Case Name: City of Ft. Smith v. Southwestern Bell Telephone Company
Court: Arkansas Supreme Court
Jurisdiction: Arkansas
Decision Date: 1952-02-18
Citations: 220 Ark. 70
Docket Number: 4-9647
Parties: City of Ft. Smith v. Southwestern Bell Telephone Company.
Judges: Mr. Justice Millwee and Mr. Justice George Rose Smith would sustain the Cities’ third contention, and disallow Southwestern a working capital of $410,000. To such extent only, they dissent from the opinion.
Reporter: Arkansas Reports
Volume: 220
Pages: 70–100

Head Matter:
City of Ft. Smith v. Southwestern Bell Telephone Company.
4-9647
247 S. W. 2d 474
Opinion delivered February 18, 1952.
Rehearing denied April 7, 1952.
B. A. Eilbott, Jr., Harrell Harper, Glyman E.' I sard, Kaneaster Hodges, M. M. Little, O. D. Longstreth, Jr., and Joseph Brooks, for appellant.
Blake Downie, L. Wright and Bonald J. Foulis, for appellee.

Opinion:
Ed. F. McFaddin, Justice.
This appeal involves telephone rates. The appellants (hereinafter called "Cities") are the City of Fort Smith and nine other Arkansas cities, which protest the rate increase made by the order herein involved. The real appellee is the Southwestern Bell Telephone Company (hereinafter called "Southwestern") which, by cross-appeal, seeks a greater rate increase than the one allowed. The Arkansas Public Service Commission (hereinafter called "Commission") is also an appellee, since this proceeding was prosecuted in the Circuit Court by petition to review the order of the Commission under § 73-233 Ark. Stats.
On August 21, 1950, Southwestern filed with the Commission certain rate schedules designed to increase Southwestern's annual Arkansas revenues by the sum of $4,600,000. The increased rates were to become effective on September 21, 1950. On August 22, 1950, the Commission suspended the said schedules, and on August 23rd, Southwestern filed with the Commission a bond to insure any refunds ordered; and accordingly the said proposed increased rates were put into effect on September 21, 1950. (See § 73-217 Ark. Stats.) Interventions and objections were filed by a number of cities in Arkansas which are served by Southwestern.
Hearings commenced before the Commission on September 5, 1950, and, with various recesses, continued until November 28, 1950; and on January 20, 1951, the issued its findings, and order here challenged. On January 25, 1950, certain cities, including all the appellants, filed a petition for rehearing, and when such petition was denied by the Commission, the present ten appellant cities filed in the Pulaski Circuit Court on March 3, 1951, a petition for review of the Commission's order. Such is the procedure prescribed by § 73-233 Ark. Stats. Likewise, Southwestern filed with the Commission a petition for rehearing and later filed in the Circuit Court a petition for review. The Circuit Court, by judgment of July 5, 1951, dismissed the petitions for review of all of the parties; and this direct and cross-appeal ensued after proper motions for new trial were filed, both by the ten appellant cities and by Southwestern.
The record reflects that Southwestern is a Missouri corporation, and operates as a telephone public utility in the States of Missouri, Oklahoma, Kansas, Arkansas, Texas, and a portion of Illinois; that Southwestern is a subsidiary of, and wholly owned by, American Telephone & Telegraph Company, which latter, having assets of over 10 billion dollars, is the largest corporation in the United States. American Telephone & Telegraph Company (sometimes herein called "American") owns in whole or in part, either directly or indirectly through its other subsidiaries like Southwestern, nineteen operating telephone companies, and supplies more telephone service than all the other telephone companies in the United States combined.
American owns 98.8% of the stock of Western Electric Company, which is the subsidiary that manufactures and sells telephone equipment to all the nineteen telephone companies controlled by American. American also controls the "Bell Telephone Laboratories", a research and development project, and has a-"Long Lines Department", which has the long distance lines that supply the wire and other facilities for calls from one city to another. American charges Southwestern a fee of 1°/o of its gross revenue for "Supervision", and fixes Western.Electric's charges to Southwestern; and also, subject to Federal and State regulations, American determines the charges Southwestern pays to "Long Lines Department". It is apparent that American, through its affiliates, does not bargain with Southwestern at arm's length.
