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

• Decision Date: 11 November 1971
• Citation: 275 N.E.2d 493,360 Mass. 443
• Parties: , 59 A.L.R.3d 899, 92 P.U.R.3d 113 NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY v. DEPARTMENT OF PUBLIC UTILITIES.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 493

275 N.E.2d 493

360 Mass. 443, 59 A.L.R.3d 899, 92

P.U.R.3d 113

NEW ENGLAND TELEPHONE AND TELEGRAPH COMPANY v. DEPARTMENT OF PUBLIC UTILITIES.

Supreme Judicial Court of Massachusetts, Suffolk.

Argued May 7, 1971.

Decided Nov. 11, 1971.

Robert W. Meserve, Boston (Laurence M. Johnson and Robert G. Bleakney, Jr., Boston, with him), for the New England Telephone and Telegraph Co.

Herbert Baer, Sp. Asst. Atty. Gen., for the Dept. of Public Utilities.

Philip Raoul Tetu, Natick, for The Telephone Answering Assn. of New England, amicus curiae, submitted a brief.

Eli Goldston and Hans F. Loeser, Boston, for The Massachusetts Bay United Fund, Inc., amicus curiae, submitted a brief.

Before TAURO, C.J., and CUTTER, REARDON, QUIRICO and BRAUCHER, JJ.

QUIRICO, Justice.

This is an appeal by the New England Telephone and Telegraph Company (Company) from the final decision, orders and rulings of the Department of Public Utilities (Department) entered on June 10, 1970, in disposing of proposed tariff revisions filed by the Company on July 15, 1969. The appeal was filed in the Supreme Judicial Court for the county of Suffolk (county court) under G.L. c. 25, § 5, as amended through St.1956, c. 190. Because of the length of this opinion, a table of contents is appended hereto.

HISTORY OF PROCEEDINGS.

The last general increases requested by the Company took effect in February, 1958. On July 15, 1969, the Company filed a comprehensive tariff revision to take effect on August 15, 1969. The Company estimated that the proposed rates would have produced increased revenues of $55,000,000 if they had been in effect during 1969. On the same day the proposed rates were filed the Department suspended their operation until June 15, 1970, pending investigation. G.L. c. 159, § 20 (as amended by St.1939, c. 18). It then held hearings, received evidence and heard arguments in the case on various dates between February 13 and May 29, 1970. On June 10, 1970, the Department made its decision and orders which (a) disallowed the rate revisions filed by the Company on July 15, 1969, and (b) authorized the Company to file new revisions 'designed to produce additional gross annual revenues of $7,713,000.' The Company contends that the rates allowed by the Department represented an increase of about two per cent in the Company's gross annual revenues whereas the $55,000,000 requested by the Company would have represented an increase of about fourteen per cent. The Company issued such new revisions on June 19, 1970, for effect on July 10, 1970, without waiving its right to appeal to this court. It entered its appeal from the Department's decision and orders in the county court on June 26, 1970. ¹ On December 11, 1970, the case was reserved and reported by a single justice for the determination of the full court upon the record before the Department. The single justice also ordered that certain additional evidence which had not been presented at the hearing before the Department be included in the record on appeal, but his order expressly reserved, for ultimate decision by the full court, the question 'whether said evidence is relevant, material, necessary or otherwise properly includible in the record on appeal.' ² We now accept and admit all of the additional evidence thus offered in order 'to bring the proof as nearly as reasonably possible down to the date of final decision.' Opinion of the Justices, 328 Mass. 679, 687, 106 N.E.2d 259, 264. The Department may verify the accuracy of this additional evidence which consists in large part of information contained in reports filed with it by the Company. Such additional evidence, to the extent that it is verified and found accurate, shall be considered in the Department's disposition of the several issues remanded for its further attention. BOSTON GAS CO. V. DEPARTMENT OF PUB. UTIL. MASS. , 269 N.E.2D 248^A.

NATURE AND SCOPE OF JUDICIAL REVIEW REQUESTED.

1. The Company alleges in its appeal that the 'orders and rulings of the Department are confiscatory and unlawful in that they deprive the * * * (Company) of its property and appropriate the same to public uses without reasonable compensation and without due process of law, contrary to Articles X and XII of the Declaration of Rights of the Constitution of the Commonwealth.' It contends, and properly so, that under these allegations it is entitled to an independent judicial review as to both law and fact. MYSTIC VALLEY GAS CO. V. DEPARTMENT OF PUB. UTIL. MASS. , 269 N.E.2D 233^B and cases cited.

