Title: C & P TELEPHONE CO. v. Public Service Com'n

State: west-virginia

Issuer: West Virginia Supreme Court

Document:

301 S.E.2d 798 (1983) The C & P TELEPHONE COMPANY OF W. VA. v. PUBLIC SERVICE COMMISSION OF W. VA. No. 15661. Supreme Court of Appeals of West Virginia. March 29, 1983. *800 David B. Frost, Charleston, for petitioner. Joel B. Shifman, Daniel L. Frutchey and Marc E. Lewis, Legal Div., Public Service Com'n, Charleston, for respondent. HARSHBARGER, Justice: The Chesapeake and Potomac Telephone Company of West Virginia, Inc. appeals from a May 7, 1982 order of the Public Service Commission denying its requested rate increases for (1) salaries scheduled for C & P's lower level managers, (2) the cash working capital component of C & P's rate base, and (3) the inflation adjustment on Western Electric purchases.[1] C & P's original tariff sought a $75 million increase in rates and charges. It revised its request to $67.69 million. This matter was heard before the Public Service Commission in February and March, 1982. On May 7, 1982, the Commission granted C & P an increase in annual revenues of $32,069,000. Our standard of review in Public Service Commission cases was stated in Syllabus Point 2 of Monongahela Power Company v. Public Service Commission, W.Va., 276 S.E.2d 179 (1981): The burden of proof is on a public utility to show that its proposed increased rates or charges are just and reasonable. W.Va.Code, 24-2-4a; Syllabus Point 1, Natural Gas Company v. Public Service Commission, 95 W.Va. 557, 121 S.E. 716 (1924). C & P sought management wage level increases of $5,036,000 as going-level adjustments.[2]*801 These increases would have been implemented over the years 1980, 1981 and 1982. In Case No. 80-182, C & P's prior rate filing, the Commission allowed management wage increases for 1980 and 1981 of $536,000 and $779,000, respectively. In this case, C & P requested management wage increases of $1,343,000 and $2,335,000, respectively for 1980 and 1981. The Commission approved an increase of 20.1 percent over the 1980 test year levels,[3] and granted a wage level increase of $3,808,000. The Commission's disallowance of $1,228,000, does not reduce the increase previously approved in Case No. 80-182, and the Commission found that it permitted C & P to meet other competitive salaries in the utility industries. Finding of Fact No. 34 of the Commission's final order reads: In Conclusion of Law No. 15, the Commission decided: In the text of the final order, the Commission explained its position more clearly: The Commission is of the opinion that the C & P management levels which are included in this salary increase are entitled to higher levels than those approved by this Commission in Case No. 80-182-T-42T. Common sense indicates that for all citizens, the cost of living has increased and C & P's employees are not exempt from these increases. However, this Commission also recognizes that currently the State and the entire nation are undergoing a period of economic downturn, in which both union and management employees in companies across the nation are accepting either lower wage increases, no increases, or even wage reductions in return for continued employment. The Commission is of the opinion that C & P's proposed management salary increases should be approved only to the extent that they are not in excess of the inflation adjustment approved by the Commission previously in this order. Thus, we will adopt the Company adjustment up to the level of the inflation adjustment adopted previously in this order but will disallow those management salary increases, amounting to $1,228,000 which exceed the level of the inflation adjustment we have approved in this case. This decision reasonably reflects both the need of C & P employees for reasonable salaries and a recognition that in this current economic period, unlimited management salary increases may not be justified. We are mindful of C & P's arguments that its proposed salary levels are the minimum necessary to hire and retain qualified management; however, we are of the opinion given the occurrences set forth previously in this section (i.e. union and management employees across the nation accepting small or no wage increases, or even wage reductions), *802 a management salary level increase up to 20.1 percent over the levels approved in Case No. 80-182-T-42T adequately meets C & P's need to pay competitive salaries. The Public Service Commission has balanced the financial integrity of C & P with appropriate protection to the relevant public interests and we cannot say their conclusion is contrary to the evidence, arbitrary, or results from a misapplication of legal principles. Virginia Electric and Power