Opinion ID: 2348955
Heading Depth: 1
Heading Rank: 5

Heading: operating expenses and revenues

Text: Another essential step in a rate proceeding is to determine the utility's operating revenues and expenses, and then to deduct one from the other in order to arrive at the amount of income available to pay the wages of capital, i.e. interest on debt securities, dividends on stock and additions to surplus. The actual income and expense figures are found in books of account for the test period and are therefore not likely to be disputed. There are often disagreements, however, about whether some of the figures appearing there should be allowed as operating outlays or whether others which do not appear should be included as revenue. 1. Wage & Fringe Benefits.  There is such a disagreement in this case. It arises because the company included in its operating expenses a 12.3 per cent ($1,244,000) annual increase in wage and fringe benefits which it is, and has in fact been, paying to its employees in compliance with a collective bargaining agreement. The commission, purporting to rely upon certain unidentified Presidential Price Commission regulations, refused to allow an increase of more than 5.5 per cent ($568,000) to be claimed as an operating expense. The company challenges the disallowance by asserting that the Presidential Price Commission has ruled [3] that wage and fringe benefit increases, even though in excess of the 5.5 per cent guideline, are allowable as costs for the purpose of justifying a utility rate increase, provided they are payable under a contract which took effect prior to the price freeze decreed under the Economic Stabilization Act of 1970, as amended. While the rulings cited do not directly support the company's position, they do so at least inferentially. The council questions the listing of the increases as an operating expense, but on a different ground from that advanced by the commission. Presumably, it was either unable to locate the regulations which the commission relied upon, or having found them, concluded that they were inapposite. In any event it claims that the increase in wage and fringe benefits should not be allowed as an operating expense because it violates Price Commission News Release No. 26, November 29, 1971. That release, where pertinent, permits a utility rate increase  not a wage or fringe benefit increase  only if it reflect[s] productivity gains. While compliance with that guideline may be a precondition to a rate increase, it is not mandated with respect to wage and fringe benefit increases and is without relevance in this proceeding. Thus, the only potentially sound bases for the disallowance of the claimed operating expense are regulations which the commission has not identified. Failure to pinpoint them makes it impossible for us to ascertain with reasonable certainty whether the disallowance is soundly grounded. Moreover, those regulations, even if controlling when the commission acted, may since have been modified or rescinded by the Presidential Proclamation which ended Phase II and inaugurated Phase III of the war against inflation. In these circumstances our procedure is clear. Instead of searching for the regulations or attempting to ascertain whether they are still pertinent, we remand the case to afford the commission an opportunity to provide us with that information, or, if the circumstances require, to alter its decision and order. United Transit Co. v. Nunes, 99 R.I. 501, 504-05, 209 A.2d 215, 217-18 (1965); New England Tel. & Tel. Co. v. Kennelly, 81 R.I. 1, 9-10, 98 A.2d 835, 839 (1953). 2. Purchases by the Company from Western Electric.  For many years Western Electric Company (Western) has virtually been the manufacturing department for American Telephone & Telegraph Company (AT&T) affiliates and has supplied them with a major portion of their telephone equipment and supplies. Smith v. Illinois Bell Tel. Co., 282 U.S. 133, 153, 51 S.Ct. 65, 70, 75 L.Ed. 255, 265 (1930); Illinois Bell Tel. Co. v. Gilbert, 3 F. Supp. 595, 602 (N.D. Ill. 1933). The nature of the relationship is such that telephone rate cases often become forums for inquiry into the fairness and reasonableness of Western's profit margin on its sales to those affiliates. This rate hearing was no exception. Here the company, an AT&T affiliate, in an attempt to prove compliance with the criteria laid down in Smith v. Illinois Bell Tel. Co., supra at 152-53, 51 S.Ct. at 70, 75 L.Ed. at 265 and in Illinois Bell Tel. Co. v. Gilbert, supra at 602-03, and thereby to establish the reasonableness of its profit margin, produced evidence: (1) that a substantial portion of Western's sales to it were priced at about 65 per cent of the general price level for comparable items; (2) that the average profit margin per dollar on its sales was lower than that of many of the fifty largest industrial manufacturers in the country; and (3) that Western's return on its net investment averages 9.4 per cent as compared with 12.1 per cent and 12 per cent average earned by the fifty largest manufacturers and the one hundred and twenty-five largest industrial concerns in the country, respectively. The council takes issue on whether the profits were reasonable and refers us to the testimony of Robert G. Towers, an expert who appeared on its behalf. In his judgment the company has been overcharged $1,940,145. The council appears to say that he arrived at that figure by deducting so much of Western's profit on its sales to the company during the 14 years since 1957 as exceeded what Western would have earned had its profit margin on those sales been limited to the company's allowable rate of return during the same period. In essence, he seemed to be urging the adoption of the unique California rule that Western is entitled to no greater return on its sales to an affiliate than the latter is entitled to earn on its own operations. Pacific Tel. & Tel. Co. v. Public Utilities Comm'n, 62 Cal.2d 634, 661-62, 401 P.2d 353, 370, 44 Cal. Rptr. 1, 18 (1965). Acknowledging Towers' method as innovative, the commission nonetheless concluded that there was insufficient basic data to warrant its adoption. It was, however, less tolerant with respect to the company's claim that the prices paid to Western were reasonable. It approached that claim harboring the suspicion that the relationship between Western and the company was designed to provide hidden profits believing that one company was the alter ego for the other; convinced that Western enjoyed inherent advantages because it was the single large supplier to a single large market; and apparently satisfied that there is a similarity between the Bell System and the Soviet system, but unsure    whether the Soviet system was modeled after the Bell System, or whether the Bell System was modeled after the Soviet system. [4] Having thus unburdened itself concerning the company's relationship with Western, the commission, reiterating a warning issued in an earlier case, announced it was assuming the role of watchdog agency of the public, and it proceeded, or so it said, to sink its teeth and fangs into the company's claim that the prices charged by Western were fair and reasonable. Its bark was worse than its bite, for the only adjustment was to deduct $71,000 from the company's operating expenses. Its sole substantiation for that deduction is found in the two-line plus conclusory statement that    on the basis of what has been presented [that amount] appears to be fair under the circumstances. Adjustments in rate cases cannot rest on conjecture, and we therefore cannot permit the commission to roam the unfenced fields of speculation. St. Louis-San Francisco Ry. v. State Corp. Comm'n, 187 Kan. 23, 27, 353 P.2d 505, 507 (1960). Once again the rubric of United Transit Co. v. Nunes, supra , demands a remand and a supplementary decision.