EN BANC
G.R. No. L-32068 October 4, 1971
REPUBLIC OF THE PHILIPPINES, petitioner,
vs.
HON. ENRIQUE MEDINA, HON. GREGORIO PANGANIBAN, HON. JOSUE L. CADIAO, HON. FILOMENO KINTANAR, HON. PAZ VETO PLANAS, as Associate Commissioners of the Public Service Commission and MANILA ELECTRIC COMPANY, respondents.
G.R. No. L-32083 October 4, 1971
AMELITO R. MUTUC, petitioner,
vs.
MANILA ELECTRIC COMPANY and THE PUBLIC SERVICE COMMISSION, respondents.
G.R. No. L-32155 October 4, 1971
MAYOR ANTONIO J. VILLEGAS, for and in behalf of the City of Manila and all other Manila concessionaires similarly situated, petitioner,
vs.
PUBLIC SERVICE COMMISSION, HON. ENRIQUE MEDINA, as Commissioner, GREGORIO C. PANGANIBAN, JOSUE L. CADIAO, FILOMENO C. KINTANAR, and PAZ VETO PLANAS, as Associate Commissioners of the PUBLIC SERVICE COMMISSION, and MANILA ELECTRIC COMPANY, respondents.
G.R. No. L-32374 October 4, 1971
REPUBLIC OF THE PHILIPPINES, petitioner,
vs.
PUBLIC SERVICE COMMISSION and MANILA ELECTRIC COMPANY, respondents, AMELITO R. MUTUC, and LEONARDO BARO, intervenors.
G.R. No. L-32402 October 4, 1971
MANILA ELECTRIC COMPANY, petitioner,
vs.
PUBLIC SERVICE COMMISSION and REPUBLIC OF THE PHILIPPINES, respondents.
G.R. No. L-32464 October 4, 1971
RAMON A. GONZALEZ, petitioner,
vs.
MANILA ELECTRIC COMPANY and PUBLIC SERVICE COMMISSION, respondents.
Office of the Solicitor General Felix Q. Antonio, Assistant Solicitor General Ricardo L. Pronove, Jr., Solicitor Bernardo P. Pardo and Solicitor Pedro A. Ramirez for petitioner.
Porfirio H. del Pilar and Leonardo Baro for respondent PSC.
Jose L. Africa, Pastor S. del Rosario, Renato E. Tañada, Wigberto E. Tañada, Camilo D. Quiason and Francisco Carreon for respondent Meraldo.
Separate Opinions
CASTRO, J., concurring:
My concurrence is limited to the result reached by the majority of my brethren because of misgivings I entertain with respect to a number of adjective aspects of the cases at bar.
I am hard put to agree that there was no unseemly haste with which the hearings below were conducted and terminated. The nagging impression that abides with me after a conscientious perusal of the proceedings below is that Commissioner Enrique Medina was racing against time to terminate the hearings, because he had set, as the deadline for the handing down of the decision (of the division of the Commission which he headed), the day before the date of his compulsory retirement from public service. This unseemly haste cannot command the approval of people(whether lawyers or persons unschooled in the law)who have an innate love for orderliness. Expedition is no doubt desirable in the disposition of cases, but it must nonetheless always observe due process, which of course basically means formal opportunity afforded to all parties to be fully heard. When due process is impaired because of inordinate haste, perceptive observes would draw the implication that legal, processes have been eroded. And there would be dark, albeit veiled or circumlocutory, imputations of malfeasance, nonfeasance or misfeasance, or a combination of two or all of these. Deliberate speed is to be commended; inordinate haste deserves only condemnation.
I likewise view with some degree of concern an innovation in public utility adjudication that in effect has received the sanction of the majority here. This Court has proceeded to decide the cases at bar despite its awareness that a motion for reconsideration of the decision a quo is pending before the Public Service Commission en banc, which motion could not for some length of time be resolved because of the lack of quorum in that body.
Realizing, however, that the demands of moral justice indicate need for positive forward action on the part of this Court, I cannot, in conscience, completely disagree with the position taken by the majority that this Court can and should go ahead, peremptorily sweeping away procedural road locks, to decide these cases in order the better to subserve the public interest. Nevertheless, I want to place on record my reservation that the manner by which the majority, impelled by the peculiar factual milieu, has disposed of these cases, should properly be regarded as adhoc.
These is yet another matter upon which I differ with the majority. It is indeed a salutary doctrine, implied in the majority opinion ably penned by Mr. Justice J. B. L. Reyes, that the Solicitor General, in representation of the consuming public, may, at any time he seems necessary, petition the Public Service Commission for a reversion of the rates fixed by this regulatory agency, since there is no res judicata in rate-making adjudication. Nowhere, however, in the said opinion is there a recognition in affected private parties in general the right to seek a revision of rates. The dispositive portion of the said opinion, as I construe it, reserved the right to seek a revision only to the parties in these cases and only in reference thereto. If this is so, then I say that this Court has unduly constricted the coverage of the doctrine. For my part, I would expand the doctrine explicitly to authorize the mayor and the municipal or city council of a municipality or city directly affected by a previous adjudication to initiate action for rate revision. In such an event, the Solicitor may ask, and should be allowed, to intervene. I would not leave the representation of the consuming public exclusively to the Solicitor General, for a number of reasons, the basic of which are that (1) the Solicitor General is not necessarily better situated than municipal or city officials to determine the need and the time for a re-examination of previously adjudicated rates, and (2) it undoubtedly can happen that exercise by the Solicitor General of his initiative may, for one reason or another, be slow in coming (if it comes at all), and, when it comes, it feeble and therefore in effectual.