Company v. Public Service Commission, W.Va., 242 S.E.2d 698 (1978). Traditionally, a cash working capital allowance is a component of C & P's rate base. This allowance permits the company to retain investor-supplied funds to pay its outstanding indebtedness between the time when service is rendered and payments are received from the customers. It is placed in the rate base so investors will get a fair return on their money. The Public Service Commission, exercising powers granted it in W.Va.Code, 24-1-7, has established Rules and Regulations for the Government of the Construction and Filing of Tariffs of Public Utilities and Common Carriers by Motor Vehicle. Rule 19 explains procedure for proposed rate changes: Rule 42 states, in pertinent part: The Commission's Statement B, Schedule 7, explains: Telephone companies were provided a different working cash allowance because telephone bills are generally paid in advance of service. The Commission first adopted its cash working capital formula in 1949, and has used this formula in every one of C & P's fifteen rate setting cases since then. Using the 4.11% annual expenses figure, C & P sought to include $7,334,210 in its rate base for a cash working capital allowance. The Commission accepted the staff's argument that C & P did not require a working cash allowance because there were not excess investor-supplied funds which were not earning a fair return. The Commission reasoned: We do not conclude that a disallowance of cash working capital is unreasonable. We do find, however, that C & P was reasonable in relying on Statement B, Schedule 7 of the Commission's filing Rule 42 in submitting a cash working capital figure equal to 4.11 percent of annual operation and maintenance expenses. C & P was not informed of the Staff's challenge to its cash working capital allowance until almost seven months after the case was filed, and three weeks before hearings were to commence. It did not have sufficient time to complete a lead-lag study to determine the actual period between the time expenditures are made and the time revenues are received from customers. The United States Supreme Court recognized a due process deprivation in a Public Service Commission's change of an allocation method without timely notice to a company. The court stated in West Ohio Gas Company v. Public Utilities Commission, 294 U.S. 63, 70, 55 S. Ct. 316, 320, 79 L. Ed. 761 (1935): We do not now decide that there would be a denial of due process through the spread of distributing costs over the total area of service, if the new method of allocation had been adopted after timely notice to the company and then consistently applied. This court does not sit as a board of revision with power to review the action of administrative agencies upon grounds unrelated to the maintenance of constitutional immunities. Los Angeles Gas & Electric Corp. v. Railroad Commission of California, 289 U.S. 287 [53 S. Ct. 637, 77 L. Ed. 1180]. Our inquiry in rate cases coming here from the state courts is whether the action of the state officials in the totality of its consequences is consistent with the enjoyment by the regulated utility of a revenue something higher than the line of confiscation. If this level is attained, and attained with suitable opportunity through evidence and argument (Southern Ry. Co. v. Virginia, 290 U.S. 190 [54 S. Ct. 148, 78 L.Ed. 260]) to challenge the result, there is no denial of due process, though the proceeding is shot through with irregularity or error. But the weakness of the case for the appellee is that the fundamentals of a fair hearing were not conceded to the company. Opportunity did not exist to supplement or explain the annual reports as to the distribution of the expenses in the neighboring communities, nor did opportunity exist to bring *804 the rates outside of Lima into harmony with the exigencies of a new method of allocation adopted without warning. The United States Supreme Court was dealing with a change in allocation method; here we are referring to a change in a filing rule with less substantive implications, according to a majority of our court. Nonetheless, fairness requires administrative bodies to abide by their rules until they are lawfully changed by law. Syllabus Point 1, State ex rel. Wilson v. Truby, W.Va., 281 S.E.2d 231 (1981); Syllabus Point 1, Trimboli v. Board of Education, W.Va., 254 S.E.2d 561 (1979). Accord, Vitarelli v. Seaton, 359 U.S. 535, 79 S. Ct. 968, 3 L. Ed. 2d 1012 (1959); Service v. Dulles, 354 U.S. 363, 77 S. Ct. 1152, 1 L. Ed. 2d 1403 (1957); United States ex rel. Accardi v. Shaughnessy, 347 U.S. 260, 74 S. Ct. 499, 98 L. Ed. 681 (1954); Bridges v. Wixon, 326 U.S. 135, 65 S. Ct. 1443, 89 L. Ed. 2103 (1945); Arizona Grocery Co. v. Atchison, Topeka and Santa Fe Ry., 284 U.S. 370, 52 S. Ct. 183, 76 L. Ed. 348 (1932). See Gadsden State Bank v. Lewis, 348 So. 343 (Fla.Dist. Ct.App.1977); Central Louisiana Electric Co. v. Louisiana Public Service Commission, La., 377 So. 2d 1188 (1980); Indiana Alcoholic Beverage Commission v. McShane, 170 Ind.App. 586, 354 N.E.2d 259, 265, n. 1 (1976); State ex rel. Independent School District No. 6 v. Johnson, 242 Minn. 539, 65 N.W.2d 668 (1954); Douglas County Welfare Admin. v. Parks, 204 Neb. 570, 284 N.W.2d 10 (1979); State ex rel. Meeks v. Gagnon, 95 Wis.2d 115, 289 N.W.2d 357, 361 (1980); Note, Violations by Agencies of Their Own Regulations, 87 Harv.L.Rev. 629 (1974). This is especially true when an individual or company "reasonably relied on agency regulations promulgated for his guidance or benefit and has suffered substantially because of their violation by the agency." United States v. Caceres, 440 U.S. 741, 752-753, 99 S. Ct. 1465, 1471-1472, 59 L. Ed. 2d 733, 744 (1979); United States v. Nixon, 418 U.S. 683, 94 S. Ct. 3090, 41 L. Ed. 2d 1039 (1974); Morton v. Ruiz, 415 U.S. 199, 235, 94 S. Ct. 1055, 1074, 39 L. Ed. 2d 270 (1974). See also Panhandle Eastern Pipe Line Co. v. Federal Energy Regulatory Commission, 198 U.S.App.D.C. 387, 613 F.2d 1120, 1135 (1979), cert. den., 449 U.S. 889, 101 S. Ct. 247, 66 L. Ed. 2d 115 (1980); United States Lines, Inc. v. Federal Maritime Commission, 189 U.S.App.D.C. 361, 584 F.2d 519, 526, n. 20 (1978); Brown Express, Inc. v. United States, 607 F.2d 695 (5th Cir.1979); Daughters of Miriam Center For the Aged v. Mathews, 590 F.2d 1250 (3d Cir.1978); Illinois Bell Telephone Company v. Allphin, 50 Ill.Dec. 739, 95 Ill.App.3d 115, 419 N.E.2d 1188, 1196-1199 (1981); People ex rel. Cinquino v. Board of Education, 86 Ill.App.2d 298, 307, 230 N.E.2d 85 (1967). Public utilities use these rules to plan their proofs in rate cases. And, of course, their rate cases found their survival. Utilities have no vested right to any particular approach, but they have a right to application of the current, effective rules to their rate filing, absent reasonable notice (here only three weeks) that another rule would be contended for by the Commission's staff. In English Moving & Storage Co. v. Public Service Commission, 143 W.Va. 146, 100 S.E.2d 407, 410 (1957), we reversed our public service commission for failing to follow and apply rules it had promulgated: When an administrative agency reverses course from its precedents, it must give reasonable notice and supporting rationale before it changes its standards, or its actions appear arbitrary and capricious. Boston Edison Co. v. Federal Power Commission, 181 U.S.App.D.C. 222, 557 F.2d 845, 848-849, cert. denied, 434 U.S. 956, 98 S. Ct. 482, 54 L. Ed. 2d 314 (1977); Trustees of Clark University v. Dept. of Public Utilities, 372 Mass. 331, 361 N.E.2d 1285 (1977); New England Telephone and Telegraph Co. v. *805 Public Utilities Commission, R.I., 446 A.2d 1376, 1389-1390 (1982); Michaelson v. New England Telephone and Telegraph Co., R.I., 404 A.2d 799, 813 (1979). In Re Chesapeake and Potomac Telephone Company, 43 PUR.4th 169 (1981), the District of Columbia Public Service Commission rejected the Office of People's Counsel's challenge to C & P's working capital study. It stated at p. 177: The Commission should accept C & P's working cash capital allowance in this filing, and if it pursues this revision of its former posture, require C & P to conduct proper lead-lag studies before its next filing. The Commission adopted an inflation adjustment of 20.1 percent for all expenses for which a going-level adjustment was not specifically made. C & P does not challenge the factor selected by the Commission. C & P argues that the Commission's decision to not apply the inflation adjustment to Western Electric purchases was intended to punish C & P, not a legitimate reason for eliminating this figure from the rate base. It claims the Commission's actions were arbitrary. The Commission made the following findings of fact and conclusions of law with respect to Western Electric's purchases:[4] 13. In many instances, prices charged by Western Electric for its products are *806 considerably higher than prices charged by general trade suppliers for similar products (Staff Exh. 9, pp. 16-18; Staff Exh. 9A). These conclusions are further explained in the text of the final order: Staff Adjustment No. 46 increases operating expenses by $7,500,000 to reflect the effects of inflation which will occur during the first full year in which these rates will be in effect. This adjustment parallels the Company's Adjustment No. 44, but excludes Western Electric purchase expenses, license contract