Pacific Northwest Bell Telephone Co. v. Sabin

• Jurisdiction: Oregon
• Court: Oregon Court of Appeals
• Writing for the Court: Before SCHWAB; LANGTRY
• Citation: Pacific Northwest Bell Telephone Co. v. Sabin, 21 Or.App. 200, 534 P.2d 984 (Or. App. 1975)
• Decision Date: 24 June 1975
• Docket Number: No. 81789,81789
• Parties: , 8 P.U.R.4th 159 PACIFIC NORTHWEST BELL TELEPHONE COMPANY, a corporation, Respondent, v. Richard W. SABIN, as Public Utility Commissioner of Oregon, Appellant.

Page 984

534 P.2d 984

21 Or.App. 200, 8 P.U.R.4th 159

PACIFIC NORTHWEST BELL TELEPHONE COMPANY, a corporation, Respondent, v. Richard W. SABIN, as Public Utility Commissioner of Oregon, Appellant.

No. 81789.

Court of Appeals of Oregon.

Argued and Submitted Feb. 20, 1975.

Decided April 26, 1975.

Rehearing Denied May 28, 1975.

Review Denied June 24, 1975.

Al J. Laue, Asst. Atty. Gen., Salem, argued the cause for appellant. With him on the brief were Lee Johnson, Atty. Gen., W. Michael Gillette, Sol. Gen., John H. Socolofsky, Asst. Atty., Gen., and Counsel, and Alvin L. Alexanderson, Asst. Atty. Gen., Salem.

Richard Devers, Portland, argued the cause and filed the brief for respondent. With him on the brief were Cleveland C. Cory, Davies, Biggs, Strayer, Stoel & Boley, any Lloyd G. Hammel, Jr., Portland.

Before SCHWAB, C.J., and LANGTRY and FORT, JJ.

LANGTRY, Judge.

Pursuant to ORS 756.610 Oregon's Public Utility Commissioner (hereafter 'Commissioner') appeals from a decree of the circuit court directing the entry of an order which would have the effect of increasing the annual intrastate revenues of Pacific Northwest Bell Telephone Company (hereafter 'PNB') in an amount previously determined by him to be excessive.

Public utilities ¹ operating in this state are required to provide the Commissioner with schedules showing 'all rates, tolls and charges' in force for services performed, as well as all 'rules and regulations that in any manner affect the rates charged or to be changed * * *.' ² Any increase in rates must be preceded by the submission of 'revised schedules,' and is dependent upon a showing by the utility that the proposed rates are 'just and reasonable.' ³

On September 15, 1972 PNB filed revised rate schedules designed to increase its annual intrastate revenues by approximately $31.8 million. Following notice to all interests parties and the general public, hearings, which ultimately consumed some 40 days during the period of October 1972 to April 1973, were commenced by the Commissioner. Representatives of both PNB and the Commissioner's own staff were--through these hearings--provided with an opportunity to introduce evidence upon: (a) the value of PNB's property used and useful in the rendition of intrastate service, i.e., its 'rate base'; (b) its annual gross operating revenues; (c) its annual operating expenses and costs; and (d) an appropriate 'rate of return.' Consistent with orthodox rate-making procedures, these various figures would in turn be relied upon by the Commissioner to decide whether and to what extent the proposed increase in rates and charges ought to be granted. ⁴

At the conclusion of these hearings, the Commissioner made several 'uncontested' findings of fact, including these:

'PNB is one of 24 telephone operating companies in what is known as the Bell System. American Telephone and Telegraph Company (American) is the parent company and an affiliated interest. Other principal entities of the Bell System include Western Electric Company, Inc. (Western) and Bell Telephone Laboratories, Inc. (Bell Labs).

'PNB has one class of common stock of which 89.2% Is owned by American * * *.

'* * *

'Western is wholly owned by American. It manufactures, purchases, repairs and distributes apparatus, equipment and supplies, and installs central office equipment for the Bell System under separate contracts with the Bell System operating companies. Bell Labs is jointly owned by American and Western. It performs research, development and design work for the Bell System.

'* * *

'For many years, a Standard Supply Contract has existed between Western and PNB, providing for the purchase by PNB of telephone equipment, material and supplies from Western. Western manufactures, purchases, repairs, distributes, and scraps telephonic and electronic apparatus, equipment and supplies, and installs central office equipment for Bell System companies, under the terms of the Standard Supply Contract.

'Western has 20 major manufacturing plants and 40 service centers at locations where service to Bell System companies can be provided. In 1971, Western purchased for Bell System companies from about 50,000 suppliers. The purchases exceeded $2.6 billion. Of the purchases, $18 million were made in the State of Oregon. Western's sales account for 80% Or more of the domestic market in telecommunications products.

