Opinion ID: 1752589
Heading Depth: 1
Heading Rank: 5

Heading: Increases

Text: United submitted the following income data based on actual operations during the test periods: Six Months Year Ended Ended June 30, Dec. 31, 1957 1958 ---------- ----------- Operating Revenues $5,328,984 $4,101,856 Operating Expenses (Incl. Taxes) 5,030,596 3,641,441 __________ ____________ Net Operating Income $ 298,388 $ 460,415 On this basis, for the full year of 1957 United's rate of return would be 3.23 percent. However, the Commission attempted to make certain adjustments and reductions in the operating expenses of United, which, of course, would increase its rate of return. We think the Commission erred in making these adjustments, as hereafter described. (Hn 11) In determining the sufficiency of the rate of return, the sum required by the utility to meet its operating expenses must be considered. Miss. Public Service Comm. v. Home Telephone Co., Inc., 236 Miss. at 453; 43 Am. Jur., Public Utilities and Services, Sec. 141; 73 C.J.S., Public Utilities, Secs. 25(2), 1042. United makes payments each year toward the purchase of its common stock on the open market for its employees. These payments are charged as operating expenses. During 1957 the contributions and related expenses totaled $25,790.00, and during the six months ended June 30, 1958, they totaled $15,274.00. If any employee has worked for the company five years or more, he may use up to 10 percent of his salary to buy stock on the open market in the company, and United will pay him an equal matching amount for such purchase. The stock becomes the property of the employee. The purchase is handled through trustees. The Commission disallowed these expenses. It stated the effect of the plan was to require gas consumers not only to purchase this property (stock) for the employee-stockholders, but also to pay a fair return on this property; that the ownership of the utility must provide the capital funds, but under this plan the gas consumers would provide both the capital funds, in part, and a fair return. United says the stock is purchased on the open market, and the purchase money does not go to the corporation, but to the person who sold the stock on the market. The shares are not treasury stock. Gordon Meece, testifying for appellant, noted this expense does not in any way provide additional capital; that the company's cost of this stock purchase plan is an essential part of United's operating expenses, as much as payments of salaries and wages to employees. The plan was adopted as a part of the company's overall employee benefit program, which includes other plans, such as group hospitalization, group life insurance and retirement. The employee pays part of the cost of the stock and the company the remainder. Meece said these additional payments to employees result in improved employee morale, promote employee security, and reduces employee turnover; that it helps United to hire and keep better employees, and is in the best interests of consumers. In New York Telephone Co., 5 PUR 3d 33, 57 (1954), the New York Public Service Commission stated: Here, as in the discussion on pensions, interference with the judgment of management would be injecting the commission into what amounts to the company's present contract of employment. There can be little doubt that, if these privileges were abolished, the company would be faced with a demand for increased compensation in an equivalent amount and, therefore, no saving to the public would result. That alone would be sufficient reason to refuse to prohibit the practice but this decision is not based on such narrow grounds. This commission has repeatedly asserted its position that it will not interfere with the collective bargaining rights which have become inherently part of our American system and that any payment or benefit given labor, in the absence of proof of bad faith, is presumptively a proper expenditure for fixing rates. Any effort on our part to curtail or limit a reduced telephone rate to employees would be as improper as if we were to attempt to fix the number of paid holidays or limit any other right which has been given as a result of an understanding between employer and employee. In East Ohio Gas Company v. Public Utilities Comm., 133 Ohio St. 212, 12 N.E.2d 765, 22 PUR (NS) 489, 499-500 (1938), the Supreme Court of Ohio reversed its Commission which had disallowed such an expense. It was there said: Certainly, today, there is a general widespread feeling that industry owes to its employees not only the negative duty of refraining from over-working or injuring them, but likewise the affirmative duty of providing them so far as possible with economic security. Expression of such views has found legislative sanction in the adoption of social security laws. It would seem that if the plan adopted is a fair one which promotes economic security for the employee and thereby increases his mental and moral efficiency as a worker, such payments made for his benefit should be considered as compensation just the same as his weekly or monthly salary. For this reason, the ruling of the Commission should be reversed, and the Commission is ordered to make an allowance for the sums actually expended by the company in assisting its employees to purchase stock. The Brooklyn Union Gas Company case, 24 PUR 3d 445 (N.Y., PSC, 1958), cited by appellees, involved a plan whereby the company would issue new capital stock only to selected, key employees with a 10-year option within which to speculate. The new stock issue increased the capitalization. The Commission rejected the proposal but stated it had approved general employee plans. The instant program is distinguishable, since it does not affect capital, contains no speculative features, and applies to all employees alike. (Hn 12) In short, we think the Commission erred in disallowing United's expenses incurred in its employee stock purchase plan. Its management no doubt reasoned this was a proper and legitimate operating expense, analogous to the payment of salaries and wages to employees. Certainly we cannot say this program failed to promote employee security and reduce turnover. There is no evidence that this was an abuse of discretion by the management. Somewhat analogous is the holding in Miss. Public Service Comm. v. Home Telephone Co., Inc., 236 Miss. 444, 110 So.2d 618 (1959), that the Commission erred in disallowing the total amount of salaries of the president and treasurer of a telephone company. There was no evidence that they were excessive or unreasonable. They were related to reasonable needs of the management and the utility. (Hn 13) During 1957, and the six months ended June 30, 1958, United contributed various small sums to charitable organizations aggregating $2,707.00 and $1,136.00, respectively. The Commission disallowed these donations as an operating expense. It thought these were expenses chargeable