Title: Gen. Tel. Co. of Se v. Alabama Pub. Serv. Com'n

State: alabama

Issuer: Alabama Supreme Court

Document:

335 So. 2d 151 (1976)
GENERAL TELEPHONE COMPANY OF the SOUTHEAST
v.
ALABAMA PUBLIC SERVICE COMMISSION et al.
SC 1288.

Supreme Court of Alabama.
May 21, 1976.
Rehearing Denied July 2, 1976.
*153 Hill, Hill, Carter, Franco, Cole & Black, Montgomery, Ward W. Wueste, Jr., Durham, N. C., for appellant.
Carl L. Evans, Montgomery, for Alabama Public Service Commission.
Maurice F. Bishop, Birmingham, for the State of Alabama and Hon. George C. Wallace, as Governor.
Oliver W. Brantley, Troy, for 13 Ala. Municipalities.
MADDOX, Justice.
This is an appeal by General Telephone Company of the Southeast under the provisions of Title 48, Section 90, Code of Alabama 1940, Recomp.1958, from a decree of the Circuit Court of Montgomery County which affirmed an order of the Alabama Public Service Commission dated April 15, 1974.
General Telephone filed its petition with the Commission on September 13, 1973. It sought an increase in annual revenues from intrastate telephone service in Alabama of $2,147.649, which it claimed would enable it to earn 9.5% on the reasonable value of its property devoted to the public service in Alabama, and which would permit it "to fully perform its duties to the public and to enlarge its plants, facilities and equipment to continue to provide adequate service."
General Telephone alleged that it had provided various service improvements, including the establishment of Extended Area Service (EAS) between Andalusia and Red Level and between its Dothan exchange and Columbia, Headland, Midland City, Newton and Pinckard. Additional EAS was established between New Brockton and Enterprise and between the exchanges of Daleville, Ozark, Echo, Enterprise and Newton. The company also alleged that the changes in the type of service from toll or long distances to EAS was of benefit to its customers, but resulted in a reduction to the company in income available for return and in the rate of return for the company which was not offset by increased rates from movement of various small exchanges into larger exchange rate groups.
The company contended that as a result of service improvement programs, including elimination of multi-party service in all but eight exchanges, increases in intrastate telephone plant in-service amounted to $20,832,441 between May 31, 1971, and the period ending April 30, 1973, adjusted to the level of April 30, 1974, pursuant to the provisions of Title 48, Section 52, Code of Alabama 1940, Recomp.1958. The company also claimed that the increase in telephone plant in-service was financed in substantial part through the sale of securities, which resulted in a substantial increase in the cost of capital to it, because of the increased cost of borrowing money.
On October 11, 1973, the Commission issued its order of suspension of the proposed schedules of rates and charges to April 15, 1974, and gave notice of hearing to begin on November 12, 1973, which was subsequently changed to November 14, 1973. On November 14, petitions to intervene were filed on behalf of George C. Wallace as Governor of the State of Alabama, and on behalf of the cities and towns of Brundidge, Andalusia, River Falls, Dozier, Pinckard, Kinston, Ariton, Dothan, McKenzie, Brantley and Abbeville. On November 30, 1973, petition for intervention was filed on behalf of the City of Geneva, with a subsequent petition of intervention filed on behalf of the City of Elba on January 16, 1974. Hearings were held on November 14, 1973, and on February 19, 21, 22, March 8, 9, and 11, 1974.
*154 On February 22, 1974, the APSC issued an Order on Remand in Docket No. 16474[1] reducing General Telephone's approved rates by 30 cents per month for residential telephones or $206,158 annually. The effect of the reduction, says General Telephone, was to increase the revenue sought in the present case to $2,389,578 on an annual basis.
On April 15, 1974, the APSC issued its order making findings and conclusions as to the rate base for General Telephone, its operating income, its debt equity ratio, its cost of capital, and found a rate of return on rate base of 7.20%. The Commission then denied the proposed schedule of rates and charges, giving, in part, as its reason for the denial, the statement:
On April 18, 1974, appellant filed its Notice of Appeal and appeal bond for security of costs.
Subsequently, the company filed application for supersedeas on April 29, 1974, and obtained supersedeas of the order of the Commission on May 24, 1974. Supersedeas has been continued in effect.
Each of the intervenors in the proceedings before the Commission filed motions to intervene and were allowed to intervene by order of the circuit court and each of the intervenors and the Commission filed an answer and cross-bill to bill in the nature of a bill of complaint.