In proceedings before regulatory bodies to fix utility rates, it is axiomatic that the rate fixed must be fair to all e., the public must not be overcharged, and the rate fixed must not be so low as to amount to a confiscation of the property of the utility. Somewhere between these two and confiscabe the rate to be fixed. But a tremendous factor in determining a rate depends on the method or methods used to calculate the investment of the utility. A most important factor, if not the prime one, is the so-called "proper rate base", which means the method used to determine the proper value of the property of the utility dedicated to, and actually' employed in, the public use. In the case at bar, the Commission determined that: "a proper rate base is the original or book cost, less the depreciation reserve". To this figure, the Commission added amounts for what it considered necessary "cash working capital", and "material and supplies", and reached this calculation:
"Original Cost, December 31,1950.$44,453,000.00
Less Depreciation Reserve, December 31,1950. 10,254,000.00
Net Plant Used and Useful, December 31,1950. 34,199,000.00
Material and Supplies. 445,000.00
Cash Working Capital. 410,000.00
Total Plant Account as of December 31, 1950. 35,054,000.00"
The next steps in the Commission's problem were, (1) to determine what net rate of return Southwestern should have on its "rate base", and (2) to determine the increase in revenue necessary to yield such net rate of return. The Commission fixed 6% as the rate of return; and then, to determine the increase necessary to allow 6%, the Commission used this set of figures:
"Operating Revenues .$14,102,000.00
Operating Expenses. 11,907,000.00
Total. 12,722,000.00
Net Before Taxes. 1,380,000.00
Income Taxes per Exhibit.. 417,000.00
Total. 434,000.00
Balance Available. 946,000.00
6% Return on $35,054,000. 2,103,240.00
Deficit in Net Operating Income. 1,157,240.00
Times 2.012194 equals Additional Revenue Necessary . 2,328,591.00
Add Revenue in Books from Sept. 21, 1950, Account of Increase under Bond... 1,277,000.00
Total Increase Necessary. 3,605,591.00"
The effect of this last stated calculation was to allow Southwestern an increase of $3,605,591 per annum, instead of the $4,600,000 per annum which Southwestern sought. . That is to say, Southwestern was allowed by the Commission to charge rates which would increase its gross revenue by the sum of $3,605,591.
The next and final step in the Commission's task was to put into effect a schedule of rates which would yield to Southwestern its present revenue, plus the increase of $3,605,591. That step in the proceedings is reserved for tlie final portion of this opinion, because tlie main questions now before us relate to the figures which were used to arrive at the designated increase of $3,605,591.
To the decision of the Commission allowing the increase of $3,605,591, the Cities claim the Commission erred in four points :
"1. Fixing the rate base as of December. 31, 1950, instead of September 30, 1950.
"2. Permitting the Southwestern Bell Telephone Company to back-bill for an initial period of one month when new rates became effective September 21, 1950.
"3. Allowing cash working capital in the sum of when the Telephone Company collects its bills in advance.
"4. Allowing a rate of return of 6%, which is excessive and not supported by evidence, instead of 5%, which is the amount that should have been allowed. ' '
To the failure of the Commission to allow Southwestern the prayed increase of $4,600,000, Southwestern complains, and argues its cross-appeal in this Court under the following points :
I. The Commission Erred in Allowing a Return of Only 6% on a Net Investment Rate Base.
"Point II. The Commission Erred in Refusing to Recognize and Give Weight to the Present Value of the Company's Property.
"Point III. The Commission Erred in Computing the Amount of Rate Increase in such a Way the Company Never Will Be Able to Earn as Much as the Commission Found It Is Entitled to Earn."
