Court Opinion

ID: 1865879
Source: CourtListenerOpinion
Date Created: 2013-10-30 07:39:59.075878+00
Date Added: 2024-06-11T10:11:50.460499
License: Public Domain

422 So. 2d 275 (1982)
SOUTH HINDS WATER COMPANY
v.
MISSISSIPPI PUBLIC SERVICE COMMISSION.
No. 53447.
Supreme Court of Mississippi.
November 3, 1982.
*276 Young, Scanlon & Sessums, Stephen W. Rimmer, Pat H. Scanlon, Jackson, for appellant.
Scales & Scales, Clarence R. Scales, Bennett E. Smith, Jackson, for appellee.
Before PATTERSON, C.J., and ROY NOBLE LEE and PRATHER, JJ.
PRATHER, Justice, for the Court:
South Hinds Water Company filed a petition with the Mississippi Public Service Commission in order to gain a rate increase for water service to its certificated area within Hinds County. The Commission initially approved the changes requested by South Hinds but it subsequently reinstated the case and denied the rate increase. On appeal, the Commission's decision to deny the increase was affirmed by the Chancery Court of the First Judicial District of Hinds County.
The assignments of error raised on South Hinds' appeal are:
*277 (1) That the Commission erred in excluding authorized but unpaid officers' salaries as an operating expense;
(2) That the Commission erred in excluding interest expense on long-term debts and on customers' deposits as operating expenses;
(3) That the Commission erred in failing to include the appellant's four-acre tract of land as a part of the rate base;
(4) That the Commission erred in its calculation of the working capital component of the rate base;
(5) The Commission erred in arbitrarily establishing a fair rate of return.

I.
On November 2, 1979, South Hinds Water Company filed its petition with the Mississippi Public Service Commission for approval of an increase in its rates for water service, and for approval to amend its terms and conditions for rendering said water service to customers in its certificated area. The primary change requested by the utility in this petition was an increase in the minimum monthly charge for service from $8.00 per month to $12.00 per month. Notice of the filing of this petition was provided by publication of a legal notice in a Jackson newspaper.
Thereafter, a hearing was held before the Commission concerning these matters on January 29, 1980. At the hearing, no one appeared to protest or object to the proposed changes in rates. Upon conclusion of the utility's presentation of its evidence and testimony by a Commission witness, the Commission unanimously adopted the appellant utility's requests, and on February 15, 1980, the Commission entered its original order approving the changes sought by South Hinds.
Meanwhile, a number of complaints had allegedly been made to the Commission regarding the new rate increase and service. As a result, the Commission concluded that the case should be reinstated, and scheduled May 8, 1980 as the date of rehearing. This hearing began with testimony from several utility customers as to the poor quality of service received from South Hinds. Both sides also presented expert testimony from certified public accountants. For the most part, they based their conclusions on the subject utility's financial status as indicated by the following financial statements:

                     SOUTH HINDS WATER COMPANY, INC.
                         UNAUDITED BALANCE SHEETS
                        DECEMBER 31, 1979 AND 1978
                                  ASSETS                 December 31,      
     Current Assets:                                  1979         1978    
     Cash                                           $   6,761    $  12,891
     Accounts Receivable                                  597        1,843
     Prepaid Insurance                                    202          280
                                                    __________   __________
        Total Current Assets                        $   7,560    $  15,014
                                                    __________   __________
     Fixed Assets:
     Land                                           $   4,000    $   4,000
     Water Distribution Lines                         211,458      211,458
     Meters                                             4,750          697
     Office Equipment                                     683           -
                                                    __________   __________
         Total                                      $ 220,891    $ 216,155
     Less: Accumulated Depreciation                    44,958       28,243
                                                    __________   __________
         Total Fixed Assets                         $ 175,933    $ 187,912
                                                    __________   __________
     Other Assets:
     Organization Cost - Net                        $     284    $     444
     Certificate of Public Utilities                    1,000        1,000
                                                    __________   __________
         Total Other Assets                         $   1,284    $   1,444
                                                    __________   __________
     Total Assets                                   $ 184,777    $ 204,370
                                                    ==========   ==========
*278                         LIABILITIES AND CAPITAL
     Current Liabilities:
     Accounts Payable                               $   2,252    $     571
     Note Payable - Mississippi Bank                  140,000      166,000
     Note Payable - City of Pearl                       5,000        5,000
     Accrued Expenses                                   6,740        4,936
     Customers' Deposits                               13,890        9,600
                                                    __________   __________
         Total Current Liabilities                  $ 167,882    $ 186,107
                                                    __________   __________
     Long-Term Debt:
     Note Payable - City of Pearl                   $  10,000    $  15,000
                                                    __________   __________
     Capital:
     Common Stock                                   $  25,000    $  25,000
     Retained Earnings                               (18,105)     (21,737)
                                                    __________   __________
         Total Capital                              $   6,895    $   3,263
                                                    __________   __________
     Total Liabilities and Capital                  $ 184,777    $ 204,370
                                                    ==========   ==========
                     SOUTH HINDS WATER COMPANY, INC.
                      UNAUDITED STATEMENTS OF INCOME
              FOR THE YEARS ENDED DECEMBER 31, 1979 AND 1978
                                                         December 31       
     Income:                                          1979         1978    
     Metered Water Sales                            $  64,955    $  53,386
     Tapping and Connection Fees                       11,828        8,544
     Service Charge                                       175           --
     Interest Income                                      269          479
                                                    __________   __________
         Total Income                               $  77,227    $  62,409
                                                    __________   __________
     Expenses:
     Accounting and Legal                           $   3,979    $   2,976
     Administrative Salaries                            1,867        1,200
     Billing and Collecting Service                     4,282        4,641
     Bad Debts                                            207          405
     Depreciation and Amortization                     16,875       16,727
     Interest Expense                                  19,186       16,821
     Insurance                                            923          688
     Meter Reading Expense                              2,394        1,050
     Office Supplies and Expense                          741           85
     Purchase of Water                                  9,136        8,285
     Repairs and Maintenance                            9,071        5,669
     Tapping and Connection Expense                     4,699        6,490
     Taxes                                                124          116
     Miscellaneous Expense                                111           --
                                                    __________   __________
         Total Expenses                             $  73,595    $  65,153
                                                    __________   __________
     Net Income (Loss)                              $   3,632    $(  2,744)
                                                    ==========   ==========

*279 The Commission's expert witness, Donald C. Weiss, introduced a pro forma statement of income for a twelve month period beginning with the date of the changed rates as follows:

                        SOUTH HINDS WATER COMPANY
                      PRO FORMA STATEMENT OF INCOME
                 FOR A TWELVE MONTH PERIOD BEGINNING WITH
                          DATE OF CHANGED RATES
                                  Adjusted
                                   Twelve      Adjustment to
                                   Month         Revenue to      Pro Forma
                                   Period       Reflect Rate   Twelve Month
                                Schedule A-1    Increase (1)      Period
     OPERATING REVENUES
        Metered water sales        $  69,671     $  30,862       $ 100,533
        Tapping & conn. fees           6,728                         6,728
                                   _________     _________       _________
                                      76,399        30,862         107,261
                                   _________     _________       _________
     OPERATING EXPENSES
        Purchased water                9,860       .....             9,860
        Operation & maint. exp.       22,035                        22,035
        Depreciation                  16,938                        16,938
        Taxes other than inc.            463                           463
        Income taxes
                                   _________     _________       _________
                                      49,296       .....            49,296
                                   _________     _________       _________
     UTILITY OPERATING INCOME         27,103        30,862          57,965
                                   _________     _________       _________
     FINANCIAL REVENUE AND EXPENSE
       Interest inc. & serv. chgs.       444       .....               444
       Int. exp. on indebtedness     (18,488)                      (18,488)
       Int. exp. on cust. deposits      (833)                         (833)
                                   _________     _________       _________
                                     (18,877)      .....           (18,877)
                                   _________     _________       _________
    NET INCOME                     $   8,226     $  30,862       $  39,088
                                   =========     =========       =========

Harold D. Boleware testified on behalf of South Hinds, and he introduced a comparable pro forma statement of income for a twelve month period beginning with the effective date of the rate change as follows:

                     SOUTH HINDS WATER COMPANY, INC.
           PRO FORMA OPERATING STATEMENT OF ESTIMATED REVENUES
              AND EXPENSES FOR TWELVE MONTH PERIOD BEGINNING
                   WITH EFFECTIVE DATE OF CHANGED RATES
                                                    Without       With
                                                   Proposed     Proposed
                                                     Rate         Rate
     OPERATING REVENUES                             Change       Change    
      Metered water sales to general customers     $  64,700    $  94,800
                                                   _________    ___________
     OPERATING EXPENSES
      Direct Expenses
        Depreciation on water plant                $  16,670    $  16,670
        Repairs and maintenance of water plant        12,223       12,223
        Purchase of water                              8,937        8,937
                                                   _________    ___________
          Total direct expenses                    $  37,830    $  37,830
                                                   _________    ___________
*280                     SOUTH HINDS WATER COMPANY, INC.
           PRO FORMA OPERATING STATEMENT OF ESTIMATED REVENUES
              AND EXPENSES FOR TWELVE MONTH PERIOD BEGINNING
                   WITH EFFECTIVE DATE OF CHANGED RATES
                                                     Without       With
                                                    Proposed     Proposed
                                                      Rate         Rate
                                                     Change       Change 
     Indirect expenses
           Amortization or organization expense    $     159    $     159
           Accounting and legal                        4,464        4,464
           Administrative salaries                    13,520       13,520
           Billing and collecting service              6,455        6,455
           Insurance                                     910          910
           Loss on uncollectible accounts                 97           97
           Meter reading expense                       3,175        3,175
           Office supplies and expense                   529          529
           Telephone                                     720          720
           Taxes - other than income                   1,841        1,841
           Rent                                        1,200        1,200
                                                   _________    ___________
             Total indirect expenses               $  33,070    $  33,070
                                                   _________    ___________
             Total operating expenses              $  70,900    $  70,900
                                                   _________    ___________
             Operating profit (loss)               $( 6,200)    $  23,900
                                                   _________    ___________
     FINANCIAL EXPENSE
        Interest on indebtedness                   $  16,020    $  16,020
        Interest on meter deposits                       644          644
                                                   _________    ___________
            Total financial expense                $  16,664    $  16,664
                                                   _________    ___________
          Net income (loss)                        $(22,864)    $   7,236
                                                   =========    ===========

One assignment of error involving a distinction between Boleware's pro forma statement of income and that introduced by Weiss was the failure by Weiss to include a substantial amount of authorized salaries for officers, with a corresponding credit for payroll taxes on such salaries. Weiss testified that he included an amount of $1200 for administrative salaries, whereas Boleware included $13,520.
Mr. Weiss also presented a "rate base" computation and a "return on rate base" computation as follows:

                                RATE BASE
                 APPLICABLE TO PERIOD OF APPLIED PROPOSED
                     RATES AND PRO FORMA ADJUSTMENTS
     PLANT IN SERVICE
       Water distribution lines and meters             $320,708
       Less: Contributions in aid of construction       104,500
                                                       ________
                                                                   $216,208
       Office equipment                                                 683
                                                                   ________
                                                                    261,891
       Less: Accumulated depreciation:
         December 31, 1979                               49,958
         Additions to March 31, 1980                      4,231      54,189
                                                       ________    ________
                                                                    162,702
     WORKING CAPITAL REQUIREMENT                                      2,754
                                                                   ________
     RATE BASE                                                     $165,456
                                                                   ========
*281                           RETURN ON RATE BASE
                                                    Present     Proposed
                                                     Rates       Rates
     RATE BASE                                      $165,456    $165,456
                                                    ========    ========
     PRO FORMA UTILITY OPERATING INCOME             $ 27,103    $ 57,965
                                                    ========    ========
     RETURN ON RATE BASE                             16.38%       35.03%
                                                     ======       ======

The two accountants had several disagreements on the above two statements, and these disagreements constitute a major basis of South Hinds' appeal. Mr. Weiss left out the fixed asset of land in the amount of $4,000 on his rate base computation. In addition, he admitted at the hearing that he deducted $5,000 too much for depreciation in the rate base computation. He also did not consider the interest owed on the long-term debt and customers' deposits, nor the alleged salary expense in arriving at the working capital component of the rate base computation. He also failed to include these amounts in arriving at net operating income. These differences, of course, had a substantial effect on the "rate base" and "return on rate base" calculations, if improperly omitted.
At the conclusion of this rehearing, the Commission apparently accepted all of Mr. Weiss's testimony and computations as accurate and therefore rescinded the prior approval of South Hinds' rate increase by an order dated May 15, 1980. On appeal to the Chancery Court of the First Judicial District of Hinds County, the Commission's decision was affirmed.

