Southern Bell Tel. & Tel. Co. v. Mississippi Public Service Commission, 41026

• Decision Date: 02 July 1959
• Docket Number: No. 41026,41026
• Parties: , 29 P.U.R.3d 417 SOUTHERN BELL TELEPHONE AND TELEGRAPH COMPANY v. MISSISSIPPI PUBLIC SERVICE COMMISSION.
• Court: Mississippi Supreme Court

Page 622

113 So.2d 622

237 Miss. 157, 29 P.U.R.3d 417

SOUTHERN BELL TELEPHONE AND TELEGRAPH COMPANY v. MISSISSIPPI PUBLIC SERVICE COMMISSION.

No. 41026.

Supreme Court of Mississippi.

July 2, 1959.

Butler, Snow, O'Mara, Stevens & Cannada, Jackson, for appellant.

Joe T. Patterson, Atty. Gen., by Wade Creekmore, Asst. Atty. Gen., Watkins & Eager, Jackson, for appellee.

Eaton, Cottrell & Galloway, Gulfport, Byrd, Wise & Smith, Wright, Overstreet, Kuykendall & Perry, Jackson, amici curiae.

KYLE, Justice.

This case is before us on appeal by the Southern Bell Telephone and Telegraph Company from a decree of the Chancery Court of Hinds County sustaining an order of the Public Service Commission setting aside and cancelling certain increased rates and charges for intrastate telephone services, filed by the appellant on June 25, 1956, and made effective under bond on July 26, 1956.

The record shows that on June 25, 1956, Southern Bell Telephone and Telegraph Company filed with the Public Service Commission new and revised schedules of rates and charges for intrastate telephone service in the State of Mississippi, pursuant to the provisions of Section 10 of Chapter 372 (House Bill No. 123), General Laws of Mississippi, Regular Legislative Session, 1956 (Sec. 7716-01 through Section 7716-38, Miss. Code of 1942, Recompiled). The new schedules of rates and charges were estimated to produce increased revenues of approximately $2,500,000 on an annual basis. The company served notice in its petition that the increased rates and charges would be made effective on July 26, 1956.

On July 20, 1956, the Public Service Commission issued an order suspending the proposed schedules of rates and charges for a period of not less than 90 days, and directing that Southern Bell 'proceed without delay to prepare and present at open hearing full and complete justification in support of the proposed rates and charges.' The Company, however, invoked the provisions of Section 10 of the above mentioned statute and filed a bond in the sum of $2,500,000, which was approved by the Commission on July 23, 1956, and the new rates and charges were made effective on July 26, 1956.

Public hearings in the matter were commenced on August 21, 1956, and concluded on November 20, 1956. Southern Bell and the Commission's staff each offered voluminous evidence in support of their respective claims, including oral testimony and numerous exhibits which have required careful study by us on this appeal.

On December 20, 1956, the Commission entered an order setting forth in detail its findings of fact; and in its order the Commission set aside and annulled the tariff of intrastate rates and charges filed by the Company on June 25, 1956, and directed that the Company make effective forthwith the tariff of rates and charges which were in effect on July 25, 1956. The Commission in its order also directed that the Company proceed forthwith to refund by check to each telephone subscriber the appropriate amount collected by it since July 25, 1956, in excess of the legal intrastate rates and charges which were in effect immediately prior to that date, with interest at the rate of six per cent per annum.

From that order the Company prosecuted an appeal to the Chancery Court of the First Judicial District of Hinds County, under authority of Section 26 of said Chapter 372, Laws of 1956 (Section 7716-26, Code of 1942, Recompiled). In its formal appeal the Company assigned 26 grounds for relief against the order of the Commission; and the Company asked that the order be set aside and canceled.

The chancellor took the case under advisement, and after a painstaking study of the record rendered an opinion on June 19, 1958, sustaining the findings and the order of the Commission in setting aside the increased rates which had been made effective under bond on July 26, 1956; and the chancellor entered a decree affirming the order of the Commission. From that decree the appellant has prosecuted its appeal to this Court.

Before undertaking to discuss the questions presented for our decision on this appeal it is necessary that we make a brief statement concerning the Southern Bell Telephone and Telegraph Company and its relation to the other members of the Bell System.

For convenience and brevity in stating the pertinent facts and discussing the questions presented for our decision on this appeal, we will hereafter refer to Southern Bell Telephone and Telegraph Company as Southern Bell or the appellant, to the Public Service Commission as the Commission, and to the American Telephone and Telegraph Company as the American Company or A. T. & T.