The record before us is voluminous: consisting of more than five thousand typewritten or mimeographed pages, and more than eight hundred pages of printed abstracts and briefs. Even to list the adjudicated cases and standard text books and commentaries cited would consume several pages. We come now to the decision we have reached.
I. Extent of Review. At the outset and before discussing the specific issues, it is well that we again state the extent to which the Circuit Court in the first instance, and this Court on appeal, reviews the Commission's findings of fact in a case like this one. The applicable statute is Paragraph 73-233 (d) Ark. Stats.:
"The review shall not be extended further than to determine whether the Department (Commission) has regularly pursued its authority, including a determination of whether the order or decision under review violated any right of the complainant under the Constitution of the United States or of the State of Arkansas."
If the Department's order is supported by substantial evidence, free from fraud, and not arbitrary, it is the duty of the Courts to permit it to stand, even though the Courts might disagree with the wisdom of the order.
As regards the extent of the review sought by the Cities, we quote from Department of Public Utilities v. Arkansas-Louisiana Gas Co., 200 Ark. 983, 142 S. W. 2d 213:
"It is contended, and we think correctly, that since there is no claim by appellee that the order of the Department complained of violated any of its constitutional rights, the review of such order 'shall not extend further than to determine whether the Department has regularly pursued its authority'. But this does not mean that the courts cannot inquire beyond mere formality. If the courts may be resorted to by any party before the Department 'for the purpose of having the lawfulness of any of its final decisions or orders inquired into and determined,' as provided in Sec. 2097 (a), then the phrase in Sec. 2097 (d), 'to determine whether the Department has regularly pursued its authority', must mean something more than an inquiry into the regularity of the proceedings before the Department. The proceedings before the Department might be regular in all respects, and still its order might be illegal and void as being arbitrary, -unreasonable, without any substantial evidence to support it, or in fraud or corruption. Jernigan, Bank Com. v. Loid Rainwater Co., 196 Ark. 251, 117 S. W. 2d 18; Lion Oil Refining Co. v. Bailey, 200 Ark. 436, 139 S. W. 2d 683."
As regards the review sought by Southwestern, we do examine, and have so examined, to see that the order of the Commission does not amount to a confiscation of the property of the Utility, and that no rights under the United States or State Constitutions have been invaded. See: Ohio Valley Water Co. v. Ben Avon Borough, 253 U. S. 287, 64 L. Ed. 908, 40 S. Ct. 587; Board of Public Utility Com'rs v. N. Y. Telephone Co., 271 U. S. 23, 70 L. Ed. 808, 46 S. Ct. 363; Alabama Public Service Comm. v. Southern Bell Telephone Co., 253 Ala. 1, 42 So. 2d 655; Dept. of Utilities v. New England T. & T. Co., 325 Mass. 281, 90 N. E. 2d 328; New England T. & T. Co. v. Department of Public Utilities, 327 Mass. 81, 97 N. E. 509.
II. The Cities' First Contention. As we have previously stated, the Commission found that Southwestern's intra-State "net plant, used and useful, on December 31, 1950" was $34,199,000. The Cities have not seen fit to urge before this Court any question as to the correctness of the "rate base'' selected by the Commission; that is, the Cities do not question, in this case, the "net cost, less depreciation'', as the method of fixing the rate base. Rather, the Cities, in their present contention, merely claim that the Commission selected an arbitrary date for the evaluation of the property of Southwestern. We agree with the Cities in this contention.
The hearings- began before the Commission on September 5, 1950; and Southwestern then offered figures of its plant extent and valuation as of May 31, 1950— four months prior to the hearings. As the hearings progressed, evidence was shown as to valuations, expenses, and earnings of Southwestern, as of September 30, 1950. All of the evidence was completed, and the hearings adjourned, on November 28, 1950. So it is obvious that there is no testimony in the record as to what actually was the plant extent and valuation as of December 31, date more than thirty days after the closing of the testimony. Figures as to the December 31st valuations were mere guesses or approximations, with no record evidence to show that proposed installations were ever in fact consummated. After the testimony closed, the Commission could not delay its opinion in order to see what equipment might be installed. The testimony must be in the record, in order that there may be a review.
