City of Fort Smith v. Southwestern Bell Telephone Co., 4-9647

Citation247 S.W.2d 474,220 Ark. 70
Decision Date18 February 1952
Docket NumberNo. 4-9647,4-9647
PartiesCITY OF FORT SMITH et al. v. SOUTHWESTERN BELL TEL. CO. et al.
CourtSupreme Court of Arkansas

R. A. Eilbott, J., Pine Bluff, Harrell Harper, Fort Smith, Clyman E. Izard, Van Buren, Kaneaster Hodges, Newport, M. M. Little, Benton, O. D. Longstreth, Jr., and Joseph Brooks, Little Rock, for appellants.

Blake Downie and Edward L. Wright, Little Rock, Ronald J. Foulis, St. Louis, Mo., for appellees.

McFADDIN, Justice.

This appeal involves telephone rates. The appellants (hereinafter called 'Cities') are the City of Fort Smith and nine other Arkansas cities, 1 which protest the rate increase made by the order herein involved. The real appellee is the Southwestern Bell Telephone Company (hereinafter called 'Southwestern') which, by cross-appeal, seeks a greater rate increase than the one allowed. The Arkansas Public Service Commission (hereinafter called 'Commission') is also an appellee, since this proceeding was prosecuted in the Circuit Court by petition to review the order of the Commission under Sec. 73-233, Ark.Stats.

On August 21, 1950, Southwestern filed with the Commission certain rate schedules designed to increase Southwestern's annual Arkansas revenues by the sum of $4,600,000. The increased rates were to become effective on September 21, 1950. On August 22, 1950, the Commission suspended the said schedules, and on August 23rd, Southwestern filed with the Commission a bond to insure any refunds ordered; and accordingly the said proposed increased rates were put into effect on September 21, 1950. See Sec. 73-217, Ark.Stats. Interventions and objections were filed by a number of cities 2 in Arkansas which are served by Southwestern.

Hearings commenced before the Commission on September 5, 1950, and, with various recesses, continued until November 28, 1950; and on January 20, 1951, the Commission issued its findings, and order here challenged. 3 On January 25, 1950, certain cities, including all the appellants, filed a petition for rehearing, and when such petition was denied by the Commission, the present ten appellant cities filed in the Pulaski Circuit Court on March 3, 1951, a petition for review of the Commission's order. Such is the procedure prescribed by Sec. 73-233, Ark.Stats. Likewise, Southwestern filed with the Commission a petition for rehearing and later filed in the Circuit Court a petition for review. The Circuit Court, by judgment of July 5, 1951, dismissed the petitions for review of all of the parties; and this direct and cross-appeal ensued after proper motions for new trial were filed, both by the ten appellant cities and by Southwestern.

The record reflects that Southwestern is a Missouri corporation, and operates as a telephone public utility in the States of Missouri, Oklahoma, Kansas, Arkansas, Texas, and a portion of Illinois; that Southwestern is a subsidiary of, and wholly owned by, 4 American Telephone & Telegraph Company, which latter, having assets of over 10 billion dollars, is the largest corporation in the United States. American Telephone & Telegraph Company (sometimes herein called 'American') owns in whole or in part, either directly or indirectly through its other subsidiaries like Southwestern, nineteen operating telephone companies, and supplies more telephone service than all the other telephone companies in the United States combined.

American owns 98.8% of the stock of Western Electric Company, which is the subsidiary that manufactures and sells telephone equipment to all the nineteen telephone companies controlled by American. American also controls the 'Bell Telephone Laboratories', a research and development project, and has a 'Long Lines Department', which has the long distance lines that supply the wire and other facilities for calls from one city to another. American charges Southwestern a fee of 1% of its gross revenue for 'Supervision', and fixes Western Electric's charges to Southwestern; and also, subject to Federal and State regulations, American determines the charges Southwestern pays to 'Long Lines Department'. It is apparent that American, through its affiliates, does not bargain with Southwestern at arm's length.

