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Application of Diamond State Telephone Co.

Supreme Court of Delaware

April 20, 1955

Application of the DIAMOND STATE TELEPHONE COMPANY For Changes in Rates in Accordance with Section 151 of Title 26 of the Delaware Code of 1953.

Rate proceeding. The Public Service Commission made a determination unfavorable to the telephone company and it appealed. After an adverse decision of the Superior Court, 103 A.2d 304, the Commission brought error. The Supreme Court, Bramhall, J., held that the Commission's finding that the property of the telephone company had a fair value of $22,000,000 was erroneous in that it was not ‘ just and right’ and in that proper weight had not been given to evidence of reproduction costs depreciated, but that the Superior Court had had no power to substitute its finding that the company's rate base should be $25,600,000.

Affirmed in part; reversed in part.

Wolcott, Justice, and Carey, Judge, dissented in part.

Modifying on reargument, 107 A.2d 786.

Page 438

Max Terry, Dover, James J. Walsh, Wilmington, and Richard W. Case, Baltimore, Md., for appellant.

William S. Potter and Richard F. Corroon (of Berl, Potter & Anderson), Wilmington, and John B. King and Paul Maloney, Philadelphia, Pa., for appellee.

WOLCOTT and BRAMHALL, Justices, and CAREY, Judge, sitting.

BRAMHALL, Justice.

In this case, subsequent to a prior opinion of this court the Diamond State Telephone Company (hereafter ‘ Company’ ) filed a motion for reargument. After consideration this motion was granted. The facts are fully set forth in the former opinion of this court herein referred to.

In its petition for reargument the Company alleged: (1) That the Superior Court had the power to determine whether or not the Public Service Commission (hereafter ‘ Commission’ ) gave proper weight to evidence of value, and, if not, that that court had the authority to revise the order of the Commission by making its own findings; (2) That the Superior Court's judgment in this case should not be reversed except for errors of law; and, (3) That the Superior Court did not err in its determination of ‘ fair value’ of the Company's property by giving predominant weight to reproduction cost depreciated and that the evidence submitted warranted the Superior Court in making the finding which it did relative to ‘ fair value’ .

[49 Del. 206] The questions raised by this motion present the following questions: (1) Did the Commission err in fixing the rate base; and, (2) Did the Superior Court have the

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right to examine the record before the Commission and, upon the finding of error, substitute its own findings in lieu of those of the Commission?

1. Did the Commission err in fixing the rate base?

At the hearing before the Commission the evidence submitted on behalf of the Company related entirely to reproduction cost less depreciation, amounting to approximately $28,400,000. The evidence submitted on behalf of the Commission related entirely to original cost depreciated, amounting to approximately $19,800,000. The factual evidence offered in support of these two theories was not contradicted. Without stating the manner in which it made its determination, the Commission fixed the value of the Company's property at $22,000,000. The Commission fixed the rate of return to the Company at 6 1/4%. The Company has taken no exception to such finding. It is therefore not in dispute.

In fixing rates the Commission chose to do so by determining the fair value of the property of the Company. Since the Commission chose to follow this method, we do not here reach the question as to whether or not the Commission was compelled to follow this method in making its findings. It is provided by statute that it may do so and it did.

In this state the Legislature has set out a procedure for the establishment of the fair value of the property of a public utility. Title 26, Sec. 126, Del.C.1953, provides as follows:

‘ 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 [49 Del. 207] 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 costs of the property, based upon the fair average price of materials, property and labor, and the developmental and going concern value of such public service company; and these, and any other elements of value, shall be given such weight by the Commission as may be just and right in each case.’

It is conceded that under this statute Delaware is what is known as a ‘ fair value’ state. The origin and development of this theory of determining values is set forth in the original opinion of this court. We see no reason for repeating it here.

In determining what is ‘ fair value’ several questions must be considered: first, the time as of which fair value shall be determined; secondly, the weight to be given to any and all of the different elements which the statute provides shall be considered in determining fair value; and, lastly, whether or not the rates fixed by the Commission will produce a fair and just return upon the reasonable value of the property use, or required to be used, in the service furnished to the public within this state.