2. The Company also alleges in its appeal that 'the Department's decision, orders and rulings are unlawful * * * in that * * * (they) are based upon errors of law, are unsupported by substantial evidence, are unwarranted in the facts contained in the record, are arbitrary and capricious and constitute an abuse of * * * discretion.' It contends, and again properly so, that under these allegations the standard of review is governed by G.L. c. 30A, § 14(8).

SUMMARY OF ISSUES INVOLVED.

The issues raised by this appeal arise from the following principal areas of decision or rulings by the Department:

1. Rate Base. The Company contends that the Department, in computing the Company's rate base for the test year 1969, committed the following errors: (a) it used the average value of the plant in use during the test year rather than the value at the end of the test year, and (b) it excluded the amounts of the following items from the computation of the rate base plant under construction, certain money on deposit with banks, and the item of 'unamortized investment (tax) credit.'

2. Rate of Return. The Company contends that the Department, in determining the rate of return to which the Company was entitled, committed the following errors: (a) it fixed a rate of return which was inadequate to attract necessary capital and (b) it used a hypothetical, rather than the actual capital structure of the Company.

3. Test Year Expenses. The Company contends that the Department, in computing the Company's expenses for the test year 1969, committed the following errors: (a) it did not properly compute the Federal income, social security and municipal property taxes, (b) it underestimated wages and maintenance expenses, and (c) it wrongfully disallowed expense items relating to advertising and charitable contributions.

RATE BASE.

A basic factor in the determination of rates which may properly be charged by a regulated utility company is the amount of the investment on which the company is entitled to an opportunity to earn a fair and reasonable return. This amount is commonly referred to as the company's 'rate base.' In this case the Department found and decided that the Company's rate base was $894,531,000. The Company contends that the Department should have found the rate base to be $1,008,467,000. This difference of $113,936,000 results in part from the Department's exclusion of several classes of property which the Company contends should be included in the rate base, and in part from the use of average rather than year-end plant investment for the test year.

1. Plant Included in Test Year Rate Base: Average Amount vs. Year-End Amount. The largest component part of the rate base, in dollar amount, is the physical plant in service, less depreciation. The average amount of such plant, before depreciation, for the test year 1969 was found by the Department to be $1,230,540,000. The amount of such plant computed at the end of the test year was $1,284,343,000. The Department computed the rate base by using the average figure and the Company contends it should have used the year-end figure. The same disagreement exists as to plant held for future use which the Department included at the test year average amount of $858,000 and which the Company contends should have been included at the year-end figure of $966,000. ³

The basic argument by the Company in support of its contention is that use of the higher year-end amount is necessary to protect it from the adverse effect of erosion or attrition in its rate of return. In declining to use the year-end plant figures the Department stated that some of the evidence demonstrated 'that under a given set of rates, projected increases in rate base and expense will not necessarily result in a decline in the rate of return, because revenues will tend to increase, and efficiencies created by the new plant will offset some aspects of expense increases.' The Company counters with the argument that the record demonstrates clearly that 'investment and expenses were growing faster than revenues, thereby necessarily eroding its rate of return.'

This is but one part of the Company's general contention that the Department, in arriving at its ultimate decision, did not give sufficient effect to the acknowledged inflationary trends in the cost of plant construction and expense of service to customers in fixing the outer limites of the gross revenue which it permitted the Company to receive during the period of such rising costs and expenses. The Department did not disregard the fact of inflation. In its decision it said that '(c)learly inflation is a fact of economic life.' It then continued: 'Recognition of its existence, however, does not dictate any particular regulatory policy. It must be evaluated in terms of its significance to the rate of earnings of the Company, and appropriate allowance should be made for it, but it does not differ from any other factor influencing rate of return and the basis for making the adjustment should be at least as rational as the basis for any other adjustment in arriving at a proper level of income for the Company.' At this point in this decision we are not concerned with the question whether the Department did or did not give sufficient effect to the factor of continuing inflation, but only with the question whether it was required to do so by using the year-end plant figures in the rate...