Pennsylvania Water & Power Co. v. Federal Power Commission (Two Cases). Pennsylvania Power Utility Commission v. Federal Power Commission

In 1944, the Federal Power Commission received two petitions — one from the Mayor and City Council of Baltimore and others, the other from the Public Service Commission of Maryland — requesting that it institute an investigation of the justness and reasonableness of the rates and charges of Pennsylvania Water and Power Company and Susquehanna Transmission Company of Maryland1 with regard to such of their sales or transmission of electric energy as are subject to the Federal Power Act, 16 U.S.C.A. § 791a et seq. By orders issued in September and October of 1944, the Commission assumed jurisdiction and began its investigation of petitioners’ rates and charges. Intervention was requested by the Pennsylvania Public Utility Commission, the Maryland Commission, and Consolidated Gas Electric Light and Power Company of Baltimore,2 all of whom were permitted to and did participate in the hearings before the Commission. Those hearings, which began on April 15, 1946, and continued until July 16, 1947, were extensive in nature and produced a voluminous record. In January 1949, the Commission issued its order requiring Penn Water to reduce its rates and charges in accordance with the Commission’s findings. The revised schedules submitted in an attempt to comply with the Commission’s order were considered unsatisfactory and, on October 27, 1949, the Commission prescribed its own schedules for Penn Water’s services. Petitioners seek review of both the January and the October orders, as does the Pennsylvania Public Utility Commission which intervened before the Commission. In addition, the same parties have moved to set aside the orders or to obtain appropriate alternative relief.

The various proceedings before the Commission present a picture of petitioners’ operations which is essential to an understanding of the issues now before us. Penn Water owns and operates both a hydroelectric and a steam generating plant at Holtwood, Pennsylvania, which is on the Susquehanna River, some nine miles north of the Pennsylvania-Maryland border. In addition, Penn Water and the Transmission Company together constitute an interconnected interstate transmission system — with Penn Water owning and operating that part of the system which is located in Pennsylvania and Transmission Company, its wholly-owned affiliate, operating the Maryland 1 facilities. A third company, Safe Harbor Water Power Corporation, 3 owns and operates a hydroelectric development at Safe Harbor, Pennsylvania, the transmission facilities of which also interconnect with Penn Water and Transmission Company.

The interest of Baltimore Company in these proceedings stems from certain system foundation contracts which have, for the past-twenty years, tied its operations to those of petitioners and of Safe Harbor. Under these contracts, Penn Water is required to provide Baltimore Company at all times with the capacity and energy available at its hydro and steam plants, beyond that part of it which is needed to fulfill its own commitments to customers. Those customers must, however, have been previously approved by Baltimore Company. Baltimore Company is also entitled, by contract, to receive two thirds of Safe Harbor’s output and such part of the remaining one third which is left after Penn Water’s needs are satisfied. In turn, Penn Water is entitled to receive from Baltimore Company steam energy to the extent that it is available after Baltimore Company’s requirements have been met. Nor do the contractual entitlements of Baltimore Company necessarily represent power used by it. Its hydro entitlement is at the disposal of the entire system in order to permit the lowest incremental cost energy to be used as needed at the various parts thereof. In return for the rights granted it under its contract with Penn Water, Baltimore Company assures Penn Water of revenues sufficient to cover all of its operating expenses and a specified return on its investment. Similarly, both Penn Water and Baltimore Company assure Safe Harbor of a combined annual payment which yields a specified return above operating expenses. The function of these contracts and of the interconnection of facilities which they accomplish is, in the words of the Commission, to achieve operations which are “closely integrated and coordinated as a matter of economy, efficiency, flexibility, and maximum utilization of hydro capabilities * * * ”4of a river which has a very variable flow.5

I

Before considering the various challenges to the Commission’s rate order, we will .address ourselves to petitioners’ motions ;to set aside and annul that order. These were filed with us on December 29, 1950, shortly after the United States Court of Appeals for the Fourth Circuit had issued a judgment declaring certain phases of the contractual arrangements between Penn Water and Baltimore Company illegal under the federal antitrust laws and the laws of Pennsylvania.6 The illegality of these system foundation contracts was first raised by petitioners in their petition for rehearing of the January 1949 order, about nineteen months before the Fourth Circuit decision was handed down. The Commission denied the request for rehearing, ruling, inter alia, that the validity of. the Commission’s order is not dependent upon the legality of the contracts under the antitrust laws. Petitioners’ position here is that the Fourth Circuit’s decision requires us to invalidate the Commission’s rate order.

