Potomac Electric Power Co. v. Public Utilities Commission of District of Columbia

158 F.2d 521, 81 U.S. App. D.C. 225, 1946 U.S. App. LEXIS 3272

• Court: Court of Appeals for the D.C. Circuit
• Decided: July 16, 1946
• Docket: No. 8967
• Status: Published

Opinions

EDGERTON, Associate Justice.

This case and No. 8995, United States v. Public Utilities Commission of the District of Columbia, - U.S.App.D.C. -, 158 F.2d 533, are appeals from orders of the District Court of the United States for the District of Columbia which dismissed separate appeals of the Potomac Electric Power Company and of .the United States from an order of the Public Utilities Commission of the District of Columbia entered July 22, 1944. The Commission’s order ¹ modified “the existing sliding scale arrangement for electric rate adjustments”, directed the Company to file new rate schedules designed to reduce its gross operal-ing revenues by $1,037,189, and directed certain adjustments in depreciation reserve and in annual provision for depreciation. Both the Company and the United States appealed to the District Court, which dismissed both appeals. The Company contends that the Commission’s procedure was invalid. The United States contends that the Commission’s order did not sufficiently reduce the Company’s rates.

On July 16, 1946, this court affirmed both orders of the District Court and stated that opinions on each appeal would be filed later. The present opinions relate to the Company’s appeal.

The law creating the Public Utilities Commission² provides in Par. 2 that the charges of public utilities shall be “reasonable, just, and nondiscriminatory”. Par. 41 directs the Commission to fix “just and reasonable” rates and charges. The statute does not undertake to provide a formula for determining what rates are just and reasonable.

Par. 18 of the law provides “That nothing in this section shall be taken to prohibit a public utility, with the consent of the commission, from providing a sliding scale of rates and dividends according to what is commonly known as the Boston sliding scale, or other financial device that may be practicable and advantageous to the parties interested. No such arrangement or device shall be lawful until it shall be found by the commission, after investigation, to be reasonable and just and not inconsistent with the purposes of this section. Such arrangement shall be under the supervision and regulation of the commission. The commission shall ascertain, determine, and order Such rates, charges, and regulations,, and the duration thereof, as may be necessary to give effect to such arrangement, but the right and power to make such other and further changes in rates, charges, and regulations as the commission may ascertain and determine to be necessary and reasonable, and the right to alter or amend all orders relative thereto, is reseryed and vested in the commission notwithstanding any such arrangement and mutual agreement”.

In order to understand the present controversy it is» necessary to go back to a consent decree which the District Court entered December 31, 1924. That decree provided, among other things, that the value of the Company’s property was $32,-500,000 and that “If the rates hereafter yield more than a 7% percent return on $32,500,000, plus actual cost of future additions * * *, one-half of said excess shall be used in a reduction of rates to be charged the public for electric service thereafter, thereby providing a sliding scale of rates under provisions of paragraph 18 of the Act creating the Public Utilities Commission, advantageous to the public and company alike; that is to say, by way of example, if the return for any one year should amount to $100,000 over and above 7% percent on the base ascertained as aforesaid then the rates for the succeeding year to be charged the public shall be automatically reduced by the filing of new rate schedules to absorb $50,000 of such excess during such year”.

In 1931 the theoretical basic rate of return on the rate base was reduced from 7% percent to 7 percent. It was further reduced to 6% percent in 1935 and to 6 percent in 1937. The order here on appeal would reduce it to 5% percent. The Company does not contend that these basic rates (percentages) of return have been less than fair to it. No such contention could well be made. The Supreme Court in 1933 upheld the sufficiency of a 7 percent rate of return in Wabash Valley Electric Co. v. Young, 287 U.S. 488, 502, 53 S.Ct. 234, 77 L.Ed. 447, and in Los Angeles Gas & Electric Corporation v. Railroad Commission, 289 U.S. 287, 319, 53 S.Ct. 637, 77 L.Ed. 1180. In 1938 it upheld a 6 percent rate of return in Driscoll v. Edison Light & Power Co., 307 U.S. 104, 119, 59 S.Ct. 715, 83 L.Ed. 1134. Since the charges for electricity which the Commission has prescribed from time to time have been theoretically designed, in accordance with the consent decree, to reduce by 50 percent per year, and thereby substantially to eliminate within a short time, any excess above the prescribed basic rate of return, it is evident that this basic rate has been the rate of return which the Commission has decided to be fair and reasonable.

