Alabama Public Service Commission v. Southern Bell Tel. & Tel. Co.

• Decision Date: 03 November 1949
• Docket Number: 3 Div. 533.
• Citation: 42 So.2d 655,253 Ala. 1
• Court: Alabama Supreme Court
• Parties: ALABAMA PUBLIC SERVICE COMMISSION v. SOUTHERN BELL TELEPHONE & TELEGRAPH CO.

42 So.2d 655

253 Ala. 1

ALABAMA PUBLIC SERVICE COMMISSION v. SOUTHERN BELL TELEPHONE & TELEGRAPH CO.

3 Div. 533.

Supreme Court of Alabama

Nov. 3, 1949

[Copyrighted Material Omitted] [Copyrighted Material Omitted]

A. A. Carmichael, Atty. Gen., and MacDonald Gallion Asst. Atty. Gen., and Frank G. Clement, of Nashville, Tenn., for appellant.

R. E. Steiner, Jr., and Richard T. Rives, of Montgomery, and Edw. B. Crosland, John T. Goree and Edw. W. Smith, of Atlanta, Ga., for appellee.

STAKELY, Justice.

On October 28, 1947, The Southern Bell Telephone and Telegraph Company, a public utility engaged in the telephone business pursuant to § 53, Title 48, Code of 1940 filed with the Alabama Public Service Commission schedules of proposed increased local exchange (local service) and intrastate toll (long distance) rates to become effective January 6, 1948, accompanied by a petition requesting approval by the Commission. Under § 54, Title 48, Code of 1940 the Commission suspended the effectiveness of such schedules until March 5, 1948 and proceeded to hold hearings. Before the expiration of such suspension period the Commission entered an order (1) denying the Company the right to charge the schedules of increased local exchange and intrastate toll rates which had been filed with the Commission and (2) granting a new schedule which made a small increase in intrastate toll rates and no increase in local exchange rates.

In accordance with § 79, Title 48, Code of 1940 the Company took an appeal to the Circuit Court of Montgomery County, in Equity. In due course that Court entered its findings, opinion and decree setting aside the order of the Commission. The Court considered in detail the evidence establishing the Company's earnings requirement and each of the items of the Company's operating expense which had been disallowed by the Commission. It found that the findings by the Commission with respect to the earnings requirement of the Company were without evidence to support them and contrary to the evidence. It also found that the rates and charges fixed by the Commission were confiscatory and that based on the evidence earnings at the annual rate of at least 6 2/3% on the Company's intrastate net investments are required in order to provide the Company with a fair net return on the reasonable value of its intrastate property devoted to the public service in Alabama. It also found that all the items of the Company's operating expenses were supported by the uncontradicted evidence.

Pursuant to § 90, Title 48, Code of 1940, the Commission brings this appeal to this Court from the aforesaid decree of the Circuit Court of Montgomery County, in Equity.

Questions for decision are (1) Is the order of the Commission based upon findings without substantial evidence to support them? (2) What is the function and duty of the Court upon the issue of confiscation vel non under the facts in this case? (3) Is the order of the Commission contrary to § 52, Title 48, Code of 1940? and (4) Should the various items of the Company's operating expenses have been disallowed?

We think it will simplify the case if pertinent facts are stated in connection with the discussion of the various assignments of error. However the case can be better understood if certain facts, as shown by the record, are now set forth which partly form the basis of the Company's claim of its need for additional revenue. It is well to point out that the evidence is so voluminous that it is not practicable to set out all the evidence.

There has been no general increase in the Company's local exchange rates and charges in Alabama since 1921 and no general increase in the Company's intrastate toll rates since 1926. On the contrary both its local exchange and toll rates and charges have been reduced several times since those dates. During the period since those rates and charges were fixed by the Commission, due to factors over which the Company had no control such as general increases in the cost of labor, materials, supplies and services purchased, there has been a great increase in costs necessarily incurred in the furnishing of telephone service.