'* * *

'(According to a price survey conducted by American the operating companies benefit from significant price advantages in nearly all kinds of equipment and supplies provided by Western.) Western's average earnings over the period of 1946--1971 of 9.3% Were also compared to average earnings of 12.1% For 50 large manufacturers and 11.9% For Moody's 125 industrials.

'Western has developed what it terms a volatility index for Western sales (which it compared) with such an index developed for 50 large manufacturers and * * * for the Bell System operating revenues. (This) study (was) based on dollar volume of sales or revenues (Bell companies) for the years 1946 through 1971 and the percent deviation from trend (was) determined for each year to come up with an average annual deviation of 10.8% (volatility index) in sales of Western to 4.5% In revenues for Bell System companies. Western's volatility index (was) about 25th in the volatility ranking of the 50 manufacturers.

'Western also (demonstrated) that, while Bell System revenues have been increasing yearly within a rather narrow range of variation, its construction expenditures, hence Western's sales vary within a much wider range of both increases and decreases. Average profit per dollar sales for the years 1946--1971 shows 5.0 cents of Western, 5.9 cents for the 50 largest manufacturers, and 6.3 cents for Moody's 125 industrials.'

Taking note of the unique relationship shared by American Telephone and Telegraph Company (hereafter 'American'), PNB and Western--as well as the disproportionate market power enjoyed by these corporate entities as a result of that relationship--the Commissioner proceeded to reject the view that this evidence was sufficient to show that either Western's earnings or PNB's payments under the Standard Supply Contract were 'fair and reasonable,' concluding:

'* * * Even if it were shown that PNB could not have benefitted (sic) by dealing with other suppliers in any of its transactions, the fairness of Western-PNB transactions can only be determined by considering the level of Western's earnings.

'The appropriate level of earnings cannot be determined by a comparison to other manufacturers because other manufacturers are not comparable to Western. Western's earnings must be viewed as earnings on an investment in the manufacturing and supply arm of the Bell System, the function of which is to provide utility service. Oregon ratepayers should not be required to pay rates which yield a greater return on the assets of (or investment in) one part of the Bell System than on another simply because the assets are employed in a function undertaken by a non-jurisdictional arm of the system rather than by PNB

'In each year, 1946 to 1972, Western has achieved a return on its investment devoted to Bell business in excess of the rate of return earned by PNB and authorized by the Commissioner, with the exception of 1946 in which Western's return was less. These earnings will be referred to as 'excess earnings.' PNB's rate base and test year expenses are overstated by the undepreciated amount of higher prices charged by Western to PNB in order to produce PNB's contribution to the excess earnings.

'* * * To the extent that its proposed revenue increase is based on transactions between PNB and Western which yield to Western a greater return than enjoyed by or allowed to PNB, the company has not shown that such increase is fair and reasonable.'

On July 14, 1973 the Commissioner issued Order No. 73--447 authorizing PNB to file tariffs increasing its revenues by approximately $18.9 million--an increase some $12.9 million less than that requested. This difference resulted from a number of disallowances in PNB's estimated operating expenses, and adjustments to its rate base as well as the adoption by the Commissioner of a lower rate of return than that proposed by the utility. Included among these disallowances and adjustments were reductions in operating expenses of $207,181 and in the rate base of $2,296,351 attributed ot the 'excess earnings' of Western. At the rate of return approved (8.93 percent) these specific disallowances and adjustments accounted for approximately $653,000 of the $12.9 million difference between the increase sought by PNB and that found to be necessary by the Commissioner.

Subsequent to the entry of this order PNB initiated an action in the Circuit Court for Marion County in which Only those disallowances and adjustments based on Western's 'excess earnings' were challenged. In addition to alleging that the findings and conclusions of the Commissioner noted above were 'legally erroneous, arbitrary, unjust, unreasonable, (and) not supported by substantial evidence * * *,' the complaint included the suggestion that prior approval of the Standard Supply Contract ⁵ as well as the utility's annual budgets ⁶ ought to have estopped the Commissioner from denying the reasonableness of prices paid Western and from disallowing any portion of those payments for purposes of calculating 'just and reasonable' rates. Absent from the pleading, however, was any suggestion that the challenged adjustments and disallowances had led to the imposition of rates which would result in the taking of PNB's property for public use without just compensation. (It was conceded by PNB in its argument to this court that the rates authorized by the Commissioner in Order No. 73--447 Were not confiscatory, and had not, therefore, been imposed in violation of either Art. I, § 18 of the Oregon Constitution or the Fifth and Fourteenth...