Opinion ID: 1224779
Heading Depth: 1
Heading Rank: 1

Heading: Deduction From Rate Base On Account Of Excess Margin In Central Office Equipment

Text: Witnesses for General testified to the following effect concerning additions to plant: All telephone companies operating in North Carolina had a combined station growth of 96% from 1960 to 1970. General's station growth in that period was 91.7%. At the time of the hearing, General anticipated that its construction of outside plant, as contrasted with central office construction and equipment, would be a larger proportion of its total construction program in 1971 than had been the case in 1970. It is moving toward a complete one-party service; that is, it is moving toward the elimination of two-party and multi-party lines. [This will, of course, increase its average revenue per telephone without any increase in the present rates for service. It will also increase to some extent its investment in plant per telephone.] The company contemplates gross additions to its telephone plant in North Carolina, including both interstate and intrastate operations, of approximately $10,000,000 per year for the next five years. In the three year period ending 30 November 1970, General's investment in telephone plant in service in North Carolina increased from $30,143,000 to $50,809,000, an increase of 69%, and in the same period its primary or main telephones in service increased from 41,338 to 51,096, an increase of 24%. The Chief Engineer of the Commission, Mr. Clemmons, testified: General's investment in central office equipment increased 127.5% for the three years of 1967, 1968 and 1969. This increase was at such a rapid rate that main station growth has not been able to keep pace with the investment. He made a study to determine whether General's investment in plant included central office equipment not reasonably needed during the test period. As a result of this study he found that on 31 March 1970, the end of the test period, there were 16,202 lines, representing an investment of $1,457,000, and 7,236 terminals, representing an investment of $253,355 available but not in use. Mr. Clemmons also made a study to determine the engineering interval for the last line and terminal additions at each central office. In his opinion, an engineering interval of two and one-half years for large central office additions and three years for small additions is reasonable. The term engineering interval, so used by him, means the period beginning with the completed installation of the equipment and ending when it is completely in service, so that it no longer affords margin for further growth in business. Substantial line and terminal additions were made during the test period, or within the few months immediately preceding it. The long engineering intervals, for which these additions made during, or just prior to, the test period provided, resulted in the above mentioned lines and terminals being included in the plant during the test period in excess of those needed for a two and one-half year engineering interval. The company's program for conversion of its system to an all one-party service is scheduled to be completed by the end of 1973, with most of the conversion to be completed by the end of 1972. Consequently, this does not explain the excessive quantity of lines and terminals exceeding the two and one-half year engineering interval. Mr. Clemmons' final conclusion was that the quantity of lines and terminals installed just prior to and during the test period was exceptionally large for the reason that they were in some cases engineered for long periods of time and also the regrade program required more equipment that would normal growth. Exhibit 22, prepared and introduced in evidence by this witness, showed that at the end of the test period the company had 9,842 lines, representing an investment of $885,900, and 4,711 terminals, representing an investment of $164,830, installed but not actually in use, all of which exceeded the appropriate engineering interval of two and one-half years from the end of the test period. In the witness' opinion, this was excess plant margin at the end of the test period. A substantial portion of the lines and terminals, installed but not in use at the end of the test period, will be used for regrade and new growth at some time in the future. Rule 1-21(b) (1) of the Rules of Practice Before the Utilities Commission, promulgated pursuant to G.S. § 62-72, requires that the exhibits and direct testimony of expert witnesses to be offered by the Commission's staff in a general rate case be reduced to writing, filed with the Commission and made available to the utility company not less than twenty days prior to the commencement of the hearing. Thus, General had full notice of the evidence to be given by Mr. Clemmons. Nevertheless, General offered no evidence to rebut his expert opinion that two and one-half years is a reasonable engineering interval for the planning and installation of lines and terminals for future station growth, or to rebut his testimony that, as of the end of the test period, General had installed the above mentioned lines and terminals which were not in use at the end of the test period and which could not reasonably be anticipated to be put in use until more than two and one-half years after the end of the test period. These unused lines and terminals represent a total investment of $1,050,730, which is reflected in the net investment (original cost less depreciation) shown on General's books. The Commission, in reaching its finding of the original cost, less depreciation, eliminated $690,340 on this account. The Court of Appeals held this was error. The city contends the full amount of the excess, as shown in the testimony of Mr. Clemmons, should have been eliminated. The burden of proof is upon the utility seeking a rate increase to show the proposed rates are just and reasonable. G.S. § 62-75; G.S. § 62-134(c); State ex rel. North Carolina Utilities Commission v. Southern Railway Co., 267 N.C. 317, 148 S. E.2d 210. The question for determination in connection with an alleged overbuilding of the utility plant is whether the properties in question can be deemed used and useful in rendering the service, as of the end of the test period. If not, they may not properly be included in the rate base. G.S. § 62-133; State ex rel. Utilities Commission v. Morgan, Attorney General, supra, 277 N.C. at p. 268, 177 S.E.2d 405; State ex rel. North Carolina Utilities Commission v. Piedmont Natural Gas Co., 254 N.C. 536, 548, 119 S.E.2d 469. As the Supreme Court of Oregon said, in Pacific Telephone & Telegraph Co. v. Wallace, 158 Or. 210, 231, 75 P.2d 942, 951: We are well satisfied that the company cannot include within its valuations property which it neither used nor was useful to the public service. Property which was not reasonably necessary to the adequate furnishing of telephone service must be excluded from the rate base. Similarly, in St. Joseph Stockyards Co. v. United States, 11 F.Supp. 322, 329 (W. D.Mo.), aff'd 298 U.S. 38, 56 S.Ct. 720, 80 L.Ed. 1033, the Court said: The matter of including or excluding land or property held for business expansion in the rate base is the matter of whothe ratepayers or the company shall carry property which is not being used to produce the service paid for by the rate. Obviously, it may be proper and good business judgment may sometimes dictate provision for future expansion of the business. It is equally clear that, so far as the present ratepayers are concerned, there must be a limit to the extent to which they can be compelled to pay for providing possible future facilities for future business. While a broad power and discretion must be left undisturbed in company management, yet, even as to expenditures directly entering into the present service for which the now customer pays this discretion is not beyond control. [Citations omitted.] It would seem that such control should be much more extensive where the expenditure has no part whatsoever in furnishing the service paid for. In fact, the general doctrine is that the rate base is made up of values used in furnishing the service.