One of the Commissioners dissented from his associates on the point under discussion, and used this language in his dissenting opinion:
"I believe that the rates based on September 30 figures would be reasonable and just for the present and for a reasonable time in the future and would be in line with requirements prescribed by the courts.
"Using the September figures, the company would be entitled to a rate increase of $3,177,000 per year instead of $4,600,000, which it is hoping to receive and instead of $3,605,591 allowed under the December 31 figures . . . But I am unwilling to apply the 6% rate of return to the estimated values, income and operating-expenses of December 31, 1950."
In support of the December 31, 1950, figures, Southwestern insists that it is proper to add something for future net capital additions, and that the Commission had a right to take the testimony of Southwestern's witnesses as to what would be the condition of the plant on December 31, 1950. To buttress its contention, Southwestern quotes from two cases of the Supreme Court of the U. S. The first is McCardle v. Indianapolis Water Co., 272 U. S. 400, 71 L. Ed. 316, 47 S. Ct. 144:
"In every confiscation case, the future as well as the present must be regarded. It must be determined whether the rates complained of are yielding and will yield, over and above the amounts required to pay taxes and proper operating charges, a sum sufficient to constitute just compensation for the use of the property employed to furnish the service; that is, a reasonable rate of return on the value of the property at the time of the investigation and for a reasonable time in the immediate future."
The second case urged by Southwestern is Federal Power Com. v. Hope Nat. Gas Co., decided in 1944, 320 U. S. 591, 88 L. Ed. 333, 64 S. Ct. 281, in which the Supreme Court of the U. S. said, in reference to the Federal Power Commission:
We recognize that a utility rate must be reasonable and just as to the present, and also for a reasonable time in the future, and that the Commission order to forestall subsequent applications for rate ina reasonable figure for anticipated extensions to be made in the future. But to anticipate reasonable future extensions is one thing, and quite another thing to select a future date after the closing of the evidence on which to base a factual finding as to value of property. We adhere to the view that in order to determine the actual plant, used and useful, on a certain date, there must be proof, as distinguished from mere promises or predictions: so we hold that the Commission, should have used the figures of September 30, 1950, rather than those that it did use, supposed to be December 31, 1950. The correction of this error by the Commission, means the adoption by us of the figures stated in the opinion of the dissenting Commissioner, as heretofore quoted.
III. The Cities' -Second,Contention. This relates to the service rates charged for only one month. Southwestern charges its telephone customers one month in advance. That is, the bills rendered the customers on September 21st and afterwards, showed the increased rate, which went into effect on September 21, 1950, as heretofore stated. The Cities contend, that since the order allowing the increase did not go into effect until September 21st, the bills should have shown no increased rate for one month thereafter. We see no merit to the Cities ' contention on this point.
On August 21, 1950, Southwestern filed a petition for increased rates, and gave notice that such rates would become effective on September 21, 1950. The Commission suspended the proposed rates, and a bond was then filed. Under the Statute (§ 73-217 Ark. Stats.), the bonded rates became effective on September 21, 1950, and after that date, the bonded rates were the only lawful rates that the Company could charge.
The Statute previously referred to (§ 73-217 Ark. Stats.) says:
". . . that notwithstanding any such order of suspension, the public utility may put such suspended rate or rates into effect on the date when it, or they, would have become effective if not so suspended, by filing with the Department (Commission) a bond . to insure prompt payment of . . . refunds."
Furthermore, the same section, in discussing the powers of the Commission, says:
"The Department (Commission) for good cause shown, may allow changes in rates without requiring the thirty (30) day notice, under such conditions as it may prescribe. All such allowed changes shall be immediately indicated upon its schedules by such public utility."
This section is ample authority to support the conclusion of the Commission as to the effective date of the.rates: so we find no merit to the Cities ' second contention.
