Title: Pacific Tel. & Tel. Co. v. Flagg

State: oregon

Issuer: Oregon Supreme Court

Document:

Reversed June 30, 1950.
*372 Fletcher Rockwood argued the cause for appellant. On the brief were Paul L. Boley and Hart, Spencer, McCulloch, Rockwood & Davies, of Portland.
E.L. Graham, Assistant Attorney General, of Salem, argued the cause for respondent. With him on the brief were George Neuner, Attorney General, and Max L. McMillin, Assistant Attorney General, of Salem.
Alexander G. Brown, City Attorney, of Portland, and Marian C. Rushing, Deputy City Attorney, of Portland, filed a brief as amici curiae.
REVERSED.
LUSK, C.J.
The Pacific Telephone and Telegraph Company, a corporation, (Pacific) commenced three suits pursuant to the provisions of the Uniform Practice Act of the Public Utilities Commissioner, § 112-4,119, O.C.L.A., for the purpose of obtaining decrees declaring invalid, and enjoining the enforcement of, certain orders of the public utilities commissioner which rejected items of proposed expenditures by Pacific under its so-called *373 license contract with American Telephone and Telegraph Company, a corporation, (American) for the years 1948 and 1949, and prescribed the conditions under which payments for services rendered to Pacific by American may be made. The suits were consolidated for trial in the Circuit Court, which, after a hearing, entered a decree affirming the orders except in one particular. Pacific has appealed. The appeals were consolidated for hearing in this court.
The challenged orders are, in substance and meaning, identical; and the three suits present the same question, namely, whether, in making the orders, the commissioner has exceeded the authority conferred on him by statute.
The commissioner first indicated his views upon the propriety of the license contract in an order made January 8, 1948, in a rate case involving Pacific's intrastate Oregon rates. Thereafter, in Order No. 21057, dated November 8, 1948, which is here under review, he rejected a proposed payment under the contract of $363,000.00 contained in Pacific's supplemental budget for 1948. Pacific then asked for reconsideration of the item, and this was granted. There was an extended hearing, and on March 31, 1949, the commissioner entered his Order No. 21859, which, after certain recitals, concludes with the following "Findings and Conclusions":
Order No. 21057, referred to above, is, in substance, the same as the concluding paragraph of the foregoing findings and conclusions as are the other orders under review.
By the Circuit Court's decree that part of the orders which required Pacific to requisition services from American was eliminated as going beyond the Commissioner's authority.
Pacific is a California corporation which owns and operates a telephone and telegraph system in California, Oregon, Washington and Idaho, and, through a wholly owned subsidiary, in Nevada. It is a part of the so-called "Bell System", which comprises American Telephone and Telegraph Company, Western Electric Company (Western), and Bell Telephone Laboratories (Bell Laboratories), all New York corporations, and twenty-two operating companies, one of which is in Canada. American owns 87.93 per cent of the voting stock of Pacific, all or substantially all the voting stock of sixteen of the other operating companies, and substantial fractions of the voting stock of the remainder. Bell Laboratories owns and operates laboratories engaged in research in all the sciences relating to the telephone art and in the application of discoveries in the art to the practical problem of rendering telephone service. The stock of Bell Laboratories is owned 50 per cent by American and 50 per cent by Western, while 99.8 per cent of the stock of Western is owned by American. Western manufactures a substantial part of the apparatus and equipment *377 required by the operating companies, and acts as purchasing agent for the system in the purchase from other manufacturers for resale to the operating companies of material not manufactured or produced by Western.
The license contract had its genesis in a contract dated May 7, 1880, between National Bell Telephone Company, a predecessor of American, and Pacific Bell Telephone Company, predecessor of Pacific, under which the former, as licensor, granted to the latter, as licensee, the right to use on a lease basis telephones supplied by the licensor. The licensor also undertook to defend at its own expense patent litigation. On March 10, 1936, the then existing rights and obligations of the parties under the license contract, as they had developed during the intervening years, were reduced to writing and a memorandum agreement executed, which is the license contract in controversy save for changes in the percentages of gross revenues which Pacific agrees to pay. The agreed basis of payment at the time of execution of the contract was 1 1/2 per cent. On September 30, 1948, American reduced this to 1 per cent. American, however, reserved the right to restore the rate to 2 1/2 per cent on notice, which right had been in effect at one time prior to March 10, 1936.
