City of Cincinnati v. Public Utilities Commission of Ohio

• Decision Date: 12 May 1954
• Docket Number: 33742,33702 and 33743,Nos. 33701,s. 33701
• Parties: , 53 O.O. 304, 5 P.U.R.3d 251 CITY OF CINCINNATI v. PUBLIC UTILITIES COMMISSION OF OHIO et al. (two cases). CINCINNATI RETAIL MERCHANTS ASS'N v. PUBLIC UTILITIES COMMISSION OF OHIO et al.(two cases).
• Court: Ohio Supreme Court

Page 395

161 Ohio St. 395

119 N.E.2d 619, 53 O.O. 304, 5 P.U.R.3d 251

CITY OF CINCINNATI v. PUBLIC UTILITIES COMMISSION OF OHIO et al. (two cases).

CINCINNATI RETAIL MERCHANTS ASS'N v. PUBLIC UTILITIES COMMISSION OF OHIO et al.(two cases).

Nos. 33701, 33742, 33702 and 33743.

Supreme Court of Ohio.

May 12, 1954.

Syllabus by the Court.

1. In an appeal from a final order of the Public Utilities Commission fixing rates for a telephone company, the court is ordinarily required, under Section 544, General Code (Section 4903.13, Revised Code), to reverse, vacate or modify such order as being unlawful or unreasonable, where the commission has abused its discretion by allowing the inclusion of improper items in the rate-base structure or has wrongfully allowed improper items to be included as recurring expenses in the company's operations.

2. Where a telephone company was not required to pay federal excess profits taxes, under the rates in effect on the day certain of July 1, 1952, and under a federal tax statute which was automatically scheduled to expire by its terms on June 30, 1953, and which actually did expire after a limited extension on December 31, 1953, and where such company was only required to pay excess profits taxes beginning on June 1, 1953, in the total sum of $378,431, for the year 1953, because of an increase in rates allowed by the Public Utilities Commission and effective June 1, 1953, it is unlawful and unreasonable for the commission, on the company's application, to include an item of $647,026 for excess profits taxes as a recurring annual expense of the company.

3. The annual contributions of a telephone company to maintain a pension fund for its employees are a proper charge to be included in the company's operating expenses for rate-making purposes.

4. Contributions by a telephone company to the amortization of a deficiency in an 'actuarial reserve' for the pension fund of its employees, to cover service of such employees rendered before such fund was put on an actuarial basis, are not a proper or legal charge to be included as a recurring annual operating expense in fixing telephone rates, where such 'actuarial reserve' deficiency will be fully amortized over a period of ten years and within 18 months after the date certain fixed by the commission for rate-making purposes.

5. In fixing telephone rates, customers' contributions in the form of accruals for the payment of taxes, deposits to secure the payment of customers' bills for service or as advances on installation charges, and collections of rents to be paid at future dates, which will be constant with reasonable certainty in the foreseeable future and which are available for investments in materials and supplies, or for use as working capital, should be used as an offset on the allowance for working capital, including investments in materials and supplies necessary for the normal operations of the company and for plant maintenance and repair.

6. The materials and supplies of a telephone company which will be used for new construction, extensions and additions, as distinguished from normal operations of the company and for plant maintenance and repair, are not property 'used and useful for the service and convenience of the public,' as required by Section 499-9, General Code (Section 4909.05, Revised Code), and the inclusion of the investments in such materials and supplies in the rate-base structure of the company is unlawful and unreasonable.

On September 12, 1952, The Cincinnati & Suburban Bell Telephone Company, hereinafter referred to as the company, filed an application with the Public Utilities Commission of Ohio for authority to increase its Ohio intrastate rates. Objections to the proposed increases were filed with the commission by the city of Cincinnati and The Cincinnati Retail Merchants Association, the appellants herein.

The cities of Hamilton and Norwood also entered appearances and objected to the proposed rates.

On May 28, 1953, after an extended hearing, which the appellants claim was not conducted in accordance with the mandatory provisions of Section 614-20, General Code, the commission entered an order approving the proposed rate increases in full (effective as of June 1, 1953). Thereafter the commission granted and held a rehearing, and on August 6, 1953, it adhered to its order of May 28, 1953.

The city of Cincinnati perfected appeals to this court from both orders of the commission, which are designated as cases numbered 33701 and 33742, respectively, and The Cincinnati Retail Merchants Association likewise perfected appeals from both orders, as cases numbered 33702 and 33743, respectively.