IY. The Cities' Third Contention. The Commission, in determining the rate base, allowed Southwestern working capital in the sum of $410,000, in addition to the value of its properties. The Cities contend that no such sum should have been allowed for working capital, because (a) Southwestern Collects in advance from its customers; and (b) because the Commission allowed Southwestern the sum of $445,000 for materials and supplies. The Cities argue that with $445,000 worth of materials and supplies, and with collections in advance for its services, the result is that Southwestern has ample operating capital, without an additional $410,000. To review all the cases cited by the Cities in support of their contention, and those cited by Southwestern in opposition to such contention, would be unduly prolonging this opinion. While we think the figure of $410,000 is high, nevertheless, for us to substitute another figure, would be to substitute our judgment for that of the Commission, and to become a trier of the facts. This would be beyond the extent of review, as heretofore discussed. .Therefore, we uphold the Commission against the Cities' third contention.
V. The Cities' Fourth Contention. After determining the rate base, the Commission allowed South western a rate of return of 6%. The Cities claim that this 6% is grossly excessive, and that the rate of return should he 5%. This question blends into the second point of Southwestern's cross-appeal; and we will discuss it when we consider that phase of the case.
VI. The First Point of Southwestern's Gross-Appeal. Southwestern's cross-appeal presents three questions, as heretofore copied; and each is a challenge to the findings and order of the Commission. Briefly, these points relate to (a) the rate base; (b) the rate of return; and (c) computations. Considering these in the order mentioned, we first discuss the rate base.
Southwestern insists that the Commission should have determined the real value of Southwestern's properties in Arkansas, rather than to have used the "cost less depreciation" basis. The argument of Southwestern is, that it is entitled to earn a fair return on property at its present day value. We revert to a statement in an earlier portion of this e.\ "A most important factor if not the prime one, is the so-called 'proper rate base', which means the method used to determine the proper value of the property of the utility dedicated to and actually employed in the public use."
In Pond on Public Utilities, 4th Ed. § 590 et seq., there is a discussion of various methods to determine the rate base. Among those mentioned are (a) original cost, (b) the cost of reproduction, (c) outstanding capitalization, (d) present value, (e) prudent investment, and (f) net earnings. In the American Bar Association Journal for December, 1948, at page 1096, et seq., there is an article entitled: "Public Utility Property: Views of Commission Counsel as to Valuation". This article is by Everett C. McKeage, Chief Counsel of the California Public Utility Commission, and contains an excellent statement of the historical developments of the various tests and rules used in this matter of the rate base. It is pointed out that in "hard times" utilities want the original cost as the basis of calculation, whereas in times of inflation, the utilities want the reproduction value as' the basis of calculation. A careful study of the said article from the American Bar Association Journal has been helpful to this Court. From all of the cases and authorities which we have studied, we reach the conclusion that no public utility has a vested right to any particular method of valuation. The aim of a regulatory body is to determine a fair valuation; and the method of calculation may vary as between the type of the utility involved and the economic conditions existing.
In the case at bar, the Arkansas Public Service Commission used the "cost less depreciation" method; but even with that system, we point out that the Commission failed to go to the real beginning of Southwestern's system in Arkansas, and failed to see whether Southwestern had built its plant during a period of excessive rates. In short, the Commission through necessity (being understaffed for the class of investigation thrust upon it in a state-wide transaction involving thousands of miles of lines and the equipment and other properties peculiar to the business) accepted Southwestern's figures in many instances; but unquestionably the Commission was not satisfied that it had plumbed the full depth of the problem. Until Southwestern either has a separate corporation for each State it serves, or until the various States served by Southwestern pool their regulatory staffs for a system wide investigation, there will always be a thought that the other States are played against the one immediately concerned. From what we have said, it is clear that Southwestern has not made a case on its first point. And in this connection we point out that the record here reflects that Southwestern obtained a rate increase of approximately 1½ million dollars in Arkansas in September, 1948; and then filed in May, 1949, an application for' a further rate increase of 2½ million dollars. This May, 1949, application was substituted in August, 1950, for the present application of $4,600,000. So it is evident that applications for rate increase by this utility have been persistently pursued. Should Southwestern prosecute an application for a further rate increase, then the words of this paragraph will have especial pertinency. Then, undoubtedly the entire rate structure would be re examined by tbe Commission; and, of course, tbe doctrine of res judicata would not apply.
