Southwestern Bell Telephone Co. v. State Corp. Commission

• Decision Date: 02 November 1963
• Docket Number: Nos. 42348,42472,s. 42348
• Citation: 386 P.2d 515,192 Kan. 39
• Parties: , 51 P.U.R.3d 113 SOUTHWESTERN BELL TELEPHONE COMPANY, a Corporation, Appellee, v. The STATE CORPORATION COMMISSION of the State of Kansas, Harry G. Wiles, Chairman and Commissioner, Marion Beatty, Commissioner, and Richard C. Byrd, Commissioner, Members of the State Corporation Commission of the State of Kansas, Appellants.
• Court: Kansas Supreme Court

Page 515

386 P.2d 515

192 Kan. 39, 51 P.U.R.3d 113

SOUTHWESTERN BELL TELEPHONE COMPANY, a Corporation, Appellee, v. The STATE CORPORATION COMMISSION of the State of Kansas Harry G. Wiles, Chairman and Commissioner, Marion Beatty Commissioner, and Richard C. Byrd, Commissioner, Members of the State Corporation Commission of the State of Kansas, Appellants.

Nos. 42348, 42472.

Supreme Court of Kansas.

Nov. 2, 1963.

Syllabus by the Court

1. The statutes (G.S.1949, 66-118a et seq.) providing for review of orders of the State Corporation Commission do not provide for reports by referees, but require the district court to transmit its own findings of fact and conclusions of law to the State Corporation Commission if it finds the order unreasonable or unlawful. A report of a referee in such cases can be nothing more than advisory, and a motion for a new trial addressed to the findings of fact and conclusions of law of a referee is not necessary to protect the scope of this court's review.

2. On appeal from a judgment of the district court rendered in the review of a public utility rate order, the jurisdiction, powers, responsibilities and restrictions which should be observed by the State Corporation Commission, the district court, and the supreme court, are considered.

3. A public utility has no vested right in any one particular formula or method, and the State Corporation Commission is not bound to use any particular formula, or combination of formulae, in valuing a public utility's property for rate making purposes. The State Corporation Commission should received and consider all evidence which has a relevant bearing on reasonable value and then determine what formula, or combination of formulae, it believes should be used under the facts and circumstances of the case to arrive at a reasonable value of the property for rate making purposes.

4. There should be no allowance for going concern value in determining a rate base unless there is evidence showing that the public utility has suffered a loss by reason of the constituting elements, that the loss has not been recouped by prior earnings and that it has not been included elsewhere in the valuation of the property.

5. Where the reasonableness of the price paid by a public utility for a telephone exchange property is not questioned, the entire purchase price should be included in the rate base, less subsequent depreciation.

6. In considering allowances and deductions for expense in a public utility rate investigation, the purpose of annual depreciation is to return to the investors the amount invested and it should be calculated on the original cost of the plant.

7. Where a parent holding company elects to file a joint income tax return, consolidating the income and expense of itself and that of its numerous subsidiary operating companies, the State Corporation Commission does not violate the rule against disregarding separate corporate entities by considering the income tax liability of one of the subsidiary companies on a similar basis in a public utility rate investigation.

8. The reasonable cost of meeting civic responsibilities such as Chamber of Commerce dues and charitable donations should be allowed as an operating expense in a public utility rate investigation, but they are subject to close scrutiny as to reasonableness.

9. Whether the expense in presenting a public utility rate case includes salaries of regular employees which should not be amortized, is a matter for the Company to establish by evidence under the facts in the case.

10. In a rate investigation the allowance for anticipated casualty repair expense should be so calculated as to produce a sum sufficient to make the repair at the cost to be anticipated at the time of the casualty.

11. Standards for determining a fair rate of return in a rate investigation discussed.

12. In determining a fair rate of return in a public utility rate investigation, the State Corporation Commission may disregard evidence of earnings of alleged comparable businesses where it has reasonable grounds to believe the businesses are not comparable.

13. The State Corporation Commission properly adopted the composite contractual cost of the public utility company and its parent holding company in determining cost of debt capital and correctly calculated capital revenue requirements.

14. Capital structure is an element to be considered in a rate investigation only when the debt ratio of the operating company is at such variance with the debt ratio of its parent holding company that unfair dealing is indicated, or when equity capital becomes a luxury to the stockholders reflecting an unreasonable charge to the public.

