New England Tel. & Tel. Co. v. Public Utilities Commission

Citation390 A.2d 8
PartiesNEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY v. PUBLIC UTILITIES COMMISSION.
Decision Date28 June 1978
CourtSupreme Judicial Court of Maine (US)

Pierce, Atwood, Scribner, Allen, Smith & Lancaster by Jotham D. Pierce, Jr., (orally), Ralph I. Lancaster, Jr., Everett P. Ingalls, George J. Marcus, Portland, C. Duane Aldrich (orally), Robert D. Bruce, Christopher M. Bennett, Boston, Mass., for plaintiff.

Horace S. Libby (orally), Thomas R. Gibbon, Alan G. Stone, Frederick S. Samp, Public Utilities Commission, Augusta, for defendant.

Before POMEROY, WERNICK, ARCHIBALD, GODFREY and NICHOLS, JJ., and DUFRESNE, A. R. J.

POMEROY, Justice.

On October 8, 1974, New England Telephone and Telegraph Company (New England) filed with the Maine Public Utilities Commission (Commission) a revision of New England's then effective schedule of intrastate rates, tolls, and charges designed to achieve an increase in gross annual revenues of approximately $21,000,000 or about 25% Above its 1974 intrastate revenues. On July 3, 1975, the Commission granted a "temporary" rate increase of $9,500,000; and, on February 13, 1976, it granted a "permanent" rate increase of $9,074,000, from which New England appealed. On August 10, 1976, this Court sustained New England's appeal and held the schedule of rates put into effect by the $9,500,000 rate increase, being the last lawful rates, to be the effective rates. In addition, this Court remanded to the Commission to undertake an investigation of the justness and reasonableness of the $9,500,000 rate increase as permanent rates.

On September 10, 1976, New England filed with the Commission a new revised schedule of rates designed to achieve an increase in gross annual intrastate revenues of approximately $27,000,000, or about 24% Above the revenues which would otherwise be generated during the year beginning July 1, 1977. The Commission consolidated the September 10, 1976 application and the case remanded to it by this Court's August 10, 1976 decision into one rate investigation proceeding.

On June 10, 1977, the Commission issued its final Decree in this matter, ordering New England to Reduce its rates so as to produce a decrease in annual revenues of $1,900,000. A number of appeals, complaints, and motions to this Court followed. On September 2, 1977, then Chief Justice Armand A. Dufresne, Jr., stayed the effect of the Commission's June 10, 1977 Decree, leaving in effect New England's authorized rates which were in existence before the Decree. Those prior rates would remain in effect until this Court's final determination of the issues raised with respect to the June 10, 1977 Decree. However, if the case remained undecided on July 1, 1978, New England would be allowed a temporary rate increase to produce additional revenues of $5,000,000, pending final determination by this Court. Oral arguments were held on February 10, 1978.

We decided that the case must be remanded to the Commission to determine the appropriate revenues to be allowed New England based upon our disposition of the issues in the case which, in summary, is as follows.

A The Court overrules the Commission on the following issues:

1. Accelerated Depreciation. The Commission disallowed as a legitimate expense for ratemaking purposes federal income taxes deferred by New England's use of accelerated depreciation instead of straight-line depreciation. The Court decides that this adjustment is contrary to the established 2. Double Leveraging Adjustment. The Commission reduced New England's allowed rate of return to account for the double leveraging in AT&T's 86% Ownership of New England. The Court decides that the Commission failed to give adequate consideration to the effect of its double leveraging adjustment upon the 14% Of New England's stock owned by 45,000 members of the investing public.

national economic policy established by Congress, and that the Commission's arbitrary treatment of New England's books of account in this respect and its placing of New England in jeopardy of losing its right to take such accelerated depreciation constituted an abuse of discretion.

3. Commission Audit. The Commission ordered that New England bear the cost of an audit of its books of account by an outside firm under the direction of the Commission. The Court concludes that the Commission lacked the statutory authority to require New England to bear the cost of such an investigation.

B The Court sustains the Commission on the following issues:

1. Allocation of AT&T Interest. The Commission allocated to New England a portion of the interest paid by the consolidated Bell System on debt owed by the parent company, American Telephone and Telegraph Company (AT&T). The allocation of this interest to New England reduces, for ratemaking purposes, the income taxes it owes, thereby reducing the revenues necessary to pay such taxes.

