South Cent. Bell Telephone Co. v. Louisiana Public Service Com'n

• Decision Date: 17 January 1992
• Docket Number: No. 91-CA-0907,91-CA-0907
• Citation: 594 So.2d 357
• Parties: SOUTH CENTRAL BELL TELEPHONE COMPANY v. LOUISIANA PUBLIC SERVICE COMMISSION. 594 So.2d 357
• Court: Louisiana Supreme Court

Page 357

594 So.2d 357

SOUTH CENTRAL BELL TELEPHONE COMPANY v. LOUISIANA PUBLIC SERVICE COMMISSION.

No. 91-CA-0907.

594 So.2d 357

Supreme Court of Louisiana.

Jan. 17, 1992.

Additional Concurring and Dissenting Opinion of Chief Justice Calogero

Feb. 13, 1992.

Rehearing Denied Feb. 27, 1992.

Herschel Abbott, Edward H. Bergin, Jones, Walker, Waechter, Poitevent & Carrere, Larry S. Bankston, Donald A. Hoffman, Hoffman, Sutterfield, Ensenat & Bankston, Robert L. Rieger, Michael Fontham, Paul L. Zimmering, Noel J. Darce, Laurie Barcelona Halpern, Stone, Pigman, Walther, Wittman & Hutchinson, William J. Guste, Jr., Atty. Gen., Richard M. Troy, J. David McNeill, Asst. Attys. Gen., for appellants.

Paul H. Spaht, Kantrow, Spaht, Weaver & Blitzer, Katherine W. King, Kean, Miller, Hawthoren, D'Armond, McCowan & Jarman, Deborah J. Winegard, Kenric E. Port, Michael Henry, for appellee.

DENNIS, Justice.

This proceeding was initiated by the Louisiana Public Service Commission to decrease the telephone rates of South Central Bell Telephone Company in Louisiana (SCB). AT & T Communications of the South Central States, MCI Telecommunications Corporation, and the state were granted leave to intervene. Prior to the commencement of the rate proceedings the Commission issued an order announcing an investigation and placing the utility on notice that $32 million of its annual revenues were subject to refund if its rates proved to be excessive. After extensive rate hearings, the Commission ordered a decrease in the utility's rate of return from 14.75% to 12.75% and a decrease in its rates so as to effect a decrease in its annual revenues of $35,398 million; and the Commission ordered the utility to refund customers $34,981,000 representing the excess collected by the utility over the new rates during the rate investigation and proceeding.

South Central Bell appealed to the district court, which affirmed the rate decrease, but reversed the refund order. The utility, the Commission and the state appealed to this court.

The only issues presented by the appeals that warrant extensive discussion by this court are: (1) Whether the Commission's order requiring the utility to refund to its customers all revenues over and above the new rate level collected during the rate investigation and proceeding constituted prohibited retroactive ratemaking; and (2) Whether the Commission acted arbitrarily, capriciously or unreasonably by disregarding the utility's actual capital structure and using a hypothetical capital structure for rate making purposes without first finding that the actual structure was the product of unreasonable or imprudent investments. The other issues are adequately dealt with by the district court's opinion, except in one instance in which our disagreement can be stated summarily, and do not call for the discussion or elaboration of any issues of law.

1. Retroactive Rate Making & Refund

On April 27, 1988, defendant, the Louisiana Public Service Commission, on its own motion initiated a general investigation of the revenues and rate of return of the plaintiff-appellant South Central Bell Telephone Company primarily to determine whether the utility's earnings had been excessive and whether its rates should be decreased. In its Order No. U-17494 of that date the Commission announced the beginning of its investigation and placed SCB on notice that during the probe the utility would be permitted to maintain its current rates in effect, but that $32 million of the annual intrastate revenues of the company would be collected subject to refund, and a refund would be ordered if the Commission determined that the utility's rates were excessive. Extended hearings were held, and on May 25, 1989, the Commission issued its decision No. U-17949-A finding the rates to be excessive and ordering the Company to reduce its rates so as to decrease its future revenues $35,398,000 annually and reduce its rate of return from 14.75% to 12.75%. Three weeks later, on June 16, 1989 by decision No. U-17949-B the Commission also ordered the utility to refund to customers $34,981,000 collected during the pendency of the investigation in excess of the new rates prescribed by the Commission in its May 1989 order.

The function of ratemaking is legislative in character whether it is exercised directly by the legislature or by a regulatory agency to which the power to fix rates has been delegated. Arizona Grocery Co. v. Atchison, Topeka & Santa Fe Ry. Co., 284 U.S. 370, 52 S.Ct. 183, 76 L.Ed. 348 (1932); Louisiana Power & Light Co. v. Louisiana Pub. Serv. Comm'n, 523 So.2d 850 (La.1988); Louisiana Power and Light Co. v. Louisiana Pub. Serv. Comm'n, 377 So.2d 1023 (La.1979). Accordingly, it is well established that the exercise by the Public Service Commission of its ratemaking authority is primarily a legislative function, which, in the absence of constitutional or statutory authority to the contrary, is limited to fixing rates to be applied prospectively. South Central Bell v. Louisiana Pub. Serv. Comm'n, 555 So.2d 1370 (La.1990); Louisiana Power & Light Co. v. Louisiana Pub. Serv. Comm'n, 523 So.2d 850 (La.1988); Public Utilities Comm'n of Ohio v. United Fuel Gas Co., 317 U.S. 456, 63 S.Ct. 369, 87 L.Ed. 396 (1942); In re Petition of Minnesota Power & Light Co., 435 N.W.2d 550 (Minn.App.1989); In re Petition of Elizabethtown Water Co., 107 N.J. 440, 527 A.2d 354 (1987).

