Wood v. Public Utilities Commission , 4 Cal. 3d 288 ( 1971 )

Opinion

WRIGHT, C. J.

Petitioners, Henry Wood and Genevera Gonzales, seek review of decision No. 76065 of the Public Utilities Commission ordering dismissal of cases brought by them against Pacific Telephone and Telegraph Company (hereinafter PT&T) and Pacific Gas and Electric Company (hereinafter PG&E) challenging the validity of the two utilities’ credit rules. (See Pub. Util. Code, §§ 1756-1761.) Contrary to petitioners’ contentions, we conclude that the rules were validly adopted and that they do not violate the equal protection clause of the Fourteenth Amendment to the United States Constitution.

The challenged rules are set forth in full in an appendix to this opinion. They were adopted as part of the utilities’ rate tariffs for the purpose of reducing bad debt losses, and they have resulted in a substantial reduction of such losses. In essence each rule provides that unless credit is established in one or another of several specified ways, an applicant must make a deposit to secure utility service. In the case of domestic service, which is the only service here involved, the PT&T rule provides for a $25 deposit, and the PG&E rule for a deposit of twice the estimated monthly charge but not less than $5. If service is terminated, the excess, if any, of the amount of the deposit over charges due is refunded to the customer. If service is not terminated, the deposit is retained until credit is otherwise established, as it may be, for example, by the satisfactory payment for service for a period of one year. With some exceptions, the utility pays interest on the deposit.

Although in the past the commission has authorized the adoption of similar credit rules following public hearings (see, e.g., Re Deposits (1.915) 7 C.R.C. 830), the rules here challenged were adopted pursuant to advice letters that set forth the justifications for the rules and that were approved without hearings by resolutions of the commission. The adoption of the rules in this way did not violate due process and was authorized by the statutes and regulations governing the commission’s procedures.

In adopting rules governing service and in fixing rates, a regulatory commission exercises legislative functions delegated to it and does not, in so doing, adjudicate vested interests or render quasi-judicial decisions which require a public hearing for affected ratepayers. (United States v. Merchants' and Manufacturers Association of Sacramento (1916) 242 U.S. 178 [61 L.Ed. 233, 37 S.Ct. 24]; cf. Koppers Co. v. United States (W.D.Pa. 1955) 132 F.Supp. 159; and Florida Citrus Commission v. United States (N.D. Fla. 1956) 144 F.Supp. 517, affd. 352 U.S. 1021 [1 L.Ed.2d 595, 77 S.Ct. 589].)

Thus, in Public Utilities Com’n of State of Cal. v. United States (9th Cir. 1966) 356 F.2d 236, 241, certiorari denied 385 U.S. 816 [17 L.Ed.2d 54, 87 S.Ct. 35], the court rejected the claim of the California commission that due process entitled it to be heard in an informal meeting before the Federal Communications Commission, which later resulted in rate changes. The court stated that “Public utility regulation, historically, has been a function of the legislature; and the prescription of public utility rates by a regulatory commission, as the authorized representative of the legislature, is recognized to be essentially a legislative act. Colorado Interstate Gas Co. v. Federal Power Commission, 324 U.S. 581, 589, 65 S.Ct. 829, 89 L.Ed. 1206 (1945). As a ratepayer would have no constitutional right to participate in a legislative procedure setting rates, this right to be heard in a commission proceeding exists at all only as a statutory and not a constitutional right.”

The Public Utilities Code does not require public hearings before rate increases or rule changes resulting in rate increases may be authorized. Section 454 of that code requires only a showing before the commission and a finding by the commission of justification for such increases. It leaves to the commission the determination of the appropriate procedures to be followed. (See Pub. Util. Code, § 701.) When proposed changes in a utility’s rules result in rate increases that are minor in nature, the commission’s General Order No. 96-A (formerly No. 96) provides that the commission “may accept a showing” in an advice letter “provided justification is fully set forth therein, without the necessity of a formal application.”

It bears emphasis that the fact that ratepayers have no constitutional or statutory right to a hearing before rules such as those before us are adopted in no way means that they are without a remedy to challenge the lawfulness of any such rule or its application by the utility involved. Section 1702 of the Public Utilities Code provides that such challenges may be made by complaint before the commission at any time, and section 1756 provides that the commission’s decision thereon is subject to review in this court. It is pursuant to these procedures that petitioners are before us now.

We turn to the question of equal protection.

