Wilmington Suburban Water Corp., Application of

• Decision Date: 23 June 1964
• Citation: 58 Del. 8,8 Storey 8,203 A.2d 817
• Court: Delaware Superior Court
• Parties: , 58 Del. 8, 56 P.U.R.3d 66 Application of WILMINGTON SUBURBAN WATER CORPORATION and Delaware Water Corporation for changes in Rates in accordance with § 151, Title 26, Delaware Code.

Page 817

203 A.2d 817

8 Storey 8, 58 Del. 8, 56 P.U.R.3d 66

Application of WILMINGTON SUBURBAN WATER CORPORATION and

Delaware Water Corporation for changes in Rates in

accordance with § 151, Title 26, Delaware Code.

Superior Court of Delaware, New Castle County.

June 23, 1964.

David F. Anderson (of Berl, Potter & Anderson), Wilmington, for appellants.

Joseph T. Walsh, Wilmington, and J. Parker Connor, Washington, D. C., for appellee.

WRIGHT, Judge.

This is an appeal, under 26 Del.C. § 192, from the findings, opinion and order of the Delaware Public Service Commission. The Wilmington Suburban Water Corporation and the Delaware Water Company filed separate applications for a change in rates pursuant to 26 Del.C. § 151. The Wilmington Suburban Water Corporation sought an increase in its operating income in the amount of $134,438.00, an increase of approximately 35% over its present rates. Delaware Water Company sought an increase in its operating income in the amount of $107,357.00, an increase of approximately 50% above its present rates. The Commission suspended operation of the proposed rates and held public hearings. Thereafter, the Commission, by its findings and opinion, fixed the amount of the present fair value rate base, the rate of return on the rate base, and a fixed dollar amount of additional gross revenue for each of the companies.

Both Wilmington Suburban Water Corporation, hereinafter referred to as 'Wilmington', and Delaware Water Company, hereinafter referred to as 'Delaware', are public utility companies engaged in supplying water to customers in New Castle County. Delaware supplies industrial, commercial and residential customers and further supplies a substantial part of the water distributed by Wilmington Suburban Water Corporation. It also supplies water for resale to The Artesian Water Company, New Castle County Water Company, the City of Newark, and to a standpipe connection to the Town of Newport. Wilmington renders services to residential, commercial and industrial customers and also operates the facilities of Arden Water Company, hereinafter referred to as 'Arden'. The Commission consolidated the rate applications since an increase in rates granted to Delaware would substantially effect the cost of water to Wilmington. Originally, Delaware was a subsidiary of the Philadelphia, Baltimore, and Washington Railroad Company, which in turn was a subsidiary of the Pennsylvania Railroad Company. It was formed in 1906 to furnish water to the railroad. Initially, its property consisted of an impounding, pumping and filtration facility on the Christiana Creek; two cast iron water pipe lines paralleling the railroad right of way; a storage system at Edgemoor and a standpipe at Bark Mills; and a supply line interconnecting the storage facilities in the railroad right of way. The Christiana station was converted to electrical power in 1926 and, in 1947, a new plant was constructed at White Clay Creek. In 1954, the properties were transferred to the Delaware Water Company. The Commission approved the transfer of the Delaware Water Company property to General Water Works Corporation, the present owners, in 1956. The General Water Works Corporation leased back the property to the Delaware Water Company. Since 1955, further improvements have been made to the existing facilities, namely, a 24"'"' pipe paralleling the railroad right of way, a new treatment filtration plant at Station and further water main extensions.

The Wilmington Suburban Water Corporation was originally organized in 1934 to supply water to a limited area. Periodically, Wilmington acquired smaller water systems until, in 1941, it serviced an area between the distribution limits of the City of Wilmington system to the Pennsylvania border. The original source of supply was augmented by other sources, including a supply contract with the Delaware Water Corporation. To adequately supply increasing demands, Wilmington has augmented its storage facilities, power and pumping facilities, filtration systems, and transmission mains. In 1948, General Water Works Corporation purchased a controlling interest in Wilmington stock.