As to the time for determining fair value, this court held in its previous opinion

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[ 107 A.2d 790] that ‘ fair value’ meant " present' fair value.' This determination is not disputed [49 Del. 208] on behalf of either the Commission or the Company. We find no fault with this conclusion now.

The question as to the weight to be given to the different elements enumerated in the statute in determining fair value has always been a problem of great difficulty to the courts. Some courts have given predominant weight to original cost; others to reproduction cost depreciated; and, still others to original cost and reproduction cost depreciated jointly. We feel free in this case to make our own interpretation of the meaning of ‘ fair value’ based upon the language of the statute and in the light of its historical background.

Among the items set up in Sec. 126 of the statute are original cost depreciated and reproduction cost depreciated. However, it is also set forth therein that all these different elements shall be considered along with all other pertinent elements of value and that they shall be given such weight as shall be ‘ just and right in each case.’

The difficulty with which a court is faced in determining fair value under a fair value statute, as in this state, is that while the statute sets forth the elements to be considered, except for the nebulous phrase ‘ just and right in each case’, there is nothing said specifically therein about the weight to be given to any or all of these different elements. Interpreting the pertinent sections of the statute as a whole, the intention of the Legislature in adopting the dictum of Smyth v. Ames, 169 U.S. 466, 18 S.Ct. 418, 42 L.Ed. 819, at set forth in the previous opinion in this case, becomes more understandable. Sec. 183(b) provides that the findings of the Commission ‘ shall be in sufficient detail to enable the court on appeal to determine the controverted question presented by the proceeding, and whether proper weight was given to the evidence.’ In Sec. 127 it is said that the Commission shall ‘ fix just and reasonable individual rates, joint rates, charges or schedules thereof’ . It is provided in Sec. 126‘ and these, and any other elements of value, shall be given such weight by the Commission as may be just and right [49 Del. 209] in each case.’ Considering the language quoted from each of these sections in the light of the relationship of these sections to each other, we interpret these sections to mean that the Commission in giving proper weight to the evidence presented and in giving such consideration to the criteria of fair value as are ‘ just and right’ shall accord to each element of value such weight as may be necessary and proper under the facts presented in each particular case.

Did the Commission in reaching its determination give proper weight to original cost depreciated and reproduction cost depreciated? As previously stated, the Commission gave no reason for its findings, although the statute provides that it shall do so. The finding of the Commission as to the fair value of the Company's property in the sum of $22,000,000 is approximately 12% above original cost depreciated, or approximately 25% under reproduction cost depreciated. Since there was no factual dispute in the testimony before the Commission, the question here is not one relating to the correctness or incorrectness of the testimony, or any part thereof, but rather one for the determination by the Commission as to the weight to be given to each of these elements or standards of value.

The findings of the Commission must reflect its reasonable judgment in accordance with the statute and all relevant facts. See New Jersey Power & Light Co. v. State, 9 N.J. 498, 89 A.2d 26, 31, 32. Sec. 183(b) provides that the ‘ findings shall be in sufficient detail to enable the court on appeal to determine the controverted question presented by the proceeding, and whether proper weight was given to the evidence.’ Under the language of this statute, the question presented is not whether there was substantial evidence to support the finding of the Commission; it is rather one of whether or not the finding of the Commission was against the weight of the evidence. If the clear

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weight of the evidence is against the finding of the Commission, it will be set aside. Manlowe Transfer & Distributing Co., Inc., v. Department of Public Service of Washington, 18 Wash.2d 754, 140 P.2d 287, 155 A.L.R. 928; [49 Del. 210]Public Service Coordinated Transport v. State, 5 N.J. 196, 74 A.2d 580; East Ohio Gas Co. v. Public Utilities Commission of Ohio, 133 Ohio St. 212, 12 N.E.2d 765; State ex rel. Dail v. Public Service Commission, 240 Mo.App. 250, 203 S.W.2d 491.

We are living in an inflationary period. Since 1940 the increase in the cost of wages and material which the Company has had to pay has been much greater than the increase in rates for telephone service. During that period the evidence discloses that the Consumers Price Index has increased 89%; the Company's wage has doubled; federal income taxes have increased 117%; building construction more than 100%; railway freight rates 79%; bare copper wire 107%; creosoted pine poles 123% and 148%; clay conduit 88% and 91%; private branch exchange switch equipment 50% to 100% for different sizes. To reflect this increased cost during this period the Company has been permitted to raise its telephone rates only 18%. As a result, the earnings deteriorated progressively until in 1952 it was necessary for it to reduce its surplus account by $33,000 in order to pay its usual dividend. There is no evidence to indicate that these present conditions are merely temporary and will not remain more or less static for a considerable period of time. Certainly they have existed long enough to place the burden of proving the contrary on the Commission.

