Com. ex rel. Stephens v. South Central Bell Tel. Co.

• Decision Date: 03 December 1976
• Citation: 545 S.W.2d 927
• Parties: COMMONWEALTH of Kentucky ex rel. Robert F. STEPHENS, Attorney General, Movant, v. SOUTH CENTRAL BELL TELEPHONE COMPANY, Respondent.
• Court: United States State Supreme Court — District of Kentucky

Page 927

545 S.W.2d 927

COMMONWEALTH of Kentucky ex rel. Robert F. STEPHENS Attorney General, Movant, v. SOUTH CENTRAL BELL TELEPHONE COMPANY, Respondent.

Supreme Court of Kentucky.

Dec. 3, 1976.

Robert F. Stephens, Atty. Gen., James E. Rogers, Jr., Laura L. Murrell, Asst. Attys. Gen., Morris E. Burton, Frankfort, for movant.

Lively M. Wilson, James G. Apple, Stites, McElwain & Fowler, William S. Connolly, Gen. Atty., South Central Bell Tel. Co., Louisville, Norman C. Frost, Vice President and Gen. Counsel, South Central Bell Tel. Co., Birmingham, Ala., W. M. Booker, Jr. Gen. Sol., and John P. Fons, Sol., Birmingham, Ala., Martin R. Glenn, Louisville, for respondent.

GRANTING RELIEF PURSUANT TO CR 65.07

LUKOWSKY, Justice.

This cause is before the court on motion of the Attorney General for relief from a temporary injunction granted by the Franklin Circuit Court which restrained enforcement of a rate order made by the Public Service Commission prescribing telephone rates for South Central Bell.

On March 14, 1975, South Central Bell filed with the Commission, pursuant to KRS 278.180, notice that it proposed to increase its rates and charges for various services rendered by it in Kentucky effective April 3, 1975, to produce an additional $33 million in revenues on an annual basis.

Pursuant to the authority granted to the Commission in KRS 278.190, an order was entered suspending the proposed rates for a period of five (5) months from April 3, 1975, and thereafter the Commission undertook an investigation of the proposed rates. Hearings were begun on April 22, 1975, and were not completed until September 17, 1975. The Commission not having entered an order within the five months suspension period, South Central Bell, on September 3, 1975, and pursuant to KRS 278.190, placed its proposed tariffs into effect, which tariffs are still being charged.

The Commission, by order entered December 31, 1975, denied the schedule of rates which had been placed in effect by South Central Bell and, instead, directed South Central Bell to make effective rates designed by the Commission to generate only an additional $15 million in revenues on an annual basis. Further, the Commission ordered South Central Bell to refund all rates and charges which had been collected since September 3, 1975, in excess of those authorized by the aforesaid order.

The Commission, in its rate order of December 31, 1975, found that, 'a return of 8.95% on Net Investment of $394,945,000 will produce a return of 11% on Equity which will be sufficient to permit Applicant to maintain its financial integrity and raise the required capital to expand and provide adequate service in its service area.' (Emphasis supplied.) The Commission further found in that same order:

'(1) the rates set out in Appendix 'B' (those fixed by the Commission) attached hereto are the fair, just and reasonable rates and said rates will produce sufficient revenues to permit the Applicant to pay its operating expenses, service its debt, pay a reasonable dividend on its stock and have a reasonable amount for its surplus;

(2) that the return produced by the revenues authorized herein will permit the Applicant to obtain capital at reasonable cost so that it may continue to expand and improve its service to the public it is obligated to serve;

(3) that the proposed schedule of rates for intrastate telephone service proposed by the Applicant and now being charged would produce an excessive return . . ..'

On January 9, 1976, South Central Bell filed an appeal in the Franklin Circuit Court against the Commission under KRS 278.410, contesting the validity of the order of the Commission dated December 31, 1975. The complaint alleged that the rates ordered by the Commission were unjust, unlawful and confiscatory, and would not produce the rate of return which the Company found to be the minimum required by the Company. The Commission filed an answer denying the allegations of the complaint. The Attorney General of Kentucky and the City of Louisville were permitted to intervene and have filed answers as intervening defendants.

South Central Bell kept the rates which had previously been instituted in effect pending a final determination of the validity of the Commission's order by the Franklin Circuit Court.

The Franklin Circuit Court, on March 2, 1976, sustained motions of the Commission and intervening defendant, the Attorney General, to require South Central Bell to cease immediately collecting rates in excess of those rates allowed by the Commission. However, that order was set aside on March 22, 1976.

