Public Advocate v. Philadelphia Gas Com'n

• Decision Date: 22 April 1996
• Citation: 544 Pa. 129,674 A.2d 1056
• Parties: , Util. L. Rep. P 26,532 The PUBLIC ADVOCATE, Appellee, v. PHILADELPHIA GAS COMMISSION and Philadelphia Gas Works and Philadelphia Facilities Management Corporation, Appellants.
• Court: Pennsylvania Supreme Court

Page 1056

674 A.2d 1056

544 Pa. 129, Util. L. Rep. P 26,532

The PUBLIC ADVOCATE, Appellee, v. PHILADELPHIA GAS COMMISSION and Philadelphia Gas Works and Philadelphia Facilities Management Corporation, Appellants.

Supreme Court of Pennsylvania.

Argued Oct. 23, 1995.

Decided April 22, 1996.

Bruce W. Kauffman, Steven L. Friedman, Public Gas Works, Thomas E. Groshens, Steven B. Goodman, Richard Fader, City of Philadelphia, Joseph A. Dworetzky, City Solicitor, Philadelphia, for Appellants.

Stephen P. Hershey, Kimberly K. Hudson, The Public Advocate, Carl E. Singley, Valoria L. Cheek, Gas Commission, Philadelphia, for Appellee.

Before NIX, C.J., and FLAHERTY, ZAPPALA, CAPPY, CASTILLE and MONTEMURO, JJ.

OPINION

CASTILLE, Justice.

The issue before this Court is whether the fixed annual $18,000,000 payment by the Philadelphia Gas Works ("PGW") to the City of Philadelphia ("City"), as required by a 1972 City ordinance, is constitutional and can be included in the calculation of PGW's rate increase for fiscal year 1991-92. For the reasons expressed below, we believe this payment is constitutional, and therefore, we reverse the order of the Commonwealth Court which remanded this matter to the Philadelphia Gas Commission ("Gas Commission") to re-calculate PGW's rate increase request for the 1991-92 fiscal year without the required payment to the City.

PGW is a municipal utility wholly owned by the City. PGW is comprised of real and personal assets used to manufacture and deliver natural gas to citizens residing within the borders of the City.

Since PGW does not provide gas service beyond the City's borders, its rates are not regulated by the Pennsylvania Public Utility Commission ("PUC"). ¹ Instead, PGW's rates are regulated and approved by the Gas Commission. The Gas Commission is an agency of the City established pursuant to Section 3-909 of the Philadelphia Home Rule Charter. ²

In 1972, Philadelphia Facilities Management Corporation ("PFMC"), a non-profit corporation, entered into an agreement with the City to manage and operate PGW for the benefit of the City. Philadelphia City Council embodied this agreement in Ordinance No. 455 of 1972. Section VII of the ordinance gives the Gas Commission the authority to fix and regulate gas rates, and provides in pertinent part as follows:

Section VII

Gas Rates

1. The Gas Commission shall fix and regulate rates and charges for supplying gas to customers ..., without further authorization of City Council, which ... will, in each fiscal year produce revenues, at a minimum:

(a) Sufficient to pay all of the operation and maintenance costs and expenses of conducting the Gas Works enterprise and to pay the interest and amortization becoming due in such fiscal year on debt incurred for the Gas Works, including, but not limited to:

(i) Charges for depreciation as prescribed in Section IV 1. (b);

(ii) Charges for employees' retirement costs as prescribed in Section IV 1. (c);

(iii) A management fee to Company [PFMC] equal to the actual cost to Company of managing the Gas Works but not to exceed $300,000 annually, effective as of January 1, 1979, and for all years thereafter. The Gas Works shall reimburse Company against vouchers on the first day of each calendar month for monies expended for the operation of the Gas Works in the previous calendar month;

(iv) Expenses of the Gas Commission; and

(v) All sinking fund charges payable in respect of principal and interest on all obligations of the City issued for or with respect to the Gas Works and, with respect to Gas Works Revenue Bonds issued pursuant to the First Class City Revenue Bond Act, such additional amount as may be required to comply with any rate covenant and sinking fund reserve requirement approved by ordinance of City Council in connection with the authorization or issuance of Gas Works Revenue Bonds.