Rule 6 of the telephone company sets forth seven guidelines for establishing credit, as follows: “Each applicant for telephone service will be required to establish credit, which will be deemed established upon qualifying under any one of the following:

“1. Applicant is a customer of the utility or any other telephone utility in California, for a similar class of service and has paid all bills for service without having been temporarily or permanently discontinued for nonpayment thereof, for a period of twelve consecutive months immediately prior to the date of the present application.

“2. Applicant has been a customer of the utility or any other telephone utility in California in the last two years and during the last twelve consecutive months that service was provided has paid all bills for such service, without having been temporarily or permanently discontinued for nonpayment thereof.

“3. Applicant is the owner of the premises upon which the utility is requested to furnish service, or is the owner of other local real estate. . . .

“4. Applicant for resident service has been continuously employed by his present employer (including military) for a period of two years or more, or is retired on pension.

“5. Applicant furnishes a guarantor satisfactory to the utility to secure payment of bills of applicant for telephone service requested in the application. . . .

“6. Applicant’s credit is otherwise established to the satisfaction of the utility.

“7. Applicant makes the deposit [of $25].”

The establishment of credit rules of PG&E are essentially the same as the foregoing rules, except that they prescribe only six modes of establishing credit and do not include rule 4.¹ Also, the amount of the PG&E deposit is fixed at twice the amount of an estimated average monthly utility bill, usually $20. Under its flexible category for establishment of credit “to the satisfaction” of the company, PG&E excepts (a) private pensioners but not social security pensioners, (b) employees of large corporations but not employees of small corporations, and (c) professionals but not nonprofessionals. PT&T likewise excepts professionals under its flexible category.

Petitioners take issue specifically with the three credit rules which except from the requirement of a deposit or other proof of credit (1) persons owning real property, (2) persons continuously employed by the same employer for two years, and (3) other persons able to establish credit “to the satisfaction” of the company including private pensioners, employees of large corporations, and professionals. They contend that permitting such persons to escape the deposit requirement while compelling others to pay or meet alternative credit conditions (i.e., to obtain a guarantor or show prior uninterrupted service) is a denial of equal protection.

In the field of economic regulation equal protection ordinarily requires only that there be a reasonable relationship between the classifications drawn and the purpose for which they are made. (See, e.g., Rinaldi v. Yeager (1966) 384 U.S. 305, 308-309.[16 L.Ed.2d 577, 579-580, 86 S.Ct. 1497]; Dandridge v. Williams (1970) 397 U.S; 471 [25 L.Ed.2d 491, 90 S.Ct. 1153, 1161-1163].) Since utility service is of vital importance, however, and since the utilities’ credit rules impose greater hardship on the poor who must make a deposit to secure service than on those who need not do so, petitioners contend that the classifications set forth in the credit rules can only be justified if they are essential to promote a compelling state interest. (See generally In re Antazo (1970) 3 Cal.3d 100, 110-111 [89 Cal.Rptr. 255, 473 P.2d 999], and cases cited.) In petitioners’ view they cannot be so justified. They assert that the objective of reducing bad debt losses could be achieved by classifications more carefully drawn that would not discriminate against the poor merely because they are poor.

We reject the application of the compelling state interest test to determine the validity of the credit rules. They are in effect nothing more than a part of the utilities’ rate structures. The commission must fix rates that will provide a reasonable return on the utility’s investment, and in doing so it has wide discretion to make rate classifications that reflect a broad and varied range of economic considerations. (Pacific Tel. & Tel. Co. v. Public Util. Com. (1965) 62 Cal 2d 634, 647 [44 Cal.Rptr. 1, 401 P.2d 353]; Cal. Mfrs. Assn. v. Public Utilities Com. (1954) 42 Cal.2d 530, 536 [268 P.2d 1]; Pac. Tel. & Tel. Co. v. Public Utilities Com. (1950) 34 Cal.2d 822, 826-827 [215 P.2d 441].) The commission deals with services that are essential and the cost of which necessarily imposes greater hardship on those least able to pay. To hold that because it deals with these vital interests it must justify every facet of the rate structure that may impinge upon the poor by a showing that that facet is essential to promote a compelling state interest would lead to substituting for the commission’s expertise in fixing rates a court-determined standard of exquisite fairness to all ratepayers. That is not the court’s business. Any doubt in this respect was dispelled by the decision in Dandridge v. Williams, supra, 397 U.S. 485-487 [25 L.Ed.2d 501-503, 90 S.Ct. 1160, 1163], in which the court firmly refused to depart from the traditional equal protection test even in the highly sensitive field of aid to needy children.²