Southern Bell is one of the largest telephone operating companies in the Bell System. It is a corporation organized under the laws of the State of New York, and is duly authorized to do business in the State of Mississippi. It provides local exchange telephone service and both intrastate and interstate toll service in the 9-state area comprising Alabama, Florida, Georgia, Kentucky, Louisiana, North Carolina, South Carolina, Tennessee, and Mississippi.

Southern Bell and 19 other telephone companies constitute what is commonly called the Bell System. This telephone system through the several companies renders nation-wide service and operates about 80 per cent of all the telephone business in the United States. All of the voting stock of most of these associated companies, including Southern Bell, and the majority of the voting stock of the others, is owned by the American Telephone and Telegraph Company. The American Company also owns 99.82 per cent of the voting stock of Western Electric Company, Inc., and 50 per cent of the stock of the Bell Telephone Company Laboratories, Inc., both of which are nontelephone companies. The former of these two companies (Western Electric Company, Inc.) in turn owns the other 50 per cent of the stock of the Bell Telephone Laboratories, Inc. The Laboratories Company is a research and development company, which is operated for the benefit of the Bell System. The American Company holds an agreement called a License Contract with each of its 20 subsidiary companies composing the Bell System. Under it each subsidiary, including Southern Bell, pays the American Company one per cent of its gross annual revenue for which, in turn, they each receive valuable services from Bell Laboratories. The payments made by Southern Bell for these services are included in the operating expenses as is done by all of the other operating companies.

Southern Bell's rate of growth since World War II has greatly surpassed that of every other company in the Bell System. Southern Bell's average plant in service during the 12-months period ending June 30, 1956, was $1,485,057,665. Its average depreciation reserve was $290,821,877. The average net plant in service was $1,194,235,788. Between January 1, 1946, and December 31, 1955, the number of telephones served by Southern Bell increased 163 per cent. In Mississippi, during the same period, there was an increase of 155.5 per cent in the number of telephones served by the Company.

Southern Bell's capital structure has undergone vast changes since the end of World War II. At the end of 1946 Southern Bell's capital and surplus aggregated the sum of $318,937,007, with a debt ratio of 32.9 per cent. At the end of 1947, the total capital and surplus aggregated the sum of $393,389,943, with a debt ratio of 45.8 per cent. At the end of 1948, its total capital and surplus aggregrated the sum of $538,372,327, with a debt ratio of 33.5 per cent. At the end of 1955, its capital and surplus aggregated the sum of $1,189,883,945, with a debt ratio of only 22.3 per cent.

Despite a 72-day strike by certain of its employees during March, April and May in 1955, Southern Bell closed the year with earnings of $7.77 per common share, a new high record since at least 1945.

Since the end of World War II, Southern Bell has enjoyed five successive intrastate rate increases in Mississippi, aggregating $7,515,000 annually, as follows: $890,000 on May 1, 1947; $1,500,000 on March 4, 1948; $1,527,000 on April 6, 1949; $2,973,000 on October 26, 1951; and $625,000 on August 1, 1952.

The American Company's earnings during 1955 climbed to a record level since 1940. Its annual report to the stockholders for 1955 contains the following statement: 'Earnings of the Bell System applicable to A. T. & T. stock were $13.10 per average share in 1955, compared with $11.92 in 1954. The rate of earnings on total capital in the business was 6.8 per cent. This compares with 6.2 per cent in 1954 and was in fact the best we have done since 1940.'

As the Commission stated in its opinion and other in this case, 'The business transactions between Southern Bell and the American Company are manifestly conducted at less than arm's length, and it is reasonable to assume that they are not unprofitable to the parent holding company. These transactions are of a substantial magnitude.' According to its annual report for 1955, in addition to common stock dividends of $53,706,250, Southern Bell paid $4,835,844 that year in License Contract fees to the American Company, and $135,136,170 to Western Electric Company for supplies, equipment and services. The American Company is, of course, practically the sole beneficiary of the profits derived by Western Electric from this business.

The rate of return to which a regulated public utility is entitled is one of the most important questions which the Commission has to consider. Section 8 of Chapter 372, Laws of 1956 (Section 7716-08(a), Code of 1942 Recompiled), provides that no rate demanded or received by any public utility shall exceed that which is just and reasonable, but such utility may demand, collect, and receive fair, just and reasonable rates, and that the rates prescribed by the Commission shall be such as to yield 'a fair rate of return to the utility furnishing...