New England Tel. & Tel. Co. v. State

• Decision Date: 16 July 1962
• Citation: 104 N.H. 229,183 A.2d 237
• Parties: , 44 P.U.R.3d 498 NEW ENGLAND TELEPHONE & TELEGRAPH COMPANY v. STATE.
• Court: New Hampshire Supreme Court

Page 237

183 A.2d 237

104 N.H. 229, 44 P.U.R.3d 498

NEW ENGLAND TELEPHONE & TELEGRAPH COMPANY v. STATE.

Supreme Court of New Hampshire.

Argued April 10, 1962.

Decided July 16, 1962.

McLane, Carleton, Graf, Greene & Brown, Manchester, Robert D. Bruce and John M. Gepson, Boston, Mass., Kenneth F. Graf, Manchester, for company.

Raymond K. Perkins, Concord, for International Brotherhood of Telephone Workers.

William Maynard, Atty. Gen., and Frederic T. Greenhalge, Asst. Atty. Gen., for State.

John N. Nassikas, Sp. Counsel, Manchester, for Public Utilities Commission.

LAMPRON, Justice.

The company's rates and charges reduced by the order of the Commission which is the subject of this appeal were established by Commission orders dated November 22, and 29, 1957, prescribing an annual rate increase of $1,075,206. designed to produce a fair return of 6.2% upon the company's average net intrastate investment. 39 N.H.P.U.C. 284, 291.292.

Reports filed with the Commission by the company showed that it had since earned on that investment 6.57% for the year 1958, 6.54% for 1959, and 7.1% for 1960. Conferences between the Commission and the company failed to produce agreement on adjustments to be made in the existing rates. Under authority of RSA 378:7, the Commission on March 16, 1961, ordered an investigation of the company's then currently effective rates and charges to determine whether they were just and reasonable and ordered the company 'to appear at said investigation to present evidence as to the reasonableness of its present rates and charges, and if * * * found to be unreasonable or unjust to show cause why [they] should not be reduced.'

After hearing, the Commission in its report filed December 28, 1961, found 'that a 45% ratio of debt to total capital is a reasonable capital structure and that 7.75% is a reasonable cost of equity based on this capital structure. Performing the Company's capital structure as May 31, 1961 in terms of a 45% debt ratio, using a historical cost rate of debt of 3.49% and 4.75% as the cost of new debt or a composite rate for debt of 4.11% and using 7.75% as the cost of equity * * * it found 6.1% is the cost of capital to the New England Telephone and Telegraph Company * * * [and] that 6.3% when applied to an original cost rate base, is a just and reasonable rate of return for the * * * Company's New Hampshire intrastate operations.'

The Commission further found that the twelve months ended June 30, 1961, the last complete year of operating results of the Company for the period without adjustment, is a reasonable standard for the determination of the level of reasonable rates and charges. The Commission found further that the company's New Hampshire intrastate net earnings for that test year period produced an earned rate of return of 6.81%. 'We find that this rate of return is excessive and that the current rates which produced this rate of return are unreasonable and should be reduced to a level which will yield a rate of return of 6.3% on the Company's average net investment for the test year ended June 30, 1961.'

The company contends that the State has failed to prove that the charges existing prior to the present order of the Commission were unjust and unreasonable and that therefore they could not be reduced; that the Commission's report and order are not supported by adequate findings and are contrary to the weight of the evidence and unsupported thereby. The company maintains further that the Commission's theory that the reasonableness of rates and charges must be tested by the standard of rate of return is erroneous and that its disregard of clear and uncontradicted evidence of a declining return resulted in an unlawful order in violation of the company's constitutional rights.

Just and reasonable rates is the touchstone by which the Commission was to assay the company's rates and charges prevailing when it ordered its investigation and the standard by which it was to order and fix new rates. RSA 378:7, 27, 28. New England Tel. & Tel. Company v. State, 95 N.H. 353, 356, 64 A.2d 9; New Eng. Tel. & Tel. Co. v. State, 98 N.H. 211, 218, 97 A.2d 213; Federal Power Com. v. Hope Nat. Gas Co., 320 U.S. 591, 602, 64 S.Ct. 281, 88 L.Ed. 333. 'The proper rate of return is a matter for the judgment of the commission, based upon the evidence before it. In fixing the rate the cost of capital may not be ignored; but what that cost may be is also a matter for determination by the commission upon the evidence. * * * Once determined, it marks the minimum rate of return to which the company is lawfully entitled.' New England Tel. & Tel. Company v. State, supra, 95 N.H. 361, 64 A.2d 16. However in accordance with the statutory directive that rates must be 'just and reasonable' (RSA 378:7, 27, 28), the Commission in the exercise of its judgment on the evidence before it can allow a rate of return in excess of the cost of capital. Chicopee Mfg. Co. v. Public Service Company, 98 N.H. 5, 13, 93 A.2d 820.

