Application of Northwestern Bell Tel. Co.

• Decision Date: 15 September 1959
• Docket Number: No. 9764,9764
• Citation: 78 S.D. 15,30 P.U.R.3d 289,98 N.W.2d 170
• Parties: , 30 P.U.R.3d 289 Application of NORTHWESTERN BELL TELEPHONE COMPANY.
• Court: South Dakota Supreme Court

Page 170

98 N.W.2d 170

78 S.D. 15, 30 P.U.R.3d 289

Application of NORTHWESTERN BELL TELEPHONE COMPANY.

No. 9764.

Supreme Court of South Dakota.

Sept. 15, 1959.

Martens, Goldsmith & May, Pierre, John A. Anderson, Walter D. James, Jr., Allan L. Grauer, Omaha, Neb., for appellant, Northwestern Bell Telephone Co.

M. Q. Sharpe, Kennebec, for respondents.

ROBERTS, Judge.

This appeal involves the application of the Northwestern Bell Telephone Company, hereafter referred to as the Company, to increase intrastate telephone rates and charges. The application together with proposed rate schedules designed to increase the annual net revenues of the Company by approximately $500,000 was filed on February 14, 1958, with the Public Utilities Commission of South Dakota, hereafter referred to as the Commission. October 18, 1957, the Commission had denied a prior application for a general increase in rates, but authorized a rate group reclassification which as found by the Commission would produce additional revenue of $500,000 and a return based upon the 1956 level of operations of about 5.9 per cent. In the application in the instant proceeding, the Company alleges that the Commission by such order establishing present rate schedules had failed to make proper adjustments for known changes affecting plant investments and operating costs in the immediate future; that plant investments in South Dakota during 1957 increased by more than $6,350,000 and that during the final quarter of that year the Company entered into a contract with the labor union representing its employees which increases its annual wage cost by approximately $366,000; that the construction program of the Company in South Dakota for 1958 will exceed $7,000,000; and that the present application is made for the purpose only of restoring the net earnings of the Company to the level determined by the Commission in its order of October 18, 1957, to be reasonable.

Hearing was had and under date of May 18, 1958, the Commission filed its report and made and entered its order denying the application. The Commission on July 28 following filed a report containing additional findings and entered its order denying petition for rehearing. The Company in addition to claimed errors in the decision of the Commission sought a rehearing for the purpose of introducing evidence of actual operating results in 1958 and pointed out that almost six months of the year had already elapsed. The Company appealed from these orders to the Circuit Court of Hughes County. From the judgment of that court affirming the orders, the Company appealed to this Court.

The Commission adopted a rate base of $28,130,179, taking the book values of the Company as correct. It found $27,555,742 to be the average net investment in plant for the year 1957 and to this added $387,500 for the average amount of materials and supplies on hand and $186,937 for average working capital. The Commission in its decision expressed the opinion that in the case of an expanding utility a rate base cannot be fairly calculated by using year end investments since revenues for a period of twelve months more properly relate to a plant in existence over that period of time.

The Company introduced evidence of an additional net plant investment of $716,764 resulting from replacement of equipment at its Aberdeen exchange which was placed in service January 19, 1958. Adding this amount to the 1957 year end net intrastate investment of $29,827,808, the Company contended for a rate base of $30,526,681 as of January 31, 1958. The Commission refused to consider the base proposed for the reason that it extended beyond the cutoff date of December 31, 1957.

The Commission computed the 1957 intrastate net earnings to be $1,631,643. This included an adjustment upward of $238,599 for the purpose of reflecting increased earnings resulting from the order of October 18, 1957, and adjusted downward estimates of $86,866 for wage increases, $17,834 for tax increases and $6,703 for group insurance effective in 1958. The Commission found that the net earnings thus computed would provide a net return of 5.8 per cent on the rate base of $28,130,179.

The Commission rejected two adjustments sought by the Company. It asked a reduction of $38,699 in earnings to reflect an increase in casualty expenses and an adjustment upward in earnings by $8,598 which represented increased net earnings resulting from reduction in operating expenses effected by the conversion at the Aberdeen exchange. The Company claimed net earnings for the year 1957 of $1,601,542 which would mean a return of 5.24 per cent on its proposed rate base of $30,526,681.