At all events, because I believe that what ultimately is important in public utility adjudication is the end result, hold no brief against the end disposition of these cases arrived at by the majority, which in may considered view is morally just.
This limited concurrence should end here. But because these cases have posed a sharp controversy on what factors should be considered in the determination of the rate base and in the computation of the rate of return on investment, I am compelled to go farther and give expression to my own study and perspective on what the determinants should be.
I regard the power of the State to regulate the level of return that businesses "cloted with a public interest" may generate from those who make use of their properties and services as being fundamentally a master of law. It is therefore relevant to assume that in the ever-recurring contest of determining the precise constitutional boundaries of that power, the administrative implementation of rate-fixing legislation will always be elevated to this Court for judicial review. An inquiry, therefore, into judicial attitudes toward the various factors affecting this problem is imperative.
This Court's opportunity to articulate on the subject has necessarily been limited by the mere handful of cases that have come up for review from the Public Service Commission. My study therefore perforce looks to and emphasizes American pronouncements. American courts and administrative bodies have had long and constant exposure to the various problems involved in rate-fixing, and their experience is certainly to be valued, within the context of our own legal and political systems.
In the United States, the landmark pronouncement that accorded recognition to the State's power to fix the rates that regulated businesses may charge, was handed down in 1876 in Munn vs. Illinois.1 The U.S. Supreme Court, in striking down the contention that an Illinois statute which prescribed a maximum on the amount of charges that grain elevator operators may demand from the public violated the due process clause of the U.S. Constitution, said:
... Looking then, to the common law, from whence came the right which the Constitution protects, we find that when private property is "affected with a public interest, it ceases to be juris privati only." This was said by Lord Chief Justice Halemore than two hundred years ago, in his treatise De Portibus Maris, 1 Harg. Law Tracts, 78, and has been accepted without objection as an essential element in the law of property eversince.... When, therefore, one devotes his property to a use in which the public has an interest, he, in effect, grants to the public an interest in that use, and must submit to be controlled by the public for the common good, to the extent of the interest he has thus created. He may withdraw his grant by discontinuing the use; but, so long as he maintains the use, he must submit to the control.
Legislative power over these businesses in the matter of price-fixing is not, however, unlimited. As early as 1894, the U.S. Supreme Court in Reagan vs. Farmers' Loan & Trust Co. 2 said that.
...while it is not the province of the courts to enter upon the merely administrative duty of framing a tariff of rates for carriage, it is within the scope of judicial power and a part of judicial duty to restrain anything which, in the form of a regulation of rates, operates to deny to the owners of property invested in the business of transportation that equal protection which is the constitutional right of all owners of other property. There is nothing new or strange in this.
This assumption by the U.S. Supreme Court of the ultimate responsibility to adjudge what is a constitutionally permissible structure or level of rates for public utilities naturally called for the setting up of an acceptable and sufficient standard. The Court held in Reagan that the rates should be reasonable.3 But what is a reasonable rate" By what method or basis can this be determined so that the dollar amount that is arrived at may be said to be reasonable?
In the leading case of Smyth vs. Ames, 4 the U.S. Supreme Court took occasion to enumerate the bases upon which the reasonable rate may be calculated. It said:
We hold, however, that the basis of all calculations as to the reasonableness of rates to be charged by a corporation maintaining a highway under legislative sanction must be the fair value of the property being used by it for the convenience of the public. And, in order to ascertain that value, the original cost of construction, the amount expended in permanent improvements, the amount and market value of its bonds and stock, the present as compared with the original cost of construction, the probable earning capacity of the property under particular rates prescribed by statute, and the sum required to meet operating expenses, are all matters for consideration, and are to be given such weight as may be just and right in each case. We do not say that there might not be other matters to be regarded in estimating the value of the property.
What the company is entitled to ask is a fair return upon the value of that which it employs for the public convenience...
The foregoing opinion, if construed as laying down a specific formula by which to quantify numerically a reasonable rate, can be said to have entirely failed to accomplish its purpose. In spite of its being all things to all men, however, it did serve one laudable end, for it did indicate quite plainly that a reasonable rate is a rate that gives a fair return on the fair value of the property being used for public convenience.
The "fair value" rule has undoubtedly its own share of practical difficulties which the Court itself was quite frank to recognize. In the so-called Minnesota Rate Cases decided in 1912, the Court said:5
The ascertainment of that value is not controlled by artificial rules. It is not a matter of formulas, but there must be reasonable judgment, having its basis in a proper consideration of all relevant facts...
