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

• Decision Date: 20 March 1973
• Docket Number: No. 6518,6518
• Citation: 302 A.2d 814,113 N.H. 92
• Parties: , 98 P.U.R.3d 253 NEW ENGLAND TELEPHONE & TELEGRAPH COMPANY v. STATE.
• Court: New Hampshire Supreme Court

Page 814

302 A.2d 814

113 N.H. 92, 98 P.U.R.3d 253

NEW ENGLAND TELEPHONE & TELEGRAPH COMPANY v. STATE.

No. 6518.

Supreme Court of New Hampshire.

March 20, 1973.

McLane, Carleton, Graf, Greene & Brown and G. Peter Guenther, Manchester (Kenneth F. Graf, Manchester, orally), for the company.

Warren E. Waters and George L. Manias, Concord (Waters, Concord, orally), for Public Utilities Commission.

George Charles Bruno, Manchester, director, and Richard Cotton, Concord, attorney, New Hampshire Legal Assistance (Mr. Cotton, Concord, orally), for Operation Low-Income People.

Harlington Wood, Jr., U.S. Asst. Atty. Gen., William B. Cullimore, U.S. Atty. for N. H., William E. Nelson and Bruce G. Forrest, Attys., Dept. of Justice (Mr. Forrest, Atty., Dept. of Justice, orally), as amicus curiae for United States.

LAMPRON, Justice.

Appeal under RSA 541:6, 7 from order No. 10,710 entered on August 24, 1972, by the public utilities commission as a result of an investigation under RSA 378:5 of a proposed tariff change filed by the company on August 6, 1971, to become effective on September 5, 1971. This tariff constituted a 22% composite increase over existing rates and was designed to produce an annual gross revenue increase of $9,950,000. On August 26, 1971, the commission suspended the taking effect of this proposed schedule of rates pending investigation and decision thereon. RSA 378:6.

Following hearings, the commission made certain findings and on August 24, 1972, entered an order authorizing an annual increase in gross revenue of $5,245,000, about 11.6% over the revenue from existing rates, and ordered the company to amend its proposed tariff accordingly. On September 12, 1972, the company filed a motion for rehearing setting forth the grounds on which it claimed the decision of the commission was unlawful and unreasonable. RSA 541:3, 4. Certain exhibits in support were filed therewith. At the same time the company sought approval of a new tariff designed to produce the annual increase in revenue granted by the commission. Its motion for rehearing was denied, but the commission granted the company authority to file the new tariff to become effective on or after September 20, 1972. The company on Cotober 11, 1972, filed its appeal with this court which was heard on January 16, 1973. A supplemental hearing on a motion relating thereto was held on February 8, 1973.

In arriving at its order the commission adopted as the test period the calendar year 1971 with adjustments. It used an average net intrastate rate base of $127,245,000; a capital structure of 51% fixed charge capital and 49% common equity, a cost of debt of 6.1%, a cost of preferred stock of 8%, a current cost of equity of 11%, and arrived at a fair rate of return of 8.6%. This required a revenue increase of $5,245,000 annually.

Without conceding its claim that many of the determinations made by the commission constituted errors of law, or were unjust or unreasonable, the company has chosen to pursue two main issues on this appeal which are stated in its brief to be the following: 'The first, is whether the commission, by ignoring the clear evidence that the company would suffer attrition in its rate of return in the future, has approved rates which will deny the company the opportunity to earn, for a reasonable period in the future, a fair return. The second is whether the commission's total and uncritical adoption of the proposals of Staff Witness Kosh, and complete rejection of the evidence offered by three witnesses for the company, was improper and led the commission to find a rate of return which does not satisfy the Constitutional and statutory requirements of fairness and reasonableness.'

RSA 378:7 imposes on the commission the duty to determine the just and reasonable rates to be charged by a public utility for the services it renders. In making that determination, the commission must ensure that the public will not pay higher rates than are required while insuring that the rates established will yield not less than a reasonable return on the cost of the utility property used and useful in the public service. New England Tel. & Tel. Co. v. State, 104 N.H. 229, 232, 183 A.2d 237, 240 (1962); RSA 378:27, 28.

Rate-making cannot be reduced to an exact science by which a mathematically precise rate of return can be produced by a competently programmed computer. Rather, the proper rate of return is a matter for the judgment of the commission based upon the evidence before it with adequate findings upon which the validity of its orders can be determined. New England Tel. & Tel. Co. v. State, 95 N.H. 353, 359, 64 A.2d 9, 15 (1949); Grafton etc. Co. v. State, 77 N.H. 490, 93 A. 1028 (1915).