The appeals of each appellant were consolidated by agreement and all appeals were argued to the court as one appeal.

The commission found that, as of July 1, 1952, which is the date certain on which the commission based its order, the company's Ohio intrastate property had a ratebase valuation of $89,980,384, computed on a reproduction cost new of $113,182,540 minus a depreciation reserve of $23,202,156. It found also that the proposed rates would produce an additional gross annual revenue from the company's Ohio intrastate operations, in the amount of $4,637,436.

The city of Cincinnati listed 22 items in its assignment of errors and The Cincinnati Retail Merchants Association's assignment contains 15 items. However only 6 issues were variously stressed in the briefs of the appellants and in the arguments to the court. These issues may be briefly summarized as follows:

1. Were federal excess profits taxes properly includable in the company's expenses?

2. Was the payment to reduce the unfunded actuarial reserve requirement under the company's pension plan properly includable in its expenses?

3. Should accruals on the company's books be deducted from its rate-base structure?

4. Was the commission's determination with respect to the amount of material and supplies properly includable in the company's rate-base structure?

5. Was the commission's determination with respect to rate of return either unlawful or unreasonable?

6. Was the procedure followed by the commission in its hearing and rehearing either unlawful or unreasonable?

Other facts are stated in the opinion.

Henry M. Bruestle, City Sol., James W. Farrell, Jr., Robert J. White, Cincinnati, for appellant City of Cincinnati.

Paxton & Seasongood, Joseph A. Segal, A. Bruce Schimberg, Cincinnati, for appellant The Cincinnati Retail Merchants Ass'n.

C. William O'Neill, Atty. Gen., James M. Burtch, Jr., Columbus, Everett H. Krueger, Jr., Cleveland, for appellee Public Utilities Commission.

Frost & Jacobs, Charles G. Puchta, Jr., A. J. Allen, Jr., Cincinnati, George C. McConnaughey, Columbus, for appellee Cincinnati & Suburban Bell Tel. Co.

LAMNECK, Judge.

Section 544, General Code, Section 4903.13, Revised Code, provides that 'A final order made by the commission shall be reversed, vacated or modified by the supreme court on appeal, if upon consideration of the record such court is of the opinion that such order was unlawful or unreasonable.'

This section has been construed as limiting the power of the court on review to a determination of whether the final order of the commission is supported by substantial evidence and is in accordance with the standards established by law.

In the case City of Marietta v. Public Utilities Commission, 148 Ohio St. 173, 74 N.E.2d 74, 75, the fourth paragraph of the syllabus reads as follows:

'A court will not substitute its judgment as to the value of public utility property or to the cost of production and distribution of public utility service for the finding of the commission on these matters and will not reverse the order of the commission thereon unless there is a clear showing that it has abused its discretion or has omitted to give just consideration to some element in the determination of the rate base structure or the rate of return which makes its finding unlawful or unreasonable.'

The appellants' main contentions are that the commission erroneously allowed the inclusion of certain items in the company's recurring expenses as a basis for needed revenue, some of which items they contend are not properly includable and some of which they contend, if includable, are nonrecurring expenses and, therefore, are includable only when properly amortized over a period of years, and that certain other items were erroneously included in the rate-base structure.

First, the appellants contend that the commission wrongfully allowed as a recurring annual legitimate expense an item of $647,026 for federal excess profits taxes.

Basically, a regulated public utility should not be entitled to earn profits that are excessive.

However, Sections 499-9 and 614-23, General Code, Sections 4909.05 and 4909.15, Revised Code, provide that, in fixing the valuation of a public utility's property used and useful for the service and convenience of the public, the commission shall base its value on the cost of reproduction new as of a date certain minus depreciation, and that a utility is entitled to a fair and reasonable return on such valuation. It is conceivable that circumstances might exist where, in fixing rates which will produce a fair and reasonable return on such a valuation, revenues would be produced that would enable the utility to earn large profits based on the par value of its capital stock.

In City of Cincinnati v. Public Utilities Commission, 153 Ohio St. 56.90 N.E.2d 681, 682, this court held that 'Excess profits taxes paid by a utility to the federal government may be considered by the commission as an operating expense of the utility, particularly where no objection is registered thereto at the hearings before the commission.'

In the instant case, however, strong objections were registered by the appellants, in the hearings before the commission, to the inclusion of any allowance of an item for excess...