Tbe Commission took occasion to point out that Southwestern was using a portion of its receipts in a newspaper and radio campaign designed to win tbe public to tbe idea of a rate increase. Tbe Commission bad tbis to say about tbe matter:
"However, tbe record does disclose some unusual and excessive expenditures charged to tbe advertising account, and admittedly some of tbe advertising expense was incurred in connection with tbe application for a proposed rate increase. Tbe Commission condemns tbe practice of tbe Company in using tbe ratepayers ' money to conduct an advertising campaign to increase tbe rates proposed to be charged tbe ratepayer by tbe Company."
Tbe Commission's criticism of tbe Company's action in using net earnings as a means of influencing rate increases is no doubt directed to tbe proposition that a gwasi-judicial board has been created by tbe State to act for tbe public and for tbe utilities; and its determinations are not to be influenced by appeals directed to other sources. We put tbe stamp of approval on tbe Commission's quoted language, which indicates that in bearings for rate increases by any utility, tbe Commission will carefully examine to see bow much is being paid for overhead and staff work, whose duty in whole or in part is to try to get rate increases from the public. Tbe utility must use all its receipts as though they were a public trust. Receipts must no.t be dissipated in an effort to get father increases from tbe public. We are far from satisfied by tbe present record that Southwestern's rate base was thoroughly disclosed and explored. But on the record before us, we are convinced that Southwestern is not entitled to complain on tbe rate base.
VII. The Second Point of Southwestern's Gross-Appeal. Tbis relates to rate of return. We have already shown that tbe Commission fixed 6% as tbe rate. Tbe Cities claim tbis is too high; and Southwestern now insists that tbe Commission erred in allowing only 6%. Here is a portion of Southwestern's argument:
"First, we will discuss the Commission's failure to give weight to the principle that the Company is entitled to a return which is commensurate with returns on investments in enterprises having corresponding risks. Second, we will turn to the other respects in which the Commission has failed to permit the Company to protect its financial integrity so that it may maintain its credit and attract capital."
In an effort to show that it was entitled to a greater return than 6%, Southwestern called a prominent Arkansas banker, the abstract of whose testimony is as follows:
"Is testifying as to opinion of earnings currently required by telephone business in Arkansas to maintain credit with present investors. Based determination upon general knowledge of business condition of enterprises throughout Arkansas. For the purpose of securing funds for manufacturing industry you must show you can earn 15 to 25% on funds. Earnings of banks in Arkansas are a matter of record. Net returns of earnings of total invested capital in banks in Arkansas last year was 12%. This has been rate of earnings for the last four to six years. Must show earnings of 15% before you can attract funds to start state or national bank. Has no specialized knowledge of telephone or utility financing. Can tell you nothing as to securities of Southwestern Bell. Frequently invests in stock of A. T. & T. It is witness' opinion that Southwestern Bell will have to show investor at least 8% earned on money."
The witness quite candidly stated that he was not familiar with the fixing of rates to be charged by public utilities. As opposed to the views of the witness, we quote from Page 1099 of the December, 1948, issue of the American Bar Association Journal, being a portion of the article by Mr. McKeage, heretofore mentioned:
"The status of the privileged and sheltered position of a public utility, under regulation, carries with it corresponding obligations to the public. It must follow that a public utility may not lawfully demand the application of the same rules to its operations that are applicable to an unregulated business. Having undertaken to serve the public and having acquired the status that entitles it to claim the enjoyment of the extraordinary privileges available to it, a public utility may not also claim that it is entitled to the speculative profits to which the unregulated business is entitled. It must be remembered that a public utility is guaranteed against many of the hazards to which the unregulated business is subject."
