Court Opinion

ID: 6282245
Source: CourtListenerOpinion
Date Created: 2022-02-18 16:32:49.898935+00
Date Added: 2024-06-11T09:00:13.981351
License: Public Domain

*29Dissenting Opinion by
Rhodes, P. J.:
I dissent from the majority opinion which affirms the order of the Pennsylvania Public Utility Commission in this contested rate case. The record should be returned to the Commission for complete review, and especially that the Commission may make adequate findings supported by evidence on at least two matters: (1) Transactions between the utility and affiliates; and (2) rate of return. To comprehend these questions it is important to review the basic facts relating to this appeal by ratepayers.
The appeal is from the final order of the Commission dismissing complaints against an increase in rates requested under tariff supplements filed by the Commonwealth Telephone Company on November 10, 1952. These supplements increased local exchange service rates of 22,395 subscribers. The increase was 39 per cent in local service revenues at the level of subscribers served at September 30, 1952. The increases range from 35.71 per cent for class A, two-party residence, to 60 per cent for class E, one-party residence. Complaints against the increased rates were duly filed by ratepayers. The tariffs were suspended by the Commission, which, after hearings, rendered its report and order sustaining the increases on November 9, 1953.
The present Commonwealth Telephone Company was incorporated September 27, 1950, to effect the merger of Commonwealth Telephone Company, Luzerne Telephone Company, and Bradford County Telephone Company. As a result of the merger, Commonwealth serves all or parts of the counties of Luzerne, Lackawanna, Wyoming, Bradford, Sullivan, Susquehanna, Columbia, and Schuylkill. Of the total issue of Commonwealth’s common stock of 107,365 shares, 102,117 are owned by former State Senator Andrew J. Sordoni, presently Secretary of Commerce, members *30of Ms family, and Public Service of Pennsylvania, Inc., which is owned by Sordoni. The entire issue of Junior Preference Stock is owned by Sordoni and Sordoni Construction Company, the latter company solely owned by Sordoni. For the years 1948 to 1952, inclusive, Commonwealth contracted for construction work and additions to its plant amounting to $4,500,000. All of the construction work was performed by Sordoni Construction Company without any competitive bids having been obtained by Commonwealth. In addition, Commonwealth has a management contract with Public Service and has had numerous dealings with other companies wholly owned by Sordoni whereby these companies supplied Commonwealth with materials and supplies. The propriety and reasonableness of these transactions, which are reflected in the rate base and in operating expenses, have been seriously questioned on this appeal.
The engineering and accounting firm of Day and Zimmerman, Inc., had been employed by Commonwealth during 1950 preparatory to filing an increase in rates at that time, and that firm reported that, as of January 31, 1951, Commonwealth could not justify any increase in its rates.
Transactions With Affiliates. The law regarding transactions between affiliated companies in public utility rate cases is well defined. “Charges arising out of intercompany relationship between affiliated companies should be scrutinized with care (Johnsonburg v. P. S. C., 98 Pa. Superior Ct. 284, 291; Chambersburg Gas Co. et al. v. P. S. C., 116 Pa. Superior Ct. 196, 226, 176 A. 794); and if there is an absence of data and information from wMch the reasonableness and propriety of the services rendered and the reasonable cost of rendering such services by the servicing companies can be ascertained by the commis*31sion, allowance is properly refused (New York State Electric & Gas Corporation et al. v. P. S. C. et al., 245 App. Div. 131, 281 N.Y.S. 384, 274 N.Y. 591, 10 N.E. 2d 567, 275 N.Y. 534, 11 N.E. 2d 736; Smith v. Illinois Bell Telephone Co., 282 U. S. 133). . . .
“The desire of public utility management, evidenced by various methods, to secure the highest possible return to the ultimate owners is incompatible with the semi-public nature of the utility business, which the management directs. It therefore follows that the commission should scrutinize carefully charges by affiliates, . . .”: Solar Electric Company v. Pennsylvania Public Utility Commission, 137 Pa. Superior Ct. 325, 374, 9 A. 2d 447, 473. See, also, Scranton-Spring Brook Water Service Co. v. Public Service Commission, 119 Pa. Superior Ct. 117, 142, 181 A. 77; section 701 (a) and (c), Act of May 28, 1937, P. L. 1053, 66 PS §1271; Schuylkill Talley Lines, Inc., v. Pennsylvania Public Utility Commission, 165 Pa. Superior Ct. 393, 405, 406, 68 A. 2d 448.
