Princess Anne Utilities Corp. v. Com. ex rel. State Corp. Commission

• Decision Date: 08 March 1971
• Docket Number: No. 7372,7372
• Citation: 179 S.E.2d 714,211 Va. 620
• Court: Virginia Supreme Court
• Parties: , 88 P.U.R.3d 519 PRINCESS ANNE UTILITIES CORPORATION v. COMMONWEALTH of Virginia ex rel. STATE CORPORATION COMMISSION and the City ofVirginia Beach, et al.

Page 714

179 S.E.2d 714

211 Va. 620, 88 P.U.R.3d 519

PRINCESS ANNE UTILITIES CORPORATION

v.

COMMONWEALTH of Virginia ex rel. STATE CORPORATION COMMISSION and the City ofVirginia Beach, et al.

No. 7372.

Supreme Court of Appeals of Virginia.

March 8, 1971.

Joseph J. Lawler, Norfolk (Kellam, Pickrell, Lawler, Hodges & Kellam, Norfolk, on the brief), for appellant.

John W. Riely, Richmond (Harry T. Marshall, City Atty. for the City of Virginia Beach; J. Dale Bimson, City Atty. Designate for the City of Virginia Beach; Harry Frazier, III, Guy K. Tower, Hunton, Williams, Gay, Powell & Gibson, Richmond, on the brief), for appellees.

Before SNEAD, C.J., and CARRICO, GORDON, HARRISON, COCHRAN and HARMAN, JJ.

CARRICO, Justice.

Princess Anne Utilities Corporation (hereafter, the utility company) filed with the State Corporation Commission a petition for an increase in rates for sewerage services. The Commission ruled that the requested rates were 'excessive, unreasonable and unjust.' The utility company's petition was denied, and new rates were fixed by the Commission lower than those previously in effect. The utility company is here on an appeal of right.

The utility company contends that the rates fixed by the Commission are unreasonable and confiscatory. Specifically, the utility company maintains that the Commission erred in excluding from determination of rate base those facilities which were contributed to the utility company in aid of construction and in excluding from annual operating expenses a depreciation allowance on such contributed property.

For the most part the facts are not in dispute. The utility company was granted a certificate of convenience and necessity by the Commission in 1959 to furnish sewerage services to a limited area now located in the City of Virginia Beach. The utility company is a public service corporation privately owned and operated by John Aragona, Sr. Aragona also owns all the stock in several land development companies which, together with the utility company, are in a 'brother-sister' corporate relationship. This arrangement was designed by Aragona to permit him to subdivide and develop various tracts of land and then to sell the property with sewerage service to be furnished by the utility company.

In its first year of operation, the utility company collected, transported, and treated sewage from approximately 400 customers. This number soon increased, however, and in 1962 the plant facilities were enlarged to meet the community's needs.

In the same year, the utility company entered into an agreement with the Hampton Roads Sanitation District Commission providing for the District's assumption of the sewage treatment services then provided by the utility company. It was contemplated that this 'take over' would occur at the earliest practicable date and not more than three or four years hence. However, the Sanitation District's facilities did not become available for this purpose until July 1969, and the connection was then made. Thereafter, the utility company's service was limited to collecting sewage and delivering it to the facilities of the Sanitation District for treatment. The Sanitation District bills the utility company's customers separately for the treatment service.

Notwithstanding the decrease in the service which it was rendering, the utility company deemed it necessary to increase its base residential rate from $12.00 per quarter to $28.50 per quarter. Rates for commercial customers likewise were to be increased by a fixed amount bearing a fair relationship to the base residential rate.

Accordingly, the utility company petitioned the Commission for approval of the proposed rate modification. The City of Virginia Beach intervened in opposition to the increase, and a hearing was held before the Commission. It was the position of the utility company that the rate increase was necessary in order to yield a 'fair return based on (a) the value of the company's property used and useful in its operation; (b) its annual operating expenses and (c) its reasonable operating capital required.' The City contested the utility company's right to a return on property in which it had no investment, I.e., the facilities contributed in aid of construction.

On this point, the evidence shows that it was the practice of the development companies controlled by Aragona to sell land to one another, or through one another to unrelated builders, and to reduce the purchase price by an amount equal to the cost of constructing sewerage facilities thereon. The developers would install the sewerage facilities and then transfer them, without charge, to the utility company. In some instances, 'tap-in fees were paid (to the utility company) by unrelated builders for which a like reduction was made in the purchase price of land from the related companies.' In other cases, tap-in fees were paid directly by customers. All these items were listed by the utility company on financial statements received in evidence by the Commission as 'Contributions in Aid of Construction.'

The utility company's principal accounting witness, Gerald D. Sherman, testified before the Commission that the net cost of the company's plant which should be used in determining base for rate fixing was $2,920,896.17. Sherman further testified that in the financial statements he had compiled, a total of $3,233,840.39 was shown as 'Contributions in Aid of Construction.' The witness insisted that although the amount of contributions exceeded investment in plant by more than $300,000, the contributions should not be excluded in determining base for rate-fixing purposes.

The Commission's chief accountant, James H. Brown, testified that his staff had made a careful examination of the utility company's records and had found that the...