Mountain States Tel. & Tel. Co. v. Public Utilities Commission

• Decision Date: 30 October 1972
• Docket Number: No. 25455,25455
• Citation: 180 Colo. 74,502 P.2d 945
• Parties: The MOUNTAIN STATES TELEPHONE AND TELEGRAPH COMPANY, a Colorado corporation, Plaintiff-Appellant, v. The PUBLIC UTILITIES COMMISSION of the State of Colorado et al., Defendants-Appellees.
• Court: Colorado Supreme Court

Page 945

502 P.2d 945

180 Colo. 74

The MOUNTAIN STATES TELEPHONE AND TELEGRAPH COMPANY, a Colorado corporation, Plaintiff-Appellant, v. The PUBLIC UTILITIES COMMISSION of the State of Colorado et

al., Defendants-Appellees.

No. 25455.

Supreme Court of Colorado, En Banc.

Oct. 30, 1972.

Rehearing Denied Nov. 27, 1972.

Laurence W. DeMuth, Jr., Cotton Howell, T. M. Ledingham, Denver, for plaintiff-appellant.

Duke W. Dunbar, Atty. Gen., John P. Moore, Deputy Atty. Gen., Denver, John E. Archibold, Asst. Atty. Gen., Irwin M. Kent, Asst. Atty. Gen., Denver, for P.U.C.

Gorsuch, Kirgis, Campbell, Walker & Grover, Leonard M. Campbell, Richard B. Harvey, Howard J. Beck, Denver, Sp. Counsel for Colo. Municipal League.

Kenneth G. Bueche, Denver, Gen., Counsel for Colo. Municipal League.

GROVES, Justice.

On April 2, 1968, The Mountain States Telephone and Telegraph Company (Mountain Bell) filed an application with the Public Utilities Commission (Commission) for determination of a reasonable rate of return on intrastate telephone service. Hearings were held on the application during 1968 and on January 7, 1969, the Commission approved an increased rate of return of 7.5% To become effective as of July 19, 1969. The Colorado Municipal League and the City and County of Denver sought review of the Commission findings in the district court. That court affirmed the order of the Commission, and the League and Denver appealed to this court.

On this appeal, in Colorado Municipal League v. Public Utilities Commission, 172 Colo. 188, 473 P.2d 960 (1970), we affirmed the district court on four of the issues, and reversed and remanded as to the remaining two. We held that the Commission abused its discretion in not imputing tax benefits which would have accrued to Mountain Bell had it availed itself of an accelerated method of depreciation under § 167 of the Internal Revenue Code. We further ruled that the Commission acted arbitrarily and capriciously in awarding Mountain Bell additional annual revenue in the amount of approximately $1,200,000 to compensate for abnormal inflation. In remanding the cause to the district court, we said:

'We assume that pending review the Commission has approved new rates which are now being chrged by Mountain Bell in order to produce the revenue permitted by the Commission's order. We have concluded that under the circumstances of the case the adjustment of rates to reflect the changes necessitated by this opinion should be made effective as of the time such new rates went into effect. In other words, at all times under the Commission's order Mountan Bell's customers should have the benefits of the imputation of a method of accelerated depreciation and of the elimination of the allowance for abnormal inflation.'

By the Tax Reform Act of 1969, adopted December 30, 1969, § 167 of the Internal Revenue Code was amended to provide that a utility could not adopt an accelerated method of depreciation with flow-through if it had not reported accelerated depreciation with flow-through in a tax return filed prior to August 1, 1969. The effect of this amendment was not argued to the court but was raised by Mountain Bell in a petition for rehearing. In response, we amended our opinion by saying:

'Our opinion of necessity is predicated upon the provisions of the Internal Revenue Code as they existed at the time the Commission held its hearings. The effect of any subsequent amendments to the Code should first be considered and determined by the Commission.'

The district court then remanded the cause to the Commission for further proceedings consistent with our opinion.

Mountain Bell concluded to use an accelerated method of depreciation both in its income tax returns and for bookkeeping purposes. It moved the Commission for permission to change its bookkeeping methods from straight line depreciation to a normalization method of accounting for depreciation. The Commission denied the motion.

