Pacific Tel. & Tel. Co. v. Public Utilities Commission

• Decision Date: 28 April 1965
• Docket Number: S.F. 21788,21794,21793
• Citation: 44 Cal.Rptr. 1,62 Cal.2d 634,401 P.2d 353
• Court: California Supreme Court
• Parties: , 401 P.2d 353, 58 P.U.R.3d 229 The PACIFIC TELEPHONE AND TELEGRAPH COMPANY, Petitioner, v. PUBLIC UTILITIES COMMISSION of the State of California et al., Respondents; UNITED STATES ADMINISTRATOR OF GENERAL SERVICES, Real Party in Interest. CALIFORNIA INDEPENDENT TELEPHONE ASSOCIATION, Petitioner, v. PUBLIC UTILITIES COMMISSION of the State of California et al., Respondents. Edward L. BLINCOE, Petitioner, v. PUBLIC UTILITIES COMMISSION of the State of California, Respondent; The PACIFIC TELEPHONE AND TELEGRAPH COMPANY, Real Party in Interest.

Page 1

44 Cal.Rptr. 1

62 Cal.2d 634, 401 P.2d 353, 58 P.U.R.3d 229

The PACIFIC TELEPHONE AND TELEGRAPH COMPANY, Petitioner, v.PUBLIC UTILITIES COMMISSION of the State of California et al., Respondents;

UNITED STATES ADMINISTRATOR OF GENERAL SERVICES, Real Party in Interest.

CALIFORNIA INDEPENDENT TELEPHONE ASSOCIATION, Petitioner, v.PUBLIC UTILITIES COMMISSION of the State of California et al., Respondents.

Edward L. BLINCOE, Petitioner, v.PUBLIC UTILITIES COMMISSION of the State of California, Respondent;

The PACIFIC TELEPHONE AND TELEGRAPH COMPANY, Real Party in Interest.

S.F. 21788, 21793, 21794.

Supreme Court of California, In Bank.

April 28, 1965.

Rehearing Denied May 26, 1965.

Pillsbury, Madison & Sutro, Eugene M. Prince, John A. Sutro, Francis N. Marshall, Arthur T. George, G. H. Eckhardt, Jr., and James B. Atkin, San Francisco, for petitioner in S.F. 21788 and for real party in interest in S.F. 21794.

Edward L. Blincoe, in pro. per. in S.F. 21794.

O'Melveny & Myers, Harry L. Dunn, Los Angeles, Albert M. Hart, Bacigalupi, Elkus & Salinger, Claude N. Rosenberg, Charles de Y. Elkus, Jr., Warren A. Palmer, San Francisco, Best, Best & Krieger, James H. Krieger, Riverside, John Robert Jones, Musick, Peeler & Garrett, James E. Ludlam, Peter C. Bradford, Los Angeles, Carl M. Franklin, Richard H. Peterson, Frederick T. Searls, John C. Morrisey, San Francisco, William L. Cole, Los Angeles, Sherman

Chickering, Bruce M. Casey, Jr., C. Hayden Ames, San Francisco, Charles F. Lipman, Chickering & Gregory, San Francisco, Rollin E. Woodbury, Los Angeles, Robert J. Cahall, Los Angeles, John Ormasa, Richmond, Milford Springer, Los Angeles, McCutchen, Doyle, Brown, Trautman & Enersen, Burnham Enersen, Charles E. Goulden, San Francisco, H. Harold Leavey, Sacramento, Brobeck, Phleger & Harrison and Robert N. Lowry, San Francisco, as amici curiae on behalf of petitioner in S.F. 21788.

Richard E. Tuttle, San Andreas, Roderick B. Cassidy, J. Thomason Phelps, William R. Roche, San Francisco, William N. Foley, Sacramento, Catherine D. McAndrew and Sandra H. Cox, for respondents.

Roger Arnebergh, City Atty., Los Angeles, Charles Sullivan, Deputy City Atty., Thomas M. O'Connor, City Atty., San Francisco, Orville I. Wright, Deputy City Atty., Edward T. Butler, City Atty., and Edwin L. Miller, Jr., Asst. City Atty., San Diego, as amici curiae on behalf of respondents.

John W. Douglas, Asst U. S. Atty. Gen., Cecil F. Poole, U. S. Atty., San Francisco, Morton Hollander, David L. Rose and Edward Berlin, Washington, D. C., for real party in interest in S. F. 21788.

BURKE, Justice.

On July 26, 1962, respondentPublic Utilities Commission on the State of California(commission) on its own motion initiated a general investigation of the rates, charges and services of petitionerThe Pacific Telephone and Telegraph Company(Pacific).Extended hearings were held, and in June 1964 the commission issued its decision No. 67369 ordering that Pacific's intrastate rate of return and its rates be reduced for all service rendered on and after July 26, 1962, and that Pacific refund to customers some $80,000,000 collected since that date in excess of the new rates prescribed by the commission in its June 1964 order.By decision No. 67498 the commission denied rehearing of decision 67369.Pending this court's review of the proceedings the operative effect of decision 67369 has been stayed by the commission.¹

The proceedings are also attacked by two other petitions for review.