A management contract was entered into between Public Service and Commonwealth on October 11, 1928, providing that, effective March 1, 1928, Public Service would receive a management fee of 5 per cent of Commonwealth’s gross revenue. As of October 1, 1951, this management fee was reduced to 2% per cent of gross revenue. The record also shows that, as of September, 1952, the management fee of Public Service was fixed at $3,000 per month. Public Service maintained its office with Sordoni Construction Company and admittedly had no physical assets whatsoever. Prior to October 1, 1951, Public Service had no payroll, and, so far as the record shows, rendered no definite or specific service to Commonwealth. Prom October 1, 1951, to October 1, 1952 (the base year), Commonwealth paid Public Service $38,297.77, which *32was reduced-for future years to $36,000. The record, establishes that, of the $36,000 paid to Public Service, only $10,900 was paid out in salaries. It nowhere appears what costs in excess of salaries were incurred by Public Service. The question involved is whether or not sufficient evidence was presented by Commonwealth .to show the propriety of this charge as an operating expense. The burden of proof is on the utility to show that the payment was not excessive in view of the benefit or advantage accruing to the utility and in turn to the public by the management contract. Dayton Power & Light Co. v. Public Utilities Commission, 292 U. S. 290, 54 S. Ct. 647, 78 L. Ed. 1267, 1279; Schuylkill Valley Lines, Inc. v. Pennsylvania Public Utility Commission, supra, 165 Pa. Superior Ct. 393, 68 A. 2d 448; Solar Electric Company v. Pennsylvania Public Utility Commission, supra, 137 Pa. Superior Ct. 325, 9 A. 2d 447. It is apparent that transactions between affiliated companies complicate the task of rate making. Buyer and seller in such circumstances may not be dealing at arm’s length, and the price agreed upon between them is likely a poor criterion of value. American Telephone & Telegraph Company v. United States, 299 U. S. 232, 57 S. Ct. 170, 81 L. Ed. 142, 149; Scranton-Spring Brook Water Service Co. v. Public Service Commission, supra, 119 Pa. Superior Ct. 117, 181 A. 77. A public utility must use all its receipts as a public trust and cannot dissipate them in an effort to secure further increases from the public. The Commission, in cases such as this, has not only the prerogative but also the duty to require full disclosure under legislative mandate to protect the public interest. City of Fort Smith v. Southwestern Bell Telephone Co., 220 Ark. 70, 247 S. W. 2d 474. A commission should evidence a continuity of concern for the public when dealing with those businesses affected with a public interest.
*33On March 1, 1952, certain motor vehicles (fifty-three) were transferred from Sordoni Construction Company to Commonwealth at a depreciated hook value of $55,529.71. The validity and the reasonableness of this transaction are likewise questioned. The Commission, without any evidence on the subject, assumed the transfer price was reasonable, relying upon and making reference to an alleged general commercial practice to transfer property between affiliates at book value to avoid the problem of taxable gain or loss. Proof of a general practice in making transfers between affiliates, subject to tax considerations, is no proof whatever that the transfer was made at a fair market value for utility rate case purposes. • There were many other transactions with affiliates in this ease where the prices paid were not shown to be fair and reasonable for rate case purposes. Among these was a charge of $34,000 for additions and alterations to the Montrose Inn, at Montrose, Pennsylvania, where one of Commonwealth’s exchanges was located. Although Commonwealth was but a lessee of space in the Inn, the alterations were charged to Commonwealth’s plant account and allowed by the Commission. Mont-rose Inn is owned by Montrose Inn, Inc., which in turn is owned by Sordoni.
It is apparent that on this record evidence is entirely lacking in many instances to support the reasonableness of these transactions and charges by affiliates, and the utility failed to meet its burden of proof in this respect. The Commission’s allowance of such items was not warranted by the evidence. Under the law it was the duty of the Commission to scrutinize these transactions, and the utility had the burden of proving the prices paid were reasonable. The Commission here wholly misconceived its duty in this respect and treated the lack of evidence as though it were *34positive evidence. The majority opinion is also basically erroneous when it assumes lack of evidence is the equivalent of affirmative proof. The majority opinion states : “There is no evidence that the amounts [paid to affiliated interests] are excessive or unreasonable.” Again it says: “The fact that the work was done and a profit made by an affiliate raises only the necessity of close scrutiny of the transactions which, in the absence of evidence, we can presume was given by the Commission.”
The majority opinion further states: “This Court will not go into the question of inventories or supplies where evidence of flagrant disregard of reason in stocking of materials is absent.” It is significant that Commonwealth’s inventory rose from $298,988 to $438,-823 from the end of 1950 to the end of 1951. The Commission reduced Commonwealth’s claim for materials and supplies from $513,426 to $475,000. However, if, as stated by the majority, much of this allowance is to cover expansion as well as current maintenance requirements, then consideration should be given by the Commission to the prospective return from such expansion. This was not done.