It is therefore apparent that there is more than one rate that may be a just and reasonable rate of return. The area between the lowest rate that is not confiscatory and the highest rate that is not excessive and extortionate has been referred to as a zone of reasonableness. Banton v. Belt Line Ref. Corp., 268 U.S. 413, 423, 45 S.Ct. 534, 69 L.Ed. 1020; Atlantic Coast Line R. Co. v. Florida, 295 U.S. 301, 317, 55 S.Ct. 713, 79 L.Ed. 1451; Wisconsin Telephone Co. v. Public Service Comm., 232 Wis. 274, 329, 287 N.W. 122, 593; Michigan Bell Telephone Co. v. Michigan Public Service Commission, 332 Mich. 7, 26, 50 N.W.2d 826

The company takes the position that in setting rates in a case where the reasonableness of existing rates is not in issue, the Commission could set the rates at the lowest limit of the zone of reasonableness and such rates could be found just and reasonable. But it contends that in a case where a finding that existing rates are unjust and unreasonable is a prerequisite to reducing those rates, they may not be reduced if they lie within the zone of reasonableness above mentioned.

Regardless of whether the proceeding is one in which the Commission has ordered new and higher rates or one in which it has ordered existing rates to be reduced the ultimate issue before this court on appeal is whether the party seeking to set aside the decision of the Commission has demonstrated 'by a clear preponderance of the evidence * * * that [its] order is unjust and unreasonable.' RSA 541:13; Public Service Co. v. State, 102 N.H. 150, 162, 153 A.2d 801. If it were demonstrated that the Commission fixed a rate below the lowest level of the zone of reasonableness, that is, a confiscatory rate, or that it fixed a rate higher than the highest rate within said zone, in other words, an excessive or extortionate rate, the order of the Commission would be set aside as unlawful for such a rate could not be found just and reasonable. It does not follow from this that because current or company-proposed rates fall within the zone of reasonableness, the Commission as a matter of law must approve them as the 'just and reasonable * * * rates * * * to be thereafter observed and in force' RSA 378:7, supra. The mere fact that rates charged by the company are not extortionate and hence not unreasonable as a matter of law does not establish that they may not be unreasonable as a matter of fact, and some other rate within the zone of reasonableness found to be the reasonable rate to be in force for the future. In determining what the latter rate should be in this case, the Commission expressly found that the rates being collected by the company were unreasonable (RSA 378:7 supra) and was not precluded as a matter of law from so doing even though the rates might reasonably have been found less than extortionate. As long as the reduced rates ordered have not been shown to be unjust and unreasonable the Commission's order does not violate the Company's statutory or constitutional rights and will not be set aside. New Eng. Tel. & Tel. Co. v. State, 98 N.H. 211, 222, 97 A.2d 213.

Since our statutes do not provide a formula to be followed by the Commission in determining what are just and reasonable rates, we are not warranted in rejecting the method employed by it unless it plaintiff contravenes the statutory scheme of regulation or violates our law in some other respect. New Eng. Tel. & Tel. Co. v. State, supra, p. 219, 97 A.2d 213; Federal Power Com. v. Natural Gas Pipeline Co., 315 U.S. 575, 585, 62 S.Ct. 736, 86 L.Ed. 1037. Where, as in this case, the rate base is not in question, the rate of return the company was reasonably entitled to earn thereon is the main issue in controversy in the determination of just and reasonable rates. In fixing such rate of return the cost of capital is an important factor to be determined and considered by the Commission in 'the exercise of a fair and enlightened judgment, having regard to all relevant facts.' Bluefield Water Works & Improvement Co. v. Public Service Com., 262 U.S. 679, 692, 43 S.Ct. 675, 67 L.Ed. 1176; New England Tel. & Tel. Company v. State, 95 N.H. 353, 361, 64 A.2d 9; Chicopee Mfg. Co. v. Public Service Company, 98 N.H. 5, 11, 93 A.2d 820.

In determining that the company's prevailing rates were unjust and unreasonable, and in fixing the reduced rates, the Commission relied primarily on the cost of capital approach as developed by Kosh, an expert witness called by the State. The cost of debt not being in dispute, and the company having no preferred stock, the cost of equity was the major element on which the parties differed in arriving at the cost of capital. Kosh used a fifty-one page exhibit prepared by him which he explained and supplemented by his testimony. He used the earnings-price ratios for the years 1953-1960 for the five Bell operating companies whose stocks are traded, including the New England Company; the earnings-price ratios...