New England Tel. & Tel. Co. v. Department of Public Utilities

• Decision Date: 14 September 1976
• Citation: 354 N.E.2d 860,371 Mass. 67
• Parties: , 16 P.U.R.4th 346 NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY v. DEPARTMENT OF PUBLIC UTILITIES.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 860

354 N.E.2d 860

371 Mass. 67, 16 P.U.R.4th 346

NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY

v. DEPARTMENT OF PUBLIC UTILITIES.

Supreme Judicial Court of Massachusetts, Suffolk.

Argued May 7, 1976.

Decided Sept. 14, 1976.

Robert G. Bleakney, Jr., Boston (C. Duane Aldrich & Dennis Tourse, Boston, with him) for New England Telephone and Telegraph Co.

Terence P. O'Malley and Michael Eby, Asst. Attys. Gen., Boston, for the Dept. of Public Utilities.

Stanley U. Robinson, III, pro se.

Before REARDON, BRAUCHER, KAPLAN and WILKINS, JJ.

BRAUCHER, Justice.

The New England Telephone and Telegraph Company (Company) asserts that the Department of Public Utilities (Department), in regulating its rates, has not taken adequate account of the impact of inflation. In 1974 the Company sought increased annual revenues of $200 million; late in 1975 the Department allowed increases designed to produce $93 million. After argument of this appeal in May, 1976, pending our decision and subject to refund, we granted a stay permitting further increases, designed to produce $60 million. We now hold that the Department's orders are confiscatory, and order the case remanded to the Department. The stay is to remain in force pending final decision by the Department.

1. History of the litigation. This is the fourth case brought to us by the Company pursuant to G.L. c. 25, § 5, on appeal from a rate decision of the Department. See New England Tel. & Tel. Co. v. Department of Pub. Util., 327 Mass. 81, 97 N.E.2d 509 (1951) (NET I); New England Tel. & Tel. Co. v. Department of Pub. Util., 331 Mass. 604, 121 N.E.2d 896 (1954) (NET II); New England Tel. & Tel. Co. v. Department of Pub. Util., 360 Mass. 443, 275 N.E.2d 493 (1971) (NET III). See also Department of Pub. Util. v. New England Tel. & Tel. Co., 325 Mass. 281, 90 N.E.2d 358 (1950) (mandamus).

The Company filed the tariff revisions now in issue on November 26, 1974, to become effective on December 26, 1974. The revisions were designed to produce additional revenue of $200 million a year by applying nonuniform increases to about 2,000 of the 3,000 items in the tariff--a 27% increase in total Massachusetts intrastate operating revenue. The Department promptly suspended the effective date of the revised tariff for the full ten-month period permitted by statute. G.L. c. 159, § 20, as amended through St.1973, c. 816, § 1. Public hearings were held on twenty-two days between April 14, 1975, and September 12, 1975.

The Department issued its decision on October 27, 1975, disallowing the revisions filed by the Company. The Company was permitted to file new tariff revisions designed to produce an increase in gross revenues of nearly $93.6 million, but the increase was to be applied uniformly to all service classifications and equipment, with specified exceptions. The Company was also directed to prepare a cost of service study. Reserving its right to appeal, the Company filed revised tariffs which were approved and became effective on November 13, 1975. The Company then filed its appeal in the county court and moved for a stay of the Department's orders.

Stanley U. Robinson, III, an intervener before the Department, also appeals. He requested that the Department readjust the rates for metropolitan service and that it order certain realignments in the areas where metropolitan service is offered. The Department ruled that it lacked sufficient cost data to order realignment, and did not except metropolitan service from the uniform permitted increase.

A single justice of this court heard arguments on the Company's motion for stay in January, 1976, and by agreement the appeals of the Company and Robinson were consolidated. In March the stay was denied, with leave to renew the motion before the full court. In April the single justice reserved and reported the case to the full court, specifyng the issues to be heard. He included in the record affidavits submitted by the Company in support of the motion for stay; he also included monthly financial reports filed after the report for June, 1975. Those documents had not been presented at the hearings before the Department, and their inclusion was without prejudice to argument whether they were properly included. On June 2, 1976, after argument before the full court, we granted a stay, permitting the Company to submit new revised schedules designed to produce annual gross revenues of $60 million in addition to the revenues produced by the revisions which took effect November 13, 1975, subject to a bond to ensure refunds if the Department's orders are upheld.