The material portions of the Commission's order on remand were as follows:

'1. Applicant (Mountain Bell) shall, pursuant to the Supreme Court of Colorado's Decision in Colorado Municipal League, et al. vs. Public Utilities Commission, et al., supra, refund to its customers the following:

a) Revenues derived from the application of the one percent (1%) inflation factor applied to gross revenues since July 19, 1969 to the effective date of a negative rider to be ordered herein.

b) Revenues equal to income tax savings that would have resulted from taking accelerated depreciation for the calculation of income taxes--flow-through basis from July 19, 1969 through December 31, 1969.

c) Revenues equal to the reduction in revenue requirements that would have resulted from taking accelerated depreciation for income tax purposes on a normalized and deferred account basis from January 1, 1970, to the effective date of a negative rider to be ordered herein.

'2. The amounts in 1(a), (b) and (c) above shall be calculated by applying the following factors to gross revenues as defined herein in the applicable effective periods.

                                                PERIODS
                                  -----------------------------------
                                   7-19-69           1-1-70
                                      To                To
                                  12-31-69          Effective Date of
                                                    New Rates
                                  ----------------  -----------------
                                          %                 %
                a) 1% inflation
                   element               .99009877     .99009877
                   Accelerated depreciation tax effects
                b) Flow-Through          .79722102
                c) Normalization                       .02989585
                                  ----------------  -----------------
                     TOTAL              1.78731979    1.01999462
                

'3. Applicant shall pay to its customers simple interest at the annual rate of seven and one-half percent (7 1/2%) on the refund amounts for the monthly periods collections are held.

'4. Costs of making refunds to customers in the amount of $71,000 shall be deducted from the amount of interest calculated in ordering provision No. 3 above.

'5. Any refunds remaining unclaimed on December 31, 1971 shall be handled in accorandance with Article 8, Chapter 115, CRS 1963, as amended.

'6. The request that Protestant's attorney fees and costs be paid out of the refund amount be, and hereby is, denied.

'7. The motion of Applicant, in Application No. 23116, for authority to take accelerated depreciation for book accounting purposes, specifically stated in its motion 'Use of the normalization method of accounting described in Section 167(1)(3)(G)(i) of the Internal Revenue Code, as amended, both for the purpose of establishing any amount of refund due under the Colorado Supreme Court's Decision in Colorado Municipal League, et al. vs. Public Utilities Commission, et al., supra, and for the purpose of accounting and/or rate making from January 1, 1970 forward,' be, and hereby is, denied.'

Mountain Bell thereafter sought review of those parts of the Commission's order which (1) ordered a refund to customers and (2) denied Mountain Bell the authority to take accelerated depreciation for book and retemaking purposes. The Colorado Municipal League (League) sought review of those parts of the Commission's order which (3) authorized Mountain Bell to deduct the cost of making a refund from interest accruing on the refund amount and (4) denied the League request for deduction of attorney fees and expenses from interest accruing on the refund amount. The district court affirmed the Commission's order in all respects and both parties are once again before this Court. We affirm as to (1), (2) and (3) and reverse as to (4).

I. The Refund

The period of time involved in the Commission's refund order is July 19, 1969 (date the 7.5% Rate took effect) to March 25, 1971 (date the Commission authorized new rates). During the December 1970 remand hearings Mountain Bell offered evidence to show that a refund was not in fact due because, during the refund period. Mountain Bell suffered a revenue deficiency even after adjusting the approved 7.5% Rate of return by excluding the allowance for abnormal inflation and by imputing accelerated depreciation for tax purposes. The Commission refused to consider this evidence, stating correctly:

'Applicant's testimony relative to the proposition that customers suffered no excess charges because of purportedly increased costs of doing business, was outside the order of the Supreme Court. The Supreme Court relief on costs of service in the test year upon which rates were set and thus the Commission must amend its Decision No. 72385 so as to be in compliance with the Supreme Court's order. Applicant's proposition that it make no refund because of increased costs would set the stage for guaranteed earnings and rate of return. The result would be that as earings fluctuate above or below a stated rate or return the Company could immediately increase its rates any by the same reasoning immediately refund amounts earned over the stated return. Public utility regulation does not guarantee a predetermined rate of income and if it could and did then the cost of capital would be reduced accordingly. This Commission regulates rates and not revenues. There is no way to insure either the company or its customers that approved rates will not produce revenues above or below an approved rate of return. Just as the Company is not guaranteed certain earnings, the customers are not guaranteed that revenues will not exceed and approved rate of return. Such financial security cannot be assured by regulation's function of being a substitute for competition.'

We agree that the Commission properly refused to consider the evidence offered by Mountain Bell. Mountain bell, however, argues that the evidence should have been considered because the amount of a refund must be determined from facts as they actually existed during the period an erroneous rate order was...