State ex rel. Utilities Commission v. General Tel. Co. of Southeast

• Decision Date: 16 June 1972
• Docket Number: No. 5,5
• Citation: 189 S.E.2d 705,281 N.C. 318
• Parties: STATE of North Carolina ex rel. UTILITIES COMMISSION, and Robert Morgan, Attorney General v. GENERAL TELEPHONE COMPANY OF the SOUTHEAST, and City of Durham.
• Court: North Carolina Supreme Court

Page 705

189 S.E.2d 705

281 N.C. 318

STATE of North Carolina ex rel. UTILITIES COMMISSION, and Robert Morgan, Attorney General v. GENERAL TELEPHONE COMPANY OF the SOUTHEAST, and City of Durham.

No. 5.

Supreme Court of North Carolina.

June 16, 1972.

Atty. Gen. Robert Morgan, Deputy Atty. Gen. Jean A. Benoy and Associate Atty. Louis W. Payne, Jr., Raleigh, for the Attorney General.

Edward B. Hipp and Maurice W. Horne, Raleigh, for the Utilities Commission.

Claude V. Jones, Durham, for the City of Durham.

Newson, Graham, Strayhorn, Hedrick & Murray, by A. H. Graham, Jr., Durham, Power, Jones & Schneider, by John Robert Jones and William R. White, Columbus, Ohio and Ward Wueste, Jr., Durham, General Counsel and Secretary, for the General Telephone Company of the Southeast.

LAKE, Justice.

In the consideration of an appeal from an order of the Utilities Commission in a general rate case, such as this, it is necessary for the reviewing court to keep in mind certain fundamental facts and principles. Some of these are:

1. The State has granted to the utility company a legal monopoly upon a service vital to the economic well being and the domestic life on the people of a large territory. G.S. § 62--110. This franchise is a property right of great value. Normally, when the grantee sells its business to another company, the monopolistic franchise commands a substantial price, over and above the exchange value of the physical properties transferred with it. Thus, the value of the franchise enters into and affects the market price of the utility's stock. It does not, however, enter into the computation of the utility's rate base. G.S. § 62--133; Galveston Electric Co. v. Galveston, 258 U.S. 388, 396, 42 S.Ct. 351, 66 L.Ed. 678, 73 C.J.S. Public Utilities § 21.

2. Because of this monopolistic feature of the utility's business, many of the basic principles of the Free Enterprise System, which govern the operations of and the charges by industrial and commercial corporations and those of the corner grocery store, have no application to the regulation

Page 717

of the service or charges of a utility company.

3. An uncontrolled legal monopoly in an essential service leads, normally and naturally, to poor service and exorbitant charges. See Adam Smith, The Wealth of Nations (3d Ed.), Book V, Chapter 1, pp. 143--144. To prevent such result, the Legislature has conferred upon the Utilities Commission the power to police the operations of the utility company so as to require it to render service of good quality at charges which are reasonable. G.S. § 62--31; G.S. § 62--32; G.S. § 62--130; and G.S. § 62--131. These statutes confer upon The Commission, not upon this Court or the Court of Appeals, the authority to determine the adequacy of the utility's service and the rates to be charged therefor. State ex rel. Utilities Commission v. Morgan, Attorney General, 277 N.C. 255, 177 S.E.2d 405; State ex rel. North Carolina Utilities Commission v. Westco Telephone Co., 266 N.C. 450, 146 S.E.2d 487; State ex rel. Utilities Commission v. State and Utilities Commission v. Telegraph Co., 239 N.C. 333, 80 S.E.2d 133.

4. In fixing rates to be charged by a public utility, the Commission is exercising a function of the legislative branch of the government. It may not, therefore, exceed the limitations imposed upon the Legislature by the State and Federal Constitutions. The Commission, however, does not have the full power of the Legislature but only that portion conferred upon it in G.S. Chapter 62. In fixing the rates to be charged by a public utility for its service, the Commission must, therefore, comply with the requirements of that chapter, more specifically, G.S. § 62--133. This is true, notwithstanding the fact that, in Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333, the Supreme Court of the United States held the Federal Constitution no longer requires such a procedure.