The problem raised by the motions is one of the interrelation of two statutory schemes — each of which reflects different historical pressures and different conceptions of the public interest. The Sherman Act, 15 U.S.C.A. §§ 1-7, 15 note, and related laws represent an attempt to keep the channels of competition free so that prices and services are determined by the workings of a free market. They derive from the conviction that the greatest good to the greatest number will be attained by preventing monopoly, monopolizing and combinations in restraint of trade. In marked contrast is a statute such as Part II of the Federal Power Act. * It evidences congressional recognition that competition can assure protection of the public interest only in an industrial setting which is conducive to a free market and can have no place in industries which are- monopolies because of public grant, the exigencies of nature, or legislative preference for a particular way of doing business. In place of competition as a generalized and indirect regulator of prices and services in the field of interstate transmission of electric energy at wholesale, Congress has substituted a regulatory agency authorized to supervise almost every phase of the regulated company’s business.7 8 Rates charged by such utilities, as well as the services and contractual provisions affecting them, must be “just and reasonable.” And what is “just and reasonable” is not determined by the pressures of competition but by the adequacy of the service to the public, the fairness of the return allowed upon the investment in the company, and the degree to which the congressional objective of efficient use of the nation’s power resources is served. Nor was Congress unmindful of the problems of undue concentration of power in this field, characterized as it is by local monopolies. In the Public Utility Holding Company Act, 15 U.S.C.A. § 79 et seq., it provided antitrust-like remedies to assure that integration of power companies be limited in scope and confined to an efficient power area.9

These contrasting objectives indicate that the antitrust laws can have only limited application to industries regulated by specific statutes. Those laws, though quite properly viewed as having been intended “to make of ours * * * a competitive business economy”,10 are not constitutional mandates which freeze all aspects of our economic system, for all time into the pattern of “laissez-faire.” We think it obvious that they may not be extended beyond that part of the economy which Congress intended to leave to the operation of the free market. “Certainly what Congress has forbidden by the Sherman Act it can modify. * * * [It] is not impotent to deal with what it may consider to be dire consequences of laissezfaire.” 11

Courts have given effect to considerations such as those outlined above by confining the operation of the antitrust laws to those matters which are not the product of state action or which fall outside the reach of power vested in a regulatory agency. Thus, Congress or the states may authorize arrangements among producers even though such action without governmental sanction and enforcement would violate the antitrust laws.12 Similarly, states may authorize monopolies13 and Congress may susbstitute direct price fixing by a public agency for competition.14 But when the practice complained of is not protected by legislative sanction, either directly or by being committed to a commission empowered to deal with it, the antitrust laws have been relied upon as a minimal means of protecting the public interest. The net effect of what we have already said is that, though regulated industries are not per se exempt from the antitrust laws and repeals by implication are not favored, the antitrust laws are superseded by more specific regulatory statutes to the extent of the repugnancy between them.15That is not to say that competitive considerations may not be components of the public interest sought to be served by a particular regulatory statute, and hence a guide to a commission’s exercise of its authority when the question is properly before it. Thus, it has been said that the Federal Communications Act, 47 U.S.C.A. § 151 et seq., “recognizes that the field of broadcasting is one of free competition. The sections dealing with broadcasting demonstrate that Congress has not, in its regulatory scheme, abandoned the principle of free competition, as it has done in the case of railroads, in respect of which regulation involves the suppression of wasteful practices due to competition, the regulation of rates and charges, and other measures which are unnecessary if free competition is to be permitted.’’16 But where a statute povides for comprehensive and detailed regulation of a particular industry, as do the Interstate Commerce Act, 49 U.S.C.A. § 1 et seq., and the Federal Power Act,17 there is, as we have indicated, only a limited area for application of antitrust considerations to Commission decisions.1818

Applying these general propositions to the problem before us, we find that the Fourth Circuit’s decision,19 like that of the Supreme Court in Georgia v. Pennsylvania R. Co.,20 seeks to assure public utility companies of freedom to exercise their private initiative in promulgating rates, services and changes therein. This limited freedom of action is an important condition precedent to proper operation of the rate-making process. Without it, the rates proposed and approved may tend to find themselves in the upper reaches of the zone of reasonableness within which rates may properly fall. The antitrust laws have been the means of assuring that such initiative remains unchecked by conspiracies or other illegal arrangements with which the regulatory commission is powerless to deal. 21 That is not to say, however, that if otherwise illegal arrangements are permitted or required by a valid statute, they are not shorn of their illegality to that extent.

We construe the Fourth Circuit’s decision. as having done no more than declare illegal under the antitrust laws certain restraints exercised by Baltimore Company upon Penn Water — such as requiring its approval before it could take on new customers, or expand generating facilities. Those restraints had been privately agreed upon by the parties and submitted to the Commission as an accomplished fact. The court was careful to avoid using language which might be interpreted in such fashion as to affect any rate proceeding then in process. This approach followed the lead of the Supreme Court in State of Georgia v. Pennsylvania R. Co., 324 U.S. at 461-462, 65 S.Ct. 716, 89 L.Ed. 1051. It was pointed out in the Georgia case that issuance of an injunction under the antitrust laws against the conspiracy there charged would in no way affect any rate proceedings. It would merely- enable the parties to exercise their initiative with regard to future rate proceedings.