Any realistic appreciation of all the relevant facts in a valuation problem, however, must have to begin with the premise that values are necessarily dated values. In the choice of the particular space-in-time valuation of public utility properties, the U.S. Supreme Court, in these early decisions and for a long time thereafter, took the position that what the utility company is entitled to demand, in order that it may have just compensation for the public's appropriation of its property, is a fair return upon the reasonable value of the property at the time it is being used for the public.6 The position taken by the U.S. Supreme Court in this respect is what has been known as the "cost of reproduction new" theory.
The adoption of this theory of property valuation did not, of course, mean that it was the only basis to be considered in determining the public utility company's rate base. This was apparent in Smyth vs. Ames and the other cases decided by that Court.7 It was, however, clearly written in these decisions that the "cost of reproduction new" would control or should be given more weight in fixing utility property values. The U.S. Supreme Court's adoption of this posture undoubtedly reveals the practical difficulties entwined in the problem which it thought itself competent to disentangle.
A slight modification of this theory did not therefore take long in coming. In Knoxville vs. Knoxville Water Company, 8 the Court held that the cost of reproduction appraisal should include a deduction for accrued depreciation. Thus:
The cost of reproduction is not always a fair measure of the present value of a plant which has been in use for many years. The items composing the plant depreciate in value from year to year in a varying degree. Some pieces of property like real estate depreciate not at all, sometimes, on the hand, appreciate in value. But the reservoirs, the boilers, meters, tools and appliances of every kind begin to depreciate with more or less rapidity from the moment of their first use. It is not easy to fix at any given time the amount of depreciation of a plant whose component parts are of different ages with different expectations of life. But it is clear that some substantial allowance for depreciation ought to have been made
In a subsequent case, 9 the Court held that accrued depreciation should be a deduction against the current value of the fixed assets rather than their actual cost, as is usually followed in accounting procedure. This ruling was adhered to in the Philippines in the case of Ynchausti Steamship Co. vs. Public Utility Commission. 10
Another problem that was elevated to the U.S. Supreme Court for resolution in connection with its favorable attitude toward the "reproduction cost new" theory was whether the public utility should be priced on the basis of average prices or spot prices. The critical importance of an adequate and reasonable basis for fixing the prices of public utility assets under the reproduction cost calculation standard cannot be overemphasized since the prices of commodities in the market are in a continuous state of flux, influenced as they are not only by social and political turbuleness but also by the expectations of buyers and suppliers. Thus, one authority on public utility regulation, writing in 1928, observed:
Until very recently the most favored basis for the determination of unit costs has been a five-year or a ten-year average of prices covering the period immediately preceding the date of the appraisal, but the abnormal fluctuations in construction costs during and subsequent to the World War has inclined the United States Supreme Court to be indulgent to the guesses and forecasts of experts. Apparently, conditions have seemed to be so abnormal and unsettled as to destroy, or at least greatly impair, the usefulness of current prices, or of prices covering the war and postwar period, as a means of measuring fair present, value. Actual costs has been largely remote and based on prices which have seemed to be entirely out of line with present conditions. So the courts, undoubtedly with reluctance, have been forced to turn away from abnormal present conditions and the obsolete facts of the past, to speculation on what the future is going to be... 11
The use of "spot prices," with a reasonable allowance for future price changes, was sought to be justified in one case, as follows: 12
It is impossible to ascertain what will amount to a fair return upon property devoted to public service without giving consideration to the cost of labor, supplies, etc., at the time the investigation is made. An honest and intelligent forecast of probable future values made upon a view of all the relevant circumstances, is essential. If the highly important element of present costs is wholly disregarded such a forecast becomes impossible. Estimates of tomorrow cannot ignore the prices of today.
Justice Brandeis, in a dissenting opinion written in another case 13 where spot reproduction cost was used instead of the average price of a utility company's assets for a ten-year period, criticized this ruling of the majority as impossible of accomplishment without the aid of Aladdin's lamp. He intoned:
There is, so far as I recall, no statement of this court that value is tantamount to reproduction cost.
Nor do I find in the decision of this court any support for the view that a peculiar sanction attaches to "spot" reproduction cost, as distinguished from the amount that it would actually cost to reproduce the plant if that task were undertaken at the date of the hearing. "Spot" reproduction would be impossible of accomplishment without the aid of Aladdin's lamp. The actual cost of a plant may considerably indicate its actual value at the time of completion or at some time thereafter. Estimates of cost may conceivably approximate what the cost of reproduction would be at a given time. But where a plant would require years for completion, the estimate would be necessarily delusive if it were based on 'spot' prices of labor, materials and money. The estimate, to be in any way worthy of trust, must be based on a consideration of the varying costs of labor, materials, and money for a period at least as long as would be required to construct the plant and put it into operation...
