Application of General Telephone Co. of Southwest

• Decision Date: 15 September 1982
• Docket Number: No. 13726,13726
• Citation: 652 P.2d 1200,98 N.M. 749,1982 NMSC 106
• Parties: In the Matter of the Application of GENERAL TELEPHONE COMPANY OF the SOUTHWEST for an Adjustment in Rates and Charges for Intrastate Telephone Service Furnished by it within the State of New M GENERAL TELEPHONE COMPANY OF The SOUTHWEST, Appellant, v. CORPORATION COMMISSION, Appellee, and Lea County, et al., Intervenors.
• Court: New Mexico Supreme Court

Page 1200

652 P.2d 1200

98 N.M. 749

In the Matter of the Application of GENERAL TELEPHONE COMPANY OF the SOUTHWEST for an Adjustment in Rates and Charges for Intrastate Telephone Service Furnished by it within the State of New M GENERAL TELEPHONE COMPANY OF The SOUTHWEST, Appellant, v. CORPORATION COMMISSION, Appellee and Lea County, et al., Intervenors.

No. 13726.

Supreme Court of New Mexico.

Sept. 15, 1982.

Rehearing Denied Oct. 20, 1982.

Bigbee, Stephenson, Carpenter, Crout & Olmsted, Charles D. Olmsted, William P. Templeman, Lindsay A. Lovejoy, Jr., Santa Fe, Ward W. Wueste, Jr., William G. Mundy, San Angelo, Tex., for appellant.

Pat Ortiz, Gen. Counsel, State Corp. Com'n, Jeff Bingaman, Atty. Gen., Paul L. Biderman, Asst. Atty. Gen., Santa Fe, for Corp. Com'n.

R.E. Richards, Lawrence D. Hanna, Hobbs, for intervenors.

OPINION

FEDERICI, Justice.

In 1980, General Telephone of the Southwest (GTSW), filed an application with the New Mexico State Corporation Commission (SCC) requesting that tariff charges proposed by GTSW become effective December 31, 1980. The proposed changes in the tariffs were to produce additional intrastate revenues of $2,280,201.00. The SCC suspended the proposed changes pending investigation and hearings pursuant to N.M.Const., Art. XI, Secs. 7 and 8. Before any hearings were held, the SCC informally advised GTSW that it had arrived at a revenue deficiency of $694,545.00. The parties stipulated to a rate design allocating the $694,545.00 deficiency, with GTSW reserving the right to contest the deficiency proposed by the SCC.

The SCC approved the intervention of the Lea County Board of County Commissioners, the City of Hobbs, the City of Lovington, the City of Eunice and the City of Jal (Intervenors). The Intervenors sought to produce evidence that the quality of service provided by GTSW in the areas represented by the Intervenors was inadequate.

Hearings were conducted in April and May of 1981, and GTSW and the SCC each presented expert witnesses who testified as to GTSW's revenue requirements. The Intervenors presented evidence of quality of service through customers of GTSW and through an expert witness.

The SCC entered its final order on June 1, 1981, concluding that the rates proposed by GTSW were unreasonable and that such rates should only be increased by $694,545.00. GTSW filed its petition for an order of removal to this Court, which petition was granted. The cause was submitted to this Court in final form in February 1982.

In these removal proceedings, GTSW presents the following points:

1. The SCC's use of "estimated" separation factors to arrive at GTSW's rate base and expenses was arbitrary and capricious and contravenes the mandate of N.M.Const., Art. XI, Sec. 7, that "due consideration shall be given to the * * * investment and expenditure as a whole within the State."

2. The SCC's determination of GTSW's cash working capital was arbitrary and capricious and radically departs from past practice without reasonable justification in the record.

3. The SCC's determination of GTSW's net operating income by trending both local and intrastate toll service revenues was arbitrary, capricious and not supported by credible evidence.

4. The SCC erred in its determination of GTSW's federal income tax expense through the use of the "double leverage" theory.

5. The SCC's application of the "double leverage" theory to determine the appropriate rate of return on the value of GTSW's invested capital resulted in rates which are unreasonably low and confiscatory, thereby denying GTSW due process of law prescribed by the Fourteenth Amendment to the Constitution of the United States and N.M.Const., Art. II, Sec. 20.

6. The SCC's application of the "double leverage" theory to determine GTSW's appropriate rate of return on the value of its invested capital in New Mexico denied GTSW the equal protection of the laws under the Fourteenth Amendment.

7. The SCC's application of the "double leverage" theory to determine a reasonable rate of return, and the corresponding adjustment to fixed charges (interest) taken as a deduction in calculating federal income tax for ratemaking purposes, was not supported by the record and was, in fact, contrary to the evidence.

