General Tel. Co. of Midwest v. Iowa State Commerce Commission, 61283

• Decision Date: 21 February 1979
• Docket Number: No. 61283,61283
• Parties: GENERAL TELEPHONE COMPANY OF the MIDWEST, Appellee, v. IOWA STATE COMMERCE COMMISSION, Appellant.
• Court: Iowa Supreme Court

Page 364

275 N.W.2d 364

GENERAL TELEPHONE COMPANY OF the MIDWEST, Appellee, v. IOWA STATE COMMERCE COMMISSION, Appellant.

No. 61283.

Supreme Court of Iowa.

Feb. 21, 1979.

Leo J. Steffen, Jr., Asst. Commerce Counsel, Davenport, for appellant.

James L. Krambeck of Ahlers, Cooney, Dorweiler, Haynie & Smith, Des Moines, and John Robert Jones of Power, Jones & Schneider, Columbus, Ohio, for appellee.

D. H. Sitz of Lane & Waterman, Davenport, for amicus curiae, Davenport Water Co.

Considered en banc.

HARRIS, Justice.

This appeal from the action of the Iowa commerce commission (the commission) in a rate case is controlled by the statutory burden of proof and the scope of our review. The commission appeals from a trial court judgment which reversed the decision of the commission. We find substantial evidence to support the action of the commission. Hence we reverse the trial court and remand the case for an order reinstating the decision of the commission.

General Telephone Company of the Midwest (the company) is a Missouri corporation with principal offices in Grinnell, Iowa. It does business in Iowa, Minnesota, Missouri, Nebraska, and Kansas. During the test year of 1971 (the year used by the commission in determining the reasonableness of the company's proposed rate increase) the company served 116,572 telephones in 115 exchanges throughout Iowa.

The company is a wholly owned subsidiary of General Telephone and Electronics Corporation (GTE). GTE, in addition to being the parent corporation of the company, also owns two other corporations whose affairs are important in this dispute.

GTE owns GTE Automatic Electric, Inc. (Automatic). Automatic manufactures and supplies a general line of telephone equipment and supplies. During 1971 the company, without competitive bids, purchased 92.4 percent ($2,530,245) of its Iowa materials and supplies from Automatic.

GTE also owns General Telephone Directory Company (Directory Company). In 1971 $397,052 of Directory Company's gross revenues resulted from sales to the company's Iowa operations. As of January 1972, with only minor exceptions, Directory Company published the directories for all GTE affiliated companies in the nation, including the company. It also published the directories for 194 nonaffiliated independent telephone companies.

The Directory Company enters into five-year contracts with GTE affiliates, always without submission of any competitive bids. Competitive bids are submitted to nonaffiliated companies for their business. Since 1960 the Directory Company has never lost the business of any of the GTE affiliated telephone companies.

The procedural history of this dispute is rather typical. The company filed with the commission a proposal to substantially increase local rates based on operations in Iowa during 1971. This proposed rate increase was ordered suspended during investigation of the proposal by the commission. The company later placed the rate increase into effect, subject to refund under bond. See § 476.6, The Code.

Hearings on the rate increase began November 1972 and ended in July 1973. Twelve witnesses testified for the company and five for the commission staff. Eighty-six exhibits were received in evidence. The company's principal expert witnesses were Herbert Meyer, a vice president and director of GTE, and Paul Garfield, an economics consultant from the firm of Foster Associates, Inc. The commission staff's main expert witness was Charles Marberry, professor of finance at the University of Iowa.

The commission's ruling denying the requested rate increase was filed January 4, 1974. The company was directed to refund all money received as the result of the rate increase and was given 30 days to file a refund plan. The company filed for rehearing on various bases. The commission staff resisted the rehearing application.

On March 19, 1974, the commission modified its ruling in only one respect. Under the modification the company was not required (as it had been in the original decision) to make a book reduction of its plant account in an amount of $782,544. This modification is not an issue in this appeal.

A petition for judicial review was filed in the trial court, asserting the decision of the commission resulted in denial of a fair rate of return, was arbitrary and capricious, an abuse of discretion, beyond the jurisdiction of the commission, and was unsupported by substantial evidence. In considering the company's proposed rate increase the commission employed the "return on rate" concept:

Rate Base X Rate of Return = Profits

The company charged that in using this concept the commission acted illegally in: (1) ordering the downward adjustment of $782,544 to the company's rate base for Automatic's alleged excess profits in its dealings with the company; (2) increasing the company's revenue by $22,994 to reflect excess profits of the Director Company in its dealings with the company; (3) applying the double leverage concept to reduce the company's rate of return because Sylvania (GTE's manufacturing subsidiary) was thought to be generating insufficient earnings; and (4) making a further adjustment (for federal income taxes) not involved in this appeal. The company prevailed on the first three claims set out above.

