General Telephone Co. of The Northwest, Inc. v. Idaho Public Utilities Com'n

Decision Date09 January 1986
Docket NumberNo. 15275,15275
PartiesGENERAL TELEPHONE COMPANY OF THE NORTHWEST, INC., Appellant, v. IDAHO PUBLIC UTILITIES COMMISSION, Respondent.
CourtIdaho Supreme Court

Karl M. Shurtliff, Boise, L. Russell Mitten, II and William C. Fleming, Everett, Wash., for appellant.

Jim Jones, Atty. Gen., State, John J. McMahon, Chief Deputy Atty. Gen., State, and Michael S. Gilmore, Deputy Atty. Gen., State, for respondent.

HUNTLEY, Justice.

This is an appeal from an order of the Idaho Public Utilities Commission granting General Telephone Company of the Northwest a rate increase but in an amount less than that requested by the utility company. Affirmed.

On November 5, 1982, appellant General Telephone of the Northwest, Inc. ("GTNW" or "the company") filed an application with the Idaho Public Utilities Commission, seeking approval to raise its rates to Idaho customers by 19%. Public hearings were held on the proposed rates. On August 8, 1983, the commission rejected the filed request for additional revenues of $4,941,570 but allowed an increase of $1,026,598. GTNW appeals, alleging that the commission erred in evaluating the company's capital structure and income tax expense, and in adjusting downward the rates allowable for advertising costs paid by GTNW to its sister corporation, General Telephone Directories Company. We affirm the commission's decision.

I. Imputation of holding company's capital structure to the subsidiary, GTNW.

Appellant GTNW is a wholly-owned subsidiary of General Telephone and Electronics Corporation (GTE), a utility holding company. Accordingly, GTNW's stock is not publicly sold; instead, GTE Corporation provides all of GTNW's equity capital. Furthermore, GTNW does not file its own federal income tax return, but participates in a consolidated return with GTE and GTE's other subsidiaries.

In determining the rate increase allowable to GTNW, the commission took into consideration this relationship between GTNW and GTE, and the commission imputed the capital structure of the holding company into the appellant operating company. The commission stated:

"GTNW can select a capital structure with any ratios of debt and equity capital that, in the sole discretion of management, it finds desirable. The Company could select a capital structure with either 100% debt or 100% equity to finance its capital requirements. The Commission's duty in all instances is to evaluate the capital structure selected by the utility, ascertain what a reasonable capital structure would be given the utility's risks and the ratepayers' reasonable interest, and determine a fair rate of return on that capital structure. Idaho Code, §§ 61-301, -315 and -502. This is precisely the process followed by the Commission [here].

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"The underlying conflict between the approach adopted by the Commission and that recommended by GTNW is the percentage of common equity allowed in the capital structure. The imputed approach ... lowers the percentage of common equity to 35.65% because it attributes a portion of GTNW's common equity to the preferred stock and debt of GTE Corporation. The actual capital structure proposed by GTNW attributes 48.03% to common equity. Because equity capital generates more revenue than debt capital, GTNW objects to the Commission's use of an imputed capital structure with a lower percentage of equity than that in the subsidiary's actual capital structure."

The commission concluded:

"We adopt the imputed capital structure proposed by Commission Staff witness ... We have, on numerous occasions, adopted capital structures other than the actual capital structures of utilities. We cannot ignore the fact that a portion of GTNW's common equity is financed by GTE Debt and Preferred Stock. Moreover, ... we (have) specifically required that the use of double leveraging be addressed in this rate case."

We note at the outset that the commission has broad discretion in designing rates chargeable by utilities to their customers. "If the total effect of the rate order cannot be said to be unjust and unreasonable, judicial inquiry ... is at an end." FPC v. Hope Natural Gas Co., 320 U.S. 591, 602, 64 S.Ct. 281, 288, 88 L.Ed. 333 (1944). See also, Idaho Const. art. 5, § 9; I.C. § 61-629; Utah Power & Light Co. v. Idaho Pub. Util. Comm'n, 102 Idaho 282, 629 P.2d 678 (1981); Grindstone Butte Mut. Canal Co. v. Idaho Pub. Util. Com., 102 Idaho 175, 627 P.2d 804 (1981). We have formerly held that the only question presented to us when the commission adopts a hypothetical capital structure is whether, under the circumstances of the case, the commission has abused its discretion. Citizens Util. Co. v. Idaho Pub. Util. Com., 99 Idaho 164, 174, 579 P.2d 110, 120 (1978); Petition of Mountain States Telephone & Tel. Co., 76 Idaho 474, 284 P.2d 681 (1955).