The use of the "reproduction cost new" standard as the predominant factor in the determination of a public utility's rate base has not, however, been entirely free from dissent. Justice Brandeis criticized this theory as time-consuming, expensive and unreliable. In Southwestern Bell Telephone, supra, Justice Brandeis, dissenting, explained the various State Commissions' disenchantment with this theory, in this wise:
At first reproduction cost was welcomed by commissions as evidence of present value. Perhaps it was because the estimates then indicated values lower than the actual cost of installment. For, even after the price level had begun to rise, improved machinery and new devices tended for some years to reduce construction costs... The engineer spoke in figures — a language implying certitude. His estimates seemed to be free of the infirmities which have stamped as untrustworthy the opinion evidence of experts common in condemnation cases. Thus, for some time, replacement cost, on the basis of the prices prevailing at the date of the valuation, was often adopted by state commissions as the standard for fixing the rate base. But gradually it came to be realized that the definiteness of the engineer's calculations was delusive; that they rested upon shifting theories; and that their estimates varied so widely as to intensify, rather than to allay, doubts. When the price levels had risen largely, and estimates of replacement cost indicated values much greater than the actual cost of installation, many commissions refused to consider valuable what one declared to be assumptions based on things that never happened and estimates requiring the projection of the engineer's imagination into the future and methods of construction and installation that have never been and never will be adopted by sane men
The "reproduction cost new" concept was also criticized by the U.S. Interstate Commerce Commission in these words: 14
Synthetic estimates of cost of reproduction based upon statistics showing price and wage changed do not make allowance for improved methods of assembly and construction. As will hereinafter be more fully indicated, we found in Texas Midland Railroad, supra, at page 140, that the increase in the cost of labor and materials between 1900 and 1914 was largely offset by improvement in the art of construction. How far there may have been a similar offset, so far as costs in the period from 1920-1923 are concerned, is not disclosed of record.
Viewed from another angle, the same Commission, through the concurring opinion of one of its commissioners, said:
... Approximately one-third of the investment in railroad property is represented by common stock. The remaining two-thirds is represented by bonds, notes, or preferred stock, the holders of which are limited to a fixed or maximum return. The benefits of an excess in valuation from a rise in the general price level would, therefore, be reaped three-fold by the holders of common stock...
The accuracy of this conclusion is demonstrated below.
Let us assume that a simplified balance sheet contains the following data:15
| Assets |
| Not Plant Account | P1,000,000. |
| Liabilities & Capital |
| 4% Bonds ......................................................... | P500,000 |
| 5% Preferred Stock ......................................... | 250,000 |
| Common Stock ................................................ | 250,000 | P1,000,000 |
Upon the above assumptions, if the company is allowed and earns a 6% return on its assets based on original cost, it will have P60,000 with which to pay P20,000 of bond interest and P12,500 of preferred dividents, leaving P27,500 for common stock — a return of 11%. If 80% of this amount were paid out in common dividents, the yield on the common stock would be 8.8%.
Let us now assume that the company's rate base is increased by 30% to lend significance to reproduction cost or trended original cost under the existing price levels. If the same return of 6% were applied to this new rate base, the company will have P78,000 in net income. Deducting again the bond interest payment of P20,000 and the preferred dividend of P12,500, there would be available for common stock the sum of P45,500, a return equivalents to 18.2%. Assuming an 80% pay-out to common, the yield will be over 14.5%. Obviously, such stock would perform well in the securities market.
The above example provides much of the basis for the charge of "unjust enrichment" of the common stockholders of public utilities. Undoubtedly, the application of an undifferentiated rate of return to the rate base, given a capital structure where the debt capital predominates, does open up good attractions for "trading on the equity."
Proponents of the "reproduction cost new" theory argue, however, that the intrinsic value of the peso as a result of inflation has greatly depreciated and therefore public utility owners should be given a corresponding increase in profits. It is pointed out, for example, that it prices rose from an index of 100 in 1960 to 225 in 1967, this means that in 1967 the peso bought less than half as much. If, therefore, had invested P1,000 in 1960 and received 6% of P60 for it a year, that investment should be valued in 1967 at P2,250 and earn P135. In this situation the P135 in 1967 would then have the same purchasing power as P60 in 1960.