II.
There are three essential elements in the rate making process: First, the necessary operating expenses incurred to produce the utility's products; second, the rate base; and third, the rate of return allowed the utility. F. Welch, Cases and Text on Public Utility Regulation 453-54 (rev. ed. 1968). The rate base is calculated by valuing the property used and useful for public service. Then, a fair and reasonable rate of return is allowed on the value of the property included in the rate base, plus an allowance for the necessary operating expenses. In other words, a utility is given revenues in excess of its operating expenses so that it can pay a fair return to its investors and retire its indebtedness.
Under our statutory framework, the Mississippi Public Service Commission is charged with the responsibility of regulating the business and property of intrastate public utilities. Miss. Code Ann. § 77-3-5 (1972). Thus, rate making is a legislative function which has been delegated to the Commission. United Gas Corporation v. Mississippi Public Service Commission, 240 Miss. 405, 127 So. 2d 404 (1961). The Commission, with its expertise, is the trier of facts in a rate case, and it determines the reliability of estimates, the credibility of witnesses, and the weight of evidence. Mississippi Public Service Commission v. Mississippi Power Company, 337 So. 2d 936 (Miss. 1976); Southern Bell T. & T. Co. v. Mississippi Public Service Commission, 237 Miss. 157, 113 So. 2d 622 (1959).
Our courts have only limited review of the rates prescribed for a utility by the Commission. Such orders may not be set aside on appeal unless the court finds that the Commission's order contains errors of law, or is contrary to the manifest weight of the evidence, or is not supported by substantial evidence. Miss. Code Ann. § 77-3-67 (Supp. 1982); Bay Springs Telephone Company, Inc. v. Mississippi Public Service Commission, 370 So. 2d 694 (Miss. 1979); Mississippi Public Service Commission v. Mississippi Valley Gas Company, 358 So. 2d 418 (Miss. 1978).

IIIA.
In the instant case, the appellant's first contention is that the Commission *282 erred in failing to include authorized but unpaid officers' salaries as a legitimate operating expense. Officers' salaries are traditionally recognized as an operating expense. 64 Am.Jur.2d Public Utilities § 173 (1972); 73 C.J.S. Public Utilities § 25(2) (1951). And, there is no requirement that such expenses be actually paid. Investors who are also officers should be paid a reasonable compensation for management and operating services, and they are not required to donate such services to the customers of the utility. In such cases, the burden of proof is upon the owners of the utility to show that the services rendered are reasonably worth the compensation authorized for payment. The Commission, in turn, should carefully scrutinize the compensation to be paid, and among several factors, should consider the amount and quality of work performed by the officers in question. Mississippi Public Service Commission v. Home Telephone Company, Inc., 236 Miss. 444, 110 So. 2d 618 (1959).
We conclude that the Commission was in error for rejecting this item as an operating expense. Witnesses for South Hinds testified that the payments of these salaries were authorized according to the minutes of directors' meetings, but that these expenses remained unpaid for lack of funds. The utility employed only one full-time employee who handled mailing and customer complaints. The three stockholders who are unpaid were on the board of directors; they formulated policy, and they gave directions to the full-time and part-time personnel for operation of the plant. Under these circumstances, it does not seem unreasonable for the three stockholder-officers to draw a total sum of $13,520 annual salary for their duties. Thus, it was error for the Commission to exclude these expenses simply because they had not been actually paid. Consequently, it was also error to exclude the payroll taxes on the salaries.

IIIB.
The appellant also contends that the Commission erred in excluding interest expense owed on customers' deposits and on notes payable as operating expenses. For the most part, other jurisdictions follow the rule that interest paid on customers' deposits should be deducted as an operating expense if the deposits were subtracted from the utility's rate base. See, e.g. Re Missouri Public Service Company, 25 PUR 4th 24 (1978) (proper to reflect such cost as operating expense by multiplying the amount the rate base is reduced by the interest rate on such deposits); Re Davenport Water Company, 76 PUR 3d 209 (1968) (5% interest paid by a water company on customers' deposits was not included in operating expenses where the deposits were included in the rate base). Some jurisdictions take into account customers' deposits bearing interest as a part of the capital structure when determining a proper rate of return. Re Consolidated Edison Company of New York, Inc., 41 PUR 3d 305 (1961) (customer deposits on which interest is paid should be treated in same manner as funds obtained through issuance of bonds and stock). But, utilities are not given credit for such an expense in both operating expenses and in the rate of return analysis since that could permit a double recovery. In the instant case, the Commission did not subtract deposits from the rate base, and, therefore, properly declined to include interest on such deposits as an operating expense.
With regard to the question concerning interest expense owed on the utility's long-term debt, a review of the law applied by other jurisdictions also indicates a strong rejection of including interest on other indebtedness, such as notes payable, as an operating expense. See, e.g. Re Gas Company of Vermont, Inc., 26 PUR 4th 155 (1978) (standard in utility regulation that interest expense is a below the line item); Re Cheshire Water Company, 100 PUR (NS) 244 (1953) (interest and dividends are not proper items to be charged to operating expense); Ex Parte Westside Transit Lines, 91 PUR (NS) 56 (1951) (interest on borrowed capital cannot be regarded as a proper operating expense for rate making purposes); 64 Am.Jur.2d Public Utilities § 185 *283 (1972) (interest charges on borrowed capital are not allowed as operating expenses but must be considered in determining a fair rate of return). This rejection is based on the attitude that interest expense is analogous to dividends. See Ex Parte Breaux Bridge Teleph. Company, 25 PUR 3d 82 (1955) (interest is a payment for the use of borrowed capital just as dividends are payments for the use of equity capital. In other words, neither interest on indebtedness nor dividends should be regarded as operating expenses to be paid by the customers. Rather, cost of debt is included in the capital structure to arrive at a fair rate of return. We conclude that this rule is sound in theory, and therefore, affirm the Commission's ruling to exclude interest owed on notes payable as an operating expense.

