New England Tel. & Tel. Co. v. Public Utilities Com'n

• Decision Date: 28 April 1983
• Docket Number: No. 81-463-M,81-463-M
• Citation: 459 A.2d 1381
• Court: Rhode Island Supreme Court
• Parties: NEW ENGLAND TELEPHONE & TELEGRAPH COMPANY v. PUBLIC UTILITIES COMMISSION et al. P.

Page 1381

459 A.2d 1381

NEW ENGLAND TELEPHONE & TELEGRAPH COMPANY v. PUBLIC UTILITIES COMMISSION et al.

No. 81-463-M.P.

Supreme Court of Rhode Island.

April 28, 1983.

Tillinghast, Collins & Graham, Peter J. McGinn, Peter V. Lacouture, Steven E. Snow, Providence, for petitioner.

Carroll, Kelly & Murphy, C.R. Bengtson, Richard D. Prentiss, Edwards & Angell, James K. Edwards, Ricci & Ricci, Hugo L. Ricci, Jr., Providence, for respondent.

OPINION

WEISBERGER, Justice.

This is a statutory petition for certiorari filed by the New England Telephone & Telegraph Company (the company or NET) seeking to review portions of reports and orders rendered by the Public Utilities Commission (the commission) on September 13, 1981, and October 20, 1981. The petition is filed pursuant to the provisions of G.L.1956 (1977 Reenactment) § 39-5-1. In its petition the company raises five major issues. These issues will be dealt with in the order in which they are presented in the company's brief. The facts pertinent to the disposition of these issues will be supplied as required.

I Allowance for Erosion

This court has held in previous cases that a public utility is entitled to an erosion or attrition allowance in order to compensate for its inability to earn the rate of return authorized by the commission because of the effects of inflation. Michaelson v. New England Telephone & Telegraph Co., 121 R.I. 722, 746, 404 A.2d 799, 812 (1979); New England Telephone & Telegraph Co. v. Public Utilities Commission, 118 R.I. 570, 582, 376 A.2d 1041, 1047 (1977); Narragansett Electric Co. v. Harsch, 117 R.I. 395, 420-21, 368 A.2d 1194, 1209 (1977). The commission has previously recognized the propriety of an erosion allowance in rate hearings and has granted such an allowance in the case at bar. This allowance, however, is claimed by the company to be wholly inadequate.

In testimony given by John F. O'Neill, an expert accounting witness, the company sought to establish a failure on its part to achieve an authorized rate of return, due to the effects of inflation. Such a contention is supported by projections of test-year figures and also by actual earnings, resulting from operations during the twelve months subsequent to the test period. Mr. O'Neill's testimony resulted in the conclusion that the test-period's adjusted actual rate of return amounted to 7.6 percent. ¹ He then compared this rate of return with the authorized rate of 8.6 percent. The failure to achieve the authorized rate of return, the witness asserted, was due to the effects of inflation. This caused a revenue deficiency of $4,793,000 with a resulting earnings deficiency of $2,381,000. The company proposed an erosion adjustment in the sum of $4,793,000.

In opposition to this testimony, the Division of Public Utilities & Carriers (the division) presented the testimony of Dr. John W. Wilson, an expert witness. Doctor Wilson did not specifically contradict or rebut the methodology or the calculations used by Mr. O'Neill in arriving at his estimate of revenue shortfall. His criticism of the O'Neill conclusion was based upon the assertion that it did not include probable gains in productivity and market growth. Wilson based his testimony of probable gains in productivity and market growth upon an item extracted from a paper published in the Spring 1973 issue of the Bell Journal. The projections included in this paper were based upon Bell System figures for the 1961-71 period.

A subsequent company witness, Professor Frank M. Gollop of the Department of Economics of Boston College, testified that this paper had never been used for financial or economic planning by the American Telephone & Telegraph Company (AT & T), that it had no relation at all to the operating company whose rates were under consideration, and that it was not useful or even relevant to the determination of an erosion allowance for the company. Nevertheless, Dr. Wilson asserted that the company should not be entitled to an attrition allowance because of its failure to reflect, in its erosion figures, gains in productivity and volume in accordance with the Bell Journal model. We have carefully examined Dr. Wilson's testimony in the light of rebuttal testimony by Mr. O'Neill and Prof. Gollop and are of the opinion that his testimony, on this subject, constitutes baseless speculation and does not reach the threshold of competent legal evidence.