Without prolonging the discussion of this point, we reach the conclusion that the 6% rate of return is fair, but at all events, Southwestern has no just cause for complaint on the rate of return fixed by the Commission until Southwestern makes full and complete disclosure of all matters affecting its operations. We accept the Commission's figure of 6% in this case, and thus refuse Southwestern's second point and the Cities' fourth point.
But it must not be deduced that in approving the 6% rate of return in this case, we are putting the stamp of approval on that rate of return in future cases regarding this or any other utility. As a matter of fact, a lower rate of return has been found to be fair for utilities in other cases. Furthermore, in considering any rate of return as regards Southwestern, the Commission should take into consideration the peculiar position that Southwestern occupies to its parent company, American Telephone & Telegraph Company, and to the number of States served. For instance, we mention only a few such factors:
(a) American is now receiving from Southwestern 1% of the gross income of Southwestern for "supervision";
(b) American borrows money at 3% or less, and has been charging Southwestern 4.75% for money loaned it;
(c) Southwestern purchases its equipment from Western (owned or controlled by American) at prices that are not shown to be competitive, and dividends to American from Western have exceeded 12% in a single year;
(d) the apportionment of expense and income to Southwestern from inter-state and intra-state business is not clearly shown;
(e) the idea of Southwestern expecting a 6% return from one State that it serves, rather than from the entire system, is just as illogical as applying the 6% rate of return to one community; and Southwestern's own suggested rates negative such idea.
In short, American, as the owner of Southwestern, receives profits and returns from Southwestern in a number of ways, and all of these should be taken into consideration in considering the rate of return -that the owner of Southwestern should receive.
VIII. The Third Point of Southwestern's Cross-Appeal. In this point, Southwestern claims that the Commission has failed to allow Southwestern enough revenue to take care of investment costs that "will mount in future years. " Southwestern uses these figures, which it claims show what will happen to the Company's rate of return:
"In 1946 (Investment Per Telephone of $198.66) . 6.05%
In 1950 (Investment Per Telephone of $263.46) . 4.55%
In 1953 (Investment Per Telephone of $329.99) . 3.64%"
Of course, whether costs "will mount" depends on a number of factors, many of which are in control of such being excessive overhead, advertising for rate increases, payments to Western Electric for equipment, etc. And, in regard to what Southwestern has paid Western Electric for equipment, the following excerpt from the Commission's opinion is pertinent and unanswered.
"The record does not show the profits on Western's business with the Company on its Arkansas operations. We should have these figures to determine whether any amount should be deducted from the rate base by reason of excessive prices paid to Western in 1948, 1949, and 1950, as was done in California, Missouri, and West Virginia. We ask that full information be given us on this question."
Until Southwestern furnishes the information above requested, it can hardly say, with hope of success, that "the Commission erred in computing the amount of rate increase."
When a utility seeks an increase of existing rates, the burden is, of course, on the utility not only to offer all evidence to justify such increase, but also to comply with all reasonable requests of the Commission for full disclosures. The Commission, in such instances, has not only the prerogative but also the duty to make requirements for full disclosure, since the Commission acts under valid Legislative authority to see that the interests of the public are fully protected.
One phase of Southwestern's argument seems to be that the more telephones in a city, the greater is the cost to operate the individual phone. This is contrary to the accepted theory of mass production. It is a matter of common knowledge that our national manufacturing supremacy has come about through unification of operations, reductions in overhead costs, financial ability to produce when markets are slack as well as during periods of high demand. Nothing in the testimony other than subscriber access to greater connections, distinguishes the nature of Southwestern's business to such an extent that the Commission would have been justified in finding that multiplied business in a city or town imposes the peculiar burden spoken is, a higher cost per telephone. If this argument should be followed to a logical conclusion, then distinct operating units would be preferable to unity of assets, equipment, and personnel. Certainly the Commission would be justified in asking for more detailed information before placing its approval upon an accounting argument so completely out of harmony with general business experience.