In our view, the Fourth Circuit’s opinion neither purported to nor did relieve Penn Water from its obligation under the Federal Power Act to continue the then-existing services and rates. It is those services and rates, reflecting underlying operations, which were the subject of the Commission’s order. “A rate is not necessarily illegal beoause it is the result of a conspiracy in restraint of trade in violation of the Anti-Trust Act. What rates are legal is determined by” the regulatory statute.22 The validity of Commission action in this proceeding must be determined in light of the criteria furnished by the Federal Power Act, as applied to the operations and arrangements under scrutiny. If jurisdiction was properly assumed by the Commission, if its rate order is “just and reasonable” within the meaning of the Federal Power Act,23 and if its findings are supported by substantial evidence,24 Penn Water can have no complaint and our review is at an end. If petitioners, as a result of the Fourth Circuit’s decision, wish to make any changes in operations, contracts, arrangements, etc., within the jurisdiction- of the Federal Power Commission, they must do so in accordance with the Federal Power Act.25 Under § 205(d) thereof, “Unless the Commission otherwise orders, no change shall be made by any public utility in any such rate, charge, classification, or service, or in any rule, regulation, or contract relating thereto, except after thirty days’ notice to the Commission and to the public.” 26 Pursuant to that section, petitioners may submit new arrangements and rates based thereon to the Commission. And the Commission “either upon complaint or upon its own initiative without complaint” may “enter upon a hearing concerning the lawfulness of such rate, charge, classification, or service * * 27 If Penn Water feels itself aggrieved after such proposed changes have been acted upon by the Commission, it may at that time bring a new petition for review. In short, a “rate established in the mode prescribed should be deemed the legal rate, and obligatory alike upon carrier and shipper until changed in the manner provided” by the statute.28

To grant petitioners’ motions and set aside the order at this time would be to substitute antitrust criteria for those of the Federal” Power Act, a substitution which would be at cross-purposes with the intent of Congress. It would result in the reopening of a rate proceeding begun in 1944 because of an issue raised for the first time on rehearing in 1949 and a decision handed down in a suit between private parties under a non-controlling statute in 1951. In view of this chronology, we think the Supreme Court’s statement in Interstate Commerce Commission v. Jersey City, 1944, 322 U.S. 503, 514, 64 S.Ct. 1129, 1134, 88 L.Ed. 1420, is especially pertinent: “If upon the coming down of the order litigants might demand rehearings as a matter of law because some new circumstance has arisen, some new trend has been observed, or some new fact discovered, there would be little hope that the administrative process could ever be consummated in an order that would not be subject to reopening.” 29 The effect of granting petitioners’ motions would be to disrupt a pattern of regulation which was carefully drawn to meet the problems of a complex industry.

Petitioners rely for their position not only on the effect of the antitrust laws upon a regulated industry but also upon the fact that Penn Water, as a licensee under Part I of the Federal Power Act,30 is subject to § 10(h) which is said to incorporate Sherman Act standards into the Federal Power Act.31 Section 10(h) does indeed virtually restate the Sherman Act. But it is found only in Part I of the Federal Power Act, which deals with water-power licensees, and not in Part II, dealing with public utilities selling electric energy in interstate commerce at wholesale. This fact alone would indicate that Congress did not intend to make licensees which are also Part II companies, such as Penn Water,32 subject to § 10(h).

But there is a more fundamental reason for holding § 10(h) inapplicable to Part II companies. The very thing which that section prohibits, the combination of licensees with others to limit the output of electrical energy, is made one of the primary objectives of Part II. Section 202(a) 33 thereof imposes the duty upon the Commission to encourage public utilities to combine for the interconnection of facilities. Under certain circumstances, the Commission may even order such interconnections and regulate the rates and contractual arrangements involved therein.34 The end thus sought to be achieved and, in the Commission’s view, served by the present arrangement between Penn Water and Consolidated, is the most efficient use of the nation’s resources consistent with the public interest in cheap power and in Conservation. We are unable to accept the proposition that Congress intended to have § 10(h) prevent that which is contemplated by Part •II, a statute which is later in time and more specific in application. Our view is supported by the fact that § 10(h) is found in that part of the Act which establishes a limited federal regulatory scheme — one which does not come into play unless (1) the state in which the licensee is located has no regulatory commission, or (2) the state commissions involved are unable to agree upon rates for interstate sales.35 It'seems entirely likely that Congress believed that, in the absence of detailed federal regulation such as that in Part II, licensees should be required to adhere to antitrust standards. This is, in effect, saying no more than what we have already said about the antitrust laws and regulated industries. The prohibitions of § 10(h) would apply to a licensee which is also regulated under Part II only to the extent that the prior statute is not repealed by the clear repugnancy between it and the later statute.