Courts which have reviewed the imputed capital approach, in calculating the rate of return for a wholly-owned subsidiary of a holding company, have largely accepted it. See generally Communications Satellite Corp. v. F.C.C., 611 F.2d 883 (D.C.Cir.1977), wherein the court stated:

"The FCC cannot be faulted for considering consumer interests in the COMSAT proceeding, and deciding that COMSAT could reasonably have levered its capital structure with debt. In so doing, it not only was true to its statutory obligation, but was also following a practice quite commonplace among public commissions charged with reviewing and setting reasonable rates for service. The practice of imputing a hypothetical amount of debt has been explicitly approved by the public utility commissions or courts of at least twenty-two states and the District of Columbia. Over the course of the last two decades, the following jurisdictions have hypothetically altered the actual capital structure of a regulated corporation for purposes of setting rates that were more equitable to consumers: Alabama, Connecticut, Delaware, District of Columbia, Idaho, Illinois, Louisiana, Maryland, Massachusetts, Michigan, Mississippi, Montana, Nebraska, New Hampshire, New Mexico, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Vermont, Washington, and Wyoming. Minnesota and California have expressed some reservation to imputing a hypothetical amount of debt when the regulated company's outstanding debt was 'not improper.' But the term 'improper' could have referred to the perspective of a rate-payer, in which case those courts would not be in disagreement with the others cited." (Footnotes containing case citations omitted.) 611 F.2d at 904-905).

See also General Tel. Co. v. Ark. Public Service Com., 272 Ark. 440, 616 S.W.2d 1 (1981); Gen. Tel., Etc. v. Iowa State Commerce Com., 275 N.W.2d 364 (Iowa 1979); So. Cent. Bell Tel. v. La. Public Service Com'n, 352 So.2d 964 (La.1977), cert. denied, 437 U.S. 911, 98 S.Ct. 3103, 57 L.Ed.2d 1142 (1978); New England Tel. & Tel. Co. v. Public Utilities Com., 448 A.2d 272 (Me.1982); Potomac Edison Co. v. Public Service Com., 279 Md. 573, 369 A.2d 1035 (1977); Southern Bell Tel. & Tel. Co. v. Mississippi Public Service Com., 237 Miss. 157, 113 So.2d 622 (1959); Mountain States, Tel. & Tel. Co. v. Dept. of Public Service Regulation, 624 P.2d 481 (Mont.1981); Re Application of General Tel. Co. of Southwest, 98 N.M. 749, 652 P.2d 1200 (1982); Spring Valley Water Co. v. Public Service Com., 71 A.D.2d 55, 422 N.Y.S.2d 155 (1979); Ohio Suburban Water Co. v. Public Utilities Com., 62 Ohio St.2d 17, 402 N.E.2d 539 (Ohio), cert. denied, 449 U.S. 876, 101 S.Ct. 219, 66 L.Ed.2d 97 (1980); New England Tel. & Tel. Co. v. Public Utilities Com., 459 A.2d 1381 (R.I.1983); General Tel. Co. v. Public Utility Com'n, 628 S.W.2d 832 (Tex.App.1982); Central Tel. Co. v. State Corp. Com., 219 Va. 863, 252 S.E.2d 575 (1979).

GTNW asserts that the commission's use of an imputed capital structure denies the company equal protection, because a company which was not a wholly-owned subsidiary but was otherwise similarly situated to GTNW would have been allowed a higher rate of return upon the evidence presented. Assuming the truth of GTNW's allegation, the question becomes whether the distinction between wholly-owned subsidiaries and non-subsidiaries, for ratesetting purposes, is a valid one. We hold that it is, and we therefore find no denial by the commission of GTNW's right to equal protection under the law.

The mere fact of different treatment does not necessarily violate the equal protection clause of either the fifth or fourteenth amendment to the United States Constitution or article I, § 2 of the Idaho Constitution.

We note first that the ratesetting order herein is reviewed in the same manner as a challenged statute would be reviewed by this Court, because ratesetting is a legislative function delegated to the Public Utilities Commission by the legislature. The commission's authority derives from enabling statutes; it exercises limited jurisdiction, and nothing is presumed in favor of its jurisdiction. Idaho State Homebuilders v. Washington Water Power, 107 Idaho 415, 690 P.2d 350 (1984); Petition of Mountain States Tel. & Tel. Co., 76 Idaho 474, 284 P.2d 681 (1955); Idaho Power & Light Co. v. Blomquist, 26 Idaho 222, 141 P. 1083 (1914).

In Jones v. State Bd. of Medicine, 97 Idaho 859, 555 P.2d 399 (1976), cert. denied, 431 U.S. 914, 97 S.Ct. 2173, 53 L.Ed.2d 223 (1977), this Court reviewed traditional equal protection analysis. We stated "If the classification [of persons to whom the statute applies] involves a fundamental right or a suspect classification such as race, the state bears a heavy burden to justify the classification by a compelling state interest. That has been termed the strict scrutiny test.

"In other classifications, particularly in the areas of social welfare legislation, a restrained standard of review is applied. Such standard is set forth in McGowan v. Maryland, 366 U.S. 420, 425-426, 81 S.Ct. 1101, 1105, 6 L.Ed.2d 393 (1961):

'The...

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