To this argument, opponents of the theory counter, however, that this line of reasoning would be valid only if (a) investments generally are so rewarded during periods of declining purchasing power; and (b) the increased pesos of return go equally to the security holders. Experience has shown, unfortunately, that these assumptions do not occur in fact. Utility bonds, notes, and preferred stocks have specific yields which are fixed obligations regardless of the fluctuations in the purchasing power of money. Thus, if one is a holder of a ten-year bond in 1960, the interest on this bond of, say, 6% would still be the same 6% in 1967. Hence, if an original investment of P100 were to earn P12 because of a new valuation, only P6 would go to the bondholder, and all the rest to common stock which ordinarily occupies a mere minority position in the over-all capital structure of utility companies. And if a sizable portion of the company's common stock is owned by a holding company, it is easy to see that the latter stands to benefit the most under a cost of reproduction formula. 16
Due to these various weaknesses of the "reproduction cost new" theory, it appears that even the U.S. Congress has not been amenable to its continued observance by Federal courts and regulatory agencies. For instance, the Federal Power Act of 1920 expressly directed that the rate base in water projects licensed by the Government should be the "actual legitimate original cost." 17 Likewise, the Public Utilities Act of 1935 which placed electric utilities engaged in the wholesale sale of electric energy in inter estate commerce under the jurisdiction of the Federal Power Commission directed the latter to investigate the "actual legitimate cost" of the properties of the said utilities. 18 The Federal Power Commission has also, in several cases, interpreted the Natural Gas Act 19 as authorizing it to utilize the original cost of production and transmission properties of gas companies as the rate base. Its interpretation of the Act has been, in fact, sanctioned by the U.S. Supreme Court as early as 1944 in Federal Power Commission vs. Hope Natural Gas Co. (320 U.S. 591 [1944]). Moreover, an overwhelming majority of the States in the United States have likewise refused to adopt the reproduction cost formula for purposes of rate-base determination. 20 These States have preferred the use of original cost figures in estimating the rate base.
Justice Brandies explained the advantages of the original cost prudent investment tests, as follows: 21
The adoption of the amount prudently invested as the rate base and the amount of the capital charge as the measure of the rate of return would give definiteness to these two factors involved in rate controversies which are now shifting and treacherous, and which render the proceedings peculiary burdensome and largely futile. Such measures offer a basis for decision which is certain and stable. The rate base would be ascertained as a fact, not determined as matter of opinion. It would not fluctuate with the market price of labor, or materials, or money. It would not change with hard times or shifting populations. It would not be distorted by the fickle and varying judgments of appraisers, commissions, or courts. It would, when once made in respect to any utility, be fixed, for all time, subject only to increases to represent additions to plant, after allowance for the depreciation included in the annual operating charges...
... Twenty-five years ago, when Smyth vs. Ames was decided, it was impossible to ascertain with accuracy, in respect to most of the utilities, in most of the states in which rate controversies arose, what it cost in money to establish the utility; or what the money cost with which the utility was established; or what income had been earned by it; or how the income had been expended ... Now the situation is fundamentally different. These amounts are, now, readily ascertainable in respect to a large, and rapidly increasing, proportion of the utilities. The change in this respect is due to the enlargement meanwhile, of the powers and functions of state utility commissions. The issue of securities is now, and for many years has been, under the control of commissions, in the leading states. Hence, the amount of capital raised (since the conferring of these powers) and its cost are definitely known, through current supervision and prescribed accounts, supplemented by inspection of the commission's engineering force...
We have mapped out, in our jurisdiction, a course quite different from that advocated by Justice Brandeis, 22 but in rate controversies, it would seem that the result reached rather than the method employed is, in actuality and in the end, the main concern of this Court whenever it sits to review a decision of the Public Service Commission.
We now come to the problem of determining the correct rate of return which should be applied to the rate base. Leading court decisions in the United States have apparently provided three primary tests for determining or measuring the rate of return, namely, (1) cost of attracting capital; (2) maintenance of the integrity of investment or preventing the flight of capital; and (3) comparable earnings for comparable risks. 23 One of the earliest statements of recognition of these tests by the U.S. Supreme Court is found in Bluefield Water Works Co. vs. Public Service Commission, where the Court held: 24
What annual rate will constitute just compensation depends on many circumstances and must be determined by the exercise of a fair and enlightened judgment, having regard to all relevant facts. A public utility is entitled to such rates as will permit it to earn a return on the value of the property which it employs for the convenience of the public equal to that generally being made at the same time and in the same general part of the country on investments in other business undertakings which are attended by corresponding risks and uncertainties; but it has no constitutional rights to profits such as are realized or anticipated in highly profitable enterprises or speculative ventures. The return should be reasonably sufficient to assure confidence in the financial soundness of the utility and should be adequate, under efficient and economical management, to maintain and support its credit and enable it to raise the money necessary for the proper discharge of its public duties.
Obviously, the use of these tests in practice requires pragmatic adjustments and rational processes generally accepted in the field of finance, economics and accounting. This conclusion finds ample support in the fact that as early as 1914, the U.S. Interstate Commerce Commission already imposed a uniform system of accounting for electric railway companies. This was follows in 1926 by another uniform system of accounting prescribed for telephone companies and steam railroad systems. 25 The Federal Power Commission, under the Federal Power Act, has also done the same.26
A brief illustration of how, in particular, the Federal Power Commission has approached the problem of rate regulation, was described in one law journal as follows: 27
The revised regulations for electric utilities and licenses require a full cost-of-service study as part of the information submitted at the time of filing a change in a rate schedule. The required information is to provide an analysis of the electric system's cost for a test period of 12 consecutive months, including return, taxes, depreciation, operating expenses, and allocation of the cost of services rendered, cost of plant, accumulated depreciation, operating expenses, and depreciation expense must be shown for the test period by functional classification (production, transmission, distribution and general functions). The filing is required to present information in the following categories:
(1) The percentage rate of return claimed, with a brief statement of the basis for the claim, together with information on costs of debt, preferred stock capital, and returns experienced by the company on the common stock outstanding over the preceding 5 years — including (a) earnings offering price ratios and (b) earnings and divident price ratios.