The motions to set aside or to remand the Commission’s orders on the basis of the Fourth Circuit’s decision and the other points referred to above are denied.

II

The Federal Power Commission assumed jurisdiction of petitioners’ rates and services pursuant to both Parts I and II of the Act. Petitioners challenge this 'assumption of jurisdiction on the ground that licensees may be regulated only under Part I and that the Commission’s finding that the states involved are unáble to agree, which is a condition precedent to federal jurisdiction under Part I, is not supported by the evidence.

Part I applies to all federal water-power licensees, whether operating in intra- or interstate commerce. It makes Federal Power Commission regulation of the interstate operations dependent upon either (1) the non-existence of a state regulatory commission in the licensee’s state, or (2) the inability of the states involved in the licensee’s interstate activities to agree.36 Part II is not so qualified. It confers broad authority upon the Commission to regulate the rates, services, etc., of all public utilities which own and operate facilities engaged in the “transmission of electric energy in interstate commerce” and in “the sale of electric energy at wholesale in interstate commerce”.37

If the Commission is correct in its view that petitioners’ present operations are interstate in nature and involve the transmission and sale of electric energy at wholesale, a question we will discuss infra>38 then they are drawn within the express language of Part II unless the existence of Part I requires that we read an implied exception for licensees into Part II. Such a construction might appear more plausible if § 201(f) 39 of Part II did not specify those to whom that Part was not intended to apply. That section conspicuously makes no reference to Part I licensees. It seems unlikely that Congress would not have included so important a group as federal water-power licensees among the specific exceptions to Part II if it had actually intended to except them.

The only judicial utterances cited to us in this regard are to the effect that “ ‘Part II, as added in 1935, gives the Commission jurisdiction over the transmission and sale of electricity at wholesale in interstate commerce, whether or not by licensees,’ ”40 and that the Safe Harbor Company “is not only a licensee under Part I but it is also a public utility under Part II”.41 Neither Alabama Power Co. v. Federal Power Commission42 nor Niagara Falls Power Co. v. Federal Power Commission,43 both of which contain language which might be thought to run counter to Part II jurisdiction ov.er a licensee, was a rate case. Neither involved Part II and the possibility of conflict between Parts I and II was not discussed.

Legislative history bearing directly on the point also supports application of Part II to licensees. For example, Representative Rayburn, Chairman of the House Committee reporting the bill, pointed out that there was no need to make certain prohibitions contained in § 305(a), 16 U.S.C.A. § 825d(a), specifically applicable to licensees because they had already been made applicable to “public utilities” generally. He said, “The ■ Senate bill includes licensees within the provisions of this section, but inasmuch as such licensees when interstate operating public-utility companies will be subject to the provisions of the section in any event, licensees have been omitted from the bill as reported, because of the lack of public interest in those companies which are not public utilities.”44

We consider Part II to have occupied the field with regard to interstate wholesale rates of electric companies. It filled a gap in state regulation of electric companies which had been created by the Supreme Court’s decision in the Attleboro case.45 That case made it clear that interstate wholesale rates, as distinguished from interstate retail rates,46 were beyond the reach of state regulatory Commissions.47 The new legislation required to bring such rates under federal control, Part II, was drawn in 1935 with an eye to the peculiar problems of wholesale electric companies and in light of the considerable experience with such companies which had been gleaned in the fifteen years since the Federal Water Power Act had been drafted in 1920. It was apparent to Congress that application of this later scheme of regulation to the interstate wholesale rates of non-licensees alone would have created disparate regulatory treatment of licensees and non-licensees engaged in similar activities. Since this would have conflicted with the objective of Part I, which places primary emphasis upon state regulation in order to make treatment of licensees as much like that of ordinary state public service companies as possible, Congress conferred authority upon the Federal Power Commission to occupy the entire field of regulation of interstate wholesale rates, whether those of licensees or non-licensees. All other rates of licensees, whether engaged solely in intrastate activities or in interstate retail selling, were left to the regulatory scheme provided in Part I. Thus, even if Part I was intended to confer jurisdiction upon the states or the Federal Power Commission to regulate interstate wholesale rates, it was to that extent repealed by Part II.