The following, taken from Pacific's brief, is a concise summary of the services which American undertakes to render under the contract:
The identical contract exists between American and the other twenty operating companies in the United States.
Following the decision of this court in Pacific Telephone and Telegraph Company v. Wallace, 158 Or. *379 210, 75 P. (2d) 942 (a rate case), affirming the decision of a three-judge court sitting in the Circuit Court for Multnomah County, 13 P.U.R. (N.S.) 337, the then commissioner, by order of February 17, 1937, approved the license contract with an affiliate under Oregon Code, 1935 Supplement, § 61-280, now § 112-482, O.C.L.A. This order incorporates by reference the evidence in the rate proceedings involved in the case just cited, together with the testimony taken subsequent to that decision. While the decision in that case did not approve the payments made to American, this was for reasons of a purely technical and procedural nature. The opinions of both this court and the Circuit Court recognized the value and necessity of the services. See, 158 Or. 270, 271, 13 P.U.R. (N.S.) 389.
The statute under which the commissioner acted, and which he claims is the source of his authority to make the orders under review, is § 112-481, O.C.L.A., as amended by Ch. 132, Oregon Laws, 1945, and, so far as here pertinent, reads:
The first question for determination relates to the scope of judicial review in this case. The transcript of testimony taken before the commissioner consists of 1063 pages. There were received in evidence forty-five exhibits, most of them introduced by Pacific, and some consisting of several hundred printed pages. Much of this testimony and many of the exhibits were designed to show that the services under the contract were necessary and valuable to Pacific, and that the amount in dollars which Pacific proposes to pay American for them is less than the amount in dollars which it cost American to render them.
The commissioner did not attempt to meet this evidence except by cross-examination. The commissioner's brief says "that at no time has the commissioner questioned that the services rendered by American to Pacific are of value." It is argued in the brief, however, that the representations of Pacific as to the cost of the services "are of amounts spent by American rather than cost to American." Particular items of this cost, namely, federal taxes paid by American on dividends it receives from stock owned by it in the operating companies, and the cost of maintaining funds *382 available to Pacific to meet its financial needs, are criticized, as is American's failure to credit Pacific with the amount of royalties received by American on the patents it holds. Further, the amicus curiae brief attacks the inclusion of Bell Laboratories costs paid by American as a part of its license contract expense, and the so-called "holding company" expenses of American, such, for example, as expense of its Treasury, Executive and Accounting Departments.
The commissioner has made no findings upon these issues.
There are findings that, with the exception of the research and development work done by Bell Laboratories, the services now being rendered by Ebasco Services, Inc., to the Pacific Power and Light Company are generally the same as those which Pacific receives from American; that there is no relationship between the actual cost to American of rendering license service to Pacific and the percentage payments to be made under the license contract; and that it is contrary to the public interest, the interest of Pacific and its minority stockholders and its rate payers for Pacific to make these payments. There is also what possibly might be considered a general finding in the reference to Order No. 21507, which disapproves the expenditures under the license contract. But the commissioner has not found that the services, or any of them, are unnecessary or that Pacific has failed to prove that the proposed expenditures do not exceed the cost to American of rendering the service. Nor are there findings that the services could be obtained elsewhere at less than their cost to American, or could be rendered by Pacific's own personnel more economically and efficiently, if at all. Finding No. III with *383 reference to services rendered to Pacific Power and Light Company by Ebasco Services, Inc., "at actual cost", says nothing as to the relative efficiency or economy of the services as between Ebasco and American, or as to whether this actual cost, if the services were obtained elsewhere, would be less than Pacific proposes to pay to American.