(2) Income taxes computed on the basis of the rate of return claimed, together with the basis on which income taxes are assigned among the jurisdictional business, other utility department and non-utility operations.ℒαwρhi৷
(3) The cost of service allocated to the sale or sales for which the increased rate is proposed and the cost of service related to any special facilities devoted entirely to the given service.
(4) Computations to show "energy responsibility" and "demand responsibility" of the service. Non-coincident and coincident data are required for each month of the test period together with an explanation of how the unit demand costs are derived.
A regulatory commission's field of inquiry, however, is not confined to the computation of the cost of service or capital not to a mere prognostication of the future behavior of the money and capital markets. It must also balance investor and consumer expectations in such a way that the broad requirements of public interest may be meaningfully realized. It would hence appear in keeping with its public duty if a regulatory body is allowed wide discretion in the choice of methods rationally related to the achievement of this end.
The value of this kind of approach is well-recognized by the U.S. Supreme Court. In Federal Power Commission vs. Hope Natural Gas Co., that Court said: 28
Under the statutory standard of "just and reasonable" it is the result reached not the method employed which is controlling. It is not the 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. The fact that the method employed to reach that result may contain infirmities is not then important. Moreover, the Commission's order does not become suspect by reason of the fact that it is challenged. It is the product of expert judgment which carries a presumption of validity. And 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.
Rate controversies in many cases, however, have not ended in the regulatory commissions. And there is no doubt that they won't. Hence, the recognition in a regulatory agency of ample discretion in the choice of such rational processes as might be appropriate to the solution of its highly complicated and practical difficulties, suggests that it should indicate fully and carefully, in every case, the method or methods it has employed, the purposes which guided its action, and the reasons that made the method or methods chosen and the purposes pursued relevant under the facts of the case. 29 In this way, the Court's evaluation of the Commission's orders would be more accurate, efficacious and sensible. For, after all, the Court's responsibility, as held in In Re Permian Basin Area Rate Cases, 30 "is not to supplant the Commission's balance of those interests which are more nearly to its liking, but instead assure itself that the Commission has given reasoned consideration to each of the pertinent factors.
Apart from the question of whether or not the Court should actively intervene in the Commission's choice of an appropriate method by which to measure the rate base and the rate of return, American courts have also dealt with the problem of whether certain properties of the utility company should be included in the rate base for valuation purposes.
One such item pertains to those constructed our of retained earnings. In Board of Public Utility Commissioners vs. New York Telephone Co., 31 the U.S. Supreme Court expressed the view that property constructed out of surplus earnings belongs to the utility and is entitled to yield a fair return from the rates charged the consumers as fully and completely as if it had been furnished by the investors from outside sources. In this case, the New Jersey Commission found that the company in previous years had earned and set aside for depreciation amounts largely in excess of the actual depreciation accruing, and held that the company could not claim an increase of rates until this excess in the depreciation reserve had been exhausted in making up current operating deficits. In reversing the ruling of the Commission, the Court said:
...Constitutional protection against confiscation does not depend on the source of the money used to purchase the property. It is enough that it is used to render the service. The customers are entitled to demand service and the company must comply. The company is entitled to just compensation and, to have the service, the customers must pay for it. The relation between the company and its customers is not that of partners, agent and principal, or trustee and beneficiary. The revenue paid by the customers for service belongs to the company...
The Court also justified its decision on the ground that rates which in the past were unchallenged, or, if challenged, were approved by the authorities, should be assumed to have been reasonable, or, at most, not so unreasonable as to give the public a right of action against the utility company to recover any part of the charges paid. Consequently, whatever has been collected under previously approved rates became the property of the company which it is free to use as any other type of private property.
It is difficult to disagree with the approach taken by the American court with respect to property built out of surplus profits. However, it would seem that where its application in specific instances would work hardship on the consumers, there is one way out. And this is the downward adjustment of the rate of return. This solution appears most equitable in a case where security holders regularly receive a reasonable amount of dividents under existing rates, and, in addition thereto, the company has been able to put up betterments and improvements.
Another type of property which has given rise to complicated problems in the process of determining which items should be included in the inventory for valuation purposes, is that acquired by the company without cost or only for a minimal cost, and structures built through company funds but over which when completed it can claim no title. For instance, a provincial government may donate lands or rights of way to a railroad company to speed up the development of the transportation system within the province, or the municipal or city government may require that an electric company in laying down its mains or underground tunnels should reconstract and pave the streets affected by such constructions. The basic question is, therefore, often asked whether property so acquired without cost and those built by the utility over which it acquires no title should be allowed to be capitalized against the consumers.