In an order dated May 24, 1974, the Circuit Court of Montgomery County entered an order remanding the case to the APSC for further proceedings, and directed the Commission to make findings as to the rate base, revenues, expenses and rate of return in a manner consistent with the computations which the circuit court had expressly approved in Case No. 38653, by order dated February 1, 1974, which order was subsequently appealed by various of the intervenors in the present case, to this Court and affirmed in State of Alabama v. Alabama Public Service Commission, 293 Ala. 553, 307 So. 2d 521 (1975). On July 3, 1974, the APSC filed a petition for Writ of Mandamus in this Court seeking to have the order of remand dated May 24, 1974, reviewed and vacated, but the matter was *155 dismissed by this Court by order dated July 15, 1974.
On July 22, 1974, the APSC issued a supplemental order and made findings in compliance with the order of the circuit court, dated May 24, 1974, with regard to appellant's rate base, expenses, revenues and rate of return. The Commission concluded:
The circuit court reviewed the order and on May 6, 1975, found that it was supported by the substantial weight of the evidence, and was due to be affirmed. General Telephone appealed and "asks that the Court review the case upon the certified record, make its independent findings of fact and conclusions of law, and set aside the Order of the Commission as being confiscatory and remand to the Commission to establish just and reasonable rates and charges. . ."
General Telephone argues two basic issues: (1) the evidence was insufficient to sustain the finding by the APSC that a 7.36% rate of return was reasonable and (2) the rate of return is not equal to that generally being earned by others in the same general locality in business undertakings attended by corresponding risks and uncertainties and is so low as to result in the confiscation of its property. In short, the primary issue argued by General Telephone is that the rate of return allowed by the APSC is confiscatory.
In determining what is a fair return in order to avoid confiscation, a number of controlling legal principles are used. These principles are set out in detail in Alabama Public Service Commission v. Southern Bell Tel. & Tel. Co., 253 Ala. 1, 42 So. 2d 655 (1949). We consider it unnecessary to set out all of the legal principles noted by the Court in the Southern Bell case, but the plain holding of that case is that the law of this state not only requires that the utility be permitted to charge just and reasonable rates which will enable it to earn a fair net return on the reasonable value of its properties, but it take cognizance of the fact that the utility is at all times required to furnish adequate service to the public and to construct plant and facilities for enlargement and improvement of its service. It also recognizes that a utility should earn a return sufficient to inspire confidence in the financial soundness of the enterprise so that it can raise the necessary capital on reasonable terms to discharge its duty to the public.
The determination of a fair return to provide the public with adequate service is a question of fact within the legislative realm of rate-making. The rate of return in any given case calls for expert judgment not bound by any hard and fast rule or set formula. That judgment has been entrusted by the legislature to the Commission. This Court's inquiry ordinarily goes no further than to ascertain whether there is evidence to support the findings of the Commission. Alabama Gas Corp. v. George C. Wallace, as Governor, 293 Ala. 594, 602, 308, So.2d 674 (1975).
In the case at bar, however, we have a rate case where the constitutional issue of confiscation is raised. Therefore, we must recognize the distinction between the limited scope of review when the action of the Commission is within the sphere of legislative authority and the broad scope of review which must be afforded when the question is whether the Commission has acted beyond the boundaries of legislative authorities. It is clear from our cases that a duty rests on this Court to examine the order of the Alabama Public Service Commission on the issue of confiscation and the schedule of intrastate rates and in this connection to exercise our independent judgment on both the facts and the law involved. *156 Alabama Public Service Commission v. Southern Bell Tel. & Tel. Co., 253 Ala. 1, 42 So. 2d 655 (1949). Of course, the ultimate question in every rate case is a fair rate of return from a predetermined rate base. What will constitute a fair return in a given case is not capable of exact mathematical demonstration. It is a matter more or less of approximation, about which conclusions may differ. State v. Alabama Public Service Commission, 293 Ala. 553, 307 So. 2d 521 (1975). The conclusions of the parties in this appeal differ widely.
In their briefs, and during oral argument, General Telephone and the intervenors used complicated mathematical computations to show, respectively, that the Commission order was confiscatory, on the one hand, and completely reasonable and just on the other hand. In fact, the intervenors said they "parted company" with the Commission's order in some instances. They did not cross-appeal, however.
