Public Service Com'n v. Diamond State Telephone Co.

• Decision Date: 06 June 1983
• Citation: 468 A.2d 1285
• Parties: PUBLIC SERVICE COMMISSION, Appellee-Appellant/Cross-Appellee, v. DIAMOND STATE TELEPHONE COMPANY, Appellant-Appellee/Cross-Appellant. . Submitted:
• Court: Supreme Court of Delaware

Page 1285

468 A.2d 1285

PUBLIC SERVICE COMMISSION, Appellee-Appellant/Cross-Appellee, v. DIAMOND STATE TELEPHONE COMPANY, Appellant-Appellee/Cross-Appellant.

Supreme Court of Delaware.

Submitted: June 6, 1983.

Decided: Nov. 2, 1983.

Upon appeal from Superior Court. Affirmed in part, Reversed in part and Remanded.

William D. Bailey, Jr., Wilmington, for appellee-appellant/cross-appellee.

Richard L. Sutton (argued) and Lawrence A. Hamermesh of Morris, Nichols, Arsht & Tunnell, Wilmington, for appellant-appellee/cross-appellant.

Before HORSEY and MOORE, JJ., and LONGOBARDI, Vice Chancellor.

HORSEY, Justice:

The Public Service Commission (the Commission) appeals an interlocutory Order of the Superior Court dated November 5, 1982; and Diamond State Telephone Company (Telephone Co.) cross-appeals from the same Order. The Court accepted the interlocutory appeal on January 3, 1983. The appeals concern the Commission's general rate Order of October 8, 1981 (the "1981 Order"); Telephone Co.'s appeal of such Order to Superior Court; and Superior Court's reversal of the Commission's 1981 Order by Opinion dated August 12, 1982, unreported.

Two questions are raised by the appeal and one by the cross-appeal:

(1) Did the Commission's 1981 Order improperly deny Telephone Co. a current fair return on a portion of its investment by deferring, if not removing, from Telephone Co.'s rate base its pre-1981 unamortized "inside wiring" investment of $21.8 million?

(2) Did the Commission's 1981 Order improperly disallow Telephone Co. nearly $806,000 of license contract expenses for Telephone Co.'s refusal to produce certain documents for inspection by the Public Advocate's expert witness or for failure of Telephone Co. to meet its burden of proof of such expenses?

(3) Did Superior Court err in rejecting Telephone Co.'s application that the Court's favorable ruling in August 1982 be given retroactive effect to the date of the Commission's Order in October, 1981?

With respect to question # (1), we answer it in the affirmative and affirm Superior Court's ruling. We hold that Telephone Co. was entitled to include the unamortized balance of its pre-1981 inside wiring investment in its rate base until fully amortized over the next ten years.

With respect to question # (2), Superior Court concluded that the expense disallowance was "meant to be a sanction" for failure of Telephone Co. to make discovery. The Court then found the sanction to have been arbitrarily imposed. However, we find the present record inadequate to determine whether the Commission's disallowance was imposed as a discovery sanction against Telephone Co. or for failure of Telephone Co. to prove the validity of such expenses. Hence, we reverse Superior Court's ruling on the question and remand this issue to the Commission to make explicit its basis for disallowance of the contract expense item, with jurisdiction reserved.

With respect to the cross appeal and question # (3), we affirm Superior Court's refusal to impose a temporary rate surcharge to enable Telephone Co. to recoup revenues lost from the erroneous Commission rulings. To grant such relief would involve the Court in retrospective rate-making without a clear legislative mandate--particularly in view of the relief otherwise available to Telephone Co. under 26 Del.C. § 511 (see footnote 18).

I

Of the three questions raised, the central issue relates to the proper treatment for accounting purposes of unamortized "inside wiring" costs incurred by Telephone Co. before January 1, 1981. ¹

Until 1981, all station connection expenses, including inside wiring costs, were traditionally capitalized and included in a utility's rate base. However, the Federal Communications Commission (FCC) on March 31, 1981 changed the accounting for the inside wiring component of station connections costs to require that all new expenditures for inside wiring be accounted for, for FCC purposes, as operating expenses either in the year incurred or, at the utility's option, partially taken over a four-year phase-in approach. ²

The rationale for the FCC's accounting change in telephone utilities' treatment of inside wiring costs was: (a) the extraordinary growth in such costs in recent years; and (b) belief that the burden of such costs should fall on the "immediate cost causative customer" and not be shifted in later years by an annual charge for depreciation or amortization until fully amortized. ³

In compliance with the FCC Order, Telephone Co. amended a petition then pending before the Commission for a general rate increase to request the Commission's approval of the following accounting changes: (1) to expense its post -1980 inside wiring expenses on the four-year phase-in basis allowed by the FCC; (2) to continue to capitalize its post -1980 drop and block expenses in accordance with the FCC ruling; and (3) to continue to amortize its unamortized pre-1981 inside wiring expenses until fully amortized--presumably over the next 10 years.