It is provided by § 112-481, O.C.L.A., as amended, that, after a budget has been filed, the commissioner "shall examine into and investigate the same to determine whether each and all of the expenditures are fair and reasonable and not contrary to public interest, and within 60 days thereafter file his finding and order approving or rejecting the same". Section 112-4,1116, which is part of the Uniform Practice Act, provides with respect to hearings:
This requirement is by § 112-4,113 made to "apply to and govern all hearings upon any matter or issue coming before the commissioner under any act by him to be administered, whether instituted on the application, petition or complaint of others or initiated by the commissioner * * *" (Italics added.)
We said in Pierce Freight Lines v. Flagg, 177 Or. 1, 38, 159 P. (2d) 162:
See, also, Butcher v. Flagg, 185 Or. 471, 203 P. (2d) 651, and Warren v. Bean, 167 Or. 116, 125, 115 P. (2d) 167.
In Smith v. Illinois Bell Telephone Co., 282 U.S. 133, 157, 75 L. Ed. 255, 51 S. Ct. 65, a rate case in which one of the questions was as to the propriety of payments made under the license contract, the Supreme Court sent the case back for further findings, saying:
Upon the authority of that case a like course was taken in Petition of New England Telephone and Telegraph Co., 115 Vt. 494, 66 Atl. (2d) 135.
Referring to a similar situation, Chief Justice Hughes, in Florida v. United States, 282 U.S. 194, 75 L. Ed. 291, 51 S. Ct. 119, said:
*385 Among the more recent decisions of the Supreme Court of the United States which deal with this subject is Colorado-Wyoming Gas Co. v. Federal Power Commission, 324 U.S. 626, 89 L. Ed. 1235, 65 S. Ct. 850, a rate case arising under the Natural Gas Act of 1938. In remanding the case for further findings the court, speaking through Mr. Justice Douglas, said:
See, to the same effect, 146 A.L.R. 235, and cases there cited.
Although the commissioner's brief lays much emphasis upon the duty of this court to affirm the findings of the commissioner where they are supported by substantial evidence, it need hardly be said that we cannot either affirm or disaffirm findings *386 which were never made. "The courts cannot perform the function which (the legislature) assigned to them in absence of adequate findings". Colorado-Wyoming Gas Co. v. Federal Power Commission, supra.
1. Nor can we say that the general finding disapproving the budgets includes a finding of all the special facts necessary to sustain it. See 146 A.L.R. 235; 42 Am. Jur., Public Administrative Law, 501, § 151; H.P. Welch Co. v. State, 89 N.H. 428, 199 Atl. 886, 120 A.L.R. 282. An implication of that sort may not be indulged where the record indicates a contrary intention. When the findings and the orders of the commissioner are examined in the light of the entire record, the evidence introduced on behalf of the commissioner, the recitals which preceded the findings, the findings themselves and the argument in the commissioner's brief, it is manifest that the commissioner chose deliberately to ignore the evidence as to the necessity of the services and their cost. All this may be summed up in the statement in the commissioner's brief that the orders here "only denied payment by a method found to be contrary to the public interest." The testimony of Mr. J.L. Kennedy, chief accountant in charge of the commissioner's department of finance and accounts, who is the principal proponent on the commissioner's staff of the ideas embodied in the order, fully supports this statement, for he testified on cross-examination that the dollars of operating expense in Oregon were not of primary concern to him but the method of determining the number of dollars to be paid is the important thing.
2. The issues to which we have referred, all relating to the value, necessity and cost of the services are *387 basic; but in the absence of findings upon them, we are not authorized to review them.
The decisive question, therefore, is whether the challenged orders transcend the commissioner's statutory authority.