The commission's orders, however, must conform to certain well-established constitutional requirements. 'A public utility is entitled to such rates as will permit it to earn a return on the value of the property which it employs for the convenience of the public equal to that generally being made at the same time and in the same general part of the country on investments in other business undertakings which are attended by corresponding risks and uncertainties.' Bluefield Water Works & Improvement Co. v. Public Serv. Comm'n, 262 U.S. 679, 692, 43 S.Ct. 675, 679, 67 L.Ed. 1176, 1182-1183 (1923). 'While it is true that an attractive return to the investor is not necessarily just to the consumer . . ., a balancing of the interests of both investor and consumer requires a return which will enable the utility to maintain its credit and attract the necessary capital to meet increased demands for improvement and extension of its service.' Chicopee Mfg. Co. v. Public Service Company, 98 N.H. 5, 11, 93 A.2d 820, 825 (1953); accord, Federal Power Comm'n v. Hope Natural Gas Co., 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333 (1944); Colorado Interstate Co. v. Federal Power Comm'n, 324 U.S. 581, 65 S.Ct. 829, 89 L.Ed. 1206 (1944).

Because of the need to establish a fixed period in which to make the necessary calculations, a test year already expired is used by the commission to fix the rates under which the utility will operate for some time in the future. This necessarily imposes on the commission the obligation to fix a rate of return which will meet the constitutional standards not only at the time its order is made but for a reasonable period of time thereafter. Chicopee Mfg. Co. v. Company, 98 N.H. 5, 11, 93 A.2d 820, 825 (1953); State v. New Jersey Bell Tel. Co., 30 N.J. 16, 31, 152 A.2d 35, 43-44 (1959); New England Tel. & Tel. Co. v. Kennelly, 78 R.I. 211, 80 A.2d 891 (1951). This is recognized by RSA 378:7 which provides that the commission shall determine and fix a just and reasonable rate 'thereafter to be observed' by the utility and imposes on it no obligation to again investigate a rate matter within a period of two years.

Such 'use of the traditional test year in the traditional rate-making process assumes that actual results for some period of operations will be sufficiently representative of the future to provide a reliable testing vehicle for the proposed rates.' Note, The Use of the Future Test Year in Utility Rate-Making, 52 B.U.L.Rev. 791, 794 (1972). Witness Bolster, called by the commission, however, testified: 'Of course we know that under actual conditions, a utility's operations in the future will usually be at a different level from the test year. Usually a utility's service requirements are growing, and its investment, revenues, and expenses can generally be expected to increase as the service grows. But as long as revenues and costs remain in generally the same relative position as the test year, future costs will be covered.'

However, if unprecedented demands for goods and services at increasing costs upset the balance between revenues, investments and expenses, the assumption that future results will approximate those of the past is not realized in fact. The result is attrition. Nichols, Ruling Principles of Utility Regulation-Rate of Return 134, 158, 165 (1955); see New England Tel. & Tel. Co. v. Department of Pub. Util., 331 Mass. 604, 622, 121 N.E.2d 896, 906 (1954); Baltimore Gas and Elec. Co. v. McQuaid, 220 Md. 373, 152 A.2d 825 (1959); New England Tel. & Tel. Co. v. Department of Pub. Util, Mass., 275 N.E.2d 493, 499, 500 (1971).

Attrition has been defined by numerous courts, commissions and text writers. New England Tel. & Tel. Co. v. Department of Pub. Util., supra; In re Pub. Serv. Co., 35 N.H.P.U.C. 13, 14 (1953); Nichols & Welch, Ruling Principles of Utility Regulation-Rate of Return 55 (Supp. A 1964). Witness Bolster defined attrition as follows: 'An erosion in earning power of a revenue-producing investment. This erosion is a complex phenomenon, the result of operating expenses or plant investment, or both, increasing more rapidly than revenues. If attrition occurs, the result would be that the rate of return realized in the future would be below that which rates were designed to produce.' This effect is apt to occur in a period of comparatively high construction costs when 'new plant is being added, which . . . is relatively expensive per telephone station. As the high cost plant comes into service, it tends to increase the applicable rate base at a more rapid pace than the resultant earnings, and the rate of return decreases accordingly.' See New England Tel. & Tel. Co. v. Department of Pub. Util., 331 Mass. 604, 622, 121 N.E.2d 896, 906 (1954).

If the existence of attrition can be established by the company the commission should evaluate the impact of this factor on the earnings of the utility and make an appropriate allowance for it. In re Public Serv. Co., supra; In re New England Tel. & Tel. Co., 39 N.H.P.U.C. 284, 291 (1957); see also New England Tel. & Tel. Co. v. Department of Pub. Util., Mass., 275 N.E.2d 493, 500 (1971). The methods generally used to offset attrition are: (1) an increase in the otherwise...