Court Opinion

ID: 9587421
Source: CourtListenerOpinion
Date Created: 2023-08-21 23:21:54.016931+00
Date Added: 2024-06-11T17:41:39.276266
License: Public Domain

Ness, Justice
(concurring and dissenting) :
*605I concur in that portion of the majority opinion as applies to “Property Held for Future Use,” “Wage Adjustment,” and “Cost of Short Term Debt.” I dissent as to “Fair Rate of Return,” and would reverse the trial court and remand to the Commission to determine this.
A regulatory body, such as the Public Service Commission, is bound by certain well established legal principles in discharging its duties in rate regulation. These principles have been developed from the relevant statutes and constitutional provisions and the cases interpreting them. Code of Laws of South Carolina, 1976, Title 58, Chapter 9; Federal Power Comm’n. v. Hope Natural Gas Co., 320 U. S. 591, 64 S. Ct. 281, 88 L. Ed. 333 (1944); Bluefield Water Works & Improvement Co. v. Public Service Comm’n. of West Virginia, 262 U. S. 679, 43 S. Ct. 675, 67 L. Ed. 1176 (1923).
A regulatory commission has a responsibility to protect the customers of a utility from unwarranted, excessive or discriminatory charges on the one hand and, on the other, to deal fairly with a utility by allowing it to maintain rates which provide it with an opportunity to earn a reasonable return on the property which it has devoted to- .serving the public. Code of Laws of South Carolina, 1976, § 58-9-570.
The Commission must exercise this dual responsibility by:
(a) Not depriving investors of the opportunity to earn reasonable returns on the funds devoted to such use as that would constitute a taking of private property without just compensation.
(b) Not permitting rates which are excessive.
It is conceded that a utility commission may not make an arbitrary or capricious choice, New England Tel. & Tel. Co. v. Public Utility Comm., 116 R. I. 356, 358 A. (2d) 1 (1976); its decision must be based upon evidence in the record, Chemical Leaman Tank Lines v. S. C. Public Service Comm., 258 S. C. 518, 189 S. E. (2d) 296 (1972); it *606cannot ignore established legal principles, Duke Power v. Federal Power Comm., 130 U. S. App. D. C. 389, 408-10, 401 F. (2d) 930, 949-51 (1968); and its determination must be fairly set forth in findings which are adequate to enable a reviewing court to determine if its conclusions are supported in law, logic and fact. United Tel. Co. v. S. C. Public Service Comm., 264 S. C. 212, 213 S. E. (2d) 738 (1975).
The “test year” in this case terminated on March 31, 1976, and it was necessary to make adjustments to the test period data to properly measure the prospective effect of the proposed rates. This the Commission failed to do. See West Ohio Gas Co. v. Public Utilities Comm. of Ohio, 294 U. S. 79, 55 S. Ct. 324, 79 L. Ed. 773 (1935). The rates, when they become effective, will only approximate the results they were designed to. achieve.
This adjusted data is developed in three areas, to wit:
First, the investment of the utility is calculated in a set of figures known as the rate base. Next, the revenues and expenses are analyzed to determine the net operating income of the company. When that net operating income is divided by the rate base, the rate of return on rate base is derived, a critical item in any rate proceeding.
In judging the fairness and adequacy of this rate of return, the cost of the utility company’s invested capital must be considered. A utility company’s capital will generally consist of fixed obligations, such as bonds, preferred stock and short-term debt, and the investment of its stockholders which is the common equity of the company. To determine the cost of this capital, the cost of fixed obligations (bonds, preferred stock and short-term debt) is calculated and a reasonable return on the investment of the company’s stockholders (common equity) must be established. These costs are combined to determine the company’s overall cost of capital. The rate of return on rate base is then compared to the cost of *607capital which has been established. If the rate of return on rate base is lower than the cost of capital, the rates must be adjusted upward by the Commission. It is on this basis that the general determination is made as to what rates are appropriate for utility service.
I believe the rates of return established by the Commission, and the rates resulting therefrom, are confiscatory and unsupported by substantial evidence; hence they are arbitrary, capricious, and unreasonable.
