Mississippi Power Co. v. Mississippi Public Service Commission, 47749

• Decision Date: 04 March 1974
• Docket Number: No. 47749,47749
• Citation: 291 So.2d 541
• Parties: MISSISSIPPI POWER COMPANY v. MISSISSIPPI PUBLIC SERVICE COMMISSION.
• Court: Mississippi Supreme Court

Page 541

291 So.2d 541

4 P.U.R.4th 85

MISSISSIPPI POWER COMPANY v. MISSISSIPPI PUBLIC SERVICE COMMISSION.

No. 47749.

Supreme Court of Mississippi.

March 4, 1974.

Watkins & Eager, Jackson, Eaton, Cottrell, Galloway & Lang, Gulfport, for appellant.

Bennett E. Smith, Perry, Phillips, Crockett & Morrison, Jackson, for appellee.

SUGG, Justice:

This is an appeal by Mississippi Power Company from a decree of the Chancery Court of the First Judicial District of Hinds County affirming an order of the Mississippi Public Service Commission disapproving proposed increases in rates projected to yield $2.6 million gross revenue.

Two questions are presented by this appeal; first, whether the order of the commission was supported by substantial evidence, and second, whether the commission lost jurisdiction to enter its order of November 21, 1972.

Mississippi Power Company is a subsidiary of The Southern Company, the other subsidiaries being Georgia Power Company, Gulf Power Company, Alabama Power Company and Southern Services, Inc. The company named last is a service company providing engineering, accounting, tax, marketing and other services for the operating subsidiaries. Southern Services, Inc. also supervises The Southern Company power pool agreement relating to the operation of the interconnected system of the operating subsidiaries of The Southern Company.

On July 31, 1972, Mississippi Power Company (MPCo.) was engaged in the generation, transmission, distribution and sale of electric energy in 23 counties in the southeastern part of Mississippi. It had in excess of 141,000 retail customers, employed 995 people, operated 4 steam generating plants, including an undivided 40% interest with Alabama Power Company in a 500 megawatt (500,000 kilowatts) generating plant in Greene County, Alabama. It also operated a combustion turbine station at the Standard Oil Refinery in Pascagoula that furnished a part of the electric service and steam requirements for the refinery. Mississippi Power Company has a combined electric capacity of 965,760 kilowatts, 2,196 miles of transmission lines and 3,701 miles of lower voltage lines. The peak hour demand on the system in August, 1972 was 1,070,000 kilowatts. It is estimated the peak hourly demand will be 1,772,000 kilowatts in 1977. Average annual consumption by residential customers grew from 1605 kilowatt hours per customer in 1951 to 9552 kilowatt hours on July 1, 1972. This was an increase in consumption from 26% below the national average to 26% above the national average. During the 1961-1971 period industrial use increased 280% and commercial use increased 143%.

At the time of the hearing MPCo. was engaged in completing a 500 megawatt generating unit at Plant Jack Watson and planned construction of an additional plant in Jackson County north of Pascagoula with a 500 megawatt unit as the first unit of the new plant. The new plant was scheduled for service by the middle of 1976.

In order to meet the increased demand for electric services MPCo. estimates that within 5 years from the date of the hearing plant additions would amount to $275,000,000, an amount equal to the net plant that the company has accumulated in 47 years of operation. In order to raise the capital necessary for the huge expansion, it will be necessary to sell first mortgage bonds, preferred stock, and common stock in the amount of $79,000,000 during the years 1972 to 1974, $51,000,000 in 1975, and $28,000,000 in 1976. The total amount to be raised from these sources is $158,000,000.

The company historically has been able to generate about 50% of its capital requirements internally through retained earnings, depreciation, deferred income tax and other similar sources; however, in the years 1972 and 1973 the company estimates it will only be able to generate about 40% of its capital requirements.

As of March 31, 1972 the value of the utility plant, on a cost basis, in its operation was as follows:

Gross plant--

Excluding construction work and progress ..... $274,247,522.36

Less accumulated provision for depreciation .... 71,824,274.87

---------------

Net plant value .................................. $203,413,247.49

The capitalization of MPCo. and the capitalization ratios for the years 1962, 1971 and the average and year end in 1972 are as follows:

                                                         1972
                                                  -------------------
                                  1962    1971    Average   Year-End
                                 ------  -------  -------  ----------
                CAPITALIZATION
                ---------------
                (OOO OMITTED)
                Long Term debt   48 987  110 406  122 258  134 109
                Preferred Stock
                  and Premium     6 067   24 507   24 507   24 507
                Common Equity    32 304   70 727   77 531   84 336(1)
                                 ------  -------  -------  ----------
                   Total         87 358  205 640  224 296  242 952
                                 ------  -------  -------  ----------
                CAPITALIZATION
                    RATIOS
                Long Term Debt     56.1     53.7     54.5     55.2
                Preferred Stock
                  and Premium       6.9     11.9     10.9     10.1
                Common Equity      37.0     34.4     34.6     34.7
                                 ------  -------  -------  ----------
                   Total          100.0    100.0    100.0    100.0
                                 ------  -------  -------  ----------
                

(1) Estimated without rate increase filed.