3-7. The purpose of the budget statute is to enable the commissioner to safeguard the rate payers and the utility against improper payments to an affiliate for services of the kind covered by the license contract. To that end he is charged with the duty of determining whether "the expenditures are fair and reasonable and not contrary to public interest." A determination by him shall not "bar or estop him from later determining whether any or all of the expenditures made under the budget are fair, reasonable and commensurate with the service, material, supplies or equipment received". Construing the statute as a whole, as we are bound to do (City of Portland v. Duntley, 185 Or. 365, 203 P. (2d) 640), and, having in mind constitutional limitations against granting unfettered authority to administrative officers (Van Winkle v. Fred Meyer, Inc., 151 Or. 455, 49 P. (2d) 1140), we hold that the legislature did not intend to authorize the commissioner to base his determination on his own personal notion of the propriety or wisdom of proposed expenditures or of the public welfare, but that he is to be guided by the standards of fairness and reasonableness and whether the expenditures are "commensurate with the services". The legislature no doubt had in mind the prevention of "exploitation of operating companies" by affiliates. See Harv. L. Rev. 957, 981. If the operating company receives from an affiliate services that are necessary and valuable, at no greater price than the cost to the affiliate, or at a price not *388 in excess of that for which the services could be obtained elsewhere or could be performed by the company itself, it is not apparent that the commissioner is authorized to disallow payments for such services.
Pacific justifies the contract under which it and the other operating companies agree to pay a percentage of their gross revenues to American for identical services by the claim that, since the companies are engaged in a common enterprise having common problems, it is the most economical and efficient way of receiving such services, and, as to some of them at least, the only practicable way. Pacific also emphasizes the need of a continuing service. For example, it is the beneficiary under the contract of discoveries recently made and presently being applied in new apparatus and equipment as the result of many years of research by Bell Laboratories. It contends that it would not be practicable to order or pay for a specific part of such service at cost in the sense of the commissioner's orders. It makes an impressive showing in the evidence of remarkable progress in the telephone industry under this system. Extended reference to the evidence is deemed unnecessary, but the following from the testimony of Mr. Keith S. McHugh, a vice president of American, in support of his statement that "the telephone business has one characteristic which I believe is unique", illustrates graphically the thesis of Pacific that there must be a centralized agency for the furnishing of continuous services such as those covered by the license contract:
There seems to be no serious contention on the part of the commissioner that there is any agency anywhere better equipped to render these services than American, or that there is any other agency anywhere that is equipped to furnish some of the services at all, as, for example, the scientific research work pertaining to the art of telephony, or to maintain connections between the systems of Pacific and the other operating companies of the Bell System.
The requirement of the orders that Pacific requisition the services is now out of the case, as the Circuit Court held that provision invalid and the commissioner has not appealed. What is left is the disapproval of the budgets and the direction that Pacific shall not pay to American more than the "actual cost" to American of rendering such services, and that "said costs do not exceed the amount (for which) such service could be obtained elsewhere or performed by its own personnel." The evidence and the argument of counsel reveal that by "actual cost" is not meant cost to American, as established by the evidence, for all the services *390 in one package to all the operating companies, and then apportioned among the companies and to the Oregon area of Pacific, but specific costs of services rendered to Pacific, individually, instead of as a sharer with the other operating companies of a common service rendered to all of them as constituent parts of the Bell System. The method ordered by the commissioner appears to have for its model that pursued by Ebasco Services, Inc., which renders services on requisition to companies making up the Electric Bond and Share group and other corporations in the electric light and power industry and to many other organizations. Practically all the evidence introduced on behalf of the commissioner dealt with Ebasco's services, how they are requisitioned, and their cost determined. While we do not consider the point decisive, the evidence hardly justifies the finding that, with the exception of the research and development work performed by Bell Laboratories, Ebasco services "in all respects are generally the same" as American services to Pacific. One respect in which they are materially different is that only 2.05 per cent of Ebasco services is group services, while 97.95 per cent is specific service. On the other hand, there is convincing evidence that over 90 per cent of service under the license contract is group service. Moreover, the problem of the telephone companies in contracting for such services is quite different from that of those in the electric industry. It was conceded on cross-examination by Mr. Will T. Neill, vice president of the Pacific Power and Light Company, who testified at length as to Ebasco methods, that there is nothing in the electric industry which makes it essential to the giving of efficient service by his company that its plant be in any way coordinated *391 with the plant of a similar company in another part of the country. Obviously, a high degree of coordination among the operating companies of the Bell System is absolutely essential.