2. Cost of Debt. The Commission determined New England's cost of debt to be 6.99%. New England's proposed 10-year amortization period for a debenture repurchase premium was rejected for a 33-year period, which resulted in a lower cost of debt.

3. Cost of Equity. The Commission determined New England's cost of equity to be 11.5%.

4. Attrition Allowance. The Commission made an allowance for attrition of .56% Of rate base instead of New England's proposed allowance of .76%. The Court finds this figure to be reasonable in result and methodology and supported by the evidence. However, recalculation will be required in light of the disposition of other issues.

5. Working Capital Allowance. The Commission reduced New England's proposed working capital allowance based upon its treatment of service contract fees paid by New England to AT&T.

6. Pre-1971 Investment Tax Credits. The Commission deducted New England's accumulated pre-1971 investment tax credits from its rate base, thereby reducing the property on which its stockholders are entitled to a return.

7. Charitable Contributions and Legislative Expenses. The Commission disallowed as an expense chargeable to ratepayers New England's charitable contributions and lobbying expenditures.

8. Other Issues. The following Commission orders are upheld:

a. that New England keep a record of all contacts with the I.R.S. concerning the accelerated depreciation issue;

b. that New England publish certain of its rates and tolls in its telephone directories;

c. that New England inform customers who are applying for new service about the service charges and party-line options;

d. that New England advise the Commission of any problems inherent in offering one-party, two-party and four-party residential service;

e. that New England show on its monthly bills the number of directory assistance calls made by each customer;

f. that New England provide free directories covering all exchanges within 30 miles of the customer's exchange and charge no more than $1.00 for any other Maine directory;

g. that New England show on its monthly bills the number of hours of WATS usage to all WATS customers.

C The Court does not decide the following issues:

1. Other Tax Deferral Issues. New England conceded that a recent decision of this Court decided certain tax deferral issues in the Commission's favor.

2. Gross Receipts Tax. The parties have agreed that the gross receipts tax adjustment is no longer in issue.

3. Rate Design. The Court concludes that it is unnecessary to consider issues arising from rate design at this time because a new rate design will be proposed on remand to the Commission to account for the effect of our decision on revenues to be allowed New England.

INTRODUCTION

The United States Supreme Court said in Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333 (1944), nearly half a century ago,

The rate-making process under the Act, i.e., the fixing of "just and reasonable" rates, involves a balancing of the investor and the consumer interests. Thus we stated in the Natural Gas Pipeline Co. case that "regulation does not insure that the business shall produce net revenues." 315 U.S. p. 590, 62 S.Ct. 736, 86 L.Ed. 1037. But such considerations aside, the investor interest has a legitimate concern with the financial integrity of the company whose rates are being regulated. From the investor or company point of view it is important that there be enough revenue not only for operating expenses but also for the capital costs of the business. These include services on the debt and dividends on the stock. (citation omitted). By that standard the return to the equity owner should be commensurate with returns on investments in other enterprises having corresponding risks. That return, moreover, should be sufficient to assure confidence in the financial integrity of the enterprise, so as to maintain its credit and to attract capital. Id. at 603, 64 S.Ct. at 288.

Ratemaking in theory is a relatively simple process. To the cost of producing the service furnished is added a reasonable return to the investor. The making of public utility rates requires four basic determinations:

1. what are the enterprise's gross utility revenues under the rate structure examined;

2. what are its operating expenses, including maintenance, depreciation and all taxes, appropriately incurred to produce those gross revenues;

3. what utility property provides the service for which rates are charged and thus represents the base (rate base) on which a return should be earned; and

4. what percentage figure (rate of return) should be applied to the rate base in order to establish the return (wages of capital) to which investors in the utility enterprise are reasonably entitled. Missouri ex rel. Southwestern Bell Telephone Co. v. Public Service Commission, 262 U.S. 276, 291, 43 S.Ct. 544, 67 L.Ed. 981 (1923) (Brandeis, J., dissenting).

Simple as this formula sounds, the task of the ratemaker is more often than not extremely difficult. This is so because the...

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