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

• Citation: 331 Mass. 604,121 N.E.2d 896
• Parties: , 6 P.U.R.3d 65 NEW ENGLAND TELEPHONE & TELEGRAPH CO. v. DEPARTMENT OF PUBLIC UTILITIES.
• Decision Date: 20 September 1954
• Court: United States State Supreme Judicial Court of Massachusetts

Page 896

121 N.E.2d 896

331 Mass. 604, 6 P.U.R.3d 65

NEW ENGLAND TELEPHONE & TELEGRAPH CO. v. DEPARTMENT OF PUBLIC UTILITIES.

Supreme Judicial Court of Massachusetts, Suffolk.

Argued April 5, 1954.

Decided Sept. 20, 1954.

Charles C. Cabot (John M. Gepson, Charles Ryan, Robert H. Montgomery & William M. Hogan, Jr., Boston), for plaintiff.

Matthew S. Heaphy, Asst. Atty. Gen., Edward N. Gadsby, Littleton (Jason A. Aisner, Asst. Atty. Gen., with them), for defendants.

Before QUA, C. J., and RONAN, WILKINS, SPALDING and COUNIHAN, JJ.

WILKINS, Justice.

This appeal by the company under G.L. (Ter.Ed.) c. 25, § 5, as appearing in St.1953, c. 575, § 1, is to review orders of the department entered on September 30, 1953, and later amended, ¹ which disallowed rates and charges filed by the company on December 10, 1952, to take effect on January 10, 1953, and April 1, 1953, and ordered the filing of new schedules.

The disallowed rates were designed to increase current earnings by $10,225,000. As in Department of Public Utilities v. New England Telephone & Telegraph Co., 325 Mass. 281, 283-284, 90 N.E.2d 328, the department suspended the application of the proposed rates for ten months, the maximum period permissible. G.L.(Ter.Ed.) c. 159, § 20, as amended by St.1939, c. 18. Hearings before the department began on February 17, 1953, and ended on July 22, 1953. The new schedules ordered to be filed on September 30, 1953, were designed to increase gross annual intrastate revenues by not more than $4,519,450. The decision of the department expressed belief that this increase would produce a return upon net original cost of the company's property in this Commonwealth of 6.313%. Such return was to be at a rate of 8.5% upon common stock capital and at a rate of 3.64% on debt capital.

On October 13, 1953, the company, without waiving its right to appeal, filed new schedules. Following entry of this appeal, a single justice stayed the orders subject to a repayment bond, see Rule 46 of the Rules for the Regulation of Practice at Common Law and in Equity [1952], 328 Mass. 725, and the rates filed on December 10, 1952, became effective on November 5, 1953.

The Stipulation, Reservation, and Report.

The case was heard by a single justice upon the petition for appeal and the record on appeal. The latter includes the transcript of testimony and exhibits before the department; and, by stipulation, additional documentary evidence pertinent to the company's operations during the nine months ending September 30, 1953, and modified findings of fact and amended orders made thereon by the department. Such evidence disclosed the effect of actual operations down to the date of the department's decision and tended to show that the earnings for the first nine months of 1953 were at the rate of 5.25%. The amended orders permitted the company to file schedules of rates designed to yield gross revenues of $2,927,350 in excess of those provided in the order of September 30, 1953.

The single justice, at the request of the parties, reserved and reported the case without decision, such decree to be entered as might be appropriate under G.L. (Ter.Ed.) c. 25, § 5, as amended.

Issues.

The company contends that the department's orders are confiscatory because (1) they do not permit the company to earn a reasonable return upon the fair value of its property; and because (2) on the prudent investment-cost of capital theory adopted by the department (a) the company will not earn upon its investment the predicted return of 6.313%; (b) the department used a hypothetical debt ratio of 45% instead of the actual ratio of 36.1% in computing overall cost of capital; and (c) the department disallowed as an expense of operation certain amounts actually paid by the company into its pension fund.

The Department's Original Decision.

The department adopted a rate base computed on original cost of plant less accrued depreciation, taking the company's book figures as such, and not merely as evidence of present value, ² less certain deductions it saw fit to make. In so doing, the department excluded plant under construction, property held for future use, and cash working capital, the last on the ground that tax accruals are more than ample for the purpose. ³ It disallowed one half of the pension freezing payments so called, about which we shall have more to say later.