With modifications not material here, the arrangement set up by the consent decree has been in nominal effect since 1924. But, whether wholly because of persistent errors of prediction or partly because of errors of interpretation, it has never been in actual effect. Though the rates charged for electricity have been repeatedly reduced, the Company’s returns have been almost continuously far higher than any possible interpretation of the consent decree required or permitted, and far higher than the reasonable basic rate of return.³ In the first year, 1925, the Company’s return was 9.59 percent of the rate base. Since this was more than the basic rate, on any interpretation of the decree the return for 1926 should have been lower. Actually the return for 1926 was 9.72 percent. It was 9.22 percent for 1927, 10.28 percent for 1928, 10.34 percent for 1929, and 10.71 percent for 1930. In every year but one from 1925 to 1943, the Company’s return considerably exceeded the basic rate. In each of 7 of these years, the return exceeded the basic rate by more than $1,000,000. For the entire period of 19 years the Company’s “excess earnings”, as stated by the Commission, were more than $16,000,000.

No one contends that the rate base, i.e. the principal sum on which the rate af return is calculated, has been unfairly low. Since the Company’s returns have greatly exceeded a fair percentage of return upon a fair base, it follows as a matter of law that the rates charged for electricity, instead of being “just and reasonable” as the law requires them to be, have been excessive. There is nothing new about this principle. Speaking for a unanimous Supreme Court, Chief Justice Taft said in 1924: “If the profit is fair, the sum of the rates is so. If the profit is excessive, the sum of the rates is so”.⁴

But all'this hardly begins to suggest the extent to which the Company’s returns, and therefore the rates charged for electricity, have been excessive. For the rate base has been unfairly high. It has included not merely the proceeds of bonds, preferred stock, and common stock, but a large and increasing surplus. When a utility charges only reasonable rates, earns only reasonable returns, and accumulates a surplus by withholding some of these returns from stockholders instead of distributing them in dividends, the surplus so accumulated is in substance an investment which the stockholders have made and they are commonly entitled to a return up,on it. But the case of this Company is very different. Its surplus was accumulated out of excessive returns derived from excessive rates. It has not practiced self-denial in respect to dividends. On the contrary, it has constantly distributed very large dividends. Accordingly, the surplus, which the Commission has included in the rate base, has been built-up not by the Company’s investors but by its customers.

In 1925 the par value of the Company’s common stock was $6,000,000. The Commission has determined at various times that only $2,245,000 of this amount represented cash received by the Company and invested in plant. Recently, in 1942, an additional $3,000,000 of common stock was issued for $3,000,000 in cash, making the total par value $9,000,000 and the total common-stock investment $5,245,000. Yet the “common-stock equity” (including surplus) which the Commission has included in the rate, base increased from $8,126,886 in 1925 to $35,914,645 in 1942 and $38,073,-241 in 1943. Annual “income available for common stock” increased from $2,598,289 in 1925 to $3;786,418 in 1943.⁵ Throughout the period such income averaged 14.44 percent on the “common-stock equity”, about 60 percent on the par value of the common stock, and about 150 percent on the common-stock investment in plant. The average annual dividend rate was about 9 percent on “common-stock equity”, about 38 percent on the par value of common stock, and about 99 percent on' common-stock investment. For the 19 years from 1925 to 1943, common-stock dividends averaged more than $2,300,000 a year and totalled $45,345,000.

We come now to the effect of the appealed order of the Commission. The order is designed to result in income available for common stock, after meeting all expenses, interest, depreciation, and preferred dividends, of $3,250,000 for 1944. This would be, as the Commission observes, 8.91 percent of the “common-stock equity”. It would also be, as the Commission does not observe, some 36 percent of the par value of • the common stock and some 60 percent of the amount which the Company received for the stock and invested in plant. The Commission says that the proposed return, in its opinion, will enable the Company “to maintain its financial integrity, to attract capital, and to compensate its investors for the risks assumed”. This is understatement if not irony. The risks, if any, are as small as the human mind can conceive. The return is enormous.

“If the profit is fair, the sum of the rates is so”.⁶ “If the Commission’s order, as applied to the facts before it and viewed in its entirety, produces no arbitrary result, our inquiry is at an end”.⁷ It is scarcely necessary to say that the impact of this order upon the Company produces no arbitrary result. The Company does not even question the finding of the District Court that the rates required by the order are just and reasonable. The Company does not contend that it is entitled to earn more, or that the order will cause it to earn less, than 8.91 percent on the entire “common-stock equity”, 36 percent on the par value of the common stock, and 60 percent on the common-stock investment. “Under the statutory standard of ‘just and reasonable’ it is the result reached not the method employed which is controlling * * * It is not theory but the impact of the rate order which counts. If the total effect of the rate order cannot be said to be unjust and unreasonable, judicial inquiry under the Act is at an end * * * He who would upset the rate order under the Act carries the heavy burden of making a convincing showing that it is invalid because it is unjust and unreasonable in its consequences”.⁸