The two leading cases from the United States Supreme Court setting forth the basic principles of utility rate regulation are Bluefield Water Works & Improvement Co. v. Public Service Comm’n. of West Virginia, supra, and Federal Power Comm’n. v. Hope Natural Gas Co., supra. In Bluefield, the Court stated:
“A public utility is entitled to such rates as will permit it to earn a return on the value of the property which it employs for the convenience of the public equal to that generally being made at the same time in the same general part of the country on investments in other business undertakings which are attended by corresponding risks and uncertainties.” 262 U. S. 679 at 692, 43 S. Ct. at 679, 67 L. Ed. at 1182-83.
Subsequently, in the Hope Natural Gas Co. case, the United States Supreme Court expanded its prior definitions, and stated:
“From the investor or company point of view it is important that there be enough revenue not only for operating expenses but also for the capital costs of the business. These include service on the debt and dividends on the stock.” 320 U. S. at 603, 64 S. Ct. at 288, 88 L. Ed. at 345. (Emphasis added.)
The rates established by a utility regulatory commission must not only provide the utility with the opportunity of *608recovering its reasonable operating expenses, but must also provide a fair and reasonable return on the investments made by the company in providing utility service to its customers.
“The compensation which the Constitution guarantees an opportunity to earn is the reasonable cost of conducting the business. Cost includes, not only operating expenses, but also capital charges. Capital charges cover the allowances, by way of interest, for the use of the capital, whatever the nature of the security issued therefor; the allowance for risk incurred; and enough more to attract capital.” Missouri ex rel. Southwestern Bell v. Public Service Comm’n., 262 U. S. 276, at 291, 43 S. Ct. 544, at 547, 67 L. Ed. 981, at 986 (1923). (Emphasis added.)
While admittedly there is no set mathematical formula which can be applied in determining a fair rate of return, case law has established guidelines which may be used in determining whether the return approved by the Commission is reasonable. E.g., Federal Power Comm’n. v. Hope Natural Gas Co., supra. The Commission’s order does not comport with any of these guidelines, and is therefore based upon a confiscatory rate of return findings.
The rate of return should:
(1) Be commensurate with returns on investments in other enterprises having corresponding risks; and
(2) Be sufficient to assure confidence in the financial integrity of the enterprise so as to enable it to maintain its credit and attract capital. Federal Power Comm’n. v. Hope Natural Gas Co., supra.
The Commission concluded an appropriate return for Southern Bell on its common equity falls within a zone from 8 to 11%. Tr. p. 939. The record demonstrates the unreasonableness and inequity of such a finding. Even the upper levels of this zone are unreasonable and unlawful, and the conclusion results from the Commission’s total rejection of all of the Company’s testimony, including evidence of com*609parable earnings. The Commission placed its entire reliance for support of its 11% upper limit upon techniques which it recognized in its Order required further refinement. (Tr. p. 932).
The lower level of the Commission’s zone of reasonableness is even more contrary to the evidence and, in fact, not only lacks evidentiary support but results in confiscation. Hone of the expert witnesses in direct testimony even considered returns on equity at the lower levels adopted by the Commission. The experts who testified for the Company all supported returns on equity at or above 14%. (Tr. pp. 152, 224, 284). The two experts presented by the Commission staff discussed returns of 10.45% and of “something below 13%” respectively. (Tr. pp. 900-909, 769-78). The lower limit of the range of reasonableness established by the Commission at 8% was mentioned on the record only by a rebuttal witness for Southern Bell, who indicated the manifest unreasonableness of such a figure. In testifying as to the inevitable result of setting the allowable return on equity at as low as level as 9.24%, this expert witness stated:
The stock would sell far below book value, and the Company would be unable to sell equity capital on any reasonable basis. In addition, its interest coverage ratio would decline, and this would lower its bond ratings and impair its ability to raise debt capital.” Tr. p. 853.
Thus, the only expert testimony in the record relevant to the lower level of return approved by the Commission specifically establishes that the very standards outlined in the Hope case for avoiding confiscation would be violated by such a return.
The 8% rate of return found by the Commission to be within the range of reasonableness falls below the Company’s current cost of long-term debt. Southern Bell’s latest bond issue on the record, made in April, 1976, was at a cost to the Company of 8.37%. (Exhibits Yol. I, Table 11, Rseponse to Data Request No. 1, at p. 7.)