The main disagreement, though not the only one, between the parties revolves around a question of how to treat $13,783,000 of unamortized investment tax credits and deferred income taxes. The telephone company contends that these items are properly includable in the rate base since the deferrals were included in the capital structure at zero cost. The company cites a statement by the Alabama Public Service Commission in Re South Central Bell Telephone Co., Docket 16392, 89 PUR 3 Ed. 519, 522 (1971), in support of its position. There, the APSC said:
Our research shows that regulatory commissions are not in harmony on the treatment which should be given to these socalled "deferrals." A majority of regulatory agencies appear to exclude unamortized investment tax credits and deferred income taxes from the rate base on the ground that they represent customer contributed costfree capital. See PUR Dig. 2 Ed. Vol. 9 § 192.1, Valuation, at 7040. It appears that even the Alabama Public Service Commission has on at least one occasion excluded such cost-free capital from the rate base.[2]
Even though the "confiscation" question was not raised in State v. Alabama Public Service Commission, 293 Ala. 553, 307 So. 2d 521 (1975), what this Court said there is abundantly true here. There, this Court opined:
The telephone company argues that the record affirmatively shows that the 7.36% return on rate base will not result in an 11.05% return on equity, which the company contends the Commission found was reasonable.
Intervenors, on the other hand, take the same evidence and arrive at a totally different rate of return to equity. They accomplish this primarily by deducting the "deferrals"  or cost-free funds  from the capital structure.
Under one method, the intervenors say that the record shows that 93.06%[3] of the plant in-service is invested capital and the balance is in the cost-free funds. They argued orally:
A higher rate of return on common equity is accomplished by the intervenors under their second computation.
Here's the argument:
Faced with these conflicting calculations which are based upon the same record, and with the duty to make a determination of the question upon our independent judgment as to both law and facts, we find that the best way to determine what actually happened would be to remand the cause to the Commission for a limited reopening of the hearing.
It has been said that "[E]laborate calculations which are at war with realities are of no avail." Lindheimer v. Illinois Bell Tel. Co., 292 U.S. 151, 164, 54 S. Ct. 658, 663, 78 L. Ed. 1182, 1191 (1934). If the opinions and prophecies of the experts were wrong, and confiscation, in fact, did occur, we would be under a duty to make sure that the utility received a reasonable return on the value of the property used at the time that it was being used for the public service. Alabama Public Service Commission v. Southern Bell, supra.
The telephone company argues in brief:
The company cites the New York decision in New York Tel. Co. v. New York Public Service Commission, 29 N.Y.2d 164, 324 N.Y.S.2d 53, 272 N.E.2d 554, 556 (1971), in support of the above-quoted argument. There, the court remanded the cause to the Commission to reopen the hearing to determine, from actual experience, the effect of the Commission's order. There, the Court of Appeals of New York held that where, according to the telephone company's figures, the actual experience yielded a significantly lower return than that deemed reasonable by the Public Service Commission, the refusal of the Commission to reopen proceedings to consider the actual operating experience of the company in arriving at a proper rate was arbitrary. The court said:
The Commission, in its order, has determined that a 11.05% return to equity is just and reasonable. This finding is supported by substantial evidence in the record. If the 11.05% return on equity has not been produced, it would be an indication that the overall rate of return of 7.36% was not sufficient, from the outset, to result in a fair rate on equity. If however, experience shows to the contrary, then the only question remaining is whether the prescribed rates of return meet the legal standards to be applied where confiscation is alleged. In view of the wide variations between the parties on the prospective returns that would result from the order, it is appropriate to test those returns by a practical yardstick  the actual experience under the order.
*160 The remand of this case to the Commission should not be considered as a routine procedure which the Court will follow when confiscation is alleged. Ratemaking is legislative, and not judicial. Alabama Public Service Commission v. Southern Bell T. & T. Co., 253 Ala. 1, 42 So. 2d 655 (1949). While a remand will not always be appropriate, neither will it be inappropriate.
When this Court finds it "expedient" to do so, it can remand a cause to the Commission for further proceedings or evidence. Title 48, Section 82, Code; Alabama Public Service Commission v. Atlantic Coast L. R. Co., 253 Ala. 559, 45 So. 2d 449 (1950). This Court has remanded causes to the Commission in prior cases. In Alabama Public Service Commission v. Southern Bell T. & T. Co., 268 Ala. 312, 106 So. 2d 163 (1958), this Court said:
We elect to remand this case. Under our statutory scheme, the company will not be harmed since it has been permitted to supersede the order of the Commission pending a judicial review. There is no danger of irreparable harm to the subscribers either, as the excess, if any, of the proposed rates over that authorized by the Commission after remand would be refunded.
As we view the matter, the Commission has determined that an 11.05% return to equity is reasonable.
