Chesapeake & Potomac Tel. Co. of Md. v. Public Service Commission

Decision Date17 January 1963
Docket NumberNo. 97,97
Citation187 A.2d 475,230 Md. 395
CourtMaryland Court of Appeals

Richard W. Case, Baltimore (Clifford Davis, Jr., Edward O. Clarke, Jr., Roger D. Redden and Smith, Somerville & Case, Baltimore, on the briefs), for appellant.

Francis X. Gallagher, People's Counsel, Baltimore (Rudolf A. Carrico, Gen. Counsel, and William J. Torrington, Baltimore, on the brief), for appellee, Public Service Commission.

David L. Rose, Washington, D. C. (John G. Laughlin, Atty., Dept. of Justice, and Joseph D. Guilfoyle, Acting Asst. Atty. Gen., Washington, D. C., and Joseph D. Tydings, U. S. Atty., Baltimore, on the brief), for appellee United States.

L. A. Scholz, Sykesville, for intervenor-appellee.



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.

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 require the refund of any excess income. At the Company's request formal hearings on its application for the fixing of its 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 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 * * * [D]ividends 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 date of the Dean of the John 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 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. Chesapeake & Potomac Telephone Co. v. Public Service Commission, 201 Md. 170, 93 A.2d 249; Baltimore Transit Co. v. Public Service Commission, 206 Md. 533, 112 A.2d 687; Hagerstown v. Public Service Commission, 217 Md. 101, 141 A.2d 699; Baltimore Gas Co. v. McQuaid, 220 Md. 373, 152 A.2d 825. 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...

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