to the stockholders but not to the rate payers. Appellant admits there are differences among the courts as to charitable donations being considered a part of operating expenses. However, we conclude the Commission was in error in rejecting these items as operating expenses. A public utility must be a good citizen as well as an efficient servant of its customers. In Application of Diamond State Telephone Co., 51 Del. 525, 149 A.2d 324 (1959), the Delaware commission disallowed donations of $4,656.00, representing charitable contributions to the Red Cross and the Community Chest. The Superior Court's action in reversing the commission and allowing these items as operating expenses was affirmed by the Supreme Court of Delaware, which said: Modest contributions to important local charities, made to preserve community good-will, will be allowed as a proper deduction from operating expenses. We agree that the Commission might well disallow them if the contributions were unreasonably large, or if they were not related to the fostering of the good-will of the Company in the locality in which it operates. Since the contributions here are clearly within these limits they will be allowed, and the Superior Court's ruling will be affirmed. We think the rule stated by the Delaware Court and its limitations is sound, and we adopt it. See 65 Public Utilities Fortnightly 289. In Central Maine Power Co. v. Public Utilities Comm., 153 Me. 228, 136 A.2d 726, 731 (1957), certain charitable contributions of the utility were disallowed as operating expenses, on the ground that appellant was not required to give its money to charities, no matter how deserving. However, we do not agree with that restricted interpretation of a utility's function. As was stated in Diamond State Telephone Company , the contributions to charity must be made to a proper object and in reasonable amounts, and be related to the fostering of the good-will of the company in the localities in which it operates. However, on remand the commission may consider the effect of resulting savings, if any, on income taxes, and allow only the net cost to appellant of the donations. (Hn 14) On June 1, 1957, United made a general wage increase of 6 percent. The Commission found that, if this increase had been in effect since January 1, 1957, for the entire test year of 1957, it would have increased the operating expenses of appellant by an estimated amount of $27,019.00 for the entire year. However, it disallowed this item as an operating expense in fixing rates, on the ground the company had offered no evidence to show the net operating results for 1957, if the higher wages had related back for the entire year, as against the greater number of customers for that year. It further stated that the average compensation per employee had increase from $3,040.00 in 1953 to $3,950.00 in 1957, yet in the distribution department the total expense per Mcf of gas sold was no higher in 1957 than in 1953, and there were fewer employees on the payroll. The Commission said it could not isolate wages and make adjustments for that item alone, without considering other factors which tend to reduce the overall cost of service. Hence it declined to normalize for any wage adjustment in 1957 and for the future, and to allow the increased wages as an operating expense. Appellee cites general authorities stating an agency is not bound to accept or reject any specific adjustments, if the overall effect of its action is reasonable. In the Mississippi Southern Bell case, it was stated: In rate making proceedings the practice usually followed is to test rates for the future upon the basis of actual operating experience of a representative period of time and to adjust that experience for changes that appear definite and certain. 237 Miss. at 184, 113 So.2d at 627. Increased wages are definite and certain. In Central Maine Power Co. v. Public Utilities Commission, 153 Me. 228, 136 A.2d 726, 731-733 (1957), the Maine commission disallowed additional wage costs as an operating expense, but the court overruled that action and held they were certain and not speculative. The agency contended, as here, that the additional wages were not related by the utility to the overall revenue experience of the company. Moreover, that case involved a wage increase which went into effect after the test year had ended. Here it went into effect in the middle of the test year. Nevertheless, the Court said: In the case of wages, we know with the maximum degree of certainty attainable in a forecast that in the period for which rates are to be set there will be an increase in net expense. To ignore this probability is to defeat the very idea of fixing rates for the future upon intelligent and informed estimates. Why should a probability such as this be set aside in favor of the experience of the test year, which we know with certainty will not be repeated in the future? The experience of the test year is at best a `guess' for the future. If we can make the `guess' more in line with the probability, in the long run we will have benefitted both public and Company. Much obviously must be left to the sound judgment and experience of the Commission. When, however, the Commission refuses to include in its estimates expenses so plainly observable, we must conclude that it has improperly interpreted the evidence. See also Diamond State Telephone Co., 21 PUR 3d 417, 439 (1958 Del. PSC). In like manner, the Commission erred in disallowing as an operating expense the increased wages appellant began paying on June 1, 1957. (Hn 15) By the same token, we think the Commission was in error in disallowing as an operating expense the increase in postage rates which became effective August 1, 1958, and which the company's evidence indicated would aggregate $8,038.00 per year. The postage rate increase became effective on the same day the proposed rate schedule became effective, August 1, 1958. The amount was figured in accordance with the number of bills mailed out to the customers at the end of the 1957 test year. There is no problem of remoteness or distortion resulting from this precise item of expense. It is unreasonable in fixing rates for the future to disregard the fact that postage for mailing out customers' bills will not again be at the same level as it was during the test year. The expense is definite and ascertainable and should be allowed. Plateau Natural Gas Co., 27 PUR 3d 447, 450 (Kan. SCC, 1959). (Hn 16) The company presented pro forma figures for the test year 1957 with adjustments to show expenses by reason of known changes, and revenues were adjusted as if the number of customers in existence on December 31, 1957, had been served for a full year. Such definite and known increased costs must be allowed as an operating expense. We do not think generalizations and estimates that increased efficiency offsets increased costs are adequate to deny the actual increased costs.