Southern Bell Tel. & Tel. Co. v. Louisiana Public Service Commission

• Decision Date: 11 January 1960
• Docket Number: No. 44639,44639
• Citation: 239 La. 175,118 So.2d 372
• Parties: , 32 P.U.R.3d 1 SOUTHERN BELL TELEPHONE AND TELEGRAPH COMPANY v. LOUISIANA PUBLIC SERVICE COMMISSION et al.
• Court: Louisiana Supreme Court

Page 372

118 So.2d 372

239 La. 175, 32 P.U.R.3d 1

SOUTHERN BELL TELEPHONE AND TELEGRAPH COMPANY v. LOUISIANA PUBLIC SERVICE COMMISSION et al.

No. 44639.

Supreme Court of Louisiana.

Jan. 11, 1960.

Rehearing Denied March 21, 1960.

Harvey Peltier, J. Raburn Monroe, Andrew P. Carter, James C. Henriques, Jr., Drury B. Thompson, New Orleans, for plaintiff-appellant.

Theo F. Cangelosi, Baton Rouge, Louis Fenner Claiborne, New Orleans, for defendants-appellees.

Thomas S. Adair, Atlanta, Ga., amicus curiae.

VIOSCA, Justice.

This case is a sequel to our decision in Southern Bell Telephone & Telegraph Co. v. Louisiana Public Service Commission, 232 La. 446, 94 So.2d 431, 437. In that case Southern Bell Telephone & Telegraph Company, hereinafter referred to as 'Southern Bell' or the 'Company' instituted suit to annul an order of the Louisiana Public Service Commission, hereinafter referred to as the 'Commission', which reduced its intrastate rates. In refusing to annul the Commission's order, we pointed out that the Commission in its order stated:

"If at any time in the future, the company's investors are prejudiced in their enjoyment of a fair and equitable return, this Commission will be available for appropriate rate adjustments."

In commenting on this order we said:

'As appears from its Order, the Commission has retained jurisdiction to act upon any revision of the amount of the reduction which can be based upon competent evidence. Thus, the door is not closed to the Telephone Company in the proceedings in which the order herein involved was rendered.'

Availing itself of this suggestion, Southern Bell, on August 14, 1957, filed an application with the Commission for an increase in its intrastate rates and charges, basing its application upon: (1) the low and inadequate earnings under the prevailing telephone rates, (2) the urgent need to expand and improve its plant facilities in order to meet the Louisiana public's continuing heavy demand for more and more service, and (3) the greatly increased cost of capital.

The application sought an immediate increase of $7,000,000 a year on an emergency basis and asked that the Commission schedule an early hearing, and that at the conclusion of such an investigation it fix just and reasonable rates for the Company's Louisiana intrastate service which will provide the Company with a fair rate of return.

The Commission referred the Company's request for an immediate emergency increase to the merits and held long and extensive hearings which resulted in a voluminous record. On October 10, 1958 the Commission handed down its order in which it denied the Company's application. In a thorough and comprehensive opinion ¹ the Commission concluded that Southern Bell was entitled to increased earnings in the sum of $1,918,707 but it ordered this relief withheld on the ground that: '* * * at least since April, 1957, the Company has rendered grossly inadequate service to its Louisiana subscribers and has arbitrarily curtailed a necessary expansion program in this state, thereby failing to perform its obligation as a public utility to such an extent as to require the commission to deny to the company the increase to which it would otherwise be entitled.'

On appeal to the Nineteenth Judicial District Court in and for the Parish of East Baton Rouge, where the Commission is domiciled, that court reversed the Commission insofar as it withheld the increase of $1,918,707 on the ground that the issue of the Company's failure to perform its obligations as a public utility was not before the Commission. The district court otherwise affirmed the order of the Commission. No appeal was taken from the district court's ruling with respect to the item of $1,918,707 but Southern Bell appealed from the district court's decision insofar as it denied the Company's application for the additional increase. Hence the matter is now before us on review from the rulings of the Commission and the district court insofar as they denied an increase in rates so as to yield a sum in excess of $1,918,707.