The only problem suggested to us which may arise from such a construction is that, in the event of recapture by the United States of the site awarded to a licensee, which is also a public utility, payment would have to be made pursuant to a valuation formula contained in Part I, which is said to differ from that used for rate-making in Part II. We hardly think that the intention of Congress to reach all public utilities, whether licensees or non-licensees, under Part II can be ignored in order to eliminate the possibility that there may some day be an occasion for valuation of the property in a manner different from that provided for in Part II. The applicability of Part II to licensees would create no greater effect than would the usual prePart II situation, under which a state commission would ordinarily have been regulating the licensee’s activities under its own regulatory statute prior to recapture.48 We note, however, that the Third Circuit has pointed out the essential sameness of the valuation formulas of Parts I and II.49

In view of our position with regard to the applicability of Part II, it is unnecessary for us to examine the sufficiency of the evidence in the record to support the Commission’s finding under Part I that the Maryland and Pennsylvania commissions are unable to agree. But in the event that the Part I question should arise on appeal from our decision, we note that we have examined the record and find substantial evidence to support the Commission’s finding on this point.

Ill

Rejection of petitioners’ view that Part I furnishes the sole authority for federal regulation of their operations brings us to the contention that all or almost all their sales are intrastate in nature and hence may not be regulated under Part II. It is said that (1) Penn Water’s sales to its Pennsylvania customers for resale are sales of electric energy produced and sold in Pennsylvania; (2) the "back-feed energy generated by Baltimore Company to Penn Water and sold by it to its Pennsylvania customers loses its interstate character when it is received by Penn Water and comingled with the Pennsylvania-produced energy. Even if these sales of back-feed are considered interstate, it is suggested that they constitute so negligible a portion of Penn Water’s total sales to Pennsylvania customers that they cannot furnish the basis of federal regulation, or that federal regulation may extend only to an allocable portion of interstate sales.

Section 201(b) of the Federal Power Act50 makes Part II applicable “ * * * to the transmission of electric energy in interstate commerce and to the sale of electric energy at wholesale in interstate commerce, but shall not apply to any other sale of electric energy or deprive a State or State commission of its lawful authority now exercised over the exportation of hydroelectric energy which is transmitted across a State line. The Commission shall have jurisdiction over all facilities for such transmission or sale of electric energy, but shall not have jurisdiction, except as specifically provided in sections 824-825r of this title, over facilities used for the generation of electric energy or over facilities used in local distribution or only for the transmission of electric energy in intrastate commerce, or over facilities for the transmission of electric energy consumed wholly by the transmitter.”

We are convinced from an examination of the voluminous materials submitted to us that the Commission properly found Penn Water to be part of an “integrated and coordinated interstate electric system.”51 Energy generated at Safe Harbor and Holtwood flows south to Baltimore and, at times, Baltimore-generated energy moves north along the same line to Safe Harbor and Holtwood where it, together with energy generated there, is delivered to Penn Water’s Pennsylvania customers. This movement to and fro is made necessary by the varying electric loads which must be supplied at various times of the day. The flow of the Susquehanna River, which is the source of Penn Water’s hydro power, is too irregular to carry unaided the large utility loads it is often called upon to handle. Thus, during the river’s low periods, hydro power is scarce and Baltimore Company’s steam generators are used to “firm up” or keep constant the output of the hydro plants. At such times, the hydroelectric generators are operated only at the peak of the load and, during off-peak hours, the river flow is impounded in plant reservoirs for subsequent use at peak périods. Conversely, during the periods when the river is high, Penn Water’s hydroelectric plants are used to supply the heavy loads in both Pennsylvania and Maryland which would otherwise have to be supplied by the more expensive steam generation.

As a result of the carefully coordinated operations of the participants in this interstate energy pool, Penn Water reaps the benefit of Baltimore’s considerable and constantly available steam capacity while Baltimore Company enjoys the benefits of the cheaper hydroelectric energy. The activities of each are so meshed that the peak demands of the customers of each can be met easily at all times and with the most economic source of power then available. As the Commission has pointed out, the arrangements now in existence have been “carefully worked out” to meet the needs of the interstate system “as to firm energy requirements, while operations involving firm, interchange and emergency energy are conducted at all times by a dispatching system controlled by a dispatcher’s office in coordination with various operating committees. * * * the constituent companies of this interconnected system plan and coordinate far in advance steam maintenance schedules which are based largely upon the predicted flows of the Susquehanna River and the determination of the availability of hydro energy during periodic steam maintenance outages.”52 Because such an energy pool, drawing upon the extensive steam, and hydro capacities of Penn Water, Safe Harbor and Baltimore Company now exists, both Penn Water and Baltimore. Company have been able to satisfy commitments which would otherwise be outside their individual capacities, as they are now constituted. Given such interconnected and integrated interstate wholesale operations, there can be no such thing as assigning a particular sale solely to operations within Pennsylvania. Each sale is in effect a pool sale drawn from the ■integrated interstate system and hence interstate in nature.