The Company contends (1) that the Circuit Court erred in failing to exercise its independent judgment on the law and the facts and (2) that the orders of the Commission are unreasonable and confiscatory and that there were errors in the determinations of the Commission in these particulars: (a) that the Commission in fixing a basis for computing fair and reasonable rates used an arbitrary cutoff date of December 31, 1957, and refused to consider the latest available data, thus excluding from the rate base a substantial amount in intrastate investment resulting from a replacement of equipment at the Aberdeen exchange which was completed in January 1958; (b) that the Commission should have made an adjustment for annual casualty expenses that could be reasonably expected in the future; (c) that the Commission by adopting a theory that a utility carrying on a large construction program is not entitled to a reasonable return interfered with the managerial functions of the Company and penalized it financially; (d) that the Commission failed to make provision for the attrition or decline in rate of return which results from adding plant at present high cost; and (e) that the Commission considered and relied upon interstate operations over which it has no jurisdiction.

The record discloses that the Company is one of twenty-two operating subsidiaries of the American Telephone & Telegraph Company commonly known as A. T. & T. The Company provides local exchange and intrastate toll service in this state and in conjunction with other subsidiaries and independent telephone companies and the Long Lines Department of A. T. & T. also provides interstate toll service. A. T. & T. owns all or substantially all the stock of Western Electric Company which manufactures, purchases and distributes apparatus, equipment and supplies for the companies included in the Bell System and of Bell Laboratories, Inc., which performs research, development and design work for the Bell System. During the time here in question the Company by virtue of a license contract paid to A. T. & T. for services performed one per cent of its gross annual revenues. It also appears that A. T. & T. sells its stock to or borrows money from the public and holds the proceeds from the security issues in a fund for the purpose of enabling it to loan money to its subsidiaries.

The same equipment is used by the Company in rendering intrastate and interstate services and in the field of regulation the separation of investment, revenues and expenses becomes essential. Mr. Wade M. Meintzer, employed by the Company as a statistician, testified at length concerning its books and accounts. He testified that all records and accounts are kept on a total state basis and that an allocation of revenues and expenses to intrastate and interstate operations commonly designated as separation is made only for the purpose of a rate proceeding. A Separations Manual has been prepared by representatives of the National Association of Railroad and Utilities Commissioners and the Federal Communication Commission and has been generally accepted by state regulatory agencies. The witness further testified: 'In separating the telephone plant investment, revenues, and expenses between interstate and intrastate operations for the purpose of this rate hearing I have followed the principles contained in the Separations Manual * * *. Exhibits were delivered to the Commission about March 13th or 14th. At that time, the latest available information as to South Dakota intrastate operating results was the twelve month period ending December 31, 1957. In the meantime, intrastate operation results for January, 1958, have become available. * * * The company's net investment in intrastate plant and equipment as of January 31, 1958 * * * amounts to $30,526,681. The only significant change in this investment figure involves the investment changes resulting from the central office equipment replacement at Aberdeen. The Aberdeen replacement was placed in service on January 19, so that the changes in plant investment resulting from this replacement are now actually reflected in our books as plant in service.' The witness further testified that the Company was unusually fortunate in experiencing only a negligible amount of casualty expense in the year 1957 and that the adjustment increase relied upon by the Company for casualty expenses is founded upon storm damage occurring in the past ten years and that the adjustment proposed is the average for that period modified to take into consideration the change in composition of plant and current cost levels.

It appears from exhibits introduced by the Commission that the Company had in this state a total year end investment in plant in 1954 of $40,286,433; 1955, $42,747,938; 1956, $45,419,778; and 1957, $50,919,283. The increase in plant investment for the year 1957 was about 12 per cent. The average annual increase for the three prior years was about 6.7 per cent. In the year 1957 there was an increase of 6696 or 4.73 per cent in the number of telephones in operation. During the three preceding years there was a yearly average increase of 6473 or 5.05 per cent.

Mr. Ellwein Quinney, an engineer employed by the Commission, testified: 'From the foregoing it...