By a lease approved by the Commission in 1961, Wilmington also operates the Arden Water Company facilities. Arden was originally organized in 1913. Its facilities were expanded in 1924 when a dam was constructed on Naaman's Creek. Its source of supply was again augmented in 1953 by contract with Wilmington. Wilmington acquired a controlling interest in Arden in 1936. In 1948, the General Water Works Corporation purchased a controlling interest in the outstanding shares of Arden stock.

In order to arrive at a fair and just rate base upon which to calculate a reasonable rate of return, the Commission attempted to ascertain the present value of the utilities' property currently in use. Accordingly, at the hearing the appellant utilities offered evidence of the measure of value of the utilities' property based on book cost, original cost depreciated and reproduction cost depreciated as evidenced by 1961 year end trended prices and 5-year average trended prices.

The state's witnesses attacked reproduction cost on the basis that price indexes do not give proper weight to increased labor productivity and technological advancements. The Commission then adjusted the accumulated depreciation on the utility plant in service and further discounted the companies' facilities and plants because of 'supersession'. According to this theory, an existing plant is reduced in value since it would never be rebuilt with the same materials, same design or the same method of construction, but would be built at present so as to provide more economy of operation. This being so it is unfair, contends the Commission, to compel consumers to pay rates based on the valuation, without consideration of supersession, of a facility which is outmoded though still in use.

Based upon the testimony of the state's witnesses, the Commission also adjusted certain operating income and expense accounts. The materials and supplies account was computed on the 5-year average balance as opposed to the companies' computation of this account on a 1961 year end basis. The companies' allowances for cash working capital were reduced to nominal sums. Other operating expenses and payroll increases and federal income taxes were adjusted by the Commission. At the hearing, the companies and the Commission stipulated that a fair rate of return would be a rate not exceeding 6% per annum. The rate of return granted by the Commission was less than 6% per annum for both companies, namely, 5.3% rate of return for Delaware and 5.72% rate of return for Wilmington. The companies now contend that since no evidence was offered on the fair rates of return, these findings of the Commission were arbitrary and baseless.

The appellants argue at the outset that this Court may revise, modify, and change the findings and order of the Commission so as to conform with the evidence. This matter is raised principally for appellate purposes since it is conceded that this Court is bound by a contrary ruling of the Delaware Supreme Court. That Court had held that the Superior Court, in a case such as this, could not substitute its findings for the findings of the Commission. In re Diamond State Telephone Company, 10 Terry 203, 113 A.2d 437 (1955).

Thus, the following three general issues are presented on this appeal:

1. Do the rate bases, as found by the Commission to exist in the case of Delaware and Wilmington, allot proper weight to each element of value so as to represent the present fair value of the utilities property?

2. Are the rates of return as granted by the Commission on the present fair value of Delaware's and Wilmington's property sufficient to pay, in addition to the cost of production, a reasonable rate of return to its stockholders and some surplus for necessary expansion?

3. Did the Commission err in adjusting and normalizing certain operating income and operating expenses?

The Public Service Commission is directed to ascertain and establish a rate of return for facilities that will produce a reasonable return on the present fair value of the companies' property sufficient to pay, in additional to the cost of production, a reasonable return to its stockholders and some surplus for expansion. In re Diamond State Telephone Company, 10 Terry 203, 113 A.2d 437 (1955). As a starting point in determining a reasonable return, the Commission must establish a rate base to which a rate of return is applied. 26 Del.C. § 126 provides:

'The Commission may, from time to time, ascertain and determine the fair value of the property of any public utility whenever, in the judgment of the Commission, it is necessary so to do for the purpose of carrying out any of the provisions of this chapter, and in making such valuation the Commission may have access to and use any books, documents, or records in the possession of any department or board of this State or any political subdivision thereof. In ascertaining and determining such fair value, the Commission may determine every fact, matter, or thing which, in its judgment, does or may have any bearing on such value; and may take into consideration, among other things, the original cost of construction, particularly with reference to the amount expended in the existing and useful permanent improvements; with such consideration for the amount in market value of its bonds and stocks, the probable earning capacity of the property under particular rates prescribed by statute or ordinance, or other municipal contract, or fixed or proposed by the Commission, and for the items of expenditures for obsolete equipment and construction, as the circumstances and the historical development of the enterprise may warrant; the reproduction cost of the property, based upon the fair average price of materials, property and labor, and the developmental...