Title: City of Miami v. Florida Public Service Commission

State: florida

Issuer: Florida Supreme Court

Document:

208 So. 2d 249 (1968)
The CITY OF MIAMI, Florida, Petitioner,
v.
FLORIDA PUBLIC SERVICE COMMISSION, and Southern Bell Telephone and Telegraph Company, Respondents.
The CITY OF MIAMI, Florida, Petitioner,
v.
FLORIDA PUBLIC SERVICE COMMISSION, and Florida Power & Light Company, Respondents.
Nos. 35978, 35994.

Supreme Court of Florida.
January 15, 1968.
As Revised on Denial of Rehearing March 27, 1968.
*250 Jack R. Rice, Jr., City Atty., and Sam Daniels, Miami, Special Counsel for City of Miami, petitioner.
William C. Steel, Phillip Goldman, Scott, McCarthy, Steel, Hector & Davis, Miami, James H. Sweeny, Jr., DeLand, and Sidney Hoehl, Coral Gables, for Florida Power & Light Co.
Harold B. Wahl, Loftin & Wahl, Jacksonville, William C. Lantaff, John H. Wahl, Jr., Walton, Lantaff, Schroeder, Carson & Wahl, Miami, Nathan H. Wilson, Jacksonville, Jefferson Davis, and Drury B. Thompson, Atlanta, Ga., for Southern Bell Telephone and Telegraph Co.
Lewis W. Petteway, Tallahassee, for Florida Public Service Commission.
ERVIN, Justice.
Petitioner, the City of Miami, Florida, seeks judicial review by certiorari of Orders 4076 and 4078 of the Florida Public Service Commission relating to the rates, charges and earnings of, respectively, Southern Bell Telephone and Telegraph Company and Florida Power & Light Company. Upon certiorari granted, the two cases were consolidated for oral argument pursuant to motion of the Petitioner. Due to the fact that the basic issues in both cases involve common questions of law, we have consolidated them for purposes of review and decision.
General Services Administration, a protestant with Petitioner in the original hearings, did not petition us for review.
Some background facts involved in the instant consolidated cases are related as follows:
On November 30, 1964 the Florida Public Service Commission issued an order fixing January 18, 1965 as the date for commencement of hearings on the justness and reasonableness of the rates and charges of Southern Bell Telephone and Telegraph Company for intrastate service in the State of Florida. The Commission on December 4, 1964 issued an order fixing January 28, 1965 as the date for commencement of similar hearings regarding the justness and reasonableness of rates and charges of Florida Power & Light Company. The purpose and reason for each of the orders was to hear
After a number of public hearings were held in each case, producing more than 5,000 pages of testimony and in excess of 400 documentary exhibits, the cases were submitted to the Commission, which determined as follows:
Regarding Southern Bell Telephone and Telegraph Company, on October 26, 1966 the Commission issued Order No. 4076, the basic import of which is as follows:
Regarding Florida Power & Light Company  on November 2, 1966 the Commission entered Order No. 4078, the basic import of said order being:
Petitioner contends that in both cases the Commission should and would have ordered a much greater reduction in rates if due consideration had been given the applicable law and admitted facts. Specifically, Petitioner contends that in both orders the Commission departed from essential requirements of law by doing or allowing the following:
A. Computing rate base at the end of the test year rather than on the average investment during the twelve-month period.
B. Making only a 20% deduction for federal income tax accruals.
C. Allowing the companies concerned to make charitable contributions with consumer monies.
D. Allowing each company to retain its excessive charges rather than making the reduction orders retroactive.
E. Erred in the determination as to the fair rate of return on invested capital of each company.
We preface our discussion of the aforementioned points with the following general proposition regarding judicial review of utility rates:
In both cases Petitioner contends that while it has no quarrel with the test period adopted by the Commission, it does most vigorously take exception to the computations of rate base at the end of the test year selected by the Commission which extended from October 1, 1963 to September 30, 1964, rather than on the average investments during the twelve-month period. Petitioner argues that the soundest and most reliable method of computing a utility's earned rate of return is to relate the average rate base during the test year to the actual earnings produced by that rate base. In the briefs Petitioner asserts that "most regulatory bodies, both State and Federal" employ this average investment method, and further argues "that the radical departure below from such a well established method * * * was a clear departure from the essential requirements of law." In both orders reviewed the Florida Public Service Commission sets forth some of the policy reasons and factors supporting utilization of the year-end rate base as follows:
Sections 364.14 and 366.06, Florida Statutes, F.S.A., deal with the procedures for fixing and changing rates, charges, tolls, *253 etc., of telephone and telegraph companies and public utilities, respectively. F.S. Section 364.14, F.S.A., reads in part:
Section 366.06(2), Florida Statutes, F.S.A., states that in determining rate base for public utilities the Commission
It is quite apparent these statutes repose considerable discretion in the Commission in the rate-making process.
In 1953 a basic policy pronouncement was made by the Commission in Re Florida Power Corp., 99 P.U.R. 129, from which we quote as follows:
Upon thorough study of the authorities cited by all parties, we conclude that, to borrow the above quoted words of the Commission, "under present conditions, as disclosed by the record herein * * * the year-end rate base is more realistic than the average investment rate base." (Emphasis supplied.) The voluminous testimony and exhibits of the transcript of record and the detailed discussion by the Commission on the totality of the evidence and circumstances leading to the *254 determinations in Orders 4076 and 4078 bear out and support our decision to uphold both orders as to the rate base concept.
We will not unduly burden this opinion with verbatim recitations of the total scope of determinative factors leading to the choice of rate-making method in the instant cases. We will, however, set forth some of the basic factors involved in each case which were influential in the determination of both orders. In Order 4076 the Commission made the following observations in regard to Southern Bell Telephone and Telegraph Company:
Regarding Florida Power & Light Company, the Commission related the following in Order No. 4078:
Thus, in view of the particular circumstances and facts involved, we can not agree with Petitioner's assertion that the method employed by the Commission to compute the rate of return of the two companies involved was "so plainly irrational, incongruous, arbitrary and capricious as to constitute a flagrant abuse of discretion. * * *"
Another factor to be considered and one lending further support to the method selected by the Commission for determining rate base, is the concept or principle known as the "end result" rule. This concept was originated in the case of Federal Power Commission v. Hope Natural Gas Co. (1944), 320 U.S. 591, 64 S. Ct. 281, 88 L. Ed. 333. There the Supreme Court of the United States, reviewing a rate reduction order of the Federal Power Commission, said
This "end result" doctrine was adopted in Florida in the case of Jacksonville Gas. Corp. v. Railroad & Public Utilities Comm. (1951), Fla., 50 So. 2d 887, in which this Court, speaking through Mr. Justice Thomas, said:
Later, in 1959, we reaffirmed the "end result" concept in the case of General Telephone Co. v. Carter, et al., Fla., 115 So. 2d 554, wherein we said, speaking through the late Mr. Justice Hobson:
Thus, it is our considered judgment that Petitioner has failed to make a showing that the rate base method employed by the Commission in the instant two cases resulted in unjust and unreasonable effects. We do not, however, intend by this opinion to give blanket-type approval to, or adopt as a standard procedure or method, the year-end rate base. Rather, we would borrow language used by the Tennessee Public Service Commission in the case of Re Inter Mountain Teleph. Co. (1965), 59 P.U.R.3d 337, which reads:
The "end result" doctrine was never intended to justify improper or erroneous methods or factors in the rate-making *257 process. It operates to neutralize such irregularities where they do not appear to be serious enough to produce harmful effects in the final determination of a fair and reasonable return. Applied to the instant cases the doctrine operates to help neutralize the dispute over whether the year-end test or the average investment during the year should have been used. For example, even if the rate bases ascertained by use of the year-end test are inflated, the percentages fixed by the Commission to be applied to such rate bases to produce fair returns may be low enough to offset the inflated rate bases. At this point, we reiterate careful inspection of the record in these cases does not disclose competent and substantial evidence contrary to the findings of the Commission that the percentages of return allowed are neither confiscatory to the utilities nor excessive or exorbitant to their subscribers and consumers. Nevertheless, we are not happy that resort to the "end result" doctrine is necessary in order to conclusively determine this disputed issue. We fear "end result" can tend to discourage use of proper yardsticks in determining rate base and encourage unsystematic rate making. See 73 C.J.S. Public Utilities § 17, pp. 1013 et seq., both text and annotation. Year-end test if used without regard to the reality of an exceptional or abnormal condition can produce an exaggerated rate base.
Under controlling rules of law we cannot substitute our judgment for that of the Commission in regard to its administrative determination to use the year-end test for ascertaining rate base  nor can we disregard precedent that the rule of "end result" may render harmless the year-end method. In future rate cases before the Commission the advisability of using particular test methods and criteria over others for rate base determinations may be more scientifically ascertained due to the evolution of the rate fixing process and the trend of rate decisions. It may not be necessary in such cases to fall back on "end result" to wash out erroneous administrative methods, mistakes and judgments in the rate-making process. An example of a rather egregious mistake in this case is pointed out by the Petitioner and confirmed by the record. The Commission made a mathematical error of $108,356 in computing excess net earnings of Florida Power & Light Company, but since the factors making up its rate base were found to total $637,826,667, upon which a fair return of 6.95% was allowed, the error in these large calculations is de minimus under the "end result" rule on the theory it may have helped offset possible mistakes unfavorable to the Company. "An excessive allowance by a rate-fixing body for a particular rate factor does not necessarily invalidate the rate fixed. Such an allowance as to one factor may, when the rate is judicially reviewed, compensate for error in others." 43 Am.Jur., Public Utilities and Services, § 160, p. 677.
We note the 1967 Legislature has given the Commission some financial relief by providing it additional regulatory trust funds (Ch. 67-300, Item 928), as well as some additional utility regulatory authority (Ch. 67-326). This augurs well for the Commission in the discharge of its rate-fixing function and hopefully indicates a continuing legislative disposition to make it possible in approaching decades for the Commission to be adequately staffed and equipped so that it can regularly and systematically, through the aid of competent experts and data collecting equipment, evaluate the rate bases of public utilities, their operating expenses, their capital outlay needs, including financing and other features incident to determining fair and reasonable rates, as well as permit the Commission to keep abreast of rate practices in other jurisdictions in order that the public utilities in our state will be accorded fair and reasonable returns on their investments and consumers and patrons fair and reasonable rates.[1]
*258 We wish to make it clear that in not disturbing the use of the year-end method which was utilized by the Commission in fixing rates in these cases rather than average investment during the test year, we do so because of the strong unrebutted evidentiary showing that the two utilities are endeavoring to cope with extraordinary needs for their services due to abnormal population and economic growth conditions within their service areas. The Commission did not find the proliferation of subscribers and consumers due to increased population and economic growth had the effect of increasing the earnings of the two utilities to the point where a year-end rate base was unnecessary.
Concluding our discussion on this point, it is our belief that in the absence of the most extraordinary or emergency conditions or situations, average investment during the test year should be the method employed by the Commission in determining rate base. Our study of the subject discloses that average investment during the year is the better choice of methods and we commend it to the Commission in future cases  and suggest it should not be departed from except in the most unusual and extraordinary situations where not to do so would result in rates so low as to be confiscatory to the utility. See Re Montana-Dakota Utilities Co. (N.D. 1960), 102 N.W.2d 329; Narragansett Electric Co. v. Kennelly (R.I. 1958), 88 R.I. 56, 143 A.2d 709; Re North Carolina Gas Service Div. (North Carolina Utilities Comm. 1961), 41 P.U.R.3d 91, 101-102; and Re Niagara Mohawk Power Corp. (New York Public Service Comm. 1960), 35 P.U.R.3d 149.
In both cases Petitioner makes the assertion that the Commission should have deducted from the rate base 50% of the utility's federal income tax accruals for the test period. Instead, complains the Petitioner, the Commission "arbitrarily deducted only 20% of such taxes" from the rate bases of both companies. We find no support for Petitioner's pronouncement that the Commission "arbitrarily" deducted only 20% of federal income tax accruals. Our examination of the records leads us to conclude that the Respondents logically, legally and successfully counter this contention by the following arguments in their briefs:
This point concerns the alleged departure from essential requirements by the Commission in allowing the two companies involved in the instant cause to make charitable contributions and deduct the same as operating expenses. In Orders 4076 and 4078 the Commission made the following statements:
The Commission is quite correct in its observation in the instant cases that there is diversity of opinion and treatment on the matter of charitable contributions by utilities companies. Research fails to disclose any decision or determination by this Court on this particular point. The Commission, however, in 1962 said in the case of Re General Telephone Co. of Florida, 44 P.U.R.3d 247, that
Likewise, the Federal Power Commission said in 1964 in the case of Re United Gas Pipe Line, 54 P.U.R.3d 285:
We are of the opinion that the better concept on this matter is that set forth by the Florida Public Service Commission in Re General Telephone Co. of Florida, supra, and by the Federal Power Commission in Re United Gas Pipe Line, supra. Namely, if contributions are of a reasonable amount to recognized and appropriate charities, then they may be classified as legitimate operating expenses. Petitioner herein fails to make any conclusive showing that the amounts contributed by Florida Power and Southern Bell are either unreasonable or made to inappropriate charities.
Petitioner contends that in both orders the Commission departed from essential requirements of law by allowing both companies involved herein to retain those past charges deemed excessive rather than making said reduction orders retroactive. Petitioner points out that the test period adopted by the Commission in each proceeding to determine the justness and reasonableness of the rates and charges of each company covered the period of October 1, 1963 through September 30, 1964. In each order (No. 4076 and No. 4078) the Commission found these rates and charges unreasonably high and ordered reduction on an annual basis in the amounts of $3,741,885 and $7,073,000, respectively. Petitioner further points out that these rate reductions were made effective at dates subsequent to October 26, 1966, and November 2, 1966, respectively. It is Petitioner's contention that said rate reductions should be made retroactive to October 1, 1963 with appropriate refunds to the rate-payers. We do not agree with the petitioner's contention on this point. An examination of pertinent statutes leads us to conclude that the Commission would have no authority to make retroactive ratemaking orders. F.S. Section 364.14, F.S.A., specifically provides, in part:
F.S. Sections 366.06(3) and 366.07, F.S.A., read in part:
Our decision on this point is supported by an opinion of the Supreme Court of the United States presenting the same question and involving an Ohio statute having basically the same language as the Florida statutes. In the case of Public Utilities Commission of Ohio v. United Fuel Gas. Co., 317 U.S. 456, 63 S. Ct. 369, 87 L. Ed. 396, the Court said:
Thus, in conclusion on this point, the statutes preclude such a retroactive order by the Commission.
Petitioner contends that the Commission erred in its determination as to what constituted a fair rate of return on invested capital of both companies. The *261 Commission found Southern Bell entitled to a fair rate of return of 6.80% and Florida Power & Light entitled to a 6.95% fair rate of return. Petitioner makes the assertion, but without convincing proofs in support, that both rates should be lower and contends that the methods utilized by the Commission to determine said rates constituted departure from essential requirements of law and is not supported by competent substantial evidence, but we find nothing in the record to substantiate Petitioner's assertion on this point. There is no showing in either case by Petitioner that withstands the "end result" test discussed earlier in this opinion.
Other points raised by the Petitioner relating to one and not the other utility have been considered also, including contentions that in the Southern Bell case the Commission: (1) improperly allowed all Western Electric profits from the sale of telephone equipment to Southern Bell to be included as part of Southern Bell's operating expenses in the determination of a fair return for it, notwithstanding both companies are owned by the American Telephone & Telegraph Company; (2) improperly accepted an arbitrarily fixed A.T. & T. dividend requirement of $4.00 per share on its common stock issued to obtain capital for Southern Bell in its determination of a fair return for the latter, and (3) in the Florida Power & Light Company rate case, arbitrarily and unlawfully denied the Petitioner the right to examine the books and records underlying the Company's exhibits.
The Commission found that the evidence did not show the prices paid by Southern Bell to Western Electric for telephone equipment were excessive but were in fact less than would have been paid other similar suppliers, or that Western's profits thereon were unreasonable. It found that telephone subscribers in Florida have substantially benefitted from the economies and efficiencies resulting from such sales between Southern Bell and Western Electric. Consequently, the Commission did not agree that the fact Western Electric and Southern Bell were subsidiaries of A.T. & T. affected the return allowed Southern Bell.
The record reflects A.T. & T. has a policy of paying a $4.00 per share common stock dividend to maintain the position of its stock in the money markets; that A.T. & T. is the money raiser and financial overseer of the Bell System, of which Southern Bell is a unit. The Commission did not find A.T. & T.'s policy of maintaining the $4.00 dividend resulted in increasing the financing costs of Southern Bell and augmented the rates of its subscribers.
In answer to the complaint the Petitioner was not permitted to examine the books and records of the Florida Power & Light Company underlying its exhibits, the Commission states the Petitioner made no effort to comply with the Commission's production and discovery rules (Rule 310-2.88 and Rule 1.28) but attempted an "en masse" examination or "fishing expedition" into the Company's records. Except for the failures of the Petitioner as indicated, we deem it would have been proper for the Commission to have accorded the Petitioner the right to examine relevant books and records of the Company under reasonable conditions and safeguards. See 73 C.J.S. Public Utilities § 54, p. 1122.
We do not find error in the specific findings and determinations of the Commission concerning these three points. Such findings and determinations of the Commission are presumed to be valid and reasonable absent clear and convincing showings to the contrary. 43 Am.Jur. Public Utilities and Services § 186, pp. 695, 696.
In summary, our principal holding in these cases is that from our study of the record evidence we find we should not disturb the two orders of the Commission because a test of the orders by the "end result" rule discloses the Commission's use of the end-of-the-year method in ascertaining *262 the rate bases of the two utilities considered in relation to the maximum percentages allowed on such bases for fair returns on investments to the utilities does not produce rates confiscatory to the utilities or excessive or exorbitant to their consumers or patrons. However, our ruling on this issue applies only to the instant cases and is not a binding precedent precluding the Commission from using the average investment during the test year method for rate base determinations in future rate cases. Moreover, the average investment method is expressly commended to the Commission as the better and sounder practice, except in abnormal and extraordinary situations and conditions where its use would clearly produce rates confiscatory to a utility.
Other contentions of Petitioner were specifically ruled upon and decided but also without binding the Commission to follow such rulings as precedents in future cases if to do so would be unreasonable or tend to produce rates confiscatory to a utility or excessive to its consumers or patrons.
Thus, for the reasons stated the writ of certiorari is discharged and Orders Nos. 4076 and 4078 of the Florida Public Service Commission should be and are hereby affirmed.
It is so ordered.
CALDWELL, C.J., and THOMAS, ROBERTS and THORNAL, JJ., concur.
[1]  The recent book OVERCHARGE by Metcalfe and Reinemer points out the need for adequate Commission staffs in properly determining electric power rates.