Opinion ID: 1422157
Heading Depth: 1
Heading Rank: 9

Heading: The Separations Manual

Text: Appellant's above figure of $6,998,900, as plant in service for its intrastate operation, is derived through application of what is known as the Separations Manual. In other words, it reflects the current proportion of intrastate usage in ascertaining the plant in service in the rate base. Respondent commission rejects the use of this Manual. Since Smyth v. Ames, 169 U.S. 466, 18 S.Ct. 418, 42 L.Ed. 819, it has been universally recognized that, as the federal jurisdiction in rate matters is restricted to interstate commerce, so the jurisdiction of the various states is restricted to intrastate rates in their respective jurisdictions. Most of the telephone plant and equipment is used in both interstate and intrastate communications. It is obvious that the wires and cables, the pole lines, the central office equipment, the telephone instruments themselves are for the most part used for the purpose of making calls which originate and end within the state as well as calls originating in the state and crossing one or many state lines. Since the Minnesota Rate Cases, Simpson v. Shepard, 230 U.S. 352, 33 S.Ct. 729, 57 L.Ed. 1511, the accepted law has been that the properties serving such dual purpose must be separated, for rate making purposes in the respective jurisdictions, in accordance with proportionate use. To this end the National Association of Railroad and Utilities Commissioners (NARUC) and the Federal Communications Commission (FCC), for a period commencing in 1941, have worked upon the development of a fixed procedure to be followed for such separations not only of the property but likewise of operating expense. In October, 1951, at Charleston, S.C., a revision of the existing plan of separations was unanimously adopted by NARUC and the revision was approved on November 20, 1951 by FCC. The Separations Manual, as thus revised has come to be known as the Charleston Plan or the Charleston Revision. A very material part of the briefs is occupied with a discussion of the propriety of using the Separations Manual as thus finally adopted. On the first day of the trial before the court on October 15, 1951 on the utility's suit to set aside the commission's rejection of the company's new proposed rates, the learned district judge expressed his concern with that phase of the case dealing with the Separations Manual. After referring to the fact that the commission, as formerly constituted, had by its decision recognized the Manual, the court noted that after a change in the commission it was apparently not satisfied with the Separations Manual and that the court would be loath to compel a following of the Manual if in fairness to interested parties it appeared that the Manual needed revision. The utility immediately gave notice of its position in this regard, namely, that the Separations Manual furnished to the commission and the court was the only method of separation in evidence. The court commented, That's the present record, and counsel again stated their position that the evidence in the case should be followed. Thus the commission was charged with notice on the first day of the trial that the utility and the court recognized and insisted upon the proposition that at that point no evidence as to method of separations was in the record except that afforded by the Manual. Such Manual is a printed volume of eighty-seven pages, is based upon the general principle of separations made upon the actual use basis, is divided into major categories of plant, with many subdivisions, and develops a full and complete procedure. Despite the general approval and acceptance of the Separations Manual (including its acceptance by the former personnel of the Public Service Commission of Nevada), we may concede for the sake of argument that the present membership of that commission might find some of its procedures so faulty or unjustified as to move them to reject the same in the face of procedures they might consider more fair or accurate. This however was not done. Respondent does not point to a single item in which the procedures of the Manual are inaccurate, faulty, unfair or unjust, but states flatly that it rejects the same. It has however applied no formula and has made no suggestion as to what method of separation should be used. The court, in adopting the commission's figures, arrived at them (after some mathematical corrections) by applying to the total plant the ratio of intrastate plant existing in 1949, and applied that figure to the test period of the first seven months of 1951. As the proportion varies not only from year to year but from month to month, it is obvious that a false figure resulted. The proportion of intrastate property and intrastate use increased every year from 1949 to 1951, and in 1951 it was 19.4% higher than in 1949. The figures submitted by the appellant on the other hand were actual figures for the period involved. We have set them out above and indicated the difference between the two figures. Before noting the difference in rate of return resulting from the commission's failure to use the only evidence in the record in allocating to the intrastate rate base the proper proportion of the entire interstate and intrastate plant, some further observations will be in order. The conclusions expressed by us above as to the necessity for following the Separations Manual in the apportionment of the intrastate operating expense and in the apportionment of property devoted to intrastate use were the inevitable result of many factors appearing in the record. Before the Charleston Commission changes, the Manual originally went into the evidence without objection. The continued use of the Manual over a long period of years was shown. In the earlier hearing the Nevada commission accepted and adopted it, and particularly noted its general acceptance by the state commissions. All of this, as well as the subsequent revision of the Manual, went into the evidence before the court  for the most part without objection. The commission accepted the figure of $4,800,600 as average net plant in service March 31, 1949, and the figure of $1,346,700 accrued depreciation to that date, both of which were the result of applying the Separations Manual. Even the 1949 figures erroneously used for the 1951 test period had been obtained by using the Separations Manual. Despite all this, the commission