5. Upon appeal, the authority of the reviewing court, whether the Court of Appeals or this Court, to reverse or modify the order of the Commission, or to remand the matter to the Commission for further proceedings, is limited to that specified in G.S. § 62--94, which includes the authority to reverse or modify such order on the ground that it violates a constitutional provision. State ex rel. Utilities Commission v. Morgan, Attorney General, supra. Upon such appeal, the rates fixed by the Commission, pursuant to G.S. Chapter 62, are deemed prima facie just and reasonable. G.S. § 62--94(e); G.S. § 62--132. All findings of fact made by the Commission, which are supported by competent, material and substantial evidence, are conclusive. State ex rel. Utilities Commission v. Carolina Coach Co., 269 N.C. 717, 153 S.E.2d 461; State ex rel. Utilities Commission v. Carolina Telephone & Telegraph Co., 267 N.C. 257, 148 S.E.2d 100; State ex rel. North Carolina Utilities Commission v. Carolina Coach Co., 261 N.C. 384, 134 S.E.2d 689; State ex rel. Utilities Commission v. Champion Papers, Inc., 259 N.C. 449, 130 S.E.2d 890; State ex rel. Utilities Commission v. Gulf-Atlantic Towing Corp., 251 N.C. 105, 110 S.E.2d 886. Neither such finding of fact nor the Commission's determination of what rates are reasonable may be reversed or modified by a reviewing court merely because the court would have reached a different finding or determination upon the evidence. State ex rel. Utilities Commission v. Morgan, Attorney General, supra; State ex rel. North Carolina Utilities Commission v. Southern Railway Co., 267 N.C. 317, 148 S.E.2d 210; State ex rel. Utilities Commission v. Southern Railway Co., 254 N.C. 73, 118 S.E.2d 21; State ex rel. Utilities Commission v. Gulf-Atlantic Towing Corp., supra.

6. Notwithstanding the authority of the Commission to regulate its services and rates, and other matters incidental thereto, the property of the utility is private property and the business is private business. Except as otherwise provided, expressly or by reasonable implication, in G.S. Chapter 62, the utility is free to manage

Page 718

its property and business as it sees fit and the Commission may not restrict, or control, the discretion of the board of directors in the acquisition of property, or in the price paid for it. North Carolina ex rel. Utilities Commission v. Piedmont Natural Gas Co., 254 N.C. 536, 119 S.E.2d 469.

7. As a practical matter, apart from constitutional right, the utility must be able to attact from volunteer investors additional capital, as required from time to time for the expansion or improvement of its service. State ex rel. Utilities Commission v. Morgan, Attorney General, supra; G.S. § 62--133(b)(4) (5). Here, the principles of the Free Enterprise System do come into play, for the utility must win the favor of the free, volunteer investor in competition with all other investment options available to him. This the utility does by offering the investor an opportunity to earn on his investment at a rate which, considered together with the risk of loss of part or all of the principal of his investment, outweighs, in his opinion, the corresponding prospects and risks in those other types of investment. Obviously, the utility will have little appeal to many investors, strong appeal to others. Some investors paramount safety of principal, some the prospect of very large earnings. To attract capital, a utility does not need to charge, and it is not entitled to charge, for its service rates which will make its shares, or its bonds, attractive to investors who are willing to risk substantial loss of principal in return for the possibility of abnormally high earnings. The reason is the utility, having a legal monopoly in an essential service, offers its investors a minimal risk of loss of principal. Bluefield Water Works & Improvement Co. v. Public Service Commission, 262 U.S. 679, 43 S.Ct. 675, 67 L.Ed. 1176; Federal Power Commission v. Hope Natural Gas Co., supra.

8. In order to assure the utility of earnings sufficient to attract capital and also in order to limit its charges for service to levels sufficient for that purpose, the Legislature has prescribed in G.S. § 62--133 the steps which the Commission must taken in fixing such charges. This statute requires the Commission to 'ascertain the fair value of the public utility's property Used and useful in providing the service.' (Emphasis added.) In so doing, the Commission is required to Consider: (1) 'The Reasonable original cost of the property' (emphasis added) less depreciation, (2) the replacement cost of the property, and (3) any other factors relevant to its fair value. The statute then requires the Commission to 'fix such rate of return on the fair value of the property' as will enable the company, after payment of its 'reasonable operating expenses,' including taxes, maintenance of its properties and 'reasonable actual depreciation,' to attract, upon reasonable terms, such capital as it reasonably requires for the expansion and improvement of its service. Paragraph (d) of this statute further directs the Commission to 'consider all other material facts of record that will enable it to determine what are reasonable and just rates.'

9. The 'fair value' which the statute requires the Commission to 'ascertain' is not the price for which the property could be sold 'as used or second-hand property.' United States ex rel. Utilities Commission v. State (State ex rel. Utilities Commission v. Telephone & Telegraph Co.), 239 N.C. 333, 80 S.E.2d 133. On the other hand, it is not the sale or exchange value of the entire business as a going concern, for that is determined by its prospective earnings. To undertake to regulate rates for service so as to maintain a value based on earnings leads into a vicious circle. 'The property is not ordinarily the subject of barter and sale and, when rates themselves are in dispute, earnings produced by rates do not afford a standard...