*610Not only is the rate of return established by the Commission below the Company’s current cost of long-term debt, but it is drastically lower than the returns consistently found reasonable by the Commission in its three previous rate decisions concerning Southern Bell, spanning 1971 to 1975. S. C. P. S. C. Orders No. 15, 962 [93 P. U. R. (3d) 76 at 84 (1971)]; No. 17,302 [3 P. U. R. 4th 406 at 410-411 (1973)], and No. 18,474 [10 P. U. R. 4th 166 at 174 (1975)]. See, 31 C. J. S. Evidence § 41 p. 991 (1964); Colorado Kenworth, Inc. v. Archie Meek Transp. Co., Wyo., 495 P. (2d) 1183 (1972). In each of those three decisions, the Commission concluded a return of 12% was appropriate and reasonable for Southern Bell in South Carolina. While recognizing the- Commission is not bound by its prior decisions, and it may re-examine and alter its previous findings as to reasonableness when conditions warrant, the present return is a radical departure from those levels of earnings previously established and is not only unexplained but also completely contrary to- current economic fact.
In Southern Union Gas Company v. New Mexico P. S. C., 84 N. M. 330, 503 P. (2d) 310, 313 (1972) the court held:
“[I]n the preceding cause between the same parties, Cause No. 31074, supra, the cost of capital was actually used as the rate of return . . . [T]here was no evidence of changed circumstances which would justify a departure from previous Commission procedure . . . Although a Commission should be able -to change its procedure, it should not arbitrarily or capriciously do so without good reasons.”
The Commission’s unwarranted -and drastic reduction in its previously approved returns for the Company completely ignores the continuing inflation and increased costs of doing business which confront the Company. Recently, the Massachusetts Supreme Court held that, at an absolute minimum, the telephone Company must be allowed a rate of return of 13%. In its opinion, the Court stated:
*611“In substance, [the Commission made] an assumption that there will be no inflation. That assumption is not only-speculative and uncertain; it is clearly erroneous ... In view of what we say as to cost of equity capital, moreover, it seems clear that the error has resulted in confiscation.” New England Tel & Tel. Co. v. Dept. of Public Utilities, Mass., 354 N. E. (2d) 860 at 865 (1976).
The Commission has not explained its departure from its prior findings oí 12 Jo as a reasonable return on equity capital. In fact the record conclusively reveals that the Company has not been able to earn the returns previously approved by the Commission because of inflation and erosion. E.g. Tr. p. 421.
The “comparable earnings test” to which the Commission in its 1975 order gave primary emphasis, reveals what an investor can earn in various alternative investments with comparable risks. Although the Commission had applied these tests in 1971 and 1975, it completely abandoned the comparable earnings measurement here and rejected all of the testimony concerning what businesses of like risk were earning during relevant periods. Moreover, it did not articulate the reason for this major change in regulatory policy. The general rule concerning the error of such a departure has been stated as follows:
“ [A] dministrative bodies are not ordinarily bound by their prior determinations or the principles or policies on which they are based. However, prior determinations are entitled to great weight . . . and radical departures from administrative interpretations consistently followed cannot be made except for most cogent reasons.” 73 C. J. S. Public Administrative Bodies and Procedure § 48, p. 482. [See, e. g., New England Tel. & Tel. Co. v. Dept. of Public Util., supra, 354 N. E. (2d) at 871.
Under the Commission’s Order, Southern Bell cannot preserve its financial integrity and attract new capital on rea*612sonable terms. The rate of return on equity capital authorized by the Commission is at or below the current interest rate paid by the Company on long-term debt.1
Even the majority opinion implies this by stating:
“Assuming, without deciding, that the rate of return allowed by the Commission is somewhat low . . .”
“We think it is inescapable that inflation has continued and is still continuing such that it may, within the foreseeable future, warrant a re-evaluation of Southern Bell’s rate structure.”
I conclude the Commission’s Order is unlawful and unreasonable. I would reverse the trial court in this respect and remand.
Gregory, J., concurs.

 Southern Bell’s latest bond issue on the record, made in April, 1976, was at a cost to the Company of 8.37%. (Exhibits Vol. I., Table 11, Response to Data Request No. 1, at p. 7).