The trial court reversed the commission's decision and ordered the case remanded to the commission for determination of fair and reasonable rates. This appeal was taken by the commission from that ruling.

I. The standard for our review. The hearings conducted by the commission during 1972 and 1973 were guided by chapter 490A, The Code, 1973. The company, under § 490A.8, The Code, 1973, held the burden of proof to prove it would make no unreasonable profit under the rate increase. The burden remains the same under § 476.8, The Code, 1977.

On January 4, 1974, chapter 490A was renumbered by the code editor as chapter 476. Sections 490A.14 through 490A.19 (judicial review and standards for review) were repealed by the Acts of the 65th G.A., 1974, chapter 1090, § 211. Review is now provided for in § 476.13, The Code, which adopts the standards appearing in chapter 17A, The Code (Iowa administrative procedure act).

Under this standard we are not bound by any findings of the trial court. We have said:

"An appeal from the determination of the district court is allowed under § 17A.20. Our review in a contested case under § 17A.20 is not de novo. Our task is to review the record in the manner specified in § 17A.19(7) and make anew the judicial determination specified in § 17A.19(8). Our review is limited, as the district court's review should have been, to the record made before the hearing officer." Hoffman v. Iowa Dept. of Transp., 257 N.W.2d 22, 25 (Iowa 1977).

In applying § 17A.19(7) it is to be remembered that a rate-making case is a "contested case." § 17A.2(2), The Code. With certain exceptions not applicable here (see 2 Am.Jur.2d, Administrative Law, § 726, p. 627 and 73 C.J.S. Public Administrative Bodies § 246, Supplement, footnote 46.5) our review is limited to those questions considered by the commission. 2 Am.Jur.2d, Administrative Law, § 724, pp. 624-625; 73 C.J.S. Public Administrative Bodies and Procedure § 246, p. 613; Unemployment Comp. Com. v. Aragon, 329 U.S. 143, 155, 67 S.Ct. 245, 251, 91 L.Ed. 136, 146 (1946); United States v. L. A. Tucker Truck Lines, 344 U.S. 33, 37, 73 S.Ct. 67, 69, 97 L.Ed. 54, 58 (1972).

We turn to the issues raised by the company in its petition for rehearing filed with the commission. We believe three major issues were preserved for judicial review. In addressing these three issues our task is to determine whether, based on the evidence before the commission, the contested ruling violated § 17A.19(8).

It would unnecessarily extend this opinion to discuss in detail each argument made in connection with the three issues. They will be discussed generally in the divisions which follow.

II. The rate base. The commission established the company's rate base by the "original cost depreciated or prudent investment" method which we defined in Davenport Water Co. v. Iowa State Commerce Com'n, 190 N.W.2d 583, 588 (Iowa 1971):

"A rate base determined by 'original cost depreciated or prudent investment' usually consists of original cost of the property used or useful in rendering services, plus working capital, less accumulated depreciation and contributions to construction and capital. This is ordinarily determined by an analysis of the utility's books and records. (Authorities.)"

We approved this method in Davenport Water Co. and implicitly in United Tel. Co. of Iowa v. Iowa State Com., 257 N.W.2d 466, 472-473 (Iowa 1977). The company challenges the method, insisting that the rate base should include things not reflected in book value, such as goodwill. But we believe the cases just cited hold there is no requirement for the commission to make such an adjustment.

The commission on the other hand did make an adjustment to the company's book value by deducting what it found to be unreasonable profits Automatic made in selling goods to the company. In finding Automatic's profits were unreasonable the commission used the "cost standard." Under this standard profits are limited to the recovery of the reasonable cost of furnishing goods and services plus a reasonable return on capital invested in the business. Applying the cost standard, the commission again used the original cost depreciated or prudent investment method. The resulting reduction was consistent with the commission's guiding philosophy in rate making: the obtaining of maximum service with minimum cost for the public. The commission refused to consider costs which it believed were not justified in providing service.

In determining the reasonableness of Automatic's profits in its transactions with the company, the commission rejected methods the company proposed for making the determination. The company wished to...