Simms v. Round Valley Light & Power Co.

• Decision Date: 21 February 1956
• Docket Number: No. 5960,5960
• Citation: 294 P.2d 378,80 Ariz. 145
• Parties: , 13 P.U.R.3d 456 Mit SIMMS, William T. Brooks and Timothy D. Parkman, constiuting The Corporation Commission of the State of Arizona, Appellants, v. ROUND VALLEY LIGHT & POWER COMPANY, Appellee.
• Court: Arizona Supreme Court

Page 378

294 P.2d 378

80 Ariz. 145, 13 P.U.R.3d 456

Mit SIMMS, William T. Brooks and Timothy D. Parkman, constiuting The Corporation Commission of the State of Arizona, Appellants, v. ROUND VALLEY LIGHT & POWER COMPANY, Appellee.

No. 5960.

Supreme Court of Arizona.

Feb. 21, 1956.

Rehearing Denied June 12, 1956.

Robert Morrison, Atty. Gen., Donald O. Corbitt and William T. Willey, Assts. to the Atty. Gen., for appellants. On the brief are James E. Hunter, Phoenix, and Robert C. Stubbs, Tucson.

Platt & Greer, St. Johns, Jennings, Strouss, Salmon & Trask, Irving A. Jennings and Wallace O. Tanner, Phoenix, for appellee.

Evo De Concini, Tucson, Fennemore, Craig, allen & Bledsoe, Walter E. Craig, Ryley, Carlock & Ralston, Joseph P. Ralston, Snell & Wilmer, Edward Jacobson, A. B. Spector, amici curiae.

WINDES, Justice.

Appellant, the Corporation Commission of Arizona, entered upon an inquiry concerning the rates being charged by the appellee, Round Valley Light and Power Company, a public utility corporation. The appellant will be designated hereinafter as the commission, and the appellee as the company. A hearing was had and the commission entered an order requiring the company to reduce its rates. Thereafter, upon petition of the company, this order was suspended and another hearing held, after which the commission entered its second order requiring reduction in rates but changed the original order in some respects as will hereinafter appear. The company brought an action against the commission under the provisions of section 69-249, A.C.A.1939. The trial court entered judgment setting aside the commission's final order and the commission appeals.

The problems presented are, first, whether the commission in its decision fixing the reduced rates is required to find the fair value of the company's properties being used to serve the public as a basis for the calculation of reasonable rates; and second if the law requires the commission to find such value, whether and to what extent the commission must, in finding the same, consider the present reproduction cost less depreciation.

The accounting and engineering staff of the commission made an investigation, including an analysis of the books of the company. As a result of such investigation, the members of the staff at the first hearing presented evidence showing the original book costs of the property less accrued depreciation and customer advances to be $114,158. To this figure was added certain items not disputed herein such as materials and supplies, operating expense reserve, deposits, etc., which produced a total value of $128,884. It is clear that the original order did not take into consideration the reproduction cost of the property but essentially adopted the book cost less depreciation in finding the rate base.

On the second hearing the staff presented evidence showing original book cost of the property less accrued depreciation and customer advances to be $110,526, thereafter making certain additions not herein contested producing a total value of $127,017. This latter figure was recommended by the staff as the proper rate base.

On the rehearing the company submitted evidence concerning the value of the plant and started with the figure of $114,158 presented by the staff on the first hearing as the book cost of the property less depreciation and customer advances. To that figure it added $15,773 as a correction of the depreciation reserve allowed by the staff and added the items not herein contested, and thereby produced an historical cost of $147,238. To this the company added $28,136, which latter item according to the order of the commission was derived from 'Handy's Manual' used to trend historical costs upward to compensate for the difference between the historical and present costs of construction. The company by this calculation recommended a rate base in the sum of these latter items, or $175,374. Thus, it appears that the company presented to the commission evidence, which it asked the commission to accept, of a value for rate-making purposes of $175,374 based upon reconstruction costs less depreciation.