IX. The Little Booh And Fort Smith Rates. Distinct from all other questions are the issues raised by the Cities of Little Rock and Fort Smith as to the rates to be charged in those cities under the increase allowed in the case at bar. After the Commission allowed the said increase, Southwestern brought in a rate schedule which classified the Arkansas cities it serves into eight groups, based on the type and number of phones in each such city; and the larger the city, the greater was the rate charged for the individual phone. For example, in Portland, Arkansas, with not more than 299 dial phones, the rate for a one party residence phone was $3.75 per month; whereas in Fort Smith (with an excess of 17,000 dial phones), the rate for a one party residence phone was $5.50 per month, and in Little Rock (with an excess of 30,000 phones), the rate was $6.00 per month. Southwestern sought to justify the greater charge in Little Rock and Fort Smith by the statement that the more phones in a city, the greater cost per phone. But against this contention, Little Rock and Fort Smith offered figures from some other cities served by Southwestern. For instance, Little Rock has 57,670' phones and Southwestern is seeking to charge $6.00 per month for a one party residence phone, whereas:
(a) Oklahoma City, Oklahoma, has 123,083 phones, and the rate for a one party residence phone is $3.75 per month;
(b) Houston, Texas, has 272,291 phones, and the rate for a one party residence phone is $4.75 per month; and
(c) Dallas, Texas, has 227,118 phones, and the rate for a one party residence phone is $4.65 per month.
Faced with these facts, Southwestern said that it had to charge higher rates in Little Rock and Fort Smith to make up its losses in the smaller exchanges in Arkansas. Thus, it seems that Southwestern meets itself in a circular argument. First it says "The more phones the more costs," and then says "the larger places must pay for the smaller places." This phase of the case supports our observation heretofore made that either Southwestern should set up its hooks on a state level, or the regulatory bodies of all the States served by Southwestern should pool their staffs to make a system wide examination. But the questions presented by Little Rock and Fort Smith are matters that are not final and can be developed further in the situation brought about by the remand of this case.
We are remanding this case to the Pulaski Circuit Court, to be remanded to the Arkansas Public Service Commission, with directions to allow Southwestern an increase of $3,177,000 per year, instead of the $3,605,591 allowed by the Commission; and the Commission will order refunds to be made by Southwestern in the amount the bonded rates exceed the determined rates. Southwestern will necessarily present to the Commission a revised classification of cities and rate scales; and Little Rock and Fort Smith will then be given an opportunity to present their present contention to the Commission. The order of the Circuit Court affirming the order of the Public Service Commission, is affirmed in all respects, except as to the matters mentioned in this paragraph. Costs of appeal are assessed against Southwestern, since the Cities have obtained reversal in a case appealed from a Law Court.
Mr. Justice Millwee and Mr. Justice George Rose Smith would sustain the Cities' third contention, and disallow Southwestern a working capital of $410,000. To such extent only, they dissent from the opinion.
These are Benton, Earle, Heber Springs, Little Rock, Magnolia, Malvern, Paragould, Pine Bluff and Van Burén.
The cities so intervening or objecting before the Commission were: Altheimer, Arkadelphia, Ashdown, Barling, Batesville, Beech Grove, Beebe, Benton, Bentonville, Camden, Conway, Dermott, El Dorado, Fayetteville, Forrest City, Fort Smith, Gurdon, Harrisburg, Heber Springs, Helena, Hope, Hot Springs, Jonesboro, Lonoke, Little Rock, Malvern, Marion, Mena, Mammoth Spring, McGehee, Newport, North Little Rock, Paragould, Pine Bluff, Rogers, Searcy, Springdale, Stamps, Van Burén, West Memphis and Wynne.
See "Re: Southwestern Bell Telephone Co.," 87 Public Utilities Reports, New Series, page 97, for the complete opinion of the Commission.
The record shows that 99.99% of the common stock of Southwestern is owned by American Telephone & Telegraph Company, and no common stock of Southwestern is traded in any stock and no common stock is available for purchase by the public.
The item of $2,328,591 is obtained by multiplying the net operating deficit of $1,157,240 by 2.012194.