2. Summary of issues; scope of review. We consider the Company's claims that the decision of the Department is confiscatory or otherwise contrary to law under the following headings: attrition; increased expenses; curtailment of demand; cost of equity capital; license contract payments; concession service; and rate structure. We then consider Robinson's appeal. So far as unconstitutional confiscation is claimed, the Company is entitled to an independent judicial review as to both law and fact; otherwise the standard of review is governed by G.L. c. 30A, § 14(8). See NET III,360 Mass. at 449, 275 N.E.2d 493.

The Department proceeded, as it has before, on the basis of 'an historic test year adjusted for changes occurring within a reasonable time after that period.' When the Company's initial evidence was filed in December, 1974, the latest available actual results were for the twelve months ending September 30, 1974; before the record was closed actual financial results were introduced for periods through June 30, 1975, and the Department adopted the twelve months ending June 30, 1975, as the test period. By order of the single justice, results through January, 1976, are included in the record before us.

As urged by the Department, we stand by our prior decisions that the Department, although not required to use a method based on an adjusted historic test year, is permitted to do so. See NET I, 327 Mass. at 84, 97 N.E.2d 509; NET II, 331 Mass. at 624, 121 N.E.2d 896; NET III,360 Mass. at 452, 275 N.E.2d 493. Cf. Boston Gas Co. v. Department of Pub. Util., --- Mass. ---, ---, ^a 336 N.E.2d 713 (1975); Note, The Use of the Future Test Year in Utility Rate-Making, 52 B.U.L.Rev. 791, 809 (1972). Our 'fundamental law requires no particular theory or method to be used in determining a rate base, provided the resulting rates are not confiscatory.' Boston Gas Co. v. Department of Pub. Util., --- Mass. ---, ---, ^b 324 N.E.2d 372 (1975). Those decisions, however, do not authorize the Department to ignore confiscatory effects of inflation. See NET III, 360 Mass. at 453, 275 N.E.2d 493; cf. Southbridge Water Supply Co. v. Department of Pub. Util., --- Mass. ---, ---, ^c 331 N.E.2d 523 (1975).

Contrary to the Department's request, we also stand by our decisions that additional evidence becoming available after the Department's decision may be considered by us, subject to verification of its accuracy by the Department. NET III, 360 Mass. at 448, 275 N.E.2d 493. Boston Gas Co. v. Department of Pub. Util., 359 Mass. 292, 300, 269 N.E.2d 248 (1971). Where confiscation or constitutional right is in issue, the authority of the reviewing court must 'extend to new evidence necessary to bring the proof as nearly as reasonably possible down to the date of final decision.' Opinion of the Justices, 328 Mass. 679, 687, 106 N.E.2d 259, 264 (1952). Under G.L. c. 25, § 5, the additional evidence is 'to be taken before the commission,' but we do not read the statute as requiring a possibly useless remand before we can consider the legal effect of alleged additional evidence. The Department's procedures are already slow enough.

3. Attrition. The Department purported to allow the Company a 9% rate of return on a rate base of $1.765 billion. That rate base, however, was determined as the average net intrastate investment of the Company for the 'test year' ended June 30, 1975, less items not now challenged. No adjustments in the rate base were made to take account of events after that date. But the rate base grew to $1.826 billion for the twelve months ended December 31, 1975, and to $1.835 billion for the twelve months ended January 31, 1976; and the rates of return, adjusted to include the effect of the November, 1975, rate increase for a full year, were 8.68% and 8.64%, respectively. For the twelve months ending June 30, 1976, the Company projects a return of 8.14% on a rate base of $1.935 billion. If the projection is accurate, the Company's earnings will fall more than $16 million short of the 9% rate of return allowed by the Department.

This is the problem of 'attrition,' 'the tendency of the rate of return to diminish in a period of comparatively high construction costs.' NET II, 331 Mass. at 622, 121 N.E.2d at 906. In times of inflation, as old plant is retired, the new plant built to replace it costs more. If investment increases more rapidly than revenue, the rate of return is diminished. See Boston Gas Co. v. Department of Pub. Util., 359 Mass. 292, 307 n.19, 269 N.E.2d 248 (1971).

The Company's state controller presented data to show that there had been steady attrition since 1970. The Department purported to allow a rate of return of 7.80% in 1970, 8.62% and 8.82% in 1972, 8.93% in 1973, and 8.93% in 1974. The actual rates of return for the twelve months following those decisions were 6.96% for the 1970 decision, 6.51% for the 1972 decisions and 6.80% for the 1973 decision; the Company projected 6.21% for the 1974 decision. Most of the shortfall was attributable to increase in investment. The same witness also made projections for future periods, the latest being the twelve months ending June 30, 1976, and during the hearings actual results became available for some of the periods, showing slightly higher net investment and slightly lower rates of return than he had projected. No witness...