Keystone Water Co., White Deer Dist. v. Pennsylvania Public Utility Commission

Decision Date17 May 1978
PartiesKEYSTONE WATER COMPANY, WHITE DEER DISTRICT v. PENNSYLVANIA PUBLIC UTILITY COMMISSION, Appellant.
CourtPennsylvania Supreme Court

Edward J. Morris, Counsel, PUC, Michael P. Kerrigan, Asst. Counsel, PUC, Harrisburg, for appellant.

Ernest R. von Starck, Philadelphia, for appellee.

Before JONES, C. J., and EAGEN, O'BRIEN, ROBERTS, POMEROY, NIX and MANDERINO, JJ.

OPINION

PER CURIAM.

The Court being equally divided, the order of the Commonwealth Court is affirmed.

POMEROY, J., filed an opinion in support of affirmance joined by O'BRIEN and MANDERINO, JJ.

ROBERTS, J., filed an opinion in support of reversal joined by EAGEN, C. J., and NIX, J.

JONES, former C. J., did not participate in the decision of this case.

OPINION IN SUPPORT OF AFFIRMANCE

POMEROY, Justice.

In this public utility rate case, the Pennsylvania Public Utility Commission (PUC) appeals from a decision of the Commonwealth Court to reverse an order of the PUC which had disallowed $57,906 from a general rate increase proposed by the appellee water utility, Keystone Water Company White Deer District (Keystone). See 19 Pa.Cmwlth. 292, 339 A.2d 873 (1975). * The subscribers to this opinion would affirm the order of the Commonwealth Court.

This case arises from Keystone's filing on August 31, 1972, of a supplement to its existing water tariff. The supplement proposed changes in all metered rates sufficient to produce an increase in annual revenues of $415,477. 1 Pursuant to an investigation of the reasonableness of these rates, the PUC issued an order postponing the effective date of the increase until August 22, 1973; thereafter the new rates were deemed temporary pending a final PUC adjudication. Based upon hearings and the submission of appropriate data, the Commission entered a detailed final order on April 17, 1974. Of Keystone's $423,356 requested increase in revenues (as revised), $365,450 or 86 per cent was permitted. This decrease of $57,906 is principally explained by the fact that the PUC excluded from the computation of the rate base the value of Keystone's White Deer Creek filtration plant; the Commission also eliminated from allowable operating expenses the annual depreciation chargeable to the plant. This determination by the PUC to ignore Keystone's filtration plant for rate-setting purposes is the single issue in this appeal.

To appreciate the basis for the Commission's action, some background is necessary. We quote from the summarized facts as set forth in the opinion of the late Judge Kramer, writing for the Commonwealth Court majority: 2

"For almost 75 years, one of the three sources of water for Keystone was the White Deer Creek watershed (watershed). The area of the watershed above Keystone's intake point is approximately 37 square miles. The watershed was almost entirely forest land and Keystone owned about 1,300 acres in fee. Approximately 10 per cent of the watershed is owned by the Commonwealth and is maintained as state forest land. For the remaining 90 per cent, Keystone holds deeds granting water rights dating back to about 1902, wherein it is stated that Keystone has the complete control and use of all the waters and the right to enter upon the land at all times for the purpose of maintaining its supply of water. This water was so pure that it required no treatment other than the minimal chlorination required by the Department of Health for all public water companies. In 1959 Keystone became aware that the Commonwealth proposed to construct Interstate Highway I-80 through the valley of the White Deer Creek. Keystone advised the Pennsylvania Department of Transportation (PennDOT) of the danger to its water supply but was unsuccessful in attempting to have I-80 rerouted so as not to touch the watershed. As a result of long, involved negotiations with PennDOT concerning Keystone's condemnation rights, an understanding was reached and reduced to a written agreement dated July 18, 1966." 19 Pa.Cmwlth. 292, 295-96, 339 A.2d 873, 874 (1975) (footnote omitted.)

Settlement under the July 18, 1966 condemnation agreement between the Pennsylvania Department of Transportation and Keystone Water Company, the pertinent portions of which are quoted in the margin, 3 was made on March 30, 1967. In the spring of 1968, construction of a new filter plant built at Keystone's expense, as provided by the agreement, was completed. The cost of construction of the plant was $1,100,000. Additional expenses related to the condemnation and the building of the new plant brought Keystone's total investment in the project to approximately $1,300,000, a sum equivalent to that paid by PennDOT to Keystone pursuant to the terms of the agreement. See n. 3, supra.