could possibly have justified its rejection of the Manual by submitting other and better procedures. Re Northwestern Bell Telephone Co. (S.D.P.U.C. 1949), 81 P.U.R. (N.S.) 375, on which reliance is placed by respondent, is deprived of any weight by the further history of that case. In re Northwestern Bell Telephone Co. (S.D. 1950), 43 N.W.2d 553; Re Northwestern Bell Telephone Co. (S.D.P.U.C. 1952), 92 P.U.R. (N.S.) 65. A quotation from last-named citation illustrates the problem and the difficulty of its solution: Counsel for protestants has argued at great length that the separations procedure prescribed by the Separations Manual of 1947 is without binding force upon the Commission, and should be wholly disregarded, on the alleged ground that the separations methods therein set out are grossly unfair to the states. It is doubtless true that the procedures therein prescribed are not as such binding upon this Commission. They are, however, in quite general use by telephone companies throughout the nation and have been accepted by most Commissions and courts as reasonably satisfactory. Until better methods are developed, adherence to them will probably result in a more satisfactory division of properties, revenues, [9] and expenses as between interstate and intrastate than could be devised by any one Commission. Radical departures therefrom have been frequently condemned by the courts on appeal in this and other states. Protestants did not submit any plan for a more equitable distribution nor offer any exhibit to show how they thought the separations of properties, revenues, and expenses connected with South Dakota telephone operation could be made so as to lighten the load that now is and in the future will have to be carried by subscribers to telephone service in this state. This and other Commissions have given much consideration to the manual and have for a long time advocated change similar to those adopted by the NARUC convention last October. Appellant refers us to cases decided by public service commissions in twenty-six different states in 1951 and 1952 (all subsequent to the revision of the Separations Manual as made at the Charleston meeting) in which the procedure of the revised Manual was approved and followed. Respondent has not commented on these cases. We have not examined them, and accept appellant's statement that in all of them the Manual was accepted as the guide for separating interstate and intrastate property and operation. Respondent relies strongly upon Re Chesapeake & Potomac Telephone Co. of W. Va. (W. Va. P.U.C. 1952) Case No. 3718, decided May 16, 1952. There the West Virginia commission adopted a separations formula submitted by its own expert rather than the Manual, so the case is not in point. [10] However, in many other respects it parallels this case. The West Virginia commission was greatly distressed over the fact that intrastate rates between points in Indiana were greater than interstate rates through the same points and extending many more miles into the state of Ohio. It attributed this situation directly to the separations methods adopted by the Manual, and referred to the Charleston amendments as being designed to reduce the disparity between interstate and intrastate toll rates but as having failed to do so. It said: Any system of separations    which results in a toll of 75 cents for a message from Charleston to Huntington, but a toll of only 55 cents for a message over the same facilities from Charleston through Huntington and then on over into Chesapeake, Ohio, is so obviously erroneous as to warrant its condemnation. Many similar disparities appear in the Nevada rates. Rates from Winnemucca, Nevada, to Reno, Nevada, for example, are higher than rates for service over the same facilities from Winnemucca, through Reno, to Sacramento, California. Appellant shrugs this off, saying in effect: That has nothing to do with the case. The intrastate plant must pay its own way no matter how great the disparity. Reading between the lines, the West Virginia commission said: We refuse to be slaves to a rule of law that works a manifest injustice. It sought a relief from the situation by adopting the Honaker method, which, as noted, has to date failed to receive judicial recognition. The Nevada commission senses the same injustice, and the attorney general's oral argument was largely based upon that point. The claim is not devoid of appeal or of merit. Appellant, in its oral argument, insists that this is a problem that arises only after a determination has been made as to the total net revenues necessary to provide a fair rate of return upon the intrastate property. It is not until such determination has been made, says appellant, that the second problem arises of determining the spread of rates. We are not sure that this is so. We are not sure that the application of a separations formula is entirely independent of the establishment of a spread of rates, particularly in view of the unchallenged statement that the Charleston amendments were designed to reduce the disparity between interstate and intrastate toll rates  an expression that finds repetition in other cases. The present record gives us no opportunity to afford any relief from this situation, but we desire to make it abundantly clear that we do not foreclose further inquiry into such situation if the matter is again brought before this court. We return to our computations. If the intrastate base of $3,499,496, as found by the commission, be corrected to include this figure $1,764,473 (which necessarily results from the fact that it is the only figure finding support in the record and that there is no evidence contra) and is then applied to the net revenue of $152,200, this makes a further deduction of 1.46% from the apparent net return of 6.47% found by the commission, reducing the net return to 2.89%, [11] according to the computations of the utility. Further reductions of the rate base are made by the commission in its treatment of (1) property held for future telephone use, (2) materials and supplies, (3) working cash and (4) apportionment of depreciation reserve to the intrastate plant. The aggregate of the percent return resulting from the commission's treatment of these items is less than .20%, and as the action of this court is inevitably pointed out as the result of the very material items above discussed, a detailed discussion of the four items last mentioned is not warranted.