As developed in American case-law, the rule is that the value of the property owned by the utility and devoted to public use must be included in the rate base. It is evident, however, that this rule does no more than lay down a general principle of law to guide regulatory bodies in the solution of their practical difficulties. Indeed, slavish adherence to this rule, in some instances, will produce inequitable results. Thus, writing on the basic problems involved in this type of property, one writer said: 32
On this whole matter of contributions, unless there is some good reason to the contrary, the rule should work both ways.ℒαwρhi৷ That is, the rule adopted should be applicable alike both to donations by the company and to donations by the public. If the reconstruction of a street or the building of expensive street approaches is a necessary part of the expense of constructing, a railroad, it is only fair and just that the company should be allowed to earn a fair return on such investment regardless of the fact that the title to such property is not vested in the company but in the city. Similarly if the government has given this same company the land for its right of way, the actual property in which the company has invested capital and not that part to which it has title but which has been donated by the government should be considered in determining reasonable rates. Actual title and possession are not always conclusive. The determination of a reasonable rate is an equitable process and equity will demand that certain property to which the company has no title should be included and certain property to which the company has title should be excluded....
A lot would depend, therefore, upon the purpose for which a contribution was given in resolving the various disagreements that may be encountered in this particular aspect of rate-base determination.
There is yet another class of utility property about which men of different persuasions may be expected to entertain divergent views in the formulation of specific ground rules for purposes of rate-base inclusion. This has reference to unused utility properties. One authority roughly classifies these properties into four types, namely, (1) property once used, but now become worn-out; (2) property not needed for public service, but conveniently or necessarily acquired in getting other property that is in service; (3) property acquired in anticipation of the future requirements of public service, but not yet put into use; and (4) property acquired as an investment or speculation without regard to present or future public needs. 33
The decisions of the U.S. Supreme Court provide only a vague notion of what property shall be classed as "used" or "unused." One can easily see this in that Court's free use of such expressions as "property used and actually useful in a public service," 34 properties devoted to public service," 35 "property at the time it is being used for the public," 36 to determine what should be included in the rate base. Such statements are rather quite difficult of application since a certain degree of use can always be claimed for almost any price of property.
It would seem to me, however, that, in general, this Court can do no more than say that what should be included in the rate base are those properties which are being devoted to public service at the time of the investigation for rate-revision purposes, since whether an item of property is actually being used or is being reasonably held for operations is essentially and primarily a factual question. It involves (in the very least) the exercise of reasoned judgment and a realistic appraisal of values on the part of our regulatory agency.
In the American experience, much of the confusion and uncertainty not only on this aspect of utility regulation, but on almost every step of the regulatory process, has been eliminated through the enactment of uniform systems of accounting or classification of utility property — something which our own regulatory agency might well follow and possibly improve upon. Such standards are not, of course, strictly binding upon appraisers, commissions and courts, but they do tend to bring order out of chaos. Close adherence to such standards where they produce no arbitrary result will not likely provoke reproach from this Court. 37
We do not except to follow and observe American techniques and principles all the way; differences do exist between our respective jurisdictions. But if we maintain constant touch with the growth and development of public utility principles and practices in the United States, it is mainly because of our continuing quest for that which, not being circumscribed by any political boundary or not being indigenous to any particular legal system, will provide one good workable formula — together with and among many — for keeping our Philippine society in order.
Footnotes
1 94 U.S. 113 (1876).
2 154 U.S. 362 (1894).
3 See also Covington and Lexington Turnpike Road Co. vs. Sandford, 164 U.S. 578 (1896).
4 169 U.S. 466 (1898).
5 See Simpson vs. Shepard, 230 U.S. 352 (1912), where the Court repudiated the gross revenue method of arriving at a fair rate of return, reasoning that gross earnings may be consumed by expenses, leaving little or no profit.
6 San Diego Land & Town Co. vs. National City, 174 U.S. 739 (1899).
7 See Southwestern Beel Telephone Co. vs. Public Service Commission (Mo.), 262 U.S. 276 (1923); Market Street Co. vs. Railroad Comm. of California, 324 U.S. 548 (1945).
8 212 U.S. 1 (1909).
9 United Railways & Electric Co. vs. West, 280 U.S. 234 (1929).
10 42 Phil. 621 (1922); also in Asturias Sugar Central vs. Philippine Railway Co., 72 Phil. 455 (1944).
11 Robert H. Whitten, Valuation of Public Service Corporations (Banks Law Pub., Co., New York, 1928), p. 665.
12 Southwestern Bell Telephone Co. vs. Public Service Commission, 262 U.S. 276 (1923). The idea of including future price trends in the rate base was first suggested in Galveston Electric Co. vs. Galveston, 258 U.S. 388 (1922). See also Bluefield Water Works & Improvement Co. vs. Public Service Commission, 262 U.S. 679 (1923).
13 McCardle vs. Indianapolis Water Co., 272 U.S. 400 (1926).
14 Excess Income of St. Louis & O'Fallon Railway Co., 1241. C.C. 3 (February 1927). When this case reached the U.S. Supreme Court, it reproved the Commission for its failure to give at least some weight to the reproduction cost theory. See St. Louis & O'Fallon Rr. Co. vs. United States, 279 U.S. 461(1929).
