Opinion ID: 1297749
Heading Depth: 1
Heading Rank: 6

Heading: Purchases from Western Electric.

Text: As noted hereinabove, Western is the manufacturing unit of the Bell System, and both Pacific and Western are controlled by American. Pacific purchases most of its equipment from Western; Western fixes the prices therefor. The commission found and determined that Western's profit on sales to Pacific for rate-making purposes, should be adjusted so as to result in a rate of return to Western not greater than the rate allowed Pacific. Accordingly, in arriving at Pacific's rate base the commission deducted $22,759,000 from payments made to Western which Pacific had included as original cost of plant, and in determining test-year expenses deducted the sum of $3,085,000 from payments by Pacific to Western. [22] It is without question that for the purpose of fixing rates the commission may disallow excessive and unreasonable payments between affiliated corporations. ( Pacific Tel. & Tel. Co. v. Public Utilities Com., supra, 34 Cal.2d 822, 826, 830, 832.) Pacific urges, however, that the material issue with respect to these payments to Western is whether it was reasonable for Pacific to buy the equipment in question from Western and pay the prices charged; that reasonableness of prices paid to an affiliated supplier is established by showing that such prices are at least as low as those for which the goods could be procured otherwise and that the supplier has not exploited its affiliation so as to reap extortionate profits; and that the commission made no finding on the issue which would support its adjustments of the payments to Western. Pacific claims that the record shows without contradiction that its cost for equipment procured from or through Western was far less than if it had purchased elsewhere or had attempted to provide its own, [14] that it established by extensive comparative statistics that the profits made by Western on manufactured items were substantially less than average profits enjoyed by the most nearly comparable manufacturing companies, and that it also proved that Western has worked continuously and successfully to reduce costs in every possible way and to pass on the savings to the Bell operating companies. In sum, says Pacific, the record shows that while Pacific was free to purchase from other sources, the costs of procurement through Western were so advantageous in almost every case that Pacific in the exercise of reasonable judgment could not but accept such cost advantages and purchase from Western where it actually did so. The commission states in its decision that Pacific, after establishing the inherent advantages of a single large market supplied by a single large supplier of telephone material and services, compared Western's prices with those of the much smaller non-Bell market of more than 90 manufacturers and suppliers for some similar equipment. Comparability of manufacturers and suppliers was not established and the reasonableness of other company prices, even assuming comparability, was not demonstrated. Moreover, the massive and unique market enjoyed by the nonoperating segments of American in the purchases by operating segments provides an advantage so great in volume alone in each of the fields of manufacturing, installation, purchasing and distribution that competition is effectively eliminated. Western has a stable, assured and captive market. Were American's manufacturing, supply and installation unit not more efficient than outside suppliers who do not possess the manifold advantages enjoyed by Western, the very existence of Western under American's control would be subject to great question. We find [continues the commission] that little, if any, weight can be accorded such price comparisons in judging the reasonableness of Western's prices. It is the cost to Western that is significant. Further, according to the decision of the commission, Pacific attempted to justify the earnings of Western, that resulted from the prices for telephone material that the Bell System determined that the Bell System should pay, by a comparison ... of various financial ratios over the years 1946-1961 for Western and for 47 selected utility suppliers (15 gas, 15 electric and 17 telephone). However, states the commission, Pacific's showing in this respect completely disregards the affiliation of Western with the Bell System and the unique conditions under which Western operates, is devoid of valid comparisons, and, even assuming comparability, does not demonstrate the reasonableness of earnings of the other companies. The advantage that the Bell System has in its integrated position of being researcher, designer, engineer, manufacturer, distributor, installer, repairer, junker and ... operator of 80 percent of the telephone business in the entire continental United States makes it impossible to compare one phase of its operations, that of Western Electric, with outside companies who have none of the same spread of operations and control either in utility business or with respect to any business within which the outside companies operate. Western, in its relationship to [Pacific] and other operating subsidiaries of the Bell System, is not at all comparable to an independent manufacturing concern. Additionally, As a matter of policy [Pacific] over the years has required that it [Western] provide the equipment and instrumentalities used.... The result of such a policy has been effectively to prohibit entry of any competitive instruments into the telephone market in [Pacific's] territory. Accordingly, practically all items of communication equipment on customer premises served by [Pacific] are manufactured by Western. In those few instances where Western is not the manufacturer, the instruments are subject to prior approval and acceptance by Western. Moreover, because of the close affiliated relationship between [Pacific] and Western, [Pacific's] policy results in a substantial reduction in risk since both [Pacific] and Western have the opportunity for complete control of what instruments will be offered for public use and the degree of obsolescence that they assign to the instruments that are now in [Pacific's] operating plant. [23] Pacific disputes none of the commission's factual recitals as above set forth, but nevertheless asserts that the commission's decision erroneously omits to include a finding of fact as to the reasonableness or prudence of Pacific's purchases from Western and payment of the prices charged, and that a finding in Pacific's favor was compelled by the evidence. This contention is without merit. The decision discloses that Pacific did not, and apparently could not, present convincing comparisons between the prices of Western and those of other manufacturers, or other evidence, which would establish beyond question the reasonableness for rate fixing of prices paid by Pacific to Western, its controlled affiliate. Cases cited by Pacific involved other records and other findings in other contexts, and of course do not suggest that a utility is entitled to favorable findings as a matter of right in the absence of undisputed evidence on the point. The determination of the commission in the present case that Western is entitled to no greater return on its sales to Pacific than Pacific is entitled to earn on its operations, and that American should not be permitted through the corporate instrument of Western to subject Pacific's ratepayers to the burden of providing a greater return, is based not only on extensive findings made by the commission on the subject but also on the methods and principle theretofore followed by the commission (see Decision No. 56652, 56 Cal. P.U.C. 277, 282, in which in 1958 the commission authorized an increase in the rates of Pacific), and as the commission expressly found herein, produces a fair and reasonable result.