Upon review this Court may scrutinize the facts upon which the order is based for the purpose of determining whether or not the findings have been arbitrarily or capriciously made. The findings of the Commission must be sufficiently definite and detailed to enable the reviewing court to determine the controverted questions. Aizen v. Pennsylvania Public Utility Commission, 163 Pa. Superior Ct. 305, 60 A. 2d 443; section 1005, Act of May 28, 1937, P. L. 1053, 66 PS §1395. The record in this case should be remitted to the. Commission for further proceedings so that the Commission can make proper findings on whatever evidence may be adduced as to the propriety *35of the transactions between the affiliated companies and Commonwealth. The majority opinion cites Bell Telephone Company of Pennsylvania v. Driscoll, 343 Pa. 109, 21 A. 2d 912, as controlling the transactions between Commonwealth and the affiliated companies. This decision has no application. It merely held that section 702 of the Public Utility Law of 1937, as amended, 66 PS §1272, requiring commission approval of a contract between a public utility and an affiliated interest as a precedent to its validity, was unconstitutional.
Rate Of Retukn. The Commission found a rate of return for this utility of 6.8 per cent, which is an allowance after all other operating expenses have been covered. On the record in this case, in my opinion, such a rate of return cannot be sustained. The rate of return necessarily varies with the circumstances of each case and should be determined from the evidence adduced. Solar Electric Company v. Pennsylvania Public Utility Commission, supra, 137 Pa. Superior Ct. 325, 388, 9 A. 2d 447; City of Pittsburgh v. Pennsylvania Public Utility Commission, 171 Pa. Superior Ct. 187, 207, 90 A. 2d 607. The rate of return should be adequate, and of course it may not be confiscatory. Schuylkill Valley Lines, Inc. v. Pennsylvania Public Utility Commission, supra, 165 Pa. Superior Ct. 393, 68 A. 2d 448.
The evidence does not support the Commission’s finding of a return of 6.8 per cent. For instance, the utility claimed 4.5 per cent and the Commission found 4.3 per cent as the cost of debt capital, whereas, admittedly the utility obtained a loan of $1,200,000— $1,600,000 on mortgage bonds from insurance companies in August, 1953, at 4 per cent. The Commission found the current cost of equity capital to Commonwealth to be 11 per cent. While necessarily a judgment *36figure, there is little or no evidence to support this conclusion which is entirely arbitrary. This privately owned and financially secure company, part of a larger system of privately owned enterprises, is in a unique position relative to cost of capital. Its status in this regard is analogous to the Bell system, with which it is connected, rather than the ordinary small independent telephone company. In Blue Mountain Telephone & Telegraph Company v. Pennsylvania Public Utility Commission, 165 Pa. Superior Ct. 320, 67 A. 2d 441, the Company, with a fair value of $325,000, was allowed only a 6 per cent return as sufficient to attract . capital and to keep its enterprise stable and profitable. Here the Commission allowed the return 6.8 per cent to Commonwealth on the basis of $5,651,904. The utility is entitled to a fair rate of return based on all the facts, but on this point Commonwealth’s history and unusual position cannot be ignored.
The findings of the Commission on rate of return were so arbitrary, unreasonable, and unsupported by evidence as to amount to an error of law. Under the Act we are empowered to examine the record and findings of ■ the Commission to determine whether proper weight was given to the evidence. Section 1005, Act of May 28, 1937, P. L. 1053, 66 PS §1395. Moreover, the burden of proof to show that a proposed increase in rates is just and reasonable is upon the utility (section 312, Act of May 28, 1937, P. L. 1053, 66 PS §1152; Philadelphia v. Pennsylvania Public Utility Commission, 173 Pa. Superior Ct. 38, 95 A. 2d 244); and an order of the Commission granting such increase must be supported by substantial evidence (section 1107, Act of 1937, as amended, 66 PS §1437; Ruettger v. Pennsylvania Public Utility Commission, 164 Pa. Superior Ct. 388, 64 A. 2d 675). This Court’s review is not precluded where the Commission has arbitrarily *37ignored material. and undisputed evidence, misconstrued the facts, or misapplied the law. Pittsburgh v. Pennsylvania Public Utility Commission, 370 Pa. 305, 315, 88 A. 2d 59; City of Pittsburgh v. Pennsylvania Public Utility Commission, supra, 171 Pa. Superior Ct. 187, 198, 90 A. 2d 607. The record should be returned to the Commission with direction to make adequate findings which are supported by evidence.
Judge Ross joins in this dissent.
Judge Hist joins in this dissent in so far as it relates to rate of return.