It was for the commission to determine whether it is preferable to reduce bad debt losses by credit rules reasonably designed to do so or to spread those losses among all ratepayers by increased rates. (Southwestern Tel. Co. v. Danaher (1915) 238 U.S. 482, 490 [59 L.Ed. 1419, 1422, 35 S.Ct. 886]; Riegel v. Public Utilities Commission (1931) 48 F.2d 1023 [60 App.D.C. Ill], cert. den. 284 U.S. 644 [76 L.Ed. 548, 52 S.Ct. 24]; 43 A.L.R.2d 1262, 1264.) Having chosen the former alternative, the commission was obligated to determine the content of those rules. If the classifications adopted are reasonably related to the reduction of bad debt losses, they are valid, whether or not we deem that they could be improved.

In determining whether the classifications are reasonably related to their purpose we reject the invitation to consider each subcategory separately and then to look to see whether cases may be found on each side of each line which, when considered in isolation, may appear to present no significant differences with respect to credit risks. Whenever a line must be drawn, there is little that separates the cases closest to it on either side. We must consider the credit rules in the light of their overall operation.

Examining the credit rules in their entirety, we are convinced that the commission could reasonably conclude that persons who could satisfy none of the alternative methods of establishing credit other than by making a deposit presented greater risks of bad debt losses than those who could satisfy one or more of those alternatives. Past payment of bills, ownership of real property, job stability, steady income, professional standing and ability to provide a guarantor all have some relationship to creditworthiness. Moreover, recognition of these categories together with the flexible category of establishment of credit to the utility’s satisfaction necessarily serves to eliminate hardship that would in many cases otherwise be imposed upon the poor. Persons falling into those categories are not necessarily wealthy, and to invalidate those categories might as likely lead to no exceptions to the deposit requirements as to a successful quest for preferable exceptions.

We need not pass on thé utilities’ administration of the category of establishing credit to their satisfaction, for no one is before us who has shown that he was denied service by an arbitrary application of that category. It is not invalid on its face, for it affords reasonable flexibility to avoid needless hardship. Moreover, anyone who believes he has been unfairly denied credit pursuant to it may always seek relief from the commission.

The order is affirmed.

McComb, J., Burke, J., Schauer, J.,^* and Sims, J.,^† concurred.

APPENDIX

PT&T’s tariff provisions dealing with establishment of credit are contained in its Rules 6 and 7 which at the time of hearing were as follows:

“RULE No. 6

“ESTABLISHMENT AND RE-ESTABLISHMENT OF CREDIT

“A. Establishment of Credit

“Each applicant for telephone service will be required to establish credit, which will be deemed established qualifying under one of the following:

“1. Applicant is a customer of the utility or any other telephone utility in California, for a similar class of service and has paid all bills for service without having been temporarily or permanently discontinued for nonpayment thereof, for a period of twelve consecutive months immediately prior to the date of the present .application.

“2. Applicant has been a customer of the utility or any other telephone utility in California in the last two years and during the last twelve consecutive months that service was provided has paid all bills for such service, without having been temporarily or permanently discontinued for nonpayment thereof.

“3. Applicant is the owner of the premises upon which the utility is requested to furnish service, or is the owner of other local real estate; in the case of business service, real estate must be business property.

“4. Applicant for residence service has been continuously employed by his present employer (including military) for a period of two years or more, or is retired on pension.

“5. Applicant furnishes a guarantor satisfactory to the utility to secure payment of bills of applicant for telephone service requested in the

“6. Applicant’s credit is otherwise established to the satisfaction of the utility.

“7. Applicant makes the deposit prescribed in Rule No. 7.

“B. Re-establishment of Credit

“1. A customer whose service has been discontinued for nonpayment of bills will be required to pay any unpaid balance due the utility for the premises for which service is to be restored and may be required to pay a reconnection charge as prescribed in Rule No. 11 under ‘Restoration—Reconnection Charge’ and to re-establish credit by making the deposit prescribed in Rule No. 7, before service is restored.

“2. An applicant who previously has been a customer of the utility and during the last twelve months of that prior service has had service temporarily or permanently discontinued for nonpayment of bills will be required to pay any unpaid balance due the utility, and will be required to re-establish credit by making the deposit prescribed in Rule No. 7.

