Opinion ID: 1848382
Heading Depth: 1
Heading Rank: 1

Heading: OPINION OF COMMISSIONERS McDANIEL AND WHATLEY

Text: BY THE COMMISSION: In view of recent increases in toll message rates, the crippling effect of inflation on the economy, and certain questions relating to adequacy of service, we are of the opinion that any increase in local service rates at this time should be denied and existing rates continued in effect until such time as the Company stands ready to certify and demonstrate to the Commission that the quality and reliability of service in all of its exchanges, including the Trussville exchange, is reasonable and adequate. The effect of a denial of any increase in this proceeding is to provide the Company with a return on its common equity of 11.29% (see Appendix A) using the same capital ratios adopted by this Commission in its last rate order involving Continental Telephone Company, and updating the cost of debt and preferred capital. We would expect the Company to move forward immediately to bring the quality of service up to a reasonable standard in all its exchanges. It seems that prompt correction of any existing deficiencies in service could reasonably be the basis for a further consideration of the Company's revenue requirement. We are of the opinion that an immediate program of inspection of the Company's property and finances should be initiated without delay, in order to fully inform the Commission of the progress being made. It has been held by this Commission and other regulatory bodies, and recognized by judicial authorities, that there is a zone of reasonableness in arriving at a fair rate of return in any rate proceeding. Rates fixed above the zone of reasonableness have been held to be excessive while those below the zone of reasonableness absent extenuating circumstances, have been held to be confiscatory. It is our opinion that while the existing rates of the Company provide a return on the low end of the zone of reasonableness, the condition of the economy generally, and the question as to adequacy of service, are such that the Commission's order of denial in this matter is reasonable and comports with the law of Alabama. In any determination of the amount of return to be allowed a utility on its capital dollars, the principal controversy is usually associated with the percentage return to be allowed on the utility's common stock equity. In most cases there is little if any, dispute surrounding the cost to be assigned to debt and preferred stock as these tend to be fixed amounts. This is true in this proceeding. Therefore, the amount to be allowed on the Company's common stock equity is of primary consideration. As adverted to hereinabove, existing rates will provide a return to total cost capital under the capital ratios adopted by the Commission in Docket 17123, of 8.16% (see Appendix A), a return of 11.29% on common equity (see Appendix B), and a return of 6.52% on the rate base of $38,463,449 (see Appendix C). Based on computations of the Commission staff it has been determined that an updating of the Company's preferred stock and debt cost, together with a hypothetical allowance of 12.50% on the common equity outstanding at test period end would result in an overall hypothetical return of 8.53% (see Appendix D) on cost capital. Application of this composite rate of return to the Company's total intrastate capital dollars associated with the Company's property at test period end (including Job Development Investment Credit) indicates a net operating income of $2,685,841 (see Appendix E). The Company's net operating income under existing rates approved herein is $2,507,457. General adherence to the principles adopted in Docket 17123 would thus indicate a hypothetical deficiency in operating income of $178,384 (see Appendix E) and a deficiency in rate revenue of $362,890 (see Appendix E). Actually this computation of net return would be more favorable to the Company than that determined in its last order because of the allowance of return on Job Development Investment Credit. The Commission allowed no return on this item of capital in its last order for this Company. We advert to these hypothetical computations to demonstrate what the Commission may have been inclined to approve absent the present state of the economy and the insufficiency of service. PREMISES CONSIDERED_ _ _ _ _ _ _ _ _ _ We are of the opinion that the existing rates and charges of Continental Telephone Company of the SouthAlabama are in all respects reasonable and adequate and that the application herein should be denied.