Opinion ID: 1306054
Heading Depth: 1
Heading Rank: 2

Heading: western electric profits

Text: The appellant, C&P, is one of twenty-three Bell System operating companies which are subsidiaries of American Telephone and Telegraph Company (AT&T). C&P is wholly owned by AT&T. AT&T also owns Western Electric Company, which is the manufacturing, purchasing, and supply branch of the Bell System. Western Electric supplies approximately 85 percent of the Bell System companies' equipment needs. All or a significant portion of the prices which C&P pays to Western Electric for equipment purchases is capitalized by C&P and made a part of its rate base. The price so capitalized includes the element of profit earned by Western Electric on its sales to C&P. Under the terms of W.Va. Code § 24-2-4a (1980 Replacement Vol.) a public utility seeking an increase in rates and charges has the burden of showing that the proposed increase is just and reasonable. See Natural Gas Co. v. Public Service Commission, 95 W.Va. 557, 121 S.E. 716 (1924). Thus at the hearings held before the Commission, C&P attempted to show that Western Electric prices, and the profits it earned on sales to Bell System companies, were reasonable, and therefore that the full profit earned by Western Electric on sales to C&P should be included in C&P's rate base. Testimony presented by C&P indicated that Western Electric sets its prices based on a reasonable rate of return; that the overall prices charged to C&P by Western Electric are approximately 82 percent of the lowest price charged by general trade suppliers, resulting in a 55 million dollar savings to C&P; that since 1950 Western Electric's prices have increased only 49 percent, while manufacturers listed on the producer price index increased prices 268 percent in the same period; that C&P purchases the lowest priced product suitable to its needs; that Western Electric is subject to business risks as any other manufacturing company and thus should be entitled to earn a return similar to that earned by other manufacturing industries; and that the rate of return currently earned by Western Electric is in fact lower than the rate of return earned by 50 large manufacturers throughout the nation and by the industries listed in Standard & Poor's 400 Industrial Index. Commission staff on the other hand argued that Western Electric was earning excess profits on its sales to C&P, and therefore C&P's rate base should be adjusted by reducing Western Electric's allowable return on investment, as reflected in C&P's rate base, to C&P's overall rate of return as authorized by the Commission. In support of its argument that Western Electric was earning excess profits on its sales to C&P, staff presented testimony indicating that C&P's evidence comparing Western Electric prices with those of general trade suppliers was based on prices charged by Western Electric to all Bell System affiliates, rather than on prices charged to C&P; that C&P failed to indicate whether manufacturers of telecommunication equipment are included in the producer price index for durable manufacturers, and thus its comparison of price increases for Western Electric and other manufacturers was of questionable relevance; that Western Electric's prices are in fact higher than prices charged by general trade suppliers on many products; that because AT&T owns both Western Electric, the seller, and C&P, the buyer, the business risk to Western Electric is unique and cannot be compared with other independent manufacturers; and that the normal cost of service approach used by the Commission to determine the reasonableness of Western Electric's profits is inappropriate because it fails to recognize that Western Electric contributes earnings to AT&T directly when it sells equipment to C&P, and indirectly when the cost of these investments are included in C&P's rate base. After reviewing the evidence on these points the Commission found merit in the staff's position, and ruled that it would be unreasonable to allow AT&T to earn profits from Western Electric's sales to C&P in excess of the 10.25 percent rate of return authorized by the Commission to be borne by C&P's West Virginia ratepayers. This finding was made retroactive by reducing C&P's rate base by the amount of excess profits earned by Western Electric on sales of surviving telephone equipment dating back to 1959. C&P contends the decision to disallow Western Electric's alleged excess profits is arbitrary because (A) it retroactively condemns as unreasonable the same transactions the Commission expressly found to be reasonable in three prior rate cases; (B) the disallowance is based on a theory of double profit that is factually incorrect; and, (C) the decision disavows the traditional legal standard for evaluating the reasonableness of C&P's purchases from its affiliate, and substitutes an arbitrary standard which the evidence contradicts, and imposes this arbitrary standard retroactively in a punitive fashion that no other jurisdiction, save one, has implemented.