Opinion ID: 1422157
Heading Depth: 1
Heading Rank: 7

Heading: The Net Return or Balance Net Revenue

Text: The test period used was the first seven months of 1951, namely, from January 1, 1951 to July 31, 1951. The commission found as follows: The Commission's Tabulation From analysis of the plaintiff company's annual reports to this Commission and its Exhibits 105 and 106, I & S 117, and Exhibit 5, I & S 112, the Commission finds: Total Interstate Intrastate (5) Total operating revenue (1 to 4 Exh. 105) 3,427,140 2,158,317 1,276,500 (16) Total operating exp. & taxes (13 to 15 105) 2,874,424 1,730,044 1,144,380 (17) Balance net revenue 7 mo. (5-16 Exh. 105) 552,716 420,596 132,120 Balance net revenue (12 mo.) prorated 947,520 721,020 226,500 Avg. telep. plant in service (Exh. 5 3/31/49 I & S 112) 4,800,600 Addit. to plant to Dec. 31, 1950 (Note 1) 433,827 Total Avg. plant in service 5,234,427 Exh. 5 Depreciation 3/31/49 I & S 112 1,346,700 Depreciation  12/31/50 388,231 Total depreciation 7/31/51 1,734,931 Total net plant 3,499,496 % Balance net revenue to average net telephone plant annual basis 6.47% Note 1  Addition computed to December 31, 1950  as annual report of company. Additions for first 7 months 1951 have no appreciable effect on revenue. Note 2  Item (19) property held for future use not allowed. Item (20) working cash capital not allowed. Advance payments from 27697 subscribers (intrastate) give sufficient working cash capital, as indicated by the Company rules and regulations which read: `Bills for flat rate exchange service for the period specified in the rate schedule may be rendered at the beginning of the billing period and may be rendered monthly, fortnightly, weekly, or at such other intervals as may be considered necessary and are due and payable on presentation.'    Item (21) materials and supplies are carried as current assets  not fixed to any particular plant, (see balance sheet annual reports) carried as accounts payable to affiliated companies and not allowed for rate purposes. We are interested, at this point, chiefly in items of the intrastate revenue  the first four items in the right-hand column. The district court used its own tabulation, but took precisely the same figure for operating revenue, from which it deducted the identical figure for operating expense and taxes, and arrived again at the commission's identical figure for balance net revenue. It amplified the commission's findings of operating expense by itemizing seven individual expense accounts as carried in the company's books and reflected from its exhibits, and arrived at the same result as the commission, in deducting from the total intrastate revenues for the first seven months for 1951 (on which figure the commission, the court and the utility all agree) the amount of $1,144,380 as operating expense. It is this item that draws appellant's fire. The commission did not explain it. The court derived it as follows: 7 12 of the seven accounts of 1949 operating expense .................... $ 934,910 53% + Federal income tax 1951 to take care of fluctuations in operating expenses 155,085 23.41% of total other taxes ................. 54,385 __________ $1,144,380 The company's proof of intrastate operating expense for the first seven months of 1951, the period in question, by way of its books, its accounts, its exhibits and the testimony of its witnesses showed the figure of ......... $1,165,200 No one contested the accuracy or the propriety (except as to applying the Separations Manual in segregating the intrastate from the interstate expense) of any of the items making up such expense. It is an aggregate of the many accounts kept in compliance with requirements of the uniform system of accounts. We can find no justification for the use of any of the three items making up the commission's figure and the court's figure of $1,144,380. To deduct seven months' 1949 operating expense from seven months' 1951 revenue results in a figure that can neither be characterized nor labeled. The second item is neither understandable nor identifiable from the record. The third item applies a ratio of 23.41% as the intrastate ratio that applied in 1949. The actual intrastate ratios of intrastate plant were as follows: 23.77% on March 31, 1949; 24.96% for 1949; 29.31% for 1950; and 31.65% for the first seven months of 1951, an increase of about one fifth over 1949. The end result of reducing the intrastate expenses for the trial period of the first seven months of 1951 from the actual expense of $1,165,200, as established by the testimony, the books, records and exhibits, to the sum of $1,144,380, derived by computations from the 1949 reports, was to create a false picture of balance net revenue intrastate for the first seven months of 1951 in the sum $132,120 against an actual net revenue of $111,300, or, annualizing these figures by multiplying the same by 12/7, the commission finds an annual net revenue of $226,500 against what actually appears from the evidence to be only $190,800, a difference in annual net revenue of $35,700. On the total net intrastate plant as calculated by the commission, $3,499,496, this makes a difference of 1.02% and reduces the apparent return of 6.47%, as found by the commission, to 5.45% under the utility's computations. But even after correcting the erroneous picture of net revenue resulting from deducting 1949 expenses (partially adjusted) from 1951 revenues, we are faced with the necessity for making a further correction. The evidence discloses without contradiction that future net revenues would and will be further greatly reduced by increased operating expense resulting from two factors. The first of these was the so-called fifth round of wage increases. The second was the increase of federal income taxes from 38% to 47% to 52%. Any order as to rates must perforce operate for the future. It cannot act retroactively. A failure to take into consideration the very material increase in operating expenses resulting from these two items again presents a false picture with reference to the future earnings the company may expect. Exhibits reflecting these increases are in the evidence. They are not disputed. To discuss them in detail would serve no purpose. The consequent adjustment of the figure balance net revenue for intrastate service reflecting these items shows a reduction of annual net revenue of $190,800 to an annual net revenue of $152,200. On the basis of the total net intrastate plant as found by the commission in the sum of $3,499,496, this makes a further difference of 1.10%, further reducing the apparent net return of 6.47% as found by the commission to 4.35% under the utility's computations. These figures are not the result of speculation or surmise. When the case was being tried to the court on October 15, 1951 and the parties were considering the test period of the first seven months of 1951, it definitely appeared that the fifth round wage increase had started July 29, 1951. Only two days remained within the test period. The company had contracts with six different unions. These contracts provided a fixed wage schedule, with a starting rate and defined step-ups. Knowing the number of employees of each class and on each step of the schedule, it was simply a matter of arithmetic to permit the submission of an exhibit which showed an annual increase in operating expense, though not within the test period, of $166,000 before federal income taxes. A similar situation existed with respect to federal income taxes. A bill was pending before the congress to increase this tax to 52% of net income, retroactive to April 1, 1951. There was little doubt but that it would pass and it subsequently did pass. This situation could not be ignored. Without an honest and intelligent forecast as to probable tax, price and wage levels in the immediate future the fixing of rates would be a futility. McCardle v. Indianapolis Water Co., 272 U.S. 400, 71 L.Ed. 316, 47 S.Ct. 144; Missouri ex rel. Southwestern Bell Tel. Co. v. Public Service Commission, 262 U.S. 276, 43 S.Ct. 544, 67 L.Ed. 981, 31 A.L.R. 807. The foregoing observations however have to do only with the matter of the computation of balance net intrastate revenue. The rate of return is further affected by the commission's methods and conclusions in arriving at the intrastate rate base.