“RULE No. 7

“DEPOSITS

“A. Amount of Deposit

“1. The amount of deposit required to establish credit for residential telephone service is $25.00. Whenever a deposit is taken, service connection charges and an advance payment will not be collected at the time of application.

“2. The amount of deposit required to establish credit for business telephone service is twice the estimated average monthly bill, but not less than $25.00.

“3. The amount of deposit required to re-establish credit is equal to twice the average monthly bill for the last three months, when available.

“B. Return of Deposits

“The utility will refund the deposit in accordance with the following:

“1. When an application for telephone service has been cancelled prior to the establishment of service, the deposit will be applied to any charges applicable in accordance with the tariff schedules and the excess portion of the deposit will be returned, and the applicant will be so advised.

“2. When the customer’s credit may be otherwise established in accordance Rule No. 6, and upon the customer’s request for return of the deposit with interest.

“3. Upon discontinuance of telephone service, the utility will refund, with interest the customer’s deposit or the balance in excess of unpaid bills for that service, and the customer will be so advised.

“4. After the customer has paid bills for telephone service for 12 consecutive months without having had this service temporarily or permanently discontinued for nonpayment of bills, the utility will refund the deposit with interest.

“C. Interest on Deposits

“1. The utility will pay simple interest at the rate of 1/2 percent per month on deposits held, except as mentioned in 2. below. Such interest will be paid at the time the deposit is returned.

“2. No interest will be paid if service is temporarily or permanently discontinued for nonpayment of bills, or if deposit is held less than full month increments.”

On January 28, 1969, after these cases were submitted to the commission, PT&T filed Advice Letter No. 9888, which sought authority to revise Paragraph A5 of Rule 6. The commission accepted the filing which became effective on February 28, 1969. Paragraph A5 of Rule 6 now provides:

“5. Applicant furnishes a guarantor satisfactory to the Utility to secure payment of bills of applicant for telephone service requested in the application. The amount of the guarantee shall be in the same amount as the deposit computed in accordance with Rule No. 7 and this amount shall be specified on the Guaranty Form. This guaranty shall continue in full force and effect for one year from the installation date of the service or until applicant’s credit is otherwise established.”

PG&E’s tariff provisions dealing with establishment of credit are contained in Rules 6 and 7 of its gas and electric tariffs. The gas tariff rules are as follows:

“RULE No. 6

“ESTABLISHMENT AND RE-ESTABLISHMENT OF CREDIT

“(A) Establishment of Credit—Domestic Service:

“Each applicant will be required to satisfactorily establish credit which will be deemed established:

“1. If applicant is the owner of the premises to be served or of other real estate within the territory served by the Company; or

“2. If the applicant makes a cash deposit to secure payment of bills as prescribed in Rule No. 7; or

“3. If the applicant furnishes a guarantor, satisfactory to the Company, to secure payment of bills for the service requested; or

“4. If the applicant has been a customer of the Company within the past two years and during the last twelve consecutive months of that prior service has not had more than two past due bills as defined in Rule No. ll-(A); or

“5. If applicant’s credit is otherwise established to the satisfaction of the Company; and

“6. If applicant has paid all bills for domestic gas service previously supplied applicant by the Company.

“(B) Establishment of Credit—Other Than Domestic Service:

“Each applicant will be required to satisfactorily establish credit which will be deemed established:

“1. If applicant is the owner with a substantial equity, of value satisfactory to the Company, in the premises to be served; or

“2. If applicant makes a cash deposit to secure payment of bills as prescribed in Rule No. 7; or

“3. If applicant furnishes a guarantor, satisfactory to the Company, to secure payment of bills for the service requested; or

“4. If applicant has been a customer of the Company for a similar type of service within the past two years and during the last twelve consecutive months of that prior service has had not more than two past due bills as defined in Rule No. ll-(A), provide that the periodic bill for such previous service was equal to at least 50% of that estimated for the new service, and, provided further, that the credit of applicant is unimpaired in the opinion of the Company; or

“5. If applicant’s credit is otherwise established to the satisfaction of the Company; and

“6. If applicant has paid all bills for non-domestic gas service previously supplied applicant by the Company.