All of the foregoing evidence submitted to the commission on both the first and second hearings was introduced in evidence in the trial court. In addition to this evidence, the company in court presented further evidence consisting principally of an engineer's testimony of an actual detailed appraisement of the property. He testified that in his opinion the reproduction cost less observed depreciation was $193,947. After a slight adjustment the court's judgment recites this latter figure should be $192,678. After adding items not contested, the court found that the total value was $205,070; that the commission found 7.28 percent as a fair rate of return in the first order; but that it did not apply such rate to the fair value of the company's property. The court concluded as a matter of law that had the commission found the fair value, the rate of return of 7.28 percent in the first order would not have been unreasonable. In fact, the commission in its second order allowed a rate of return of 7.01 percent.

It is elementary that a public utility subject to regulation and fixing of rates is entitled to realize a fair and reasonable profit from its operation in the service of the public. In establishing the rates that will produce the requisite return, a base figure must be found-the rate base. The troublesome questions arise when we approach the method used by the rate-making body in establishing this rate base. In the early case of Smyth v. Ames, 1898, 169 U.S. 466, 18 S.Ct. 418, 434, 42 L.Ed. 819, the Supreme Court of the United States in testing a legislative act fixing railroad rates ruled in effect that a rate-making body could not, without violating the due process and equal protection clauses of the Fourteenth Amendment to the United States constitution, require the company to commit its property to public service without allowing a fair and reasonable reward and the compensation to be allowed the company should likewise be reasonable from the standpoint of the public interest. The Court recognized that how fair compensation was to be determined would always be an embarrassing question, and then proceeded to state:

'We hold, however, that the basis of all calculations as to the reasonableness of rates to be charged by a corporation maintaining a highway under legislative sanction must be the fair value of the property being used by it for the convenience of the public. And, in order to ascertain that value, the original cost of construction, the amount expended in permanent improvements, the amount and market value of its bonds and stock, the present as compared with the original cost of construction, the probable earning capacity of the property under particular rates prescribed by statute, and the sum required to meet operating expenses, are all matters for consideration, and are to be given such weight as may be just and right in each case. We do not say that there way not be other matters to be regarded in estimating the value of the property. What the company is entitled to ask is a fair return upon the value of that which it employs for the public convenience. On the other hand, what the public is entitled to demand is that no more be exacted from it for the use of a public highway than the services rendered by it are reasonably worth.'

In State Of Missouri ex rel. Southwestern Bell Telephone Co. v. Public Service Commission, 1923, 262 U.S. 276, 43 S.Ct. 544, 546, 67 L.Ed. 981, 31 A.L.R. 807, the Supreme Court struck down a rate base established by the public service commission of Missouri for the reason that it was founded principally upon original book costs and no consideration was given to reproduction costs. The Court said:

'It is impossible to ascertain what will amount to a fair return upon properties devoted to public service, without giving consideration to the cost of labor, supplies, etc., at the time the investigation is made.'

In that case Justices Brandeis and Holmes concurred in the result but contended the rate base should be established by a finding of what amount was prudently invested in the enterprise.

Subsequent to announcing the test for arriving at a rate base in Smyth v. Ames, supra, the Supreme Court of the United States struggled with the difficult problem of determining the validity of rates that would be reasonable from the standpoint of both the company and public to be served but not until its decision in Federal Power Commission v. Hope Natural Gas Co., 1944, 320 U.S. 591, 64 S.Ct. 281, 288, 88 L.Ed. 333, did the Court in principle repudiate Smyth v. Ames, supra. In the Hope case the Court, in testing the reasonableness of rates fixed by the Federal Power Commission under the Natural Gas Act, 15 U.S.C.A. § 717 et seq., after holding that Congress had provided no formula by which just and reasonable rates were to be determined, ruled that it was the final result reached and not the method used in reaching the result that was controlling and that it was unimportant to 'determine the various permissible ways in which any rate base on which the return is computed might be arrived at.'

The commission contends that its decision in fixing the company's rates can be said to be just and reasonable under the law as announced in the Hope case and, thus tested, the rates are lawful and should not be disturbed. Our constitution provides that the commission shall prescribe just and reasonable rates, Arizona Constitution, Article 15, section 3, and says that to aid it in the proper discharge of its duties the commission shall 'ascertain the fair value of the property within the state of every public service corporation * * *.' Arizona Constitution, Article 15, section 14. This court in construing these provisions of our constitution in the case of State v. Tucson Gas, Electric Light & Power...