The same conclusion was reached by the Third Circuit with regard to another of the participants in this pool, Safe Harbor. The court pointed out that Safe Harbor is “part of a large integrated interstate electric system” and that its electric output “must be treated as an integrated whole.”53 In the second Safe Harbor case, the court again held that Safe Harbor’s sales “constitute in fact wholesale sales in interstate commerce” because they are “delivered to an integrated interstate electric system”.54

We find substantial evidence in the record to support the Commission’s factual findings with regard to the interstate nature of Penn Water’s sales. It is the nature of the operations underlying the sales which furnishes the basis for Commission action rather than legalistic niceties of title and place of sale.55 Those operations bring petitioners’ rates and services within the reach of Part II of the Federal Power Act. The Commission did not assume jurisdiction over any direct consumer sales. It “was meticulous to take in only territory which this Court had held the states could not reach”56 — interstate sales at wholesale.

: IV

Penn Water challenges the Commission’s determination of rate of return and its calculation of the rate base on both legal and evidentiary grounds. Ever since Hope Natural Gas57 was decided, such challenges have .become increasingly difficult to sustain. That case established the proposition that the Federal Power Commission is “ ‘not hound to the use of any single formula or combination of formulae in determining rates’, so long as the ‘total effect,’ ‘impact’ or ‘end result’ of the rate order ‘cannot be said to be unjust or unreasonable.’ The limits set by the Court are deliberately broad, resulting both from notions of special competence and the conception of rate-making as a primarily legislative process. So long as the public interest — i. e., that of investors and consumers — is safeguarded, it seems that the ■Commission may formulate its own standards.” 58 The “Commission may adopt any method of valuation for rate base purposes so long as the end result of the rate order ‘cannot be said to be unjust and unreasonable’.” 59 If a rate order produces “adequate revenues above operating expenses (including depreciation) to pay interest on the bonds, dividends on the stock and, in general, maintain the financial integrity of the enterprise”,60 it will not be disturbed. It still remains for us, however, to examine the theory upon which the Commission purported to act and to assure that its action was within the realm of allowable discretion and supported by substantial evidence.

a. Rate of return Rate of return

Turning first to that part of Penn Water’s petition which is addressed to rate of return, we find it argued that the 5]4 per cent allowed by the Commission on that part of the bonds and stock representing actual investment does not satisfy the test established in Hope and referred to above. Determination of the fairness of a rate of return requires “a study of the capital costs of the business, such as service on the debt and dividends on the stock, in the light of returns on investments in other enterprises having a similar risk factor. Only upon such evidence can the Commission determine what is required ‘to assure confidence in the financial integrity of the enterprise, so as to maintain its credit and to attract capital.’ ”61 This “standards of finance resting on stubborn facts”62 was satisfied by the Commission which carefully investigated Penn Water’s position in relation to that of other utilities and concluded that it was less subject to risk than are most other utility companies. The assurance it receives from Baltimore Company, under presently existing arrangements, of revenues sufficient to cover operating expenses and a fair return on its investment removes much of even the small amount of risk ordinarily found in public utility companies. To refer, as Penn Water does, to the extraordinary risk involved in the abatement of Baltimore Company’s payments to it if it fails to deliver energy because of acts of God is to illustrate how carefully insulated Penn Water really is from any substantial risk. Nor is the variability of the flow of the Susquehanna a substantial risk factor at present since Baltimore Company’s payments to Penn Water are not dependent upon the latter company’s output.

It does not prove Penn Water’s case to point to the higher than 554 Per cent return earned by the average utility. Safe Harbor, for example, was allowed only a five per cent return by the Commission. On review, the Third Circuit said, " * * * It would be difficult to conceive of .a more secure hydroelectric proj ect” 63 and affirmed the rate order. In view of the similarity of their market and financial arrangements, it would seem that Penn Water’s risks approximate Safe Harbor’s more than they do those of the “average” utility. “Each utility presents an individual problem.”64 Stability of market and income, proximity of the company to the capital markets, a long history of satisfactory earnings — all these are factors which go into the complex of fair return. Under the circumstances of this company, the Commission thought a 5}4 per cent return applied to the rate base and designed to provide 3.17 per cent for bonds, 5.21 per cent for preferred stock and 8.64 per cent for common stock and surplus was “fair.” We think the Commission had substantial evidence before it to support its findings of fact on this phase of the case and that the rates allowed meet the test laid down in the Hope case. Nor do we think that a rate of return based upon the historical cost of capital or petitioners’ milder approximation thereof, the competitive cost of capital, is a necessary part of that test. We think it sufficient to point out that cost of capital studies such as the one presented to the Commission have withstood judicial review in too many cases for us to reject the one now before us as a proper criterion of rate of return.