15 For interesting illustrations, see A.J.G. Priest, "public utility Rate Base," Iowa Law Review, vol. 51. no. 2 (Winter, 1966), p. 306. See also Mosher and Crawford, Public Utility Regulation (Harper & Bros., New York, 1933), p. 240; Thompson & Smith, Public Utility Economics (McGraw-Hill Book Co., New York, 1941), p. 355.
16 See Thompson, ibid., at p. 287.
17 16 U.S.C. 791-823 (1946). See James C. Oldham, "Rate-Base Determination and Profits," Univ. of Colorado Law Review, vol. 39, no. 4 (summer, 1967), p. 511.
18 16 U.S.C. 824-825 (1946).
19 15 U.S.C. 717 (1946).
20 See A.J.G. Priest, "Public Utility Rate Base," Iowa Law Review, vol. 51, no. 2 (1966), p. 306.
21 Southwestern Bell Telephone Co. vs. Public Service Commission of Missouri, 262 U.S. 276 (1923).
22 See Meralco vs. PSC, L-24762, and allied cases, Nov. 14, 1966, 18 SCRA 651.
23 For a technical discussion of various methods of estimating rates of return, see Burton Kolb & Otis Lipstreu (eds.), NEW Concepts and Current Issues in Public Utility Regulation, (Colorado, 1963 edition).
24 262 U.S. 679 (1923). See also Dayton-Goose Creek Railway Co. vs. United States, 263 U.S. 456 (1924). Some published articles on the subject of rate of return determination may be found in Harold Somers' "Cost of Money as Determinant in Public Utility Rates," Buffalo Law Journal, vol. 4 (1951), p.289; Harold Leventhal, "Vitality of Comparable Earnings Standard of Regulation of Utilities in a Growth Economy," Yale Law Journal, vol. 74 (May 1965), p. 989; "Rate-making Under Conditions of Regulated Intermodal Competition: The Status of Regulated Incremental Cost Pricing," Virginia Law Review, vol. 55 (May 1959), p. 691.
25 See Robert H. Whitten, Valuation of Public Service Corporations, vol. II (Banks Law Pub. Co., New York, 1928), p.1820.
26 Ibid.
27 J. Rhoads Foster, Paul J. Garfield & Henry Herz, "FPC Regulation of Sales of Electric Energy at Wholesale," Virginia Law Review, vol. 51, no. 1 (January 1965), p. 76. See also J.H. Foy, "Cost Adjustment in Utility Rate Schedules," Vanderbill Law Review, vol. 13 (June 1960), p. 663; "Evolving Concept of FPC Natural Gas Rate Regulation," Kansas Law Review, vol. 16 (April 1968), p. 378.
28 320 U.S. 591 (1944). In this case the validity of a rate order of the FPC under the Natural Gas Act (15 USC 717) was contested. The Commission adopted the cost of capital-prudent investment theory in determining fair return and was objected to as contrary to precedent. Section 5(a) of this Act provides that "Whenever the Commission, after hearing ... shall find that any rate, charge or classification demanded, observed, charged or collected by any natural gas company ... is unjust, unreasonable, unduly discriminatory, or preferential, the Commission shall determine the just and reasonable rate, charge, classification, rule, regulation, practice or contract to be thereafter observed and in force, and shall fix the same by order." Section 19(b) of the Act also provides that the "findings of the Commission as to the fact, if supported by substantial evidence, shall be conclusive."
This case is also important in other respects: It apparently overturned the "fair value" rule of Smyth vs. Ames, supra; considered rate-making an species of the police power rather than eminent domain; and approved the deduction of depreciation based on actual cost rather than upon current value, contrary to the holding in United Railways & Electric Co. vs. West, 280 U.S. 234 (1929).
29 See Harold N. Somers, "The 'End-Result' Approach to Public Utility Regulation," Buffalo Law Review, vol. 16, no. 3 (Spring, 1967), p. 689.
30 390 U.S. 1361 (1967). A discussion of the significance of the Federal Power Commission's decision in this case appeared in Edmund W. Kitch. "The Permian Basin Area Rate Cases and the Regulatory Determination of Price," Univ. of Pennsylvania Law Review, vol. 116, no. 2 (December 1967), p.191.
31 271 U.S. 23 (1926).
32 Robert H. Whitten, op cit., p. 773. See also Francis X. Welch, Preparing for the Utility Rate Case (1954), pp. 119-170.
33 Ibid., p. 808.
34 Denver vs. Denver Water Union Co., 246 U.S. 178, 190 (1918).
35 Southwestern Bell Telephone Co. vs. Public Service Commission (Mo.), 262 U.S. 276, 288 (1923).
36 San Diego Land & Town Co. vs. National City, 174 U.S. 739, 757 (1899).
37 Note that in the Permian Basin Area Rate Cases, supra, the U.S. Supreme Court said that "the Commission's orders may not be disturbed if they produce 'no arbitrary result,'" citing F.P.C. vs. Hope Natural Pipeline Co., 315 U.S. 586, and other cases.
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