By Order dated October 8, 1981, the Commission approved (1) and (2) but disapproved (3). The Commission's disapproval of the Telephone Co.'s request (3) was based on the Commission's staff recommendation that Telephone Co.'s remaining pre-1981 unamortized investment in inside wiring be removed from Telephone Co.'s rate base. The item was carried on Telephone Co.'s books at $21,045,000 and represented more than 11% of Telephone Co.'s entire rate base.

Telephone Co. challenged the removal of the embedded inside wiring cost from its rate base as being a denial of a current return on its investment in "plant used and useful", and contrary to 26 Del.C. § 102(3)a and b. ⁴ The Commission responded by finding "that the change of treatment of these expenditures from capitalization to expense (as advocated by [Telephone Co.] ) changes their nature to an expense item for all purposes." (underlining added). The Commission then tersely concluded, "Rate base treatment of an expense item would be inappropriate."

On appeal of this issue to Superior Court, the Court reversed the Commission. The Court interpreted the Commission's "special treatment" ⁵ of Telephone Co.'s pre-1981 inside wiring investment as deferring Telephone Co.'s return on its investment rather than as excluding the investment from its rate base. However, the Court found that the Commission's deferral of revenue technique deprived Telephone Co. of a fair return on its investment over at least the first five years of the ten year amortization period for the investment. ⁶ The Court added that the Commission had a simple mechanism for addressing its concerns with the "theoretical possibility of excessive earnings [by Telephone Co.] on [its inside wiring] investment in the future." The Commission could always monitor "the effects of the new rate and [simply] initiat[e] a reduction of rates, if appropriate, as authorized by statute. 26 Del.C. §§ 309, 310." We affirm Superior Court's ruling on this issue.

The scope and standard of review of an appeal from the Commission's Order is as set forth in 26 Del.C. § 510(b) and (c) which provide (b) The appeal shall not be a trial de novo but shall be based upon the record before the Commission.

(c) The scope of review before the Court shall be that the Commission's findings shall be upheld if they are supported by sufficient evidence, free of error of law and not arbitrary or capricious. When factual issues are reviewed the Court shall take due account of the presumption of official regularity and the quasi-legislative function and specialized competence of the Commission.

A.

The first question we must focus on is whether Telephone Co.'s embedded unamortized inside wiring costs qualified for inclusion in Telephone Co.'s rate base under 26 Del.C. § 102(3)a as "used and useful utility plant." The question arises only because rate counsel on appeal argues that the Commission properly excluded this item from Telephone Co.'s rate base for failure of inside wiring to qualify as "plant" under 26 Del.C. § 102(3)a. The argument fails for several reasons. First, the Commission's exclusion ruling was not based on a finding that Telephone Co.'s embedded inside wiring did not qualify as "plant" under § 102(3)a. Second, the facts and the law clearly support the contrary--the inclusion of Telephone Co.'s previously incurred inside wiring costs in its rate base until fully amortized.

The critical language of the Commission's decision that the parties focus on and variously interpret is the following:

The Applicant [Telephone Co.] has challenged the removal of the embedded cost from the rate base as being a denial of a return on plant used and useful. We find that the change of treatment of these expenditures from capitalization to expense (as advocated by Applicant) changes their nature to an expense item for all purposes. Rate base treatment of an expense item would be inappropriate.

Rate counsel interprets the Commission as thereby stating that, "the true nature of this accumulation was expense not plant and thus the inclusion in rate base inappropriate." We disagree.

The Commission's rationale for excluding Telephone Co.'s embedded inside wiring costs from its rate base cannot be reasonably attributed to an asserted failure of such costs to qualify for inclusion in rate base as "used and useful utility plant" under § 102(3)a. We interpret the Commission's exclusion of Telephone Co.'s inside wiring investment from its rate base as directly and solely attributable to the FCC's accounting "change of treatment" of inside wiring costs from capitalization to expense. The Commission's above-quoted ruling may be paraphrased as stating:

We find that the FCC change of treatment of inside wiring expenditures from capitalization to expense (and Applicant's adoption of such accounting changes) requires changing Telephone Co.'s treatment to an expense item for past as well as future expenditures. Since inside...