(b) Sufficient also (together with the excess on a cumulative basis on internally generated funds available for the purposes set forth below in this subparagraph (b) of prior years beginning after June 30, 1974, to the extent that such excess shall not have been applied to such purposes and shall be available for payment of general expenses of such fiscal year and, subject and subordinate to the payment or provision for payment of all operation and maintenance costs and all sinking fund and sinking fund reserve requirements as set forth in subparagraph (a) of this subsection 1., together with the excess funds provided by revenues of such fiscal year not required for such purposes):

(i) To make base payments to the City in the aggregate annual principal amount of $18,000,000 payable in the amount of $4,500,000 on each February 1, March 1, April 1 and May 1, provided the Gas Works may defer this payment to any time between said due date and June 30 of each year in which event it shall be assessed interest on the principal amount of prevailing rates, to be determined by the Director of Finance and the Gas Works, for the said due date of the date of payment or such different amounts at such different time, not greater in annual aggregate principal amount, as City Council shall prescribe;

(ii) To provide appropriations, to the extent not otherwise provided for prepayment of debt and for capital additions which have been determined by the Gas Commission to be reasonable and which have been determined by the Gas Commission to be reasonable and which have been approved by City Council; and

(iii) To provide cash, or equivalent, for working capital in such reasonable amounts as may be determined by the Company to be necessary and as shall be approved by the Gas Commission. (emphasis added)

On July 16, 1991, PGW filed a proposed $31,000,000 rate increase with the Gas Commission for the 1991-92 fiscal year. PGW subsequently amended this rate increase request to $28,000,000. Following formal public hearings, the Gas Commission adopted an order on December 19, 1991 permitting PGW to increase its rates by a total of $15,032,000 rather than the $28,000,000 PGW had requested. ³

On January 21, 1992, the Public Advocate, which represents residential customers in gas rate proceedings, appealed the Gas Commission's decision to the Court of Common Pleas of Philadelphia County. ⁴ On January 31, 1992, PGW and PFMC filed notices of intervention. The City also filed a notice of intervention on February 6, 1992. The Court of Common Pleas, in affirming the majority of the Gas Commission's decision, concluded that PGW's required annual $18 million payment to the City did not violate the Pennsylvania Constitution or Pennsylvania law. In reaching this conclusion, the Court of Common Pleas noted that the $18,000,000 represented a reasonable return on the City's equity in PGW as well as reasonable consideration for the economic benefits that ratepayers received from the City's ownership of PGW, such as: PGW's ability to issue debt through the City on which interest is exempt from taxation, which provided an estimated value of $10,500,000 for the 1991-92 fiscal year; PGW's exemption from the state gross receipts tax on gas revenues, estimated benefit of $23,500,000 for fiscal year 1991-92; and, the fact that PGW is not subject to federal or state income tax, which provided an estimated benefit of $22,100,000 for the 1991-92 fiscal year.

On November 16, 1992, the Public Advocate appealed the Court of Common Pleas decision to the Commonwealth Court. The Public Advocate alleged that the annual $18,000,000 payment to the City: (1) violated just and reasonable rate protections; (2) constituted an unlawful taking of customer's property for public purposes; and, (3) was an illegal payment in lieu of taxes.

The Commonwealth Court (en banc, one judge concurring and dissenting) affirmed in part and reversed in part the decision of the Court of Common Pleas. The Commonwealth Court held that the annual $18,000,000 payment to the City should not be used in the rate calculation because it bore no rational relationship to PGW's performance and use. The Commonwealth Court reasoned that since the annual $18,000,000 payment was not proportionate to the ratepayers' use of PGW, the annual payment constituted a tax which was imposed without the City properly exercising its taxing powers, and thus, was arbitrary and unconstitutional. The Commonwealth Court also found that even though the City's balance sheet showed a net equity of $201,951,000 in PGW, that amount did not justify the annual $18,000,000 payment because the net equity figure cannot be said to have come directly from the City's own funding. The Commonwealth Court ultimately ordered that the matter be remanded to the Gas Commission to re-calculate PGW's rate increase request for the 1991-92 fiscal year without the required fixed annual $18,000,000 payment to the City.

The City, PGW and PFMC (collectively "Appellants") filed a petition for allowance of appeal which this Court granted. ⁵ This Court granted allocatur in order to determine whether the fixed annual $18,000,000 payment by PGW to the City, as required by the 1972 City ordinance, is constitutional and can be included in the calculation of PGW's rate increase for fiscal year 1991-92.

Where, as here, a complete record was developed before the local agency, ⁶ the court reviewing the matter on appeal must affirm the local agency unless it is determined that constitutional rights were violated, that an error of law was committed, that the procedure before the agency was contrary to statute or that necessary findings of fact were unsupported by substantial evidence. Insinger Machine Co. v. Philadelphia Tax Review Board, 165 Pa.Commw. 344, 346 n. 4, 645 A.2d 365, 366 n. 4 (1994), appeal denied 540 Pa. 624, 657 A.2d 494, cert. denied, --- U.S. ----, 116 S.Ct. 303, 133 L.Ed.2d 208 (1995); 2 Pa.C.S. § 754(b). ⁷

As previously discussed herein, the City owns PGW. By virtue of the First Class Home Rule Act, 53 P.S. § 13101, et seq., the City:

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