatively small increase over the December 31, 1955, figure of $1,200,000 which had been fixed by the order of September 6, 1956. The net increase represented the cost of property additions, less the amount of increased accrued depreciation and less the amount of increased contributions in aid of construction. The $1,200,000 starting figure as of December 31, 1955, was based upon calculations made by officials of the Commission.

It represented the cost of the County-use property less depreciation, amounting to a net figure of $1,252,545, minus contributions in aid of construction amounting to $271,277, leaving a net amount of $981,268, to which were added an allowance for working capital of $38,000, a further allowance of $8,632 for materials on hand, and an additional allowance of $172,100 apparently made as a result of the Commission’s appraisal of the factor of reproduction cost. In arriving at its valuation of the City’s property allocable to its county water service, the Commission excluded entirely costs paid by others and not by the City for the installation of service. These are briefly described in the opinion of the Circuit Court as: “ (1) the cost of water mains in various developments * * * paid for by the developers in order to secure city water service in their additions; (2) charges for fire hydrants and for connections; (3) the amount received from the Federal Government in connection with a certain W. P. A. water line project.” For the purpose of rate regulation under Section 55 of Article 78 of the Code (1957) the City is to be treated as if it were a water company within the meaning of Section 2 (ee) of that Article; and a water company is, of course, a public service company under 2 (o). The City then points to Sections 68, 69 and 72 of Article 78.

The Commission ¹⁰⁸ is authorized under Section 68 to determine just and reasonable rates of public service companies, and under Section 72 to “* * * investigate and ascertain * * * the fair value of the property of any public service company used and useful in rendering service to the public.” The City’s principal argument rests upon Section 69 which reads as follows: “ 'Just and reasonable rates’ means rates which are not in violation of any of the provisions of this article, and which will result in an operating income to the public service company, yielding, after reasonable deduction for depreciation and other necessary and proper expenses and reserves, a reasonable return upon the fair value of the company’s property used and useful in rendering service to the public.” The words which the City especially emphasizes are “a reasonable return upon * * * the company’s property.” These-words, the City contends, are applicable to its property used and useful in the public service, no matter how acquired— whether by gift, contract or purchase. The Commission’s argument is founded upon the proposition that the customers of a public service company should not be called upon to pay rates which would yield a return to the company on property for which they or others, but not the public service company, have paid. In the instant case, as we understand the facts, much of the property involved in this dispute was acquired by the City pursuant to agreements between the City and developers of real estate subdivisions, under which' the developers paid all or part of the cost of mains and hydrants and of their installation and the City agreed to furnish water to the subdivisions. We think that it makes no difference, so far as this case is concerned, whether these payments were made in the first instance by the developers or by the purchasers of lots.

We may observe in passing that we have no doubt that any such costs originally paid by the developers were-passed on to the purchasers in the form of increased prices ¹⁰⁹ for lots, and that the purchasers or their successors in interest are the persons who must pay the water rates. None oí the agreements under which the City acquired the contributed property is before us as' an exhibit, and we understand that there was no standard form of such agreements. We think, however, that their general nature is sufficiently shown. The present question has been before numerous commissions but relatively few courts.

It has been before the Public Service Commission of Maryland, but has not previously been raised in any of the valuation cases in this Court. The first Commission case to deal with it appears to have been Re Conowingo Power Co. (1935), 10 P. U. R. (N. S.) 353, in which (at p. 359) the Commission said: “The contributions required of customers for extension of lines to serve them have resulted in the acquisition of property by the company which, the Commission holds, ought to be deducted from the base upon which the customers are required to pay the company a return. It seems obviously unfair to customers to require them to pay the same rate of return on the value of property which they have been required to contribute in order to get service as upon property which the company has itself provided.” Ten years later, in Re Consolidated Gas Electric Light and Power Co. (1945), 61 P. U. R.

(N. S.) 94, the question was again raised. There the Commission said (p. 101) : “There is, naturally, a limit to the amount which the company can invest to attach a certain class of customer without imposing an undue burden on the service as a whole, and a customer who requires more than that limit is required to pay the excess. * * * The property so created is included with other fixed capital which is subject to depreciation accrual and the cost of its maintenance is charged to