New England Tel. & Tel. Co. v. Department of Public Utilities

• Court: United States State Supreme Judicial Court of Massachusetts
• Writing for the Court: F. E. Kelly, Atty. Gen., H. Freed; Before QUA; QUA
• Citation: 97 N.E.2d 509,327 Mass. 81
• Parties: NEW ENGLAND TEL. & TEL. CO. v. DEPARTMENT OF PUBLIC UTILITIES.
• Decision Date: 28 February 1951

Page 509

97 N.E.2d 509 327 Mass. 81 NEW ENGLAND TEL. & TEL. CO.
v.
DEPARTMENT OF PUBLIC UTILITIES. Supreme Judicial Court of Massachusetts, Suffolk. Argued Oct. 3 and 4, 1950.
Decided Feb. 28, 1951.

[327 Mass. 83]

Page 510

H. P. Moulton, Boston, C. C. Cabot, Boston, for N. E. Tel. & Tel. Co.

F. E. Kelly, Atty. Gen., H. Freed, J. W. Kelleher, Boston, F. J. Quirico, Pittsfield, for defendant.

Before [327 Mass. 81] QUA, C. J., and LUMMUS, RONAN, SPALDING and WILLIAMS, JJ.

[327 Mass. 83] QUA, Chief Justice.

This is a suit in equity brought by the plaintiff, hereinafter called the company, under G.L. (Ter.Ed.) c. 25, § 5, ¹ praying for the annulment of, or other relief from, an order of the department dated March 18, 1949, in a proceeding known as D. P. U. 8181, which disallowed a schedule of rates and charges filed by the company on April 21, 1948, cancelled certain rates previously approved by the department on July 24, 1947, and ordered the company to file on or before April 1, 1949, a new schedule of rates and charges which should be the same as those in effect before July 24, 1947, except for certain specified changes designed

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to produce approximately the same revenue as the rates of July 24, 1947. This suit is the same suit in equity to which reference is made in Department of Public Utilities v. New England Telephone & Telegraph Co., 325 Mass. 281, 90 N.E.2d 328.

Previous rate schedules.

There had been no increase in the company's rates for many years prior to the approval by the department of the rates of July 24, 1947. Those rates increased the company's earnings by approximately $5,000,000 and have been known as the $5,000,000 rates. The rates filed by the company April 21, 1948, and now disallowed by the department would have still further increased the earnings by approximately $10,000,000 making a total increase of $15,000,000. These have been known as the $15,000,000 rates. The rates substituted by the department in the order now sought to be annulled preserved the original [327 Mass. 84] $5,000,000 increase, largely by means of a surcharge of 5% upon customers' bills, and have been called the 5% rates. A further surcharge of 4% allowed after the order now complained of to cover additional labor costs made the so called 9% rates, which are not directly involved in this proceeding except as the 5% rates are included in the 9% rates. The history of these successive rates more fully appears in Department of Public Utilities v. New England Telephone & Telegraph Co., 325 Mass. 281, at pages 283-286, 90 N.E.2d 328.

The stipulation, reservation and report.

When this present suit came on for hearing before the single justice of this court, the company and the department presented a stipulation wherein the company waived all issues except those relating to the adequacy of the return and the rate of return allowed by the department, including as still open the subsidiary issues (a) of adequate return upon stock capital, (b) of a safe ratio of debt capital to total capital, and (c) of the right of the company to earnings upon reinvested surplus. This stipulation included an agreement as to certain facts, among them being that the average 1949 Massachusetts intrastate rate base upon which the company was entitled to a fair return was $238,264,400, if the company was not entitled to earnings upon surplus reinvested in its plant, or $244,185,500, if the company was entitled to such earnings; that the company's total capitalization, not including surplus, was $410,570,100, consisting of long term debt of $135,000,000, advances from the American Telephone and Telegraph Company of $120,000,000, and common stock amounting to $155,570,100, making a ratio of debt capital to total capital of 62.1%; that the surplus was $9,585,000; that the composite cost of existing long term debt was 3.613% as found by the department, which (according to the stipulation and the findings) could be reduced to 3.45% ² upon the acquisition of new debt [327 Mass. 85] capital at slightly lower cost; and that the composite return on the rate base resulting from the department's order would be 4.887% ³ if the company was not entitled to earnings on reinvested surplus and 4.768%3 if the company was so entitled. Reference will be made to other facts agreed in so far as becomes necessary. It was further agreed that the case should be presented to the single justice upon the pleadings, the facts agreed, and the evidence presented to the department bearing upon rate of return for the determination of the issues 'by the court upon its own independent judgment as to both law and fact.'

