State Ex Rel. North Carolina Utilities Commission v. Westco Telephone Co.

146 S.E.2d 487 (1966) 266 N.C. 450

STATE of North Carolina ex rel. NORTH CAROLINA UTILITIES COMMISSION
v.
WESTCO TELEPHONE COMPANY.

No. 523.

Supreme Court of North Carolina.

February 4, 1966.

Edward B. Hipp, Raleigh, for the Commission.

Atty. Gen. T. W. Bruton, Asst. Atty. Gen. Charles D. Barham, Jr., for the State.

Van Winkle, Walton, Buck & Wall, by Herbert L. Hyde, Asheville, for Westco.

DENNY, Chief Justice.

The questions posed for determination on this appeal are as follows: (1) Did the court below err in affirming the finding and conclusion of the Commission that the fair value of the property of Westco used and useful in rendering service to the public as of 31 December 1963, was $4,120,000? (2) Did the court commit error in affirming the finding and conclusion of the Commission that a fair and reasonable rate of return was 3.8%, and that such rate would produce $156,560 in net operating income?

Ordinarily the fair value of a utility's property is found to be less than the reconstruction cost of the property. In this case, however, Mr. Russell, of the American Appraisal Company, who was tendered by Westco as an expert witness, testified, "(b)ased on the studies which I have conducted and conditions described, it is my opinion that the fair value of the company's property as of December 31, 1963, is $4,140,000." However, he testified that the replacement cost new, less depreciation, of the Westco property in service as of 31 December 1963, was $4,137,568. Although the witness stated that his fair value figure did not include construction cost in progress, and materials and supplies, it was permissible for the Commission to take into consideration this opinion of fair value in excess of replacement cost when it determined the fair value of Westco's property used and useful in rendering service to be $4,120,000 on 31 December 1963. On the other hand, the president of Westco testified that the net original cost of applicant's property in North Carolina, used and useful in furnishing telephone service to the public as of 31 December 1963, was $4,199,088; that this figure included plant under construction in the sum of $221,325, and materials and supplies in the sum of $48,662. Even so, he testified that in his opinion the fair value of Westco's plant, used and useful in rendering telephone service to the public as of 31 December 1963, was at least $4,407,555.

G.S. § 62-133 reads as follows:

"(a) In fixing the rates for any public utility subject to the provisions of this chapter, other than motor carriers, the Commission shall fix such rates as shall be fair both to the public utility and to the consumer.

"(b) In fixing such rates, the Commission shall:

"(1) Ascertain the fair value of the public utility's property used and useful in providing the service rendered to the public within this State, considering the reasonable original cost of the property less that portion of the cost which has been consumed by previous use recovered by depreciation expense, the replacement cost of the property, and any other factors relevant to the present fair value of the property. Replacement cost may be determined by trending such reasonable depreciated cost to current cost levels, or by any other reasonable method.

"(2) Estimate such public utility's revenue under the present and proposed rates.

"(3) Ascertain such public utility's reasonable operating expenses, including actual investment currently consumed through reasonable actual depreciation.

"(4) Fix such rate of return on the fair value of the property as will enable the public utility by sound management to produce a fair profit for its stockholders, considering changing economic conditions and other factors, as they then exist, to maintain its facilities and services in accordance with the reasonable requirements of its customers in the territory covered by its franchise, and to compete in the market for capital funds on terms which are reasonable and which are fair to its customers and to its existing investors.

"(5) Fix such rates to be charged by the public utility as will earn in addition to reasonable operating expenses ascertained pursuant to paragraph (3) of this subsection the rate of return fixed pursuant to paragraph (4) on the fair value of the public utility's property ascertained pursuant to paragraph (1).

"(c) The public utility's property and its fair value shall be determined as of the end of the test period used in the hearing and the probable future revenues and expenses shall be based on the plant and equipment in operation at that time.

"(d) The Commission shall consider all other material facts of record that will enable it to determine what are reasonable and just rates.

"(e) The fixing of a rate of return shall not bar the fixing of a different rate of return in a subsequent proceeding."

In arriving at the fair value of a public utility's property used and useful in providing the service rendered to its customers, the Commission is charged with the duty to consider the requirements set forth in G.S. § 62-133, as well as other relevant factors. It will be noted that in fixing the value of Westco's property at $4,120,000 as of 31 December 1963, it was fixed at $190,899 above the original cost less depreciation. Moreover, the Commission is required under G.S. § 62-133(c) to determine the fair value of the utility's property as of the end of the trial period based on the plant and equipment in operation at that time. In our opinion, the value fixed by the Commission is supported by substantial, competent and material evidence and should be sustained, and it is so ordered.

On the second question, we think what was said in State ex rel. Utilities Commission v. State and State ex rel. Utilities Commission v. Southern Bell Telephone and Telegraph Co., 239 N.C. 333, 80 S.E.2d 133, is applicable. Barