Mississippi Public Service Commission v. Home Tel. Co., 40999

• Decision Date: 13 April 1959
• Docket Number: No. 40999,40999
• Citation: 236 Miss. 444,110 So.2d 618
• Parties: , 28 P.U.R.3d 473 MISSISSIPPI PUBLIC SERVICE COMMISSION v. HOME TELEPHONE COMPANY, Inc.
• Court: Mississippi Supreme Court

Page 618

110 So.2d 618

236 Miss. 444, 28 P.U.R.3d 473

MISSISSIPPI PUBLIC SERVICE COMMISSION v. HOME TELEPHONE COMPANY, Inc.

No. 40999.

Supreme Court of Mississippi.

April 13, 1959.

Joe T. Patterson, Atty. Gen., by Wade Creekmore, Asst. Atty. Gen., for appellant.

Morse & Morse, Jackson, for appellee.

ETHRIDGE, Justice.

This appeal involves the validity of certain portions of an order of the Public Service Commission fixing the rates for a small, independent telephone company. The commission's order increased rates to be charged those served by the company; fixed a rate base, or a reasonable value of the property of the utility used or useful in furnishing service; made certain adjustments and reductions in operating expenses of the utility; and fixed the rate of return. The company appealed to the Chancery Court of the First Judicial District of Hinds County. Miss.Code 1942, Rec., Sec. 7716-26. That court held the rate base, as fixed by the commission, was supported by substantial evidence. But it reversed the order on three adjustments or reductions made by that agency in the company's operating expenses, and increased the rate of return on the rate base. The commission has appealed from that chancery decree. The company has taken no cross-appeal, so the commission's determination of the utility's rate base is not an issue in this case.

We are here concerned with the three adjustments or reductions made by the commission in the company's operating expenses. They are (1) the reduction for rate making purposes of salaries paid to the president and treasurer of the company, which the commission found were excessive. (2) Disallowance of petitioner's proposal to amortize over a ten-year period past losses of $25,454.95 incurred by the company under the old rates, between the dates of the filing of its first petition for an increase in rates on May 23, 1955, and June 30, 1956, when the company put into effect under a refunding bond the new rates. (3) Disallowance of the company's loss on its abandoned, old telephone plant, $25,212.08, proposed to be amortized from operating expenses over a five-year period.

I.

In 1953 and early 1954 the company obtained a loan of $463,000 from the Rural Electric Administration (REA), and with that sum rebuilt its entire system and converted from common battery to dial telephones. Operations under the new system were begun in March 1954. The equipment was new at the time of installation and of nationally recognized quality. The Public Service Commission granted the company an increase in rates which became effective in April 1954. The amount of that increase is not reflected in the record, but apparently it was granted because of the extensive improvements and conversion to the dial system.

In March 1955 the company again petitioned the Public Service Commission for a rate increase. After that hearing the commission's order found that the company had suffered an operating loss for 1954 of $15,151.98, and an actual loss of $4,796.66 for the first quarter of 1955, which indicated an anticipated loss of $19,552.54 for the entire year of 1955. But it declined to approve a rate increase. The company appealed under the statute in effect prior to the 1956 Public Utility Act. The circuit court in October 1955 reversed the commission's order, and remanded the matter to the commission for a study to determine what would be a fair and reasonable increase in rates. On remand, that agency in January 1956 allowed a ten percent increase in rates. On appeal, the circuit court, on July 23, 1956, held this rate increase was inadequate and a denial of due process of law to the company; hence it again reversed the commission and remanded the petition for fixing of rates which would be fair and adequate to the company.

Effective March 29, 1956, the Legislature enacted the Public Utility Act of 1956. Miss.Laws 1956, Ch. 372; Miss.Code 1942, Rec., Secs. 7716-01 to 7716-38. On July 26, 1956, the Home Telephone Company again petitioned the commission for an increase in rates, and attached to it a proposed schedule of rates. The petition stated an intent to put the rates into effect on September 1, 1956, under a refunding bond. Code, Sec. 7716-10. On October 15 the commission suspended the increase in rates for 90 days pending a full investigation and later suspended them for six months. However, on petition the commission approved the company's putting the increased rates into effect, upon its making a refunding bond of $20,000, conditioned upon the refund of any excessive rates, if they were finally determined to be excessive.