“(C) Re-establishment of Credit—All Classes of Service:

“1. An applicant who previously has be'en a customer of the Company and whose gas service has been discontinued by the Company during the last twelve months of that prior service because of nonpayment of bills, may be required to re-establish credit by depositing the amount prescribed in Rule No. 7 for that purpose, and by paying bills regularly due; except, an applicant for domestic service will not be denied service for failure to pay such bills for other classes of service.

“2. A customer who fails to pay bills before they become past due as defined in Rule No. ll-(A), and who further fails to pay such bills within five days after presentation of a discontinuance of service notice for nonpayment of bills, may be required, to pay said bills and re-establish his credit by depositing the amount prescribed in Rule No. 7. This rule will apply regardless of whether or not service has been discontinued for such nonpayment.

“3. A customer using other than domestic service may be required to re-establish his credit in accordance with Rule No. 6-(B) in case the conditions of service or basis on which credit was originally established have, in the opinion of the Company, materially changed.

“RULE No. 7

“DEPOSITS

“(A) Amount of Deposit:

“The amount of deposit required to establish or re-establish credit for gas service is twice the estimated average monthly bills, but in no case may the amount of deposit be less than $5.00.

“(B) Return of Deposit:

“1. Upon discontinuance of service, the Company will refund the customer’s deposit or the balance in excess of the unpaid bills for gas service furnished by the Company.

“2. After the customer has paid bills for service for twelve consecutive months without having had more than two past due bills, as defined in Rule No. ll-(A), the Company will refund the deposit. If the customer has had more than two past due bills, the Company will thereafter review the account every twelve months and will refund the deposit after the customer has not had more than two past due bills during the twelve months prior to any review. “3. The Company may return the deposit at any time upon request, provided the customer’s credit may otherwise be established in accordance with Rule No. 6.

“(C) Interest on Deposit:

“The Company will pay interest on deposits at the rate of 5 % per annum for the first twelve consecutive months during which a customer has paid bills for service without having had more than two past due bills as defined in Rule No. ll-(A) and for the additional time thereafter up to the date of refund or the date upon which a check is mailed to the customer.

“No interest will be paid if service is discontinued or if the deposit is returned before twelve months from date on which deposit was made.”

PG&E’s electric tariff Rules 6 and 7 are identical to those in its gas tariff.

1 PG&E does except persons with one year of continuous employment, but this criterion is applied pursuant to the provision for establishment of credit “to the satisfaction of the Company.”

2 “In the area of economics and social welfare, a State does not violate the Equal Protection Clause merely because the classifications made by its laws are imperfect. If the classification has some ‘reasonable basis,’ it does not offend the Constitution simply because the classification ‘is not made with mathematical nicety or because in practice it results in some inequality.’ Lindsley v. Natural Carbonic Gas Co., 220 U.S. 61, 78, 31 S.Ct. 337, 340, 55 L.Ed. 369. ‘The problems of government are practical ones and may justify, if they do not require, rough accommodations—illogical, it may be, and unscientific.’ Metropolis Theatre Co. v. City of Chicago, 228 U.S. 61, 69-70, 33 S.Ct. 441, 443, 57 L.Ed. 730. ‘A statutory discrimination will not be set aside if any state of facts reasonably may be conceived to justify it.’ McGowan v. Maryland, 366 U.S. 420, 426, 81 S.Ct. 1101, 1105, 6 L.Ed.2d 393. . . .

“It is true that in some AFDC families there may be no person who is employable. It is also true that with respect to AFDC families whose determined standard of need is below the regulatory maximum, and who therefore receive grants equal to the determined standard, the employment incentive is absent. But the Equal Protection Clause does not require that a State must choose between attacking every aspect of a problem or not attacking the problem at all. Lindsley v. Natural Carbonic Gas Co., 220 U.S. 61, 31 S.Ct. 337, 55 L.Ed. 369. It is enough that the State’s action be rationally based and free from invidious discrimination. The regulation before us meets that test.

“We do not decide today that the Maryland regulation is wise, that it best fulfills the relevant social and economic objectives that Maryland might ideally espouse, or that a more just and humane system could not be devised. Conflicting claims of morality and intelligence are raised by opponents and proponents of almost every measure, certainly including the one before us. But the intractable economic, social, and even philosophical problems presented by public welfare assistance programs are not the business of this Court.”

* Retired Associate Justice of the Supreme Court sitting under assignment by the Chairman of the Judicial Council.

† Assigned by the Chairman of the Judicial Council.