In Re Northwestern Bell

• Citation: 73 S.D. 370,43 N.W.2d 553
• Decision Date: 10 July 1950
• Docket Number: 9161,9169
• Parties: IN RE NORTHWESTERN BELL TELEPHONE COMPANY
• Court: Supreme Court of South Dakota

73 SD 370, 43 NW2d 553 (1950)

IN RE NORTHWESTERN BELL TELEPHONE COMPANY

South Dakota Supreme Court

Appeal from Circuit Court, Charles Mix County, SD

Hon. W. W. Knight, Judge

#9161, #9169—Affirmed

Sigurd Anderson, Attorney General

William Williamson, Assistant Attorney General

and General Counsel for Public Utilities Commission, Pierre, SD

Attorneys for Appellant in No. 9161.

Joseph Robbie Jr., Donald Fellows, Mitchell, SD

Attorneys for Appellants in No. 9169,

Farmers Union Educational and Cooperative Association of South Dakota

and Junior Chamber of Commerce of Mitchell.

F. G. Warren, Sioux Falls, SD

R. F. Williamson Aberdeen, SD

H. A. Poley, H. G. Burke, T. J. Peycke, Omaha, NE

Attorneys for Respondent Northwestern Bell Telephone Co.

Opinion Filed Jul 10, 1950

PER CURIAM

In November, 1947, the Northwestern Bell Telephone Company made application to the Public Utilities Commission to increase rates for telephone exchange and intrastate toll service claiming that the rates then in effect were confiscatory and unlawful. The Company filed with its application a proposed schedule of increased rates. Presentation of testimony began on March 15, 1948, hearings were continued from time to time and on October 8, 1949, the Commission filed its report and made and entered its order denying the application. The Company appealed from such order to the Circuit Court of Charles Mix County. An order permitting the Company to place in effect increased rates pending appeal was annulled in an original proceeding in certiorari to review the validity of the order. Farmers’ Educational and Coop. Union v. Circuit Court, 73 SD 203, 40 NW2d 402. On March 9, 1950, the decision and judgment of the Circuit Court was entered setting aside the Commission’s order and remanding the proceeding with directions to approve a schedule of exchange and intrastate toll rates that will permit a fair rate of return. The Commission and intervenors have appealed.

The Northwestern Bell Telephone Company, to which we herein refer to as the Company, is incorporated under the laws of the state of Iowa and operates a telephone system in the states of South Dakota, North Dakota, Iowa, Minnesota and Nebraska. The American Telephone & Telegraph Company, a New York corporation and hereinafter referred to as the American Company, owns the common stock of respondent company and practically all the common stock of the Western Electric Company. The latter company and the American Company own all the stock in Bell Laboratories.

The Company renders in this state three classes of service: (a) exchange or local service; (b) intrastate toll service; and (c) interstate toll service. The books of the Company indicate that on September 30, 1948, the total cost of plant and equipment in this state was $23,214,027 and of this amount $18,054,312 was devoted to intrastate use. The court found that the evidence is insufficient to show that an account known as “Telephone Acquisition Adjustment”, amounting to $451,389, constitutes a book cost to be considered in determining the rate base and should be deducted from the total book cost of intrastate property. The court found that the depreciation reserve account applicable to intrastate business as of September 30, 1948, was $5,341,579 and that on this basis $13,189,336 was the minimum rate base upon which the company was entitled to earn a reasonable rate of return. The court disapproved the Commission’s reductions of the following amounts: (1) $401,293 for metallicizing rural lines, (2) $55,483 as excess pension accruals and (3) $428,427 as alleged excess profits received by the Western Electric in its transactions with respondent company.

The Court found that the total intrastate revenue of the Company for the first nine months of 1948 was $4,001,001, which annualized amounted to $5,334,668; that the total intrastate expenses for those respective periods were $4,020,814 and $5,361,084; and that intrastate operations of the Company for the first nine months of the year resulted in a loss of $19,813, which annualized amounted to $26,416. The Commission found that the total intrastate revenue for 1948 was $5,427,617. The difference of $92,949 between the Court’s and the Commission’s totals results from the methods of annualizing revenue. The Company submitted evidence of gross revenue for the first nine months of 1948. The Commission basing its estimate on the year previous added the above amount to cover increased revenue for the last quarter of 1948.