IIIC.
The appellant's third contention is that the Commission erred in failing to include a four-acre tract of land as a part of the rate base. A public utility company is entitled to a fair return only upon the value of such of its property as is useful and being used in service for the customers' benefit. 1 A. Priest, Principles of Public Utility Regulation 174 (1969); 73 C.J.S. Public Utilities § 18 (1951). Otherwise, the resulting rates would impose on customers the burden of paying for something from which they receive no benefit.
It should be recognized, however, that property is not necessarily used and useful only when it is currently being used to produce the utility's product. Time lag and costs associated with development must be considered so that utilities are encouraged to maintain and increase adequate service to the public. Thus, if the property will be employed within a reasonable time, and if the utility's management can show a definite plan as to how the property will be employed for public service, then the property's value may be included in the rate base. See Welch, supra at 363-66 (discussion of types of property used and useful). The land in question was a couple of vacant lots in south Jackson, and there was no evidence produced as to when the land would be placed into public service, nor was there any precise indication of a proposed use. In the absence of such evidence, it was proper to exclude the value of the land from the rate base total.

IIID.
The appellant also claims that the Commission made several errors with regard to calculating the working capital component of the rate base. Working capital represents the amount of cash, materials, and supplies ordinarily required by a utility in its day-to-day business operation to meet current expenses and such contingencies as may typically develop. Preparing For The Utility Rate Case 195 (F. Welch ed. 1954). It is customary to include an allowance for working capital in the rate base, since cash working capital, like fixed assets, represents invested capital for which the owners should gain some return.
In the case sub judice, the appellant's counsel argued that the salaries expense and the interest expense should have been included in the working capital component. Since the officers' salaries and payroll taxes should have been regarded as legitimate operating expenditures, these amounts should have also been included in the working capital component. See J. Barnes, The Economics of Public Utility Regulation 495-99 (1942) (discussion of expenses to be included in working capital such as salaries and wages).

IIIE.
The appellant's final contention is that the Commission arbitrarily set a rate of return without considering the rate necessary to cover all expenses. In Southern Bell Telephone and Telegraph Company v. Mississippi Public Service Commission, 237 Miss. 157, 113 So. 2d 622 (1959), our Court noted the importance of fixing a rate which would not only provide for operating expenses, but would also sustain the capital costs of the utility such as service on the *284 debt and dividends on the stock. Indeed, a fair return implies one which will enable a utility to gain enough profit to pay its interest requirements. In the case under consideration, neither the Commission's order, nor its arguments on appeal, shed any light on its findings as to cost of equity, the cost of indebtedness, or the weighted cost of capital. Furthermore, it is readily apparent that the utility, under its current rates, cannot pay the omitted officers' salaries and the interest expense on its $140,000 loan. Since the Commission has wholly failed to show any reason as to how it determined that the current rate of return was fair and reasonable, it must be concluded that the Commission has committed error by arbitrarily setting the utility's rate of return.

V.
Since the Commission's order dated May 15, 1980, is based on errors of law and insubstantial evidence, we must reverse the order as confiscatory. Thus, the prior order dated February 15, 1980, is in full force and effect and thereby, providing for the rate increase requested by South Hinds. Said order shall stand until such a time when substantial evidence is available which indicates that the new rate structure is unreasonable or that a more equitable rate structure is available. Finally, questions concerning service complaints were not raised on appeal, and they are therefore not addressed by this opinion.
REVERSED AND RENDERED.
PATTERSON, C.J., SUGG and WALKER, P.JJ., and BROOM, ROY NOBLE LEE, HAWKINS and BOWLING, JJ., concur.
DAN M. LEE, J., takes no part.