In its report and order, the commission did not accept Dr. Wilson's testimony that no erosion allowance should be made because the company had omitted "consideration of key variables reflecting market growth and productivity gains." The commission agreed with Prof. Gollop that Dr. Wilson's testimony lacked "specific quantitative support on which we may make an erosion allowance calculation." The commission found that erosion probably exists, "but to a degree that cannot be calculated directly from the cases submitted by the company and the division." The commission then proceeded to determine an erosion allowance based upon expenses from which payroll and depreciation were omitted. The commission further excluded from its calculations, the company's additional investment because such an investment should be offset by additional revenue generated thereby. This adjustment gave rise to an erosion allowance of $948,000. After considering the evidence presented to the commission, we are of the opinion that the company's evidence was unrebutted by any competent legal evidence presented by the division. We believe that the company's evidence did include projections of productivity gains and reasonably anticipated market growth. The testimony of Mr. O'Neill and Prof. Gollop on these issues stands unassailed.

In light of this evidence, the elimination of approximately 80 percent of the expense and investment base for determining an erosion allowance is, in our opinion, not supported by competent legal evidence and is not justified on the theory that an erosion allowance is not designed to guarantee the company's achieving its authorized rate of return. New England Telephone & Telegraph Co. v. Public Utilities Commission, 118 R.I. at 588, 376 A.2d at 1050.

Mr. O'Neill's projected figures from the test year supported the company's proposed erosion allowance. Furthermore, the figures from the twelve months subsequent to the test period gave almost irrefutable evidence of the company's declining intrastate rate of return. Therefore, in the light of this evidence, the rejection of the company's proposal was arbitrary. Thus, we sustain the company's position on this issue and order that the commission include in the tariff an erosion adjustment in the amount of $4,793,000.

II License-Contract Expenses

The company included in its cost of doing business certain license-contract expenses relating to services performed by AT & T for the benefit of all of the telephone operating companies. These expenses are allocated to each operating company on the basis of a contract executed July 15, 1930. The total contract expenses for the period of twelve months ending August 31, 1980, came to $3,025,227. Of the expenses sought to be included in the new tariff, the commission disallowed the sum of $636,768. This disallowance included the sum of $209,022 allocated to the company as its share of defending the government and private antitrust actions brought against AT & T and its operating companies. NET was a defendant in certain private antitrust actions and was named as a coconspirator in the government antitrust action.

The commission disallowed these expenses of litigation "as a matter of policy." In support of its disallowance the commission observed:

"Those suits challenge AT & T's vast national and international corporate structure and operations, not NET's activities within the State of Rhode Island. The costs of defending against those suits properly belongs with either the interstate ratepayers who use AT & T's full network or with the AT & T shareholders who bear the risk of management policy decisions at the highest corporate levels; in any event those costs should not be borne by the Rhode Island intrastate ratepayers."

The foregoing resounding statement of policy has a superficially alluring quality. Nevertheless, in this day of litigation explosion, the cost of defending against a variety of actions, both governmental and private, is a necessary and reasonable expense to be included in the cost of doing business. Actions may be brought against any company, including a public utility, for negligence, defects in products manufactured or sold, sex discrimination, age discrimination, or the violation of a profusion of municipal, state, or federal regulations that approach infinity in their number and variety. Antitrust actions are a part of such potential challenges and do not constitute, in our opinion, a type of action which should be defended only by the stockholders of a public utility, presumably from the stated capital, capital stock or retained earnings of the corporation. Perhaps no area of the law is more fraught with doubt and dispute than the principles underlying antitrust litigation. The suggestion that the mere bringing of such an action gives rise to a presumption of impropriety and illegal conduct on the part of the defendants is in derogation of the basic principles underlying our adversary system.

We agree that the company should bear only that portion of litigation expenses for antitrust actions which is reasonable in light of the overall corporate structure of AT & T. Nevertheless, since NET has been named as a defendant or coconspirator in these actions, the company must obviously defend against them.

By excluding such expenses "as a matter of policy," we are constrained to the conclusion that the commission's disallowance of such expenses was based upon the nature of the action rather than on a determination of the company's appropriate allocation of expense....