Court Opinion

ID: 9574970
Source: CourtListenerOpinion
Date Created: 2023-08-21 21:10:11.035207+00
Date Added: 2024-06-11T12:47:34.979236
License: Public Domain

CARTER, J.
I dissent.
The question here presented is not complex. The Pacific Telephone and Telegraph Company, an operating communications utility in California, is completely dominated and controlled by the American Telephone and Telegraph Company, a New York corporation, whose main function is to hold stock in and furnish various services to local telephone operating corporations throughout the country, most of which are controlled by it through stock ownership. American enters into purported license fee contracts with its numerous affiliates, including Pacific, under which the affiliates pay a percentage of their gross revenue for the services to be rendered by American. It is conceded that in fixing rates for Pacific, our Public Utilities Commission may ignore the percentage basis of compensation under those contracts and allow only so much as is the reasonable value of such services or the cost thereof to American. The sole question is whether the commission has authority to approve or disapprove such contracts. I believe there can be no doubt of such power. It arises (1) by necessary implication, and (2) by the wording of the Public Utilities Act.
On the first proposition, there are several important considerations which must be weighed. It has been aptly said: “Contracts with operating companies range in subject from a single activity to a comprehensive scheme giving virtual domination over the policies of the subsidiary utility. But the services, even when enumerated at length, are commonly described in such general terms that no clear picture of those actually rendered can be obtained from examination of the contracts . . .
‘ ‘ The profits accruing from the servicing relationship invite inquiry into the possibilities of abuse inherent in the holding company structure. In the control possessed by the holding company, often exercised through common officers or interlocking directorates, lies the power to dictate terms and the consequent danger of unreasonable exactions. The modern super-holding company system itself furnishes a strong incentive for such exactions. Control over operating companies through a relatively small investment may be effected by the *835interposition of subholding units, the financing of which can be facilitated by the issuance of bonds and preferred stock . . .
“Exploitation of operating companies is detrimental to both consumer and investor. Although it is seemingly immaterial to the consumer whether the parent obtains income through high service charges or through dividends resulting from more economical operations, in fact excessive charges, unless disallowed by public utility commissions, may adversely affect him. Overpayments for management services result in the swelling of operating expenses. When resorted to as a screen for profits beyond a fair return, they can prevent a rate reduction, or, by so minimizing the return that only small profits or none at all are shown, can result in an increase. And the sums exacted may be so great as to impair service to the public through lack of funds for maintenance or additions. Furthermore, overcharges for construction or engineering services, reflected in the operating company’s capital account, have a dual effect upon rates: they broaden the base upon which a fair return must be earned, and enhance costs of operations by enlarging the amount annually charged to depreciation, thereby increasing the rate required to yield an adequate return . . .
“The disallowance of operating expenses increases the net operating revenue for the purposes of determining the fairness of the return in a rate case. This increase tends to subject the utility to lower rates, with the possible consequence of an ultimate decrease in income that may force a comparable reduction in expenditures.” (49 Harv.L.Rev. 957, 959, 978-981, 986.)
It has also been said: “It may be asked why should the commission, as representative of the consumers be concerned over a ‘raid on the treasury of the operating utility.’ Directly the consumers will not be affected whether the utility is solvent or insolvent. Their rates are based upon a fair return on a fair value and it should not matter to them who gets it. Unfortunately, this argument overlooks the simple facts that an insolvent utility has no credit with which to obtain the capital necessary for the continuous expansion of service demanded from a utility under modern conditions and that operation of a utility by receivers seems usually to be thought to result in higher operating expenses than would ordinarily be incurred.” (Regulation of Utility Contracts, 20 St. Louis L. Rev. 1, 58.) Those considerations point up the vital impor*836tanee of the power of the commission to disapprove such contracts as a part of rate regulation and of the necessity that the ability of the utility to serve the consumers be not impaired. I cannot believe that the Legislature intended to leave the commission impotent to cope with those conditions. It may be that some measure of protection is afforded by the power to refuse to recognize the license fee contract when fixing rates, but having that power, it of necessity follows that they may lock the door before the horse is stolen. If they may affect the utility management indirectly by subsequent action, surely they may take precautionary measures in advance. The Alabama Utilities Commission has pertinently observed in this connection: “We cannot conceive that it will be contended that a Commission is without authority to halt a raid on the treasury of the operating utility on the plea that it has no right in law to manage the property. From our point of view, it is not an assertion of management, but rather an assertion of reasonable control over practices which the Commission has a right to prevent and should prevent before the injury has been done if it is possible for us to arrive there in time.” (See, Re Southern Bell Tel. & Tel. Co., P.U.R. 1932E, 207.) Certainly it was intended that the commission would have the power incident, and indeed vital, to protect the consumer from improvident waste of funds to the detriment of the service. They surely have the power to accomplish directly that which they may do by indirection. While it may be that there is no showing in the case at bar that the payments to American here involved will seriously jeopardize Pacific’s consumer service capacity, that is not necessary, for the situation is so fraught with potential and inherent dangers that this court should not overrule the commission’s judgment that preventive advance action is necessary. It must be remembered that these license fee contracts are not true contracts made at arm’s length or on an open market. They are between corporations, one of which is controlled by the other. As such they are subject to suspicion and therefore present dangerous potentialities. It seems plainly obvious to me that if payments for such services are regularly supervised by the commission, it will not only inure to the consumer’s benefit, but will also put the utility in the advantageous position of knowing where it stands, thus escaping the risk of making excessive payments which will not be allowed in its rate base. That the commission has such implied power is squarely declared by the Public Utilities Act. “The railroad com*837mission is hereby vested with power and jurisdiction to supervise and regulate every public utility in the state and to do all things, whether herein specifically designated or in addition thereto, which are necessary and convenient in the exercise of such power and jurisdiction.” (Public Utilities Act, Stats. 1915, p. 115, §31; 2 Deering’s Cal. Gen. Laws, Act 6386.)
Secondly, it is clear that section 32 of the Public Utilities Act, quoted in the majority opinion, must be interpreted as empowering the commission to regulate the purported contracts here considered. The literal wording thereof requires it.
Fear is expressed that if the instant contract is subject to approval by the commission, all other contracts or expenditures of a utility may be scrutinized in advance. Whether or not that fear is well founded is not necessary to consider. I say only that the license fee purported contract between the operating utility and its dominating father, Pacific and American, may be so treated. There is a clear difference between such arrangements and others. They are not true contracts made at arm’s length. They are definitely subject to suspicion and potent with possibilities adverse to the interests of the consumers.
It must be conceded that the contract here in question was executed by officials of Pacific who were elected by American as the principal stockholder of Pacific and owe their allegiance to American. To say that such a contract is beyond the regulatory power of the Public Utilities Commission, when it may endanger the ability of Pacific to serve its customers, is a step backward in the public utility regulation and may open the door to abuses seriously detrimental to those dependent upon service from public utilities. While I think it is clear that the Public Utilities Act expressly empowers the commission to regulate such contracts in the public interest, there can be no question that it was the intention of the Legislature to confer upon the commission all the power necessary to protect the public interest. This, the majority overlooks in placing a strict and strained construction upon the provisions of the act in order to arrive at the conclusion reached.
I would deny the writs and affirm the orders under review.
Respondent’s and Real Parties in Interest’s petitions for a rehearing were denied March 27, 1950. Shenk, J., and Carter, J., voted for a rehearing.