8. The SCC arbitrarily refused to recognize over $2 billion in GTE common equity in its application of the double leverage theory.

9. The rate of return granted by the SCC was so low as to result in confiscation of GTSW's property in violation of the Fourteenth Amendment to the Constitution of the United States and N.M.Const., Art. II, Sec. 20 and was wholly contrary to the evidence.

10. The SCC improperly considered the "expert testimony" of its staff witness in arriving at a rate of return for GTSW.

11. The SCC had no authority to penalize a utility for reasons relating to quality of service in a ratemaking proceeding and, in any event, in purporting to do so the SCC violated GTSW's right to due process of law.

The SCC rejected GTSW's toll-leveling adjustment which resulted in a mismatch of test period revenues, investment and expenses, by utilizing end-of-period investment and expenses with average period return. The SCC adopted an adjustment designed to provide a proper matching for test period purposes.

The SCC rejected the separation ratios recommended by GTSW since those ratios distorted test period operations by reflecting only the average relationship between interstate and intrastate operations during the test period. The SCC accepted a methodology which annualized separation ratios for purposes of the test period.

The SCC rejected GTSW's federal income tax calculation in favor of a calculation derived by utilizing GTSW's double leverage capital structure and cost of debt at December 31, 1980, so as to be more reflective of the actual taxes required to be paid by GTSW.

The SCC rejected GTSW's proposed cash working capital allowance derived by means of the arbitrary formula approach. The SCC accepted a cash working capital allowance based upon a methodology that gives more recognition to the existence of time lags which work in favor of the company as well as those which work against it, and thus is more reflective of the actual cash working capital requirements of GTSW.

The SCC considered the evidence regarding cost of common equity capital and determined from that evidence that the zone of reasonableness for a fair rate of return on common equity lay between 13.8% and 16%. In determining the actual point within the zone at which rates should be set, the SCC indicated that the inadequate service being rendered by GTSW required a return at the low end of the zone, i.e., 13.8%. However, the SCC provided an incentive to GTSW to improve service by indicating that a higher return within the zone is proper when adequate service is being provided.

The SCC rejected any adjustment to the return on equity for market pressure, market break, and flotation costs, since the record indicated that such an adjustment would provide excessive revenues to GTSW and that GTSW would incur no costs for which the adjustment was intended to compensate.

The SCC rejected use of GTSW's booked capital structure and instead opted for a double leveraged capital structure in order that the ultimate stockholders of GTSW, i.e., the investors in the marketplace, would earn no more on their equity investment in GTSW than the market cost of equity. The SCC determined that such a capital structure was necessary to prevent discrimination against companies which do not engage in double leveraging as well as to prevent excessive returns at the expense of ratepayers.

The SCC determined that the weighted cost of capital method which it employed to determine the fair rate of return indicated a fair rate of return on rate base for GTSW to be 11.5%. The SCC determined that such a return was sufficient to assure confidence in the financial integrity of GTSW, so as to maintain its credit and to attract capital and was commensurate with returns on investments in other enterprises having corresponding risk. The SCC further indicated that such a return would generate enough actual dollars so that both stockholders and ratepayers were fairly treated.

The SCC then discussed the poor quality of service being provided by GTSW which constrained the SCC to grant a return of 11.5%, the low end of the zone of reasonableness, rather than a return of 11.91%, which the SCC determined would have been appropriate in the absence of service inadequacies.

We have weighed the evidence as it appears in the record, and it is our considered and independent conclusion that the results expressed in SCC findings and conclusions on Point 1 and Points 3 through 10 are correct and we adopt them as our own. We do not agree with the results reached by the SCC on Points 2 and 11. We will also discuss in some detail Point 5 (double leverage), even though we reach the same result as did the SCC.

I. Scope of Review.

The scope of review of this Court's constitutional powers and duties in removal proceedings from the SCC is indeed unique.

N.M.Const., Art. XI, Sec. 7, provides that upon removal by a party of an SCC proceeding to the Supreme Court, the Supreme Court may require or authorize additional evidence. No similar privilege is granted to the SCC. In fact, this same constitutional provision states that upon removal of proceedings to the Supreme Court by the SCC, "no additional evidence shall be allowed."

Up to this point, the Court's duty is not defined. However, the last sentence of N.M.Const., Art. XI, Sec. 7, reads:

In addition to the other powers vested in the supreme court by this constitution and the laws of the state, the said court shall have the power and it shall be its duty to decide such cases on their merits, and carry into effect its judgments, orders and decrees made in such cases, by fine, forfeiture, mandamus, injunction and contempt or other appropriate...