In proceedings before regulatory bodies to fix utility rates, it is axiomatic that the rate fixed must be fair to all concerned--i. e., the public must not be overcharged, and the rate fixed must not be so low as to amount to a confiscation of the property of the utility. Somewhere between these two extremes--overcharge and confiscation--must be the rate to be fixed. But a tremendous factor in determining a rate depends on the method or methods used to calculate the investment of the utility. A most important factor, if not the prime one, is the so-called 'proper rate base', which means the method used to determine the proper value of the property of the utility dedicated to, and actually employed in, the public use. In the case at bar, the Commission determined that: 'a proper rate base is the original or book cost, less the depreciation reserve'. To this figure, the Commission added amounts for what it considered necessary 'cash working capital', and 'material and supplies', and reached this calculation:

                'Original Cost, December 31, 1950 ............... $44,453,000.00
                  Less Depreciation Reserve, December 31, 1950 ... 10,254,000.00
                Net Plant Used and Useful, December 31, 1950 ..... 34,199,000.00
                Material and Supplies ............................... 445,000.00
                Cash Working Capital ................................ 410,000.00
                  Total Plant Account as of December 31, 1950 ... 35,054,000.00'
                

The next steps in the Commission's problem were, (1) to determine what net rate of return Southwestern should have on its 'rate base', and (2) to determine the increase in revenue necessary to yield such net rate of return. The Commission fixed 6% as the rate of return; and then, to determine the increase necessary to allow 6%, the Commission used this set of figures:

                'Operating Revenues ............................................ $14,102,000.00
                Operating Expenses .............................................. 11,907,000.00
                Operating Texes (Excl.  Income Tax) ................................. 815,000.00
                                                                     --------------------------
                  Total ......................................................... 12,722,000.00
                Net Before Taxes ................................................. 1,380,000.00
                Income Taxes per Exhibit ........................................... 417,000.00
                Adjustment for Increase in Federal Taxes ............................ 17,000.00
                                                                     --------------------------
                  Total ............................................................ 434,000.00
                  Balance Available ................................................ 946,000.00
                6% Return on $35,054,000 ......................................... 2,103,240.00
                Less Balance Available ............................................. 946,000.00
                                                                     --------------------------
                Deficit in Net Operating Income ................................ $ 1,157,240.00
                Times 2.012194 equals Additional Revenue Necessary
                  5 .............................................................. 2,328,591.00
                And Revenue in Books from Sept. 21, 1950, Account
                  of Increase Under Bond ......................................... 1,277,000.00
                Total Increase Necessary ........................................ 3,605,591.00'
                

5 The item of $2,328,591 is obtained by multiplying the net operating

deficit of $1,157,240 by 2.012194.

The effect of this last stated calculation was to allow Southwestern an increase of $3,605,591 per annum, instead of the $4,600,000 per annum which Southwestern sought. That is to say, Southwestern was allowed by the Commission to charge rates which would increase its gross revenue by the sum of $3,605,591.

The next and final step in the Commission's task was to put into effect a schedule of rates which would yield to Southwestern its present revenue, plus the increase of $3,605,591. That step in the proceedings is reserved for the final portion of this opinion, because the main questions now before us relate to the figures which were used to arrive at the designated increase of $3,605,591.

To the decision of the Commission allowing the increase of $3,605,591 the Cities claim the Commission erred in four points:

'1. Fixing the rate base as of December 31, 1950, instead of September 30, 1950.

'2. Permitting the Southwestern Bell Telephone Company to back-bill for an initial period of one month when new rates became effective September 21, 1950.

'3. Allowing cash working capital in the sum of $410,000 when the Telephone Company collects its bills in advance.

'4. Allowing a rate of return of 6%, which is excessive and not supported by evidence, instead of 5%, which is the amount that should have been allowed.'

To the failure of the Commission to allow Southwestern the prayed increase of $4,600,000, Southwestern complains, and argues its cross-appeal in this Court under the following points:

'Point I. The Commission Erred in Allowing a Return of Only 6% on a Net Investment Rate Base.

'Point II. The Commission Erred in Refusing to Recognize and Give Weight to the Present Value of the Company's Property.

'Point III. The Commission Erred in Computing the Amount of Rate Increase in such a Way that the Company Never Will Be Able to Earn as Much as the Commission Found It Is Entitled to Earn.'

The record before us is voluminous: consisting of more than five thousand typewritten or mimeographed pages, and more than eight hundred pages of printed abstracts and briefs. Even to list the adjudicated cases and standard text books and commentaries cited would consume several pages. We come now to the decision we have reached.

I. Extent Of Review. At the outset and before...

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