In Southern Bell v. Public Ser. Comm., 237 Miss. 157, 113 So.2d 622 (1959) the commission found that the capital structure of the company was imprudent and uneconomical, and unfair to telephone subscribers because of its low debt ratio. The Court held that the commission had the right to adopt a hypothetical capital structure which would be less burdensome to the telephone subscribers for use in the determination of the earnings requirements of the company. In Sou. Bell, the opinion of the Court included this excerpt from the commission's order:

'During the test period, Southern Bell's capital structure appears to have been imprudent and uneconomical by reason of having an abnormally low amount of debt, the effect of which was to distort the true rate of return earned by the company under the rates prevailing during that period.

'The composition of a utility's capital structure affects its operating costs and earnings requirement, particularly under the current level of Federal income taxes. A prudent capital structure is one conducive to the lowest cost of service that is consistent with a sound financial posture.

'The record shows that Southern Bell's debt ratio, or the percentage of long-term debt in its total capitalization, had declined from 45.8% at the end of 1947 to 22.3% at December 31, 1955. During the test period, the debt ratio averaged 21.7%. While the company's debt ratio was thus declining, the debt ratios of the privately-owned electric utilities in the United States rose from 46.8% (composite) at the end of 1947 to 50.4% at December 31, 1954, and that of the natural gas companies advanced from 50.8% to 61.8% during the period (Hirsch Exhs. 14, 19). Moreover, at December 31, 1954, the privately-owned electric utilities has a composite of 12.4% of preferred stock in their capital structures and the natural gas companies 7.8%; but Southern Bell's capitalization is, without any preferred stock, an admittedly lower cost security than common stock. And during 1955, of all the new money securities issued by the electric and gas utilities, long-term debt constituted 59.5% and 71.6%, respectively, and preferred stock represented 15.5% and 9.4%, respectively. Between January 1 and June 30, 1956, these electric and gas utilities continued to obtain most of their new money requirements through the issuance of relatively law-cost debt securities instead of the much higher priced common stock capital. During this latter period, these utilities issued 63.9% and 77.9%, respectively, of long-term debt, in addition to 15.4% and 16.9%, respectively, of preferred stock (Hirsch Exh. 18). It is manifest that while the management of the electric and gas utilities have been seeking to reduce their overall cost of capital, a policy which benefits the ratepayers, the management of Southern Bell has been steadily increasing its overall cost of capital.

'* * *.

'From the standpoint of risk and stability of earnings, we are of the opinion that Southern Bell can safely carry as much long-term debt as is characteristic of the electric utility industry.' (237 Miss. at 211, 212, 213, 113 So.2d at 641).

The Court stated with reference to a pro forma statement considered by the commission as follows:

The Commission incorporated in its opinion and order a pro forma statement of Southern Bell's intrastate capitalization under assumed debt ratios of 45 per cent and 50 per cent for rate-making purposes, and an analysis of Southern Bell's earnings under the intrastate telephone rates which were in effect during the test period, based on the current cost of debt and equity capital and the range of debt ratios which the Commission found to be fair and reasonable. The analysis showed that an increase in Southern Bell's debt ratio to 45 per cent would result in a reduction of $302,000 in the Company's Federal income taxes (based on the present corporate rate of 52 per cent), and a corresponding increase in the Company's net operating income to $3,005,785, which was sufficient, after the payment of all interest obligations, to compensate the owner of the common stock on the basis of an earnings price ratio of 6.30 per cent, and to provide a cushion of $111,001 in excess of such compensation, or the equivalent of $258,000 in excess operating revenue. The Commission also pointed out in its opinion and findings that, if the above mentioned net operating income of $3,005,785 were divided by the rate base of $60,568,045, it would produce a rate of return of 4.96 per cent. In the same manner it was also shown that, with a 50 per cent debt ratio, the rate of return on the above mentioned rate base would be 5.08 per...