The specific amount of increase asked by the Company in its petition to the district court is $14,242,478 per annum. In that petition the Company says that an allowance of less than $7,848,351 would be confiscatory, that it should receive a net return of a minimum of 6% On its net investment in Louisiana, and that a reasonable and just allowance would be 7 1/2%. It argues that it has earned a net return of only 4.07% For the year 1957 on the rate base which it contends should be adopted and that even with the exclusion of the items of telephone plant under construction, materials and supplies, and cash requirements, which the Commission disallowed, it earned a net return for 1957 of only 4.21%.

In the specification of errors in its petition in the district court, Southern Bell makes 27 complaints. In its brief filed in this Court the Company says:

'In the interest of brevity, we will not here list all of these specifications but simply the two errors which the particularization in the Transcript details. These errors are:

'1. The order of the Commission deprives the Company of its property without due process of law--Article 1, Section 2, Louisiana Constitution (1921) (LSA).

'2. The rates fixed by the Commission are not just and reasonable as required by Article 6, Section 4 of the Louisiana Constitution (1921).'

As some of the 27 alleged errors complained of are duplications and others are conclusions of law, and as in two instances the alleged errors have been rectified either by the Commission or by the district court, we shall not discuss these complaints in the way in which they are set up in the specification of errors but shall cover them all in this opinion.

There is practically no dispute in the facts in this case. The test period used was the entire year 1957. ² The amount of net average investment in intrastate property in Louisiana as taken by the Commission from the Company's books was $191,780,407. This amount is made up as follows:

The correctness of these figures is conceded by the Company. The Commission however concluded that the net investment for the purposes of this case should be $185,156,925.00, arriving at this figure as follows:

                                                          Average
                Net Investment (supra) .................. $191,780,407
                                                          ------------
                Eliminations
                    Telephone Plant Under Construction ..... 4,783,150
                    Materials and Supplies ................. 1,298,476
                    Cash Requirements ........................ 541,856
                                                          ------------
                                                          $  6,623,482
                                                          ------------
                Net Investment .......................... $185,156,925
                

From the above it will be seen that the Commission contends that the items of telephone plant under construction, material and supplies, and cash requirements should be eliminated in arriving at the net investment. The Company disputes the right of the Commission to deduct these items.

There is no dispute with respect to the operating revenues or expenses of the Company with the exception of an item of expense for advertising in the sum of $225,000 which the Commission disallowed and an item of $770,633 for income taxes actually paid but which the Commission deducted in its hypothetical computation of capital structure under the prudent investment formula which it adopted.

A major dispute between the parties is with respect to the capital structure. The Company contends that the rate of return should be based on its net investment in Louisiana, that is original cost of its property, less depreciation, while the Commission has adopted and applied a formula under the prudent investment theory under which it set up a hypothetical capital structure based on a ratio of 45% Debt capital and 55% Equity capital (in this case common stock). Alternatively the Company contends that the allowance of 4% For debt capital is too low and that the rate of return fixed by the Commission on the equity capital should be applied to all of the common stock which on December 31, 1957 constituted 74.6% And not 55% Of the capital structure.

The Company further vigorously protests against the application of the earnings-price ratio adopted by the Commission to the common stock of the Company based on par value and excluding surplus.

A last major complaint of the Company is that the rate of return adopted by the Commission is discriminatory and not just and reasonable. Before taking up these disputed points, it is necessary that we determine the extent of our jurisdiction in this case.

The Commission urges that since rate-making is a legislative function and not a judicial function we should confine our inquiry to a determination of whether the rates are confiscatory, and that it is not the function of this Court to determine for itself what is a just and reasonable rate. Undoubtedly this is the general rule in other jurisdictions. In this state however this Court is given the final authority and duty to determine by full review whether or not the action of the Commission in fixing rates conforms to the Constitutional requirement that the rates should be just and reasonable. Article VI, Section 5 of the Constitution of 1921 provides:

'The orders of the Commission fixing or establishing any rate, fare, toll or charge for any commodity furnished, service rendered, or to be rendered, by any common carrier or public utility named herein, or hereafter placed under the control of said Commission, shall go into effect at such time as may be fixed by the Commission, and shall remain in effect and be complied with, unless and until set aside by the Commission, or by a final judgment of a court of competent jurisdiction, in a suit setting aside and annulling the same; provided, however, that if an interlocutory injunction is...