Florida Tel. Corp. v. Mayo

• Decision Date: 06 October 1977
• Docket Number: No. 49860,49860
• Parties: FLORIDA TELEPHONE CORPORATION, Petitioner, v. William T. MAYO et al., Respondents.
• Court: Florida Supreme Court

Page 775

350 So.2d 775

FLORIDA TELEPHONE CORPORATION, Petitioner, v. William T. MAYO et al., Respondents.

No. 49860.

Supreme Court of Florida.

Oct. 6, 1977.

David B. Erwin and Felix A. Johnston, Jr. of Woods, Johnston & Erwin, Tallahassee, Claude M. Warren of Warren, Snider & Warren, Indianapolis, Ind., J. Thomas Gurney, Jr. of Gurney, Gurney & Handley, Orlando, and W. W. Hill, Jr., Kansas City, Mo., for petitioner.

William L. Weeks, Prentice P. Pruitt, Donald R. Alexander and Harry D. Boswell, Tallahassee, for the Florida Public Service Commission, respondents.

Earl B. Hadlow of Mahoney, Hadlow & Adams, Jacksonville, and Walter H. Alford, Miami, for Southern Bell Telephone and Telegraph Co., intervenor.

BOYD, Judge.

We have before us a petition to review by writ of certiorari ¹ Order No. 7285, a final order of the Public Service Commission. The issue presented by the petition concerns the treatment of deferred federal income taxes in the calculation of intrastate toll settlements between Florida Telephone Corporation and Southern Bell Telephone and Telegraph Company for the years 1970 to 1973.

Southern Bell and the nineteen independent telephone companies in Florida, including Florida Telephone, cooperate to provide long distance telephone (toll) service for the State. Cooperation is necessary because calls that originate in one company's territory frequently terminate in another's. As the major participant ² in the toll service, Southern Bell acts as a clearinghouse for settling between itself and the independents the revenues generated by the service. The revenues ³ are reported to Bell where they are entered into a pool. From the pool Bell makes the settlements by one of two methods. By the first, the Nationwide Averages Settlement Method, Bell returns to the independent an average revenue per call. By the second, the Cost Study Method, the independent, through studies at its expense, makes a determination of its cost (plant, expenses, taxes, etc.), in providing toll service. A method for settling relative to cost is then negotiated between Bell and the independent.

At first the Nationwide Averages toll settlement method was used by Bell and Florida Telephone, but in 1970 the two companies changed to the cost-study method. Their formula for reaching a cost study settlement, the source of this dispute, is contained in a traffic agreement which has retroactive effect to July 1, 1970. ⁴ Under the agreement Bell reimburses Florida Telephone for its cost, including taxes, and returns to Florida Telephone, as its share of the profits, an amount determined by applying a rate to the company's investment base devoted to toll service. The traffic agreement provides:

"METHOD OF SETTLEMENT The amount the Independent Company is to receive for its participation in the handling of toll telephone communications will be determined on the basis of a study of the Independent Company's book costs and expenses which are applicable to such traffic. (emphasis ours)

"The components of the interstate (and intrastate) investment base will include appropriate amounts in Accounts 100.1, 100.2, 100.3, and 122, less reserves in Accounts 171, 172 and 176." (emphasis ours) Supplement No. 6 to Traffic Agreement effective July 1, 1970, Exhibit P-11, PSC Docket No. 72196-TP, Record on Appeal, p. 721.

Florida Telephone felt the foregoing provisions were unfair, yet it entered the agreement, presumably because it needed some settlement, inadequate though it might be.

The reason Florida Telephone found the first of the provisions unfair is this: Florida Telephone has taken "accelerated depreciation" deductions for depreciation of its assets in computing its annual federal income tax since 1954. ⁵ Until 1968 its method of accounting for federal income taxes was "normalization" by which its taxes reported were as if "straight-line depreciation" deductions were taken. In "normalization" accounting the actual taxes paid are shown in one account and the taxes deferred are booked in a separate account. In 1968 Florida Telephone was granted permission by the Public Service Commission to change to the "flow-through" method of accounting for its federal income taxes. In "flow-through" accounting only the actual taxes paid are shown on the accounting books and the deferred taxes flow through to the bottom line on the balance sheet where earnings are listed. Thus, in contrast to the "normalization" procedure, under "flow-through" a smaller amount of taxes are booked as expenses. Although deferred taxes were not booked under its method of accounting, Florida Telephone demanded that Bell reimburse them. Bell refused because under the traffic agreement reimbursements were to be limited to "book costs and expenses."

Florida Telephone found the second provision of the contract unfair because it excludes from its settlements base the deferred taxes accumulated from 1954 to 1967 ⁶ while it excludes from Bell's base only deferred taxes from 1970 forward, since it was not until 1970 that Bell elected to take accelerated depreciation.

Although Florida Telephone did not contest that Southern Bell was not following the contract in the settlements procedure it felt the traffic agreement was inequitable and so it petitioned the Public Service Commission for relief. The hearing examiner, after careful...