b. Rate base Rate base

Petitioners contend that the Commission improperly excluded more than two million dollars from the amount found by it to be the gross investment in property used and useful in the public service. Commission deduction of the reserve for depreciation from the gross investment in arriving at the net investment rate base is also challenged. The propriety of such a deduction under a regulatory formula like that in Part II is too well settled to warrant our discussing it at this time. Nor would Part I, if applicable, require a different conclusion.65 As to the items excluded from the rate base, we think the Commission acted properly and upon substantial evidence. We will discuss pnly the more important of them:

1. Flashboard developement costs — The Commission included in the rate base the cost incurred in 1911 and 1912 in connection with the original installation of the project flashboard system but excluded almost $50,-000 expended from 1913 to 1921. Such ex-' penditures were for renewal of flashboards or for experimentation and testing in regard to improvement of flashboards, which experiments were ultimately abandoned. The record discloses that flashboards must be replaced so often, as a result of being carried away in whole or in part by high water, that expenditures in connection therewith are properly treated as operating expense and hence not includible in the rate base. Nor need the Commission include in the rate base abandoned experiments which do not manifest themselves in property useful in the public service.66 There is ample evidence in the record to demonstrate that these experiments neither were necessary to nor contributed to the flashboard improvement ultimately adopted.

2. Interest during construction — The Commission allowed 6 per cent interest on construction costs during the period of construction to be included in the rate base on the theory that “during the period of construction ‘there is no operating income available with which to meet these necessary charges incident to construction.’ ” 67 But Penn Water disputes the finding that there was a cessation of construction for 22 months during the more than six year period of construction and the attendant exclusion from the rate base of interest for that period, amounting to over $700,000. Penn Water also objects to exclusion of other losses found by the Commission to be traceable to the cessation of construction. “To justify allowance of interest during construction as part of the cost of the project it must appear that the licensee carried out his obligation * * * to prosecute the • construction with due diligence.”68 Here, the cessation of construction was due to the inability of Penn Water to obtain funds after it found that its financing was inadequate. Even if it be conceded that the financial market at the time of cessation of construction was as unsettled as Penn Water says, it does not follow that rate payers should now bear the burden of its failure to provide adequate financing in advance of construction to sustain the entire project. Such losses are as much due to a risk of the business as were the losses excluded from the rate base in the Puget Sound case. We agree with the Commission’s view, expressed in its brief, that “Interest on the idle investment and other losses due to financial inability to go into operation as soon as the physical conditions of normal construction would permit are no more to be recouped from rate payers in later years than past losses in operation * * 69

3. Claimed' costs from issuance of common stock for properties — Twenty thousand shares of common stock in Penn Water’s predecessor, McCall Ferry Power Company, were issued as part payment for certain properties. These shares are said to represent $500,000 in plant cost which should be included in the rate base. There was substantial evidence to support the Commission’s conclusion that almost all the shares were acquired by one Hutchinson in a transaction which was not at arm’s length and represented a profit beyond the cost of the properties to him. Hutchinson was part of a group which pooled properties and banking services necessary for the project and issued stock to itself beyond what the Commission found to be proper compensation for properties and services. Under such circumstances, especially since “neither party had any interest to reduce the nominal capitalization”,70 the stock represented paper capitalization of anticipated profits rather than actual corporate assets. Commission exclusion of the 20,000 shares resulting from this transaction was merely an elimination of the water in the stock as measured by the estimated original cost of the plant.

4. Expenditures previously charged to operating expense or to depreciation reserve — These expenditures total almost $100,000. They were properly excluded from the rate base because they have already been recovered by investors in the form of annual charges to operating expenses and depreciation reserve.71

V'

The Commission found that Baltimore Company was entitled to $1,733,318 of the total rate reduction of $1,954,261 ordered by it, based on 1946 operations. This allocation is challenged by petitioners who argue, inter alia, that it is based upon (1) an incorrect reading of certain governing contract provisions; (2) an incorrect measure of the cost of steam generated energy and capacity supplied by Baltimore Company and Penn Water; (3) an improper overstatement of revenues due to Baltimore Company from Penn Water. In view of what we have already said about the effect of the Fourth Circuit decision upon this rate proceeding, supra, 193 F.2d 233-238, there there is no need to consider whether the various contracts involved herein are part of an arrangement declared illegal under the antitrust laws.

(1) Penn Water’s generating capacity alone is inadequate to meet its commitments to its Pennsylvania customers. It makes up the deficiency in part through use of its contractual entitlement to one third of Safe Harbor’s output and, to the extent of a deficiency thereafter, by diversion of part of Baltimore’s two-thirds entitlement to Safe Harbor’s output. The Commission included this diversion from Baltimore Company’s entitlement as energy supplied by Baltimore to Penn Water for which Baltimore was entitled to a credit against Penn Water’s cost of services to it. Penn Water argues, nowever, that the 2:1 entitlement to Safe Harbor’s output does not arise until after Safe Harbor has met obligations, which it shares jointly with Penn Water, to certain of Penn Water’s Pennsylvania customers. Such a reading of the contract would mean that the energy said to be diverted from Baltimore Company by Penn Water to satisfy those customers was not Baltimore’s at all and hence that no credit would be due to it. Penn Water’s view proceeds from its assumption that since Safe Harbor is a party to the contracts referred to, it is obligated thereunder and that such contracts are obligations “to serve imposed on [it] * * by law” which are specifically exempted from the 2:1 entitlement arrangement.