Since 1940 the demand for telephone service and the volume of telephone service required to be furnished in the State of Alabama has grown enormously. There is every indication that this demand for service will be equally as great in the foreseeable future. The number of telephones owned by the Company and in service in Alabama increased from 133,000 on December 31, 1940, to 257,000 September 30, 1947, an increase of about 93%, and it is estimated that telephones will be added at an even faster rate in 1948 and 1949. On January 1, 1946, 32,000 unfilled applications for telephone service were on hand awaiting the construction of additional facilities and in spite of the fact that 110,000 new telephones were installed during the next twenty-one months, the Company had on hand 51,000 unfilled orders for telephones on September 30, 1947. As of the end of 1947 there were about 49,000 unfilled applications for telephone service on hand and it appears to have been conservatively estimated that at the end of 1948 and 1949 there will be on hand about 44,000 and 30,000 unfilled orders respectively in spite of the estimated rapid increase in installments during those years. For the year 1946 the total number of long distance messages originating in Alabama increased about 130% over 1940 and for the third quarter of 1947 increased at an annual rate of 150% over 1940. From August 31, 1945 to September 30, 1947 the number of Company employees in Alabama was increased by 1,608 or nearly 51% to handle the additional volume of service and to provide better telephone service.

To meet this ever increasing public demand the Company has provided a large amount of additional plant and facilities during the past few years in Alabama and the evidence shows that the Company will be required to continue its construction program at an equally high level for several years in the future. In Alabama for the year 1945 the actual gross construction expenditures were about $3,348,000, for the year 1946 about $8,714,000, for the year 1947 about $11,619,000 and for 1948 it was estimated that such expeditures would amount to about $15,841,000. The evidence shows that the increased revenues sought by the Company would not be used as capital to construct needed additional plant and facilities. The capital required for such construction is financed from the proceeds of the Company's security issues. The increased rates are required to provide the Company with a reasonable rate of return in order to maintain its credit and so enable it to raise on reasonable terms the required additional capital to be used for plant and facility construction.

Although the increased volume of the Company's telephone business has resulted in increased gross revenue, the rate of earnings has drastically declined. This decline is attributable to two facts, (1) the operating expenses of the Company have increased at a more rapid rate than its operating revenues and (2) the increased costs of construction required to expand and improve its service exert a definite, continued and cumulative downward pressure on its rate of earnings.

Direct labor costs comprise a major portion of the total cost of rendering telephone service and consume a major portion of the Company's total revenues. Three substantial general wage increases have resulted from wage bargaining since the beginning of 1945. The aggregate of these three wage increases to Alabama employees was $3,266,000. Prior to the wage increase in 1945 the part of each Alabama revenue dollar required for wage expense amounted to about 40 cents but after May 1947, 59 cents of each Alabama revenue dollar went for wage expenses. There is nothing to indicate a decline in wage rates under foreseeable future conditions.

The prices of services, materials, equipment and supplies used in furnishing telephone service has risen sharply since 1940. Some of these increases in costs from July 1940 to October 1947 are: lead covered cable, 86%; cross-arms, 160%; creosoted pine poles, 137%; steel strand wire, 83%; iron wire, 91%; bare copper wire, 89%; subscriber telephone sets, 35% and switchboards and other apparatus 44%.

Each telephone added at the current high levels produces a lower rate of earnings than the average earnings for telephones in service, thus resulting in a continuing decline in the overall earning ratio. The evidence shows that the Company's investment in plant per average telephone in service in Alabama on January 1, 1947 was $211.36 per telephone while the Company's investment in plant per average additional telephone placed in service in Alabama from January 1, 1947 to September 30, 1947 was $243.38. On the basis of the operating revenues and expenses for the third quarter of 1947 an annual rate of return of only 1.92% was produced on the added plant investment of $243.38 per telephone gained. The return of 1.92% for each telephone added is to be compared with the earnings rate of 2.13% on all the Company's telephones in service during the third quarter of 1947.

The low earnings rate of the Company in Alabama at the time of the hearing before the Commission was not occasioned by circumstances peculiar to its 1947 operations, but was due to the continuous increase in expenses over revenues and to continuous increase in investment necessary to furnish telephone service. This is shown by the fact that the ratio of net operating income to the average investment (undepreciated) of the total Alabama property (intrastate and interstate) has decreased from 5.10% in the year 1940 to 2.13% in the third quarter of 1947 equated to an annual...