In its 1974 rate adjudication, the PUC undertook a review of the 1967 PennDOT condemnation settlement. It construed the terms of the parties' written agreement as compensating Keystone only for the value of 130 acres of land to which PennDOT took title. 4 The remainder of the amount paid in settlement ($1,292,347), according to the PUC, was intended to remedy "consequential damages" suffered not by the utility, but by its ratepaying customers. As support for this theory, the PUC in its memorandum order pointed to the agreement provision requiring the utility company to construct a filter plant which would restore the potability of the White Deer Creek water supply. The Commission thus ordered that $1,292,347 be excluded from the calculation of rate base.

On appeal, the Commonwealth Court rejected the PUC theory and held as follows:

"(T)he payment of $1,300,000 to Keystone by PennDOT was a payment in money damages or just compensation for the taking of Keystone's property as measured by the value of the land taken, the value of the deeded water rights taken, and also for the replacement costs involved in insuring the continuance of supply of potable water to Keystone's customers, the latter damages of which were measured by the 'cost to cure' method. Upon payment of those damages, the money was properly accounted for in the surplus account because that money belonged to the stockholders of Keystone. We hold that the money or property of the stockholders of Keystone having been invested in a filtration plant used and useful in the public service of Keystone's customers, the value of that plant should have been included in the various original costs, reproduction costs (or trended original costs) and fair value evaluations as part of the total rate base of Keystone for rate-making purposes. We hold that since the filtration plant should be made a part of the rate base for rate-making purposes that annual depreciation should be allowed so that Keystone may recoup this investment over the life of the plant. In view of these holdings, we must reverse the PUC and remand this matter to it for the purpose of amending the cost of service . . . ." 19 Pa.Cmwlth. at 310-11, 339 A.2d at 882. (footnote omitted).

For reasons stated in Part I of this opinion, we concur in the holding of the Commonwealth Court that Keystone's filtration plant must be included in rate base for purposes of calculating allowable return on investment, as well as allowable depreciation expense. In Part II, we address the principal argument put to us by the PUC in the instant appeal, viz., that the Commission is free to depart from adherence to the rate base method of utility rate adjudication wherever the end result (i. e., the revenue which the utility is permitted to earn) is deemed to be "just and reasonable."

I.

We find no legal or factual support 5 for the conclusion of the PUC that most of the dollars representing Keystone's filtration plant were not damages properly belonging to Keystone as compensation for the 1966 taking of its watershed land and valuable easement rights, 6 but were "consequential damages" owing to utility consumers and thus excludable from Keystone's rate base. It is our view that the proper interpretation of the PennDOT-Keystone agreement of July 18, 1966 is that it represents a settlement negotiated by the parties thereto pursuant to established condemnation principles, and that the proceeds therefrom were thus the property of Keystone and its shareholders.

It is true, as is emphasized in the Commission's order, that the agreement was intended to insure the "continuance of a supply of potable water to the communities which (the) Company serves." That feature of the settlement, however, was simply reflective of applicable condemnation law, which envisions that the injured utility will remedy the damage done to its service capacity. In Pa. Gas & Water Co. v. Pa. Turnpike Commission, 428 Pa. 74, 236 A.2d 112 (1967), this Court ruled that land held for reservoir purposes by a water utility was to be compensated for, when condemned by the Turnpike Commission, on a basis of cost to "replace or repair", rather than the more typical "fair market value" calculation of damages. See also McSorley v. Avalon Borough School District, 291 Pa. 252, 139 A. 848 (1927). This was principally because there existed no market for such utility property. 428 Pa. at 83, 236 A.2d 112. In the present case, it was certainly no less difficult to arrive at a market value for Keystone's watershed property. The parties accordingly chose to settle on this "cost to cure" basis. 7 That the parties went a step further and agreed that the condemnee would in fact repair the damage done to its watershed by constructing facilities to insure continued purity of the water supply does not alter the fact that the settlement figure represented compensation for Keystone's loss, not a gift or donation by PennDOT to either Keystone or its customers. 8 The Public Utility Commission in its rate adjudication effectively rewrote the Keystone-PennDOT agreement so as to delete the provision granting compensation in the sum of $1.3...

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