In accordance with the stipulation, all the evidence bearing upon the rate of return, including a transcript of the voluminous testimony and including the exhibits, all of which had been received by the department, was presented to the single justice without additional evidence and, the

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evidence before him being entirely documentary, the single justice, at the request of the parties, reserved and reported the case for such relief, if any, as might be appropriate under G.L. (Ter. Ed.) c. 25, § 5. See Boston & Albany Railroad Co. v. New York Central Railroad Co., 256 Mass. 600, 604-605, 153 N.E. 19.

Scope of judicial review.

It is elementary that the fixing of rates is not a proper judicial function. On the other hand, where a rate established by a public regulatory body is attacked as confiscatory the Constitution of this Commonwealth and seemingly still that of the United States require that there be a full opportunity for judicial review as to both fact and law. The cases are collected and discussed in the recent decision of Lowell Gas Co. v. Department of Public Utilities, 324 Mass. 80, 84-89, 84 N.E.2d 811, certiorari denied sub nomine Department of Public Utilities v. Lowell Gas Co., 338 U.S. 825, 70 S.Ct. 71. See St. [327 Mass. 86] Joseph Stock Yards Co. v. United States, 298 U.S. 38, 49-54, 56 S.Ct. 720, 80 L.Ed. 1033; Federal Power Commission v. Natural Gas Pipeline Co., 315 U.S. 575, 585-586, 62 S.Ct. 736, 86 L.Ed. 1037; Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 601-602, 64 S.Ct. 281, 88 L.Ed. 333; Robert L. Hale in 55 Harv.L.Rev. 1116, 1136-1140; 39 Ill.L.Rev. 160, 172-173; Donald S. Carmichael in 40 Mich.L.Rev. 1077, 1083-1084; 51 Yale L.Jour. 1027, 1032. It is the contention of the company here that the rates set up by the order of the department of March 18, 1949 (the 5% rates), do not permit a fair return upon the property of the company devoted to the public service and are confiscatory. That issue is before us in all its aspects. It was said, however, in St. Joseph Stock Yards Co. v. United States, 298 U.S. 38, 53, 56 S.Ct. 720, 726, 80 L.Ed. 1033, that 'the court will not interfere with the exercise of the rate-making power unless confiscation is clearly established.'

The factual background of the case.

Certain undisputed facts form the background of the case and will in large measure determine the outcome. They are established by a planitude of figures, charts, and testimony, but their substance may be stated in simple language. The company is one of the associated companies of the Bell system. Of its stock 68.9% is held by the American Telephone and Telegraph Company. During and since World War II there has been an immense increase in the demand for the company's telephone service. The company has greatly increased its facilities but nevertheless by the summer of 1948 shortly before the hearings began before the department it had not yet been able to catch up with the accumulated applications for service. To enable the company to expend its plant to meet the vast public demand, and in accordance with a custom in the Bell system, the American Telephone and Telegraph Company has advanced to the company on unsecured demand notes at 2.75% the sum of $120,000,000, which amounts to between a quarter and a third of the total capitalization of the company. This money was advanced in the expectation that it would be [327 Mass. 87] repaid in accordance with the custom in the system out of new issues of securities by the company. The company is under an absolute obligation to repay these advances but can do so only by means of acquiring new permanent capital either in the form of additional debt capital through bond issues or in the form of additional stock capital through stock issues. But the experts who testified were in agreement, and we suppose it is matter of common knowledge, that the proportion of debt capital cannot be extended indefinitely without adversely affecting the credit of the company, injuring the market for its stock, and to some degree that for its bonds also. It would seem that the company, with a ratio of 62.1% of debt capital to total capital, is already top heavy with debt, and that a substantial part of the new capital required must be raised by the sale of stock, how much will be a subject of discussion later in this opinion. And at this time, when it has become necessary to raise a substantial amount of new capital through an issue of stock, we are confronted with the further undoubted facts that high costs of operation since the war have greatly impaired

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the company's earning capacity relative to the capital invested, ⁴ so that the dividends upon the stock have decreased from 6% to 4.25%, and as the hearing before the department approached its end the stock, of which the par value is $100, had fallen in the market so that it was hovering around $80 to $85. Moreover, the company is a New York corporation and under New York law cannot issue new stock at less than par. N. Y. Stock Corporation Law, McK. Consol. Laws, c. 59, § 69. Compare G.L. (Ter.Ed.) c. 166, §§ 7, 8, 9. Such in rough outline was the situation with which the company and the department had to deal. The expert witness called by the Attorney General in behalf of the public conceded that the...