The findings of the Court indicate that 77.77 per cent of the Company’s property in this state was in 1948 devoted to intrastate use and that 80.2 per cent of total expenses resulted from intrastate operations. The Commission used the 77.77 per cent as a basis in allocating expenses to intrastate operations. The court found that the allocation should have been made upon the basis of 80.2 per cent. This resulted in a difference of $124,543. The Commission held that $392,567 was the amount of depreciation expense properly chargeable for 1948, while the Court found that $665,469 was chargeable. The Court disapproved of the Commission’s deduction of $80,000 from claimed expenses for 1948 on account of alleged deferred maintenance. The Court found that a deduction from claimed expenses of the Company in the amount of $85,573 because of alleged unreasonable profits found to have been made by Western Electric in its transactions with the Company was without support in the evidence. The Commission held that payments made to the American Company during the year 1948 under a so-called license contract were not chargeable to exchange and intrastate expenses. The Court found that there was no basis in the record for such action. The Court also disapproved of the Commission’s finding to the effect that accruals in excess of the amount required for pensions on a “pay-as-you-go.” basis for 1948 was not chargeable to expenses for that year. The Court found that if the requested rate increases had been applicable in the year 1948, the net income of the Company would have been $601,416 and that this would have resulted in a net return of 4.56 per cent.

The authority to investigate and regulate intrastate telephone rates is vested in the Public Utilities Commission. SDC 52.02. The fixing of rates is inherently a legislative act whether performed directly by the legislature or by an administrative body to which the power is delegated. Farmers’ Educational and Coop. Un. v. Circuit Court, supra, A fundamental principle of rate making is that a utility is entitled to rates that will yield a fair return on the reasonable value of the property devoted to public service after paying operating expenses and carrying charges. Rates not sufficient to yield such return are unreasonable and confiscatory. The scope of judicial review of the issue of confiscation was considered by this court in Application of Northwestern Bell Telephone Co., 69 SD 36, 6 NW2d 165, 170. Judge Denu speaking for the court said:

“The State Constitution (Art. VI, §§ 2 and 13) and the United States Constitution (Amendments V and XIV) provide alike that no person shall be deprived of life, liberty or property without due process of law, and that private property shall not be taken without just compensation.”

“These constitutional provisions have been many times applied by the courts in public utility cases in which it was sought to fix rates. Perhaps the strongest and the best language of its application is found in the opinion of Chief Justice Hughes in St. Joseph Stock Yards Co. v. United States, [298 US 38, 56 SCt 720, 80 LEd 1033]. The opinion says:”

“‘The fixing of rates is a legislative act. In determining the scope of judicial review of that act, there is a distinction between action within the sphere of legislative authority and action which transcends the limits of legislative power. Exercising its rate-making authority, the Legislature has a broad discretion. It may exercise that authority directly, or through the agency it creates or appoints to act for that purpose in accordance with appropriate standards. The court does not sit as a board of revision to substitute its judgment for that of the Legislature or its agents as to matters within the province of either. ... When the Legislature itself acts within the broad field of legislative discretion, its determinations are conclusive. When the Legislature appoints an agent to act within that sphere of legislative authority, it may endow the agent with power to make findings of fact which are conclusive, provided the requirements of due process which are specially applicable to such an agency are met, as in according a fair hearing and acting upon evidence and not arbitrarily. ...”

“‘But the Constitution fixes limits to the rate-making power by prohibiting the deprivation of property without due process of law or the taking of private property for public use without just compensation. When the Legislature acts directly, its action is subject to judicial scrutiny and determination in order to prevent the transgression of these limits of power. The Legislature cannot preclude that scrutiny or determination by any declaration or legislative finding. Legislative declaration or finding is necessarily subject to independent judicial review upon the facts and the law by courts of competent jurisdiction to the end that the Constitution as the supreme law of the land may be maintained. Nor can the Legislature escape the constitutional limitation by authorizing its agent to make findings that the agent has kept within that limitation. Legislative agencies, with varying qualifications, work in a field peculiarly exposed to political demands. Some may be expert and impartial. Others subservient. It is not difficult for them to observe the requirements of law in giving a hearing and receiving evidence. But to say that their findings of fact may be made conclusive...