15. The fact that expense items occur from transactions between affiliated and parent and subsidiary companies is a matter for close scrutiny in a rate investigation. However, once the reasonableness of such expense items has been established by sufficient evidence, the fact that such corporate relationships exist becomes immaterial.

16. The consideration to be given attrition and anticipated future inflation is a matter to be left largely to the discretion of the State Corporation Commission.

17. There is an clusive range of reasonableness in calculating a fair rate of return. A court can only concern itself with the question as to whether a rate is so unreasonably low or so unreasonably high as to be unlawful. The in-between point, where the rate is most fair to the utility and its customers, is a matter for the State Corporation Commission's determination.

18. A public utility rate order should not be set aside because the court disagrees with the Commission on factors which would reduce the rate of return a small fraction of one percent, unless the court finds the return to be so unreasonably low as to be unlawful.

19. The district court erred in concluding that the Company would suffer irreparable injury unless a temporary injunction issued staying the State Corporation Commission's order and erred in making the injunction permanent.

Charles C. McCarter and Laverne Morin, Wichita, argued the cause, and George B. Collins, Wichita, was with them on the briefs for appellant.

F. Mark Garlinghouse, St. Louis, Mo., argued the cause, and Lester M. Goodell, Warren W. Shaw, William A. Gray, Jack C. Lorenz, Topeka, and John Hugh Roff, Jr., St. Louis, Mo., were with him on the briefs for appellee.

JACKSON, Justice.

There two appeals were consolidated after they reached this court. They have to do with a rate proceeding commenced before the State Corporation Commission of Kansas (hereinafter referred to as the Commission) by the Southwestern Bell Telephone Company (hereinafter referred to as the Company). On a petition for review the district court found the Commission's order unreasonable and unlawful and set it aside. The Commission has appealed. Appeal number 42,348 challenges the propriety of a temporary stay and injunction order. Appeal number 42,472 challenges the propriety of the conclusions of the court below on the merits of the case.

In order to insure a proper understanding of all of the issues involved, it will be necessary to refer to the procedural facts in some detail. The general and procedural facts do not appear to be in serious dispute.

The Company is a Missouri corporation, authorized to do business in the state of Kansas. It owns and operates an integrated telephone system within the states of Kansas, Missouri, Arkansas, Oklahoma, Texas, and a portion of Illinois. The portion of its system located in Kansas consists of various facilities and equipment comprising 185 exchanges serving 167 communities, and numerous toll lines furnishing both intrastate and interstate service to the public.

The American Telephone & Telegraph Company owns 99.99 percent of the Company's outstanding common stock. It also owns all, or a majority, of the voting stock in nineteen other telephone operating companies, and has a minority stock interest in two other telephone utilities, all of which comprise what is known as the Bell System in the United States. It also owns a minority interest in the Bell Telephone Company of Canada. A. T. & T. elects the board of directors of the Company, and, in addition, has one of its own directors on the board of directors of the Company.

A. T. & T. also owns 99.82 percent of the outstanding stock of Western Electric Company, Inc., and 50 percent of the common stock of the Bell Telephone Laboratories, Inc., the other 50 percent being owned by Western Electric Company, Inc.

Western Electric Company, Inc., manufactures, purchases and distributes most of the apparatus, equipment and supplies required by all of the companies of the Bell System. Bell Telephone Laboratories, Inc., performs research, development and design work for the entire system. It also acts as the purchasing agent for the Bell system.

The Company operates as a subsidiary of A. T. & T. under what is commonly known as a license contract. Under this contract there are basically four types of services performed by A. T. & T. for the applicant: (1) Research in the development of telephonic equipment; (2) Advice and assistance in engineering, traffic, accounting, legal and other matters; (3) Furnish financial advice and assistance; and (4) Royalty free use of equipment covered by patents owned or licensed by A. T. & T. In consideration of these services under the license contracts each operating company, including this Company, is obligated to pay a fee of one percent on all local and toll service revenues less uncollectibles.

On May 28, 1959, the Company filed an application with the Commission requesting approval of an increase in intrastate telephone rates in Kansas sufficient to produce additional revenue in the amount of $5,800,000. Accordingly, the Commission ordered an investigation pursuant to G.S.1949, 66-110 et seq.

On May 27, 1960, following extensive hearings on...