The purpose of the statute is the supervision and regulation of public utilities within this state. For the protection of the public, due to the fact that the Company is a monopoly and is not subject to competition with other companies, it is the duty of the Commission to see that the public utility shall keep the price of its commodity or service within reasonable bounds. On the other hand, the Commission must see that the utilities shall receive a reasonable return based upon the present fair value of the company's property and sufficient to pay, in addition to the cost of production, a reasonable return to its stockholders and some surplus for necessary expansion. Consolidated Gas Co. of New York v. Newton, D.C., 267 F. 231; [49 Del. 211]City of Chicago v. Illinois Commerce Commission, 4 Ill.2d 554, 123 N.E.2d 500. The Company has no constitutional right to profits such as are realized or anticipated in highly profitable or speculative enterprises. Los Angeles Gas & Electric Corporation v. Railroad Commission, 289 U.S. 287, 53 S.Ct. 637, 77 L.Ed. 1180.

Considering the fact that such a large proportion of the Company's property was purchased prior to 1946, and considering also the very great increase in the cost of operation, with a very small increase in rates during the same period, it is clear that the amount allowed by the Commission in excess of original cost depreciated does not properly reflect the impact of inflationary prices upon the value of the Company's property or upon the cost of operation or replacement. Under such conditions the amount of approximately $22,000,000 fixed by the Commission as the fair value of the Company's property is inadequate to give the Company a reasonable return upon the present fair value of its properties.

It therefore follows that the finding of the Commission in this respect is not ‘ just and right’ and that proper weight was not given to evidence of reproduction cost depreciated. The finding of the Commission in this respect must be reversed.

2. Did the Superior Court have the right to examine the record before the Commission and, upon the finding of error, substitute its own findings in lieu of those of the Commission?

The Commission asserts that the Superior Court in fixing the Company's rate base at $25,600,000 improperly assumed the prerogatives and functions of the Commission, constituting reversible error. The

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Commission contends there were three possible courses which the Supreme Court might have taken once it decided to reverse the Superior Court: (1) to reverse the action of the Superior Court and affirm the action of the Commission; (2) to reverse the action of the Superior Court and remand the case to that tribunal with directions to remand the cause to the Commission for rehearing on the rate base question; or, (3) to reverse the action of the Superior Court and remand the [49 Del. 212] case to that tribunal in order that it might make further rate base determinations.

The Company argues that the Superior Court had complete and absolute power on appeal, if it should determine that the findings of the Commission, including those of fair value, were not ‘ just and right’, to make its own determination of fair value on the record before it for the guidance of the Commission where the interest of justice will be served by such action. Of course, it is contended that the action of the Superior Court was in the interest of justice.

The fixing of rates which a public utility will be permitted to charge is generally considered to be a legislative act. St. Joseph Stock Yards Co. v. United States, 298 U.S. 38, 56 S.Ct. 720, 80 L.Ed. 1033; City of Philadelphia v. Pennsylvania Public Utility Commission, 174 Pa.Super. 641, 102 A.2d 428; Water Works and Sanitary Sewer Board of Montgomery v. Sullivan, 260 Ala. 214, 69 So.2d 709; State ex rel. Utilities Commission v. State, 239 N.C. 333, 80 S.E.2d 133; Southwestern Associated Tel. Co. v. City of Dalhart, Tex.Civ.App., 1952, 254 S.W.2d 819; Duquesne Light Co. v. Pennsylvania Public Utility Commission, 176 Pa.Super. 568, 107 A.2d 745.

The Commission is much better able to perform this function for several reasons. Presumably, a public service commission would generally be much more experienced in the fixing of rates, since it would have a great deal of specific information at its ‘ finger tips' which would not be available to a judicial body. The Commission also has the opportunity of calling and hearing the testimony of expert witnesses, and, to some extent at least, would have the advantage of ...


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