fees, and *807 utilizes a slightly different factor (C & P uses 21.1%, while Staff uses 20.1%). ... While Staff stated that it had no objection to a reasonable provision for inflation for Western Electric purchases and license contract fees, Staff did take the position that, for intercompany transactions, a specific measurement should be required before applying an inflation adjustment to those expenses. Staff took the position that better data is available within the accounting system for affiliated transactions, which is preferable to a broad based index such as the GNP implicit price deflator. Further, Staff was of the opinion that a company might attempt to simply roll all expenses into the Staff inflation adjustment, without making an effort to specify the actual effects upon inflation of specific adjustments.... Again, we start from the premise that the utility has the burden of proving the reasonableness of any increase it requests. Accord, Utah Department of Business Regulation, Division of Public Utilities v. Public Service Corporation, Utah, 614 P.2d 1242, 1245 (1980); Public Service Coordinated Transport v. State, 5 N.J. 196, 74 A.2d 580, 593-594 (1950); Bell Telephone Co. of Pennsylvania v. Pennsylvania Public Utility Commission, 47 Pa.Commw. 614, 408 A.2d 917, 925-926 (1979); Texas Alarm and Signal Association v. Public Utility Commission, Tex., 603 S.W.2d 766 (1980); Re Southern California Gas Company, 35 PUR.3d 300, 309 (1960); Re Gas Company of New Mexico, 28 PUR.4th 20, 23 (1978). The Commission has a duty to go beyond the Company's schedules and submissions. Public Service Coordinated Transport v. State, supra 74 A.2d, at 591-592; Utah Department of Business Regulation, supra 614 P.2d, at 1247. The Commission Staff requested additional submissions from C & P on Western Electric purchases. Utilities must supply information requested by the Commission, W.Va.Code, 24-2-7 and 24-2-9, and it need not be in the form of the company's account books. Accord, Washington Public Interest Organization v. Public Service Commission, 393 A.2d 71, 80-82 (D.C.App. 1978), U.S. cert. denied; New England Telephone and Telegraph Co. v. Public Utilities Commission, Me., 390 A.2d 8, 23 (1978); Trustees of Clark University v. Department of Public Utilities, 372 Mass. 331, 361 N.E.2d 1285 (1977); American Can Co. v. Davis, 28 Or.App. 207, 559 P.2d 898 (1977); New England Telephone and Telegraph Co. v. Public Utilities Commission, R.I., 446 A.2d 1376, 1385 (1982). The Staff needed that data to determine the appropriate inflation adjustment, rather than to apply an across-the-board inflation factor. These requests for data were made in ample time for C & P to respond. The Commission had requested this data in three previous orders. Re Chesapeake *808 and Potomac Telephone Company of West Virginia, 26 PUR.4th 29, 38 (1978), 40 PUR.4th 279 (1980), and 42 PUR.4th 312 (1981). The large quantity of business done with Western Electric, which resulted in $10,745,560 in C & P's operating expenses, recommends that it be treated differently than minor purchases. Although there was some evidence that purchases of manufactured goods from Western were not increasing at a rate commensurate with the general inflation rate, the Staff could not obtain sufficient data from C & P to quantify the exact level of past and prospective changes in prices for Western Electric products. Other courts and public service commissions have addressed the problem of a utility company's failure to submit required data. The Texas Supreme Court, in Texas Alarm and Signal Association v. Public Utility Commission, supra 603 S.W.2d, at 773, wrote: This same concept was articulated by the Utah Supreme Court: The Maine Supreme Court supported its Public Utilities Commission's decision to deny New England Telephone and Telegraph Co. (NET) a short-term CWIP (construction work in progress) expense in its rate base with an appropriate AFUDC (allowance for funds used during construction) adjustment. The court stated: New England Telephone & Telegraph Co. v. Public Utilities Commission, Me., 448 A.2d 272, 294-295 (1982). Rhode Island's Public Utilities Commission refused to excuse NET's failure to provide requested cost studies and rejected the cost evidence submitted by the company. The Rhode Island Supreme Court upheld the Commission on this point: In the case at bar, no finding was made concerning the additional aggregate revenue needs of NET. Indeed, the very heart of the controversy revolves around the commission's position that a threshold *809 requirement for any determination of NET's increased revenue needs is the presentation of a comprehensive fully allocated cost study identifying "all costs associated with