We think the evidence before the Commission amply disclosed that Safe Harbor was merely a nominal party to the contracts with the Pennsylvania companies and that it was made such as part of a short-lived attempt to obtain certain tax advantages. That attempt was never brought to fruition. If it had been, it would have resulted in a change of the three-way contract-to provide that Baltimore and Penn Water “would purchase the balance of the Safe Harbor output in the proportion of two-thirds and one-third respectively.” This contemplated change, which was never made, would have accomplished what Penn Water would like us to do even without the change. The three-way contract has consistently been interpreted by Safe Harbor and Penn Water in reports to stockholders and to various regulatory agencies as making a 2:1 division of Safe Harbor’s entire output between Baltimore Company and Penn Water. And the same construction of the contract was referred to in the second Safe Harbor case when the court said, “Safe Harbor’s output is delivered to an integrated interstate electric system under the terms of the so-called ‘1931 contract’, two-thirds of the energy being sold to the Maryland Company [Baltimore Company] and the remaining one-third going to the Pennsylvania Company [Penn Water].” 72

The materials before the Commission were hardly consistent with the interpretation now sought by Penn Water. They pointed instead to the view, adopted by the Commission, that Baltimore Company had a two-thirds entitlement from Safe Harbor which was diverted by Penn Water in order to satisfy its Pennsylvania commitments.

(2) Penn Water contends that, even if Baltimore Company’s energy was diverted by it for use in fulfilling its Pennsylvania commitments, the Commission erred in the basis used by it for computing the resultant credit owing from Penn Water to Baltimore. Pointing to Article VII of Safe Harbor’s Rate Schedule, Penn Water says that the credit should be based upon Safe Harbor’s hydro costs rather than Baltimore Company’s steam generated costs. We agree with the Commission’s view that Article VII does not apply to voluntary diversions of energy such as are involved here. It applies only to failure of Penn Water, through impairment of its transmission facilities, to transmit Safe Harbor energy to Baltimore Company. There was no such impairment here but instead, there was a diversion at Penn Water’s request and with Baltimore’s consent, of part of the latter company’s entitlement. If Penn Water’s view were to prevail and it were to pay Baltimore only the hydro costs, Baltimore Company would have no incentive to permit diversion of its hydro entitlement. Such diversion requires it to use its more expensive steam generating facilities, a use for which it is compensated by Penn Water’s payment of the cost of such steam generation to the extent it replaces Baltimore’s hydro entitlement. This arrangement benefits Penn Water because it is enabled to satisfy commitments it could not otherwise undertake by paying the cost of the least expensive steam energy available at the time of need. Similarly, it is beneficial to Baltimore Company because it brings the less expensive hydro power into its system. The conclusions of the Commission on this point are proper and are supported by substantial evidence.

(3) The Commission included as part of Penn Water’s cost of service to Baltimore Company the cost of energy sold by Penn Water as economy interchange — energy generated at a lower cost plant and used to replace generation at a higher cost plant — to certain of its Pennsylvania customers. And as part of what Penn Water owed to Baltimore Company, the excess revenues derived from . such sales “for Baltimore’s account” were included. The evidence supports the Commission’s view that Baltimore Company is entitled to all of Penn Water’s output and of Penn Water’s one-third Safe Harbor entitlement remaining after Penn Water’s firm power obligations to its Pennsylvania customers are met. The sales of interchange energy were sales of energy diverted from Baltimore Company’s entitlement and, as such, Baltimore was entitled to the revenues therefrom less, as we have indicated, payment to Penn Water for its cost of service.

VI

Penn Water raises many other points which, in its view, constitute error requiring us to reverse in part or to remand. Many of these points involve just the sort of weighing of evidence and making of pragmatic adjustments which fall within the special competence of an expert agency and which should not be interfered with by a court unfamiliar with day-to-day operations and complex technological and financial materials. Our review is designed to lea-ve to the Commission the flexibility which is necessary if it is satisfactorily to discharge its function of protecting the public interest, and yet to prevent arbitrary action outside the scope of the Commission’s authority. We have examined all the points raised and are convinced that the Commission’s treatment of each one was within the range of its statutory authority and was supported by substantial evidence.

The motions to set aside the Commission’s orders or to remand are denied and those orders are

Affirmed.