On March 4, 1976, South Central Bell filed a motion before the Franklin Circuit Court for a temporary injunction to stay the operation and enforcement of the Commission's order of December 31, 1975, pending a final judgment on the merits of the appeal of the order. The grounds stated for such motion were (a) that the Commission's order was arbitrary, unjust, unlawful, and unreasonable; confiscatory under the Fourteenth Amendment to the Constitution of the United States and Sections 2, 13 and 242 of the Kentucky Constitution; and a denial of equal protection of the laws under said Fourteenth Amendment; (b) the order would result in immediate and irreparable injury, damage and loss and (c) the rates being collected were subject to refund with interest if the Commission's order were sustained and thus South Central Bell's customers would sustain no injury by the issuance of a temporary injunction. Affidavits were filed in support of said motion.

A hearing on the motion for temporary injunction was held by the Franklin Circuit Court, on March 22, 1976. The only witnesses to testify at that hearing were Messrs. E. Q. Faust and W. J. Lester of South Central Bell in support of the motion for a temporary injunction. There was no refutation by any witnesses of the Commission or the Attorney General of the fact that the excess revenues would be irretrievably lost to the Company if the injunction did not issue.

On March 31, 1976, the Franklin Circuit Court sustained the motion of South Central Bell and issued a temporary injunction enjoining and restraining the Commission from enforcing the terms of the December 31, 1975 rate order. The circuit court also ordered that the rates being charged by South Central Bell 'shall remain subject to refund as provided by the Commission's order to the extent such rates are not allowed on final determination of this action.'

In the last analysis the action of the circuit court is based on its finding:

'6. The Company will suffer immediate loss unless enforcement of the Commission's order is restrained pending a final determination of this matter, in that the Comapny will be permanently deprived of revenues from the rates finally allowed, to the extent such rates may exceed the rates prescribed by the Commission because such rates could not be retroactively collected prior to such final determination.'

and its conclusion:

'4. The Company has no adequate remedy of law, and the equities favor granting the injunctive relief requested, in that the Company otherwise will be without a remedy if it prevails on the merits, but if the Commission's order is sustained, all rates collected in excess of those prescribed by the Commission will be subject to refund in accordance with the terms and conditions prescribed by such order.'

If we extend the rationale of the circuit court to its ultimate conclusion, we find that in every case in which a utility is either awarded a rate increase less than it sought or directed to make a rate reduction, it is entitled to charge the higher rate, subject to refund, until all appeals are exhausted. We are constrained to ask, 'Do constitutions require or did the legislature intend such a result?'

The federal and state constitutions protect against the confiscation of property, not against a mere reduction of revenue. South Central Bell Telephone Co. v. Louisiana Public Service Commission, 256 La. 497, 236 So.2d 813 (1970). A confiscatory rate is one that is unjust and unreasonable. Rates are non-confiscatory, just and reasonable so long as they enable the utility to operate successfully, to maintain its financial integrity, to attract capital and to compensate its investors for the risks assumed even though they might produce only a meager return on the so-called 'fair value' rate base. Federal Power Commission v. Hope Natural Gas Co.320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333 (1943). By long standing usage in the field of rate regulation the 'lowest reasonable rate' is one which is not confiscatory in the constitutional sense. Assuming that there is a zone of reasonableness within which the legislature or its designee is free to fix a rate varying in amount and higher than a confiscatory rate it is also free to decrease any rate which is not the 'lowest reasonable rate'. Federal Power Commission v. Natural Gas Pipeline Co., 315 U.S. 575, 62 S.Ct. 736, 86 L.Ed. 1037 (1942).

Ratemaking is a legislative function and the power vested in the legislature to make rates may be exercised by it either directly or through some appropriate agency. L. & N. Railroad Co. v. Garrett, 231 U.S. 298, 34 S.Ct. 48, 58 L.Ed. 229 (1913). In KRS Chapter 278 our legislature delegated the power to fix rates in cases such as this to the Public Service Commission and provided for judicial review. KRS 278.390 provides in part:

'Every order entered by the commission shall continue in force until the expiration of the time, if any, named by the commission in the order, or until revoked or modified by the commission, unless the order is suspended, or vacated in whole or in part, by order or decree of a court of competent jurisdiction.'

KRS 278.410 provides in part:

(1) '. . . any utility affected by an order of the commission may . . . bring an action against the commission in the Franklin Circuit Court to vacate or set aside the order or...