Though the Commission held a full hearing on proper notice,⁹ though Par. 62 of the statute expressly authorizes the Commission to rescind or amend any rate order, and though Par. 18 expressly vests in the Commission full authority to change rates and regulations which have been embodied in a mutual agreement regarding a sliding scale, the Company contends that the appealed order is invalid because of the manner in which it was adopted. The Company seems to argue that because a sliding scale was originally adopted with its consent, and because the appealed order does not entirely abrogate the sliding scale, the Company’s consent is necessary to the validity of the order. The plain language of Par. 18 answers this argument. The Company contends, also, that a valuation of its property is necessary to the validity of the Commission’s order. There are at least three answers to this contention.¹⁰ (1) The Company does not challenge the finding of the District Court that the order will allow the Company a fair return upon the fair value cf its property. Valuation could be only a means to that end. Since the. end is achieved, the Company cannot complain if a particular means was not used. (2) A valuation of the Company’s property was made by the consent decree, and though the Act (Par. 7) directs the Commission to “value the property * * * at the fair value thereof at the time of said valuation”, it does not direct the Commission to make a new valuation whenever rate schedules are changed. (3) The Act does not condition rate-making upon valuation. Though Congress required that a valuation be made, it may have done so either for possible use in legislation or for such use, if any, as the Commission might see fit to make of it, in regulating either rates or security issues. The Supreme Court has decided that a statutory provision for finding “fair value” does not require use of “fair value” in fixing rates. “ ‘Fair value’ is the end product of the process of rate-making not the starting point * * *. The heart of the matter is that rates cannot be made to depend upon ‘fair value’ when the value of the going enterprise depends on earnings under whatever rates may be anticipated”.¹¹

It follows that the District Court was right in dismissing the Company’s appeal.

Judge CLARK concurs in the result of the foregoing opinion, though not in the opinion. The judgment dismissing the Company’s appeal is therefore affirmed.

Affirmed.

1 Only two Commissioners concurred. Commissioner Haukin’s term of office expired before the order was issued. lie had previously filed a dissenting opinion which substantially supports the position of the United States on the present appeals.

2 37 Stat. 974, § 8, D.C.Code, 1940, §§ 43 — 101 to 43 — 1007.

3 The suggestion has been made that large returns from reduced rates mean increased efficiency on the part of the Company’s personnel, and that the holder of the Company’s stock should profit from this supposed efficiency of its officers and employees. But nothing in the record indicates whether their efficiency has in fact increased, or even whether it is relatively high. It is notorious that the population of Washington, the variety of electrical appliances, and the use of electrical appliances, have greatly increased; that scientific progress of many sorts has been made; and that all this has greatly reduced the Company’s unit cost of producing and distributing electricity.

4 Dayton-Goose Creek R. Co. v. United States, 263 U.S. 450, 483, 44 S.Ct. 180, 174, 68 L.Ed. 388, 33 A.L.R. 472.

5 In each of the years 1930, 1931, 1932, 1936, and 1937, it exceeded $4,000,000.

6 Dayton-Goose Creek R. Co. v. United States, 263 U.S. 456, 483, 44 S.Ct. 169, 174, 68 L.Ed. 388, 33 A.L.R. 472.

7 Federal Power Commission v. Natural Gas Pipeline Co., 315 U.S. 575, 586, 62 S.Ct. 736, 743, 86 L.Ed. 1037.

8 Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 602, 64 S.Ct. 281, 287, 88 L.Ed. 333.

9 The notice expressly covered not only modification of “the sliding scale method” but also its abandonment; moreover the appealed order did not abandon the sliding scale but only modified it.

10 Apart from the suggestion that the “rate base” which the Commission “finds” may be considered a valuation.

11 Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 601, 64 S.Ct. 281, 88 L.Ed. 333. Section 6 of the Natural Gas Act, 52 Stat. 821, 824, 15 Ü.S.C.A. § 717e, provides that “Tho Commission may investigate and ascertain the actual legitimate cost of the property of every natural-gas company, the depreciation therein, and, when found necessary for rate-making purposes, other facts which bear on the determination of such cost or depreciation and the fair value of such property”. In the statute we are interpreting, unlike the Natural Gas Act, references to cost and value are not linked with rate-making. It is true that Par. 7 of our statute provides that the Commission “shall” value the property. But “shall value the property” does not mean “shall use value in fixing rates”.

While Par. 7 requires the Commission to make a valuation, Par. 6 requires the Commission to determine “the amount of money expended * * * the amount of money it would require to secure the right of way, reconstruct * * * and to replace ail the physical properties belonging to {be public utility * * * the outstanding stock, bonds, debentures, and indebtedness”. Nothing is said in either paragraph, or elsewhere in the Act, as to whether any of these matters must be adopted as a rate base. If any must, all must. That would be impossible and therefore cannot have been intended.

Potomac Electric Power Co. v. Public Utilities Commission of District of Columbia, 51 App.D.C. 77, 276 F. 327, appeal dismissed, Keller v. Potomac Electric Power Co., 261 U.S. 428, 43 S.Ct. 445, 67 L.Ed. 731, is no longer law.