each and every particular service" listed in the company's tariff. Nor can it be seriously maintained that the record before us is devoid of any complaints by the commission regarding NET's failure to provide it with more adequate and detailed cost information to support both the filing in question and previous filings. ... [W]e again stress that our statutory scheme places upon a Rhode Island utility the burden of proving both its overall revenue needs and the reasonableness of its rates. Moreover, no affirmative duty is imposed upon the commission to fix such rates when the utility has not demonstrated that its new rate schedule is reasonable and not unjustly discriminatory. The New Mexico Public Service Commission stated in Re: Gas Company of New Mexico, supra 28 PUR.4th, at 23: Two other public service commissions have denied increases where access to necessary information has been denied the commission staff. In Re: Southwestern Bell Telephone Company, supra 36 PUR. 4th, at 290, the Missouri Commission denied the telephone company a portion of the license contract payment relating to antitrust litigation, stating: "[T]he portion of the contract payment relating to antitrust litigation should be disallowed since no expense should be included when the commission staff has been denied access to the supporting records to determine the proper level or the reasonableness of the claimed expense." The Ohio Commission rejected an allowance for Ohio Edison's stockpile management program, an exercise mandated by EPA requirements, because the company's testimony was not backed by any evidence. The Commission cannot punish C & P for its recalcitrance in providing requested and necessary information by denying an item. It should revise that portion of its final order that indicates its decision not to apply the inflation factor to Western Electric purchases was punitive. The Commission is provided other means of countermanding noncooperation. W.Va.Code, 24-2-2, 24-4-3.[5] Nonetheless, this portion of the Commission's decision is affirmed, based on C & P's total failure to prove by competent evidence that a 20.1 percent inflation factor was appropriately applied to its substantial purchases from Western Electric. Affirmed in part; reversed in part. [1] The Public Service Commission was asked to address thirty-one issues: rate of return, Western Electric, licenses contract, deferred federal income taxes, working capital allowance in rate base, construction work in progress (CWIP) in rate base, rate base deduction for customer deposits, station apparatus and inventory shortages, expensing of station connections, effective tax rate/consolidated taxes, inflation adjustment, separations, management salaries, advertising expense, directory revenue, rate case refund expense, community activity contributions and Pioneer activities, uncollectable expense, lobbying expenses, excused days' pay expense, Public Service Commission fees, capital recovery adjustments (whole life/remaining life depreciation rates), concession service, sale of exchanges, joint planning, after hours repair, repression, audit problems, miscellaneous issues, end results, and rate design. C & P has appealed only three of the Commission's rulings. [2] The basic approach to rate-making is to take a test year and determine revenues, expenses and investments for that year. Test year data is then adjusted for reasonably anticipated, known and measurable changes. These are called going-level adjustments. "Going-level adjustments are" "used to annualize the effect of significant changes that occurred during the test year but which were not reflected for the full twelve month period, and to reflect the effect of known and measurable changes in revenue and expense levels following the end of the test year. Consideration of items treated differently for rate-making purposes than for bookkeeping purposes should also be reflected as going-level adjustments." Rules and Regulations for the Government of the Construction and Filing of Tariffs of Public Utilities and Common Carriers by Motor Vehicle, 1977, Directions for Statement A, p. 24. [3] The Commission prescribed inflation factor of 20.1 percent is not an annual figure, but reflects the impact of inflation over a twenty-seven month period. This figure was used throughout the final order. [4] See generally, Annot., Amount Paid By Public Utility to Affiliate for Goods or Services as Includible in Utility's Rate Base and Operating Expenses in Rate Proceeding, 16 A.L.R.4th 454 § 6-10 (1982). [5] We found its contempt power in W.Va.Code, 24-4-5 unconstitutionally violative of separation of powers. Appalachian Power Co. v. Public Service Commission, W.Va., 296 S.E.2d 887 (1982).