The average net intrastate investment appearing as the company's book cost has been steadily increasing. Some of the figures are: 1947, $186,882,000; 1951, $247,436,000; 1952, $255,709,000; and May 31, 1953, $267,703,000. The company's estimates for two of the dates upon which the rates would be in effect were December 31, 1953, $282,385,000, and December 31, 1954, $305,086,000. The increase from 1947 to 1952 was about 37%. If the estimated figure for the end of 1954 should be attained, the increase from 1947 would be about 63%. The gross construction program of the company in Massachusetts appears from these figures: 1950, $22,157,000; 1951, $26,726,000; 1952, $34,899,000; 1953 (estimated) $41,000,000; and 1954 (estimated) $44,400,000.

We quote from the decision of the department: 'It is essential in order for respondent to be in position to furnish adequate service to the people of Massachusetts that this gigantic construction program be encouraged. In March, 1953, there were 22,154 orders for main station service held by respondent in Massachusetts awaiting facilities. In addition, there were 109,921 orders for regrades so held. * * * [A]lthough the company has been making some progress in reducing the number of held orders and regrades, the new demand is so substantial that it continues to have a very large number of such orders in its files at the end of each year. It is in large measure due to this situation that respondent is committed to such large capital expenditures in the immediate future. * * * The plant so being constructed is relatively expensive. At the end of 1951, the total plant in service per telephone was about $258. During 1952, 52,945 new phones were added, and the gross book cost increased at the rate of $382 per additional telephone. It is, in other words, retiring some relatively low cost plant and adding a great deal more new plant under present day inflated costs.' After criticising the company for canceling its expansion plans in 1949 when the rates in effect were those held to be confiscatory in New England Telephone & Telegraph Co. v. Department of Public Utilities, 327 Mass. 81, 97 N.E.2d 509, ⁴ the department's decision continues: '[W]e believe in [it?] our duty to further its present expansion program as best we can for the benefit of the public. It is necessary, of course, in finding the appropriate rate base, to use one to which it is possible to relate an income statement. Under the prudent investment rule, which we have followed wherever possible, such figures, as well as the rate of return used in connection therewith should be as nearly contemporary as possible. However, fair treatment of an earnings statement requires the use of a full year's figures in order to avoid seasonal distortion. The only earnings statements covering a full year which appear in evidence are those for the year 1952. We believe, therefore, that the proper rate base to use in these proceedings is the average net plant investment for the year 1952. We find the proper rate base as of such period to be $250,084,000, computed as follows:

The department made certain modifications in the earnings as appearing in the books, the more important being to allow a full year's operation to a wage increase given the company's employees effective October 12, 1952, and to a rate increase effective July 24, 1952. It then computed the 1952 net earnings to be $13,970,000, which would mean a return of 5.59% on the rate base of $250,084,000. The decision referred to estimates presented by the company that the then existing rates would yield net earnings for 1953 of $14,076,000, or 5.17%, on an average net investment of $272,375,000 and for 1954 of $14,747,000, or 5.01%, on an average net investment of $294,440,000. The estimates were dismissed with the statement: 'However, the company did not pretend to do more than support its claim to increased rates by its future estimates, and all of the itemized data presented relate to 1952 results.'

As to a substantial regulatory lag found to exist in this case, the decision commented: 'It is unfortunate that this results, in a period of rising prices, in detriment to the utility and in balance sheet results which are less favorable than contemplated by the regulatory agency. It is to be observed, however, that in a period of falling prices, this process works in reverse, and it is usually some time before even the most diligent regulatory agency can be in a position to demand a corresponding decrease in rates.'

The department made certain expense modifications. It increased the figure for taxes by $104,000, and decreased the amount of telephone expenses by $192,000 representing one half of the company's actual payments into its pension fund, so called 'pension freezing' payments, which the department found 'should have been charged against operations in previous years, and are an improper charge against operations in 1952.' The effect of these changes was to bring the net intrastate earnings under the then rates to $14,058,000, a return of 5.62% on the rate base found.

To reflect the 1953 results so far as it had them, which was for five months, the department decreased this earnings figure to $13,755,000, and used the reduced amount for the purpose of computing the increased revenues to which the company was entitled. The decision referred to testimony that the first five months normally would show better results than would the balance of the year, and that the third quarter is usually a poor earning period. These factors, however, were...