8. To sustain the commissioner's orders we would have to say that the legislature has empowered him to disallow proposed expenditures, notwithstanding they are shown to be for necessary services and reasonable in amount, because he disapproves, not the "expenditures" but the method by which the services are contracted for. We would have to say, further, that the commissioner is empowered to prescribe the terms on which the utility may contract for such services. This would be an interference with the powers of management incident to ownership, which, regardless of the constitutional question raised by counsel for Pacific (see Missouri ex rel Southwestern Bell and Telephone Company v. Public Service Commission, 262 U.S. 276, 67 L. Ed. 981, 43 S. Ct. 544, 31 A.L.R. 807), we are not at liberty to hold was authorized by the legislature in the absence of a clear expression of that intent. It would have been a simple matter to confer the asserted power in plain language; we have no warrant for conferring it by interpretation.
It is argued, however, that (in the language of the findings) "there is no relationship between the actual cost to the American Telephone and Telegraph Company of rendering license services to the Oregon area of The Pacific Telephone and Telegraph Company and the payments required to be made under the license contract based upon a percentage of gross revenues." And it is said that the commissioner "only asks, and his only order has been, that he be permitted to see *392 the cost of rendering such service and has ordered a plan that at least should be tried before it is condemned." It is, of course, true that there is no necessary relation between the percentage payment and the cost of the service. But there is bound to be a relation between the amount in dollars of the percentage payment and the cost  it will be either greater or less or the same. The argument seems to be based on the assumption that it is impossible to ascertain the cost of services rendered under the license contract. We think it is an erroneous assumption. The commissioner's chief accountant conceded on cross-examination that where group service is rendered to a number of associated companies, the total cost of rendering the service would be spread among the recipients of the service on "some acceptable basis" and that the cost allocated to each company would be "the total actual cost allocated to the individual companies on an acceptable basis." The courts have sustained showings such as were made by Pacific in this case as to such costs. The commissioner has ample authority under the statute to hold hearings and investigate the items of a proposed budget. A determination by him does not estop him from later reopening the question and making a different determination based upon fuller information. And, as the court said in Pacific Telephone and Telegraph Co. v. Public Utilities Commission, (Cal.) 215 P. (2d) 441 (decided February 28, 1950), "in fixing Pacific's rates the commission may disallow expenditures that it finds unreasonable, thus insuring that any excessive costs will be met from Pacific's profits."
In Southwestern Bell Telephone Company v. The State Corporation Commission of the State of Kansas, decided June 10, 1950, by the Supreme Court of Kansas *393 and not yet reported, the court construed the following statute:
The commission had held that a showing of cost similar to that made by Pacific in the present case was not a compliance with the statute. The commissioner's order was set aside by the Supreme Court, which affirmed a finding of the District Court, which included this sentence: "All such costs were actual costs to American and did not cease to be actual when they were apportioned."