A hearing was had on the petition in November 1956. Home Telephone Company offered two witnesses, Lawrence Curbo, a certified public accountant, and Lon J. Darley, president and the manager of appellee. The commission's two witnesses were Douglas H. Brumfield, its chief accountant, and Kenneth Croy, its chief engineer. Complaints were made about the service of the company but the commission found in its order that 'its decision in this case is not based in anywise upon the alleged inadequacy of such service'. It passed only upon the propriety of rate increases.

Home Telephone Company operates in Byhalia and Olive Branch, and nearby rural areas, in a territory of 750 square miles. It serves 1,113 customers. Lon J. Darley acquired the property sometime around 1939. It then had 35 telephones at Byhalia and 39 at Olive Branch, operated by magnetos. He began to improve it, and in 1948 converted both exchanges to common battery equipment with switchboards and operators. Over this period he gradually improved the properties. In 1953-1954 the company borrowed from the REA $463,000, at a rate of interest of 2 per cent per annum, payable over 35 years and with this loan installed a modern dial telephone system. Residential telephones produce 87.96 per cent and business telephones 12.04 per cent of the revenue. The total amount of capital stock issued is $13,980. This consists of $10,000 par value common stock, and $3,980 of 5 per cent preferred stock. Total investment consists of an equity capital of approximately 7 per cent, and debt of 93 per cent.

The rate base of the company was determined by the commission to be $439,841.17. As defined by Sec. 8(a) of the Act, it found this was the reasonable value of the property used or useful in furnishing service. The company contended for slightly more, but took no cross-appeal from the chancery court's decree approving the commission's rate base.

The order of the commission allowed increased rates which would provide for annual additional revenues of $8,804.40, and a net operating income of $9,634.78 per annum. Dividing this figure by the rate base of $439,841.17, the result is a rate of return of 2.19 per cent. It was said the reason the rate of return appears to be low is the extremely low cost of capital to the company, and the fact of its operating on approximately 97 per cent of borrowed money and 3 per cent of capital stock. The commission's order stated:

'The Commission has allowed earnings of 5% on the 5% preferred stock and about 10% for dividends on the common stock and for surplus. The seemingly high percentage of 10% is allowed because the risks of operating a small independent utility are much greater than for a large utility which may have available ready sources of capital. The allowance for cost of equity capital must be determined for each company upon the peculiar facts and circumstances affecting such utility. So the allowance of approximately 10% for dividends on common stock and providing for surplus in this case shall not be taken or considered as a precedent in any other case before this Commission. Obviously, if the ratio of equity capital to debt capital in any particular case were greater, the rate of return would be increased correspondingly.

'It is manifest that with an established rate base, as here, the rate of return is a function of the net operating income.'

The company contended that if needed and was entitled to a return of 2.666 per cent on its recommended rate base. It sought this rate of return without any of the adjustments made by the commission.

Code, Section 7716-26 defines the scope of judicial review of orders of the Public Service Commission under the Public Utility Act of 1956. Briefly, it is upon the entire record under the substantial evidence rule. The statute provides:

'(c) No new or additional evidence shall be introduced in the chancery court but the case shall be determined upon the record and evidence transferred.

'(d) The court may hear and dispose of the appeal in term time or vacation and the court may sustain or dismiss the appeal, modify or vacate the order complained of in whole or in part, as the case may be; but in case the order is wholly or partly vacated the court may also, in its discretion, remand the matter to the commission for such further proceedings, not inconsistent with the court's order as, in the opinion of the court, justice may require. The order shall not be vacated or set aside either in whole or in part, except for errors of law, unless the court finds that the order of the commission is not supported by substantial evidence, is contrary to the manifest weight of the evidence, is in excess of the statutory authority or jurisdiction of the commission, or violates constitutional rights.'

II.

The commission cut the salary of the president from $9,000 to $7,500 per year, and that of the treasurer, Mrs. Darley, from $3,000 to $1,500 per year. It found that, especially since the company had been operating at a loss for several years, these salaries were excessive and should be reduced for rate making purposes. The chancery court reversed the commission in this respect, and held the evidence did not warrant a finding that salaries were excessive. It further observed there was no evidence of fraud, inefficiency or mismanagement. We agree with the...