This rate of return to equity might become unreasonable because of changed economic conditions. If the company thought the rate was too low, it could file a rate hike proposal. If these intervenors thought the 11.05% return to equity became unreasonable because of changed economic conditions, they could file a complaint and charge that the rates were unfair and unreasonable; likewise, the Commission, "whenever it deems that the public interest so requires" may make investigation. The whole purpose of rate-making is to insure that the rates "shall be reasonable and just to both the utility and the public." Title 48, §§ 52, 57, Code.
In view of what we have said, we remand this cause to the Commission with instructions to reopen the hearing within sixty days after receipt of the certificate of judgment from this Court for the limited purpose of determining the actual rate of return earned under the rates allowable on the Company's property devoted to public service, as defined in the statute. The Commission, after considering this additional *161 evidence, is directed to determine whether the rate of return allowed by the order here on appeal produced a return to equity of 11.05% which the Commission has determined was reasonable. If not, the Commission should approve a new rate.
In the meantime, the supersedeas order made in the circuit court, and the bonds given pursuant thereto, as required by law, shall remain and continue in full force and effect until final disposition of this cause. Alabama Public Service Commission v. Southern Bell T. & T. Co., 268 Ala. 312, 106 So. 2d 163 (1958).
MERRILL, JONES, ALMON and EMBRY, JJ., concur.
HEFLIN, C. J., and BLOODWORTH, FAULKNER and SHORES, JJ., dissent.
BLOODWORTH, Justice (dissenting).
I most respectfully dissent.
In Mr. Justice Maddox' majority opinion, he writes that General Telephone argues (for reversal) two basic issues: (1) that the evidence is insufficient to sustain the APSC's finding that a 7.36 percent rate of return on the rate base is reasonable; and, (2) that the rate of return to equity is not 11.05 percent as found by APSC. Justice Maddox concludes, "In short the primary issue . . . is that the rate of return [7.36 percent] is confiscatory."
As to the first inquiry, I understand the case is remanded to the APSC for a determination as to whether the 7.36 percent rate of return on the rate base has produced a return to equity of 11.05 percent according to "actual experience."
The main disagreement between the parties, the majority opinion states, is how to treat $13,783.000 of unamortized investment tax credits and deferred income taxes. The opinion concludes that a majority of regulatory agencies appear to exclude this item from the rate base on the ground that it represents "customer contributed cost-free capital." Is it not our duty to determine which view this Court should take in handling this item ?
It seems unwise, to me, to set this precedent by remanding this case to the APSC to determine "from actual experience, the effect of the Commission's order." Of course, actual experience is always better than predictions as to future performance. But, if this case is remanded to determine "actual experience," why shouldn't we do so in all such rate cases when the question of "confiscation" is raised? In view of the fact that the APSC functions in a legislative capacity, it seems perfectly proper that it act "prospectively."
Although this Court has remanded cases to the APSC previously, it was not to determine "actual experience" vis-a-vis the issue of confiscation. In Alabama Public SerCom'n. v. Southern Bell T. & T. Co., 268 Ala. 312, 106 So. 2d 163 (1958), cited by the majority, the case was remanded because the Commission erred in excluding costs of reproduction, inter alia.
It may be appealing to remand to get the benefit of "actual experience." But, to do so in every case will place an unreasonable burden of delay on litigants, on the APSC, on the courts, but most of all on those least able to bear the burden, the consumer. Remandment will delay unduly the time it takes rate cases to journey through the courts.
Thus, I must conclude that we should not remand this case but should ourselves make a determination from the record as to whether the 7.36 percent rate of return is confiscatory or not.
HEFLIN, C. J., and FAULKNER, and SHORES, JJ., concur.
[1]  Docket No. 16474 refers to an application filed by General Telephone with the Alabama Public Service Commission on 23 September, 1971, seeking an increase in intrastate rates from its Alabama customers in the amount of $2,504,450 annually. For a complete history of that case, see State v. Alabama Public Service Commission, 293 Ala. 553, 307 So. 2d 521 (1975).
[2]  "The commission deducted from a gas company's rate base, as an item of cost-free capital, a substantial amount representing accumulated deferred income taxes arising from the use of accelerated depreciation under the Internal Revenue Code. Re Mobile Gas Service Corp., Docket 14908, Sept. 12,1960." PUR Dig. 2 Ed.Vol. 9, § 192.1, Valuation, at 7040.
[3]  "COMPANY APPENDIX A CORRECTED*

* ALL AMOUNTS TAKEN FROM RECORD, PAGE 1883
NOTE: The above factual information is per the Balance Sheet of GTSE at 4/30/73"