We have concluded that as contended by petitioner Pacific the commission exceeded its authority in ordering the refund, but that no error has been shown otherwise which would warrant interference by this court.

I.Background

Pacific is one of 20 principal telephone operating subsidiaries of American Telephone and Telegraphs Company(American) which holds approximately 90 per cent voting control of Pacific through ownership of Pacific stock.These 20 subsidiaries, together with two operating companies in the United States in which American owns less than a majority interest, are termed 'Associated Companies.'American also owns Western Electric Company, Inc.(Western or Western Electric), which is the manufacturing branch of the Bell System and also acts as purchasing agent and supply department, storekeeper, developer, installer, repairer, and salvager for the Associated Companies and Long Lines Department of American.American and Western each own 50 per cent of the outstanding capital stock of Bell Telephone Laboratories, Inc.(Bell Labs), which is the research and development branch of the Bell System.The Associated Companies, Western, and Bell Labs, together with American form the Bell System.

Under the terms of an agreement termed the 'license contract' American carries on research and development work through Bell Labs; furnishes to the Associated Companies advice, assistance and services in a wide variety of matters pertaining to the conduct of their business; and arranges for the manufacture of telephones and telephonic devices and apparatus by Western.Employees are frequently transferred between American or other Bell System companies and Pacific; in such case the employee retains full persion credit for prior service.

Until June 30, 1961, Pacific operated in California, Washington, Oregon, Idaho, and, through a wholly owned subsidiary, in Nevada.Since that date Pacific has operated only in California and Nevada, its properties in the other three states having been sold.

Pacific's toll telephone network is interconnected with other Bell System toll facilities, the major portion of which is owned and operated by American.Revenues from interstate message toll telephone business are divided among participating Bell System companies under a 'division of revenues' contract which is designed to yield a uniform rate of return upon each company's net investment devoted to such interstate business.

Pacific also interconnects with facilities of a number of independent telephone companies, ² not affiliated with the Bell System, pursuant to contracts negotiated from time to time between the parties.Among other things such contracts specify the basis upon which divisions of costs and revenues are made.

During the period 1948 to 1958 Pacific requested California intrastate rate increases on seven occasions and was granted approximately 48.9 per cent of the requested amounts.In each rate proceeding during that period Pacific requested a rate of return of 6.75 per cent or greater.Between 1948 and 1954 the authorized rate was 5.6 per cent.In 1954 it became 6.25 per cent (53 Cal.P.U.C. 275), and in 1958 it became 6.75 per cent (56 Cal.P.U.C. 277, 290).

During the course of the commission's investigation in the present proceeding, which as noted commenced July 26, 1962, Pacific filed an application seeking intrastate rate increases of almost $44,000,000 per year and further seeking a rate of return of 6.89 per cent on its claimed intrastate rate base of something over $2,000,000,000.Also, the intervening cities of Los Angeles and San Francisco in March 1963 requested the commission to issue an interim order immediately reducing Pacific's gross rates over $15,000,000 on an annual basis; the commission declined to do so.³

Following 49 days of public hearing during the period of January to October 1963, the commission took the proceeding under 'partial submission for a final determination of (Pacific's) reasonable test year intrastate revenues, expenses and rate base as well as a determination as to what is a fair rate of return for (Pacific's) intrastate operations.'Also taken under submission was Pacific's motion for rate relief, except those parts thereof which related to the manner of spreading proposed rate increases.The submission contemplated that if, based upon a resolution of the foregoing issues, the commission found rate decreases to be warranted, the commission would at that time fix rates on an interim basis pending further 'hearing and determination of issues relating to rate spread and others.'In case of a finding that rates should remain unchanged or be increased, further hearings were likewise contemplated on the rate spread and other issues.

Both Pacific and the independent telephone companies opposed the partial submission, contending that the issues of rate spread and of settlements with the independent companies with which Pacific interconnects, with respect to toll and exchange traffic, could not 'fairly be divorced from any interim rate reduction order' and that any such reduction would necessarily be made on an incomplete record on these issues and without evidence on which the commission could make findings on such issues.

In June 1964 the commission issued its decision ordering that Pacific's rate of return be reduced to 6.3 per cent from the 6.75 per cent ordered in 1958, that its rates be reduced accordingly, and that petitioner make the refund hereinabove mentioned; and further ordering that 'This investigation is continued.'This review of the commission proceedings followed.

It appears that in telephone rate proceedings in California the general approach employed by the commission, and followed in the present case, is to determine with respect to a 'test period'(1) the rate base of the utility, i. e., value of the property devoted to public use, (2) gross operating revenues, and (3) costs and expenses allowed for rate-making purposes, resulting in (4) net revenues produced, sometimes termed 'results of operations.'Then, by determining the fair and reasonable rate of return to be fixed or allowed the utility upon its rate base, and comparing the net revenue which would be achieved at that rate with the net revenue of the test period, the commission determines whether and how much the utility's rates and charges should be raised or lowered.The commission here followed its long-established principal of...