This concept is inherent in our constitutional provisions which establish in general terms the powers of the Commission to "regulate all common carriers and public utilities and have such other regulatory authority as provided by law," but authorize the agency to require a utility to make refunds only when a provisional rate increase is disallowed or reduced before it becomes final. La. Const. Art. IV, Sec. 21(B). Similarly, the legislature has authorized the Commission to exercise regulatory power "for the purpose of fixing and regulating the rates charged or to be charged" by public utilities, La.R.S. 45:1163, but has recognized its power to order a refund in only one special situation, viz., when a temporary or provisional rate increase is disallowed, in whole or part, before its finality. La.R.S. 45:1163.1.

Generally, retroactive rate making occurs when a utility is permitted to recover an additional charge for past losses, or when a utility is required to refund revenues collected pursuant to its lawfully established rates. Louisiana Power & Light Co. v. Louisiana Pub. Serv. Comm'n, 523 So.2d 850 (La.1988); In re Petition of Elizabethtown Water Co., 107 N.J. 440, 527 A.2d 354 (1987); In re Central Vermont Pub. Serv. Corp., 144 Vt. 46, 473 A.2d 1155 (1984); Cheltenham & Abington Sewerage Co. v. Pennsylvania Pub. Util. Comm'n, 344 Pa. 366, 25 A.2d 334 (1942); Chesapeake and Potomac Tel. Co. of West Virginia v. Public Serv. Comm'n of West Virginia, 171 W.Va. 494, 300 S.E.2d 607 (1982); State ex rel. Utilities Comm'n v. Edmisten, 291 N.C. 451, 232 S.E.2d 184 (1977). A commission-made rate furnishes the applicable law for the utility and its customers until a change is made by the Commission. Michigan Bell Tel. Co. v. Michigan Pub. Serv. Comm'n, 315 Mich. 533, 24 N.W.2d 200 (1946). Therefore, the utility is entitled to rely on a final rate order until a new rate in lieu thereof is fixed by the Commission. Arizona Grocery Co. v. Atchison, Topeka & Santa Fe Ry. Co., 284 U.S. 370, 52 S.Ct. 183, 76 L.Ed. 348 (1932); Michigan Bell Tel. Co. v. Michigan Pub. Serv. Comm'n, 315 Mich. 533, 24 N.W.2d 200 (1946). Consequently, the revenues collected under the lawfully imposed rates become the property of the utility and cannot rightfully be made the subject of a refund. Michigan Bell Tel. Co. v. Michigan Pub. Serv. Comm'n, 315 Mich. 533, 24 N.W.2d 200 (1946).

A utility is entitled only to the opportunity to earn a reasonable return on its investment; the law does not insure that it will in fact earn the particular rate of return authorized by the Commission or indeed that it will earn any net revenues. Southern California Edison Co. v. Public Utilities Comm'n, 20 Cal.3d 813, 144 Cal.Rptr. 905, n. 8, 576 P.2d 945, n. 8 (1978) citing Power Comm'n v. Pipeline Co., 315 U.S. 575, 590, 62 S.Ct. 736, 745, 86 L.Ed. 1037 (1942); Bluefield Co. v. Public Serv. Comm'n, 262 U.S. 679, 692-693, 43 S.Ct. 675, 678-679, 67 L.Ed. 1176; Re General Tel. Co. of Cal., 69 Cal.P.U.C. 601, 610 (1969); Oakland v. Key System Transit Lines, 52 Cal.P.U.C. 779, 786 (1953). By the same token, if the utility's profits turn out to be higher than had been forecast by the Commission in setting the rates, the law does not penalize the Company for its efficiency by requiring a divestiture of unanticipated earnings. In re Petition of Elizabethtown Water Co., 107 N.J. 440, 527 A.2d 354 (1987); Connecticut Light & Power Co. v. Department of Pub. Util. Control, 40 Conn.Sup. 520, 516 A.2d 888, 897 (1986); B & O R.R. Co. v. Pennsylvania Public Utility Commission, 136 Pa.Super. 517, 7 A.2d 488, 491 (1939). The Commission's recourse is to fix a new rate prospectively and not to change the rates retroactively. In re Petition of Elizabethtown Water Co., 107 N.J. 440, 527 A.2d 354 (1987).

Applying these precepts, we conclude that the Commission exceeded its powers and engaged in retroactive rate making when it ordered the company to refund earnings derived from approved rates. The Commission had fixed the company's rates in 1984 after a comprehensive rate case and had amended them slightly on March 1, 1988 in an abbreviated proceeding. The Commission allowed these rates to become final without seeking judicial review. South Central Bell v. Louisiana Pub. Serv. Comm'n, 555 So.2d 1370, 1373, n. 3, 1375 (La.1990). Subsequently, it notified the company on April 22, 1988 of its contemplated investigation and proceeding against the utility for a rate decrease and refund because of excessive earnings. The extended proceedings that followed...