In Washington the Department of Public Service disallowed the license fee paid to American under the license contract. The Supreme Court of Washington set the order aside in State v. Department of Public Service, 19 Wash. (2d) 200, 142 P. (2d) 498 (1943). The court said that the department found "that from the evidence introduced it was impossible to ascertain the duties performed by those employees whose wages and expenses were charged in connection with the research and other matters connected with the services *394 performed under direction of the American Company", and that the department was of the opinion that "no definite connection was shown between the service rendered and respondent's state of Washington operations." As to this the court said:
Since the decision in 1930 by the Supreme Court in Smith v. Illinois Bell Telephone Co., supra, it has been recognized that the utility is entitled to charge as operating expense no more than the cost of the services rendered under the license contract properly allocable to the telephone business involved. In addition to the cases already cited payments under the license contract have been approved in Southern Bell T. & T. Co. v. Georgia Public Service Commission, 203 Ga. 832, 49 S.E. 2d) 38 (1948); Alabama Public Service Commission v. Southern Bell T. & T. Co., (Ala.) 42 So. (2d) 655 (1949); Southern Bell T. & T. Co. v. Railroad and Public Utilities Commission, 76 P.U.R. (N.S.) 101 (1948). *395 See, also, Petition of New England Telephone and Telegraph Co., supra. We have been referred to no appellate court decision, and know of none, which refuses to uphold such expenditures when the utility has by proof established their reasonableness in accordance with the rule of the Illinois Bell Telephone Company case.
Pacific Telephone and Telegraph Company v. Public Utilities Commission, supra, is a decision upon substantially the same issue which this case presents. The commission, by order, found that the license contract "was not in fact a contract but an arbitrary exaction from Pacific by its controlling parent company", and ordered that Pacific file with the commission bi-monthly reports for the preceding two-calendar-month period showing all payments made to American "together with an itemization of said services and the amount paid by (Pacific) for each type of service rendered". It was further ordered that the reports should show for each type of service rendered the total cost incurred by American or its affiliates in the rendition of said service on an allocated basis segregated as to company-wide, total California and California intrastate operations. The commission claimed to find authority to make the order in statutes which empowered the commission to regulate the contracts of a utility affecting its rates and vested the commission with power "to do all things, whether herein specifically designated or in addition thereto, which are necessary and convenient in the exercise of such power and jurisdiction." The court held that the commission had not been given jurisdiction to determine the terms on which Pacific might contract with American, saying:
It was further said:
9. Our consideration of this case has led us to the same conclusion as that reached by the California court. While we hold that the orders under review are not within the commissioner's statutory authority, our decision leaves the commissioner entirely free to determine whether the proposed expenditures meet the test of the budget statute as we construe its provisions.
The decree of the Circuit Court is reversed and the orders under review annulled.
LATOURETTE, J., DISSENTING.
The majority opinion in this case would perhaps be correct if the matter turned solely on the interpretation of Ch. 132, Or. Laws, 1945, which amends § 1 of Ch. 441, Or. Laws, 1933, relating to the power of the Commissioner to regulate, restrict and control budgets of expenditures of public utilities, but it seems to me that § 2 of Ch. 441, Or. Laws, 1933, which is § 112-482, *397 O.C.L.A., and a part of the law as amended, must be considered to arrive at a correct solution of the matter. For some reason, this section was not briefed, argued or urged by any of the parties to the litigation and was not considered in the majority opinion. Section 2, supra, is as follows:
We see from the above that the propriety and reasonableness of the "contract for payment" must be submitted and approved by the Commissioner. We further observe that after an investigation, he has the authority, if he determines that the contract is not fair and reasonable and is contrary to public interest, to enter findings and an order accordingly, and it shall therefore "be unlawful to recognize said contract for the purposes aforesaid." The Commissioner made the following findings:
and,
and thereafter entered the following order:
It is clear to me that the findings and the Commissioner's order, supra, included an attack on the license contract itself, as well as on the expenditures under the contract.
In the case of The Pacific Telephone and Telegraph Co. v. Public Utilities Commission of State et al., (Cal.), 215 P. (2d) 441, cited in the majority opinion, the Supreme Court of California held the license contract *400 involved to be legal. One of the reasons for upholding the legality of the contract was that the law of California was not broad enough to give the Commissioner authority or power to regulate payments under the contract. However, the court said:
There were two strong dissenting opinions in that case. I quote from that of Mr. Justice Carter:
Since the legislature has expressly given the Commissioner the power and authority to pass on the propriety and reasonableness of the license contract herein involved and the commissioner has made a finding and has entered an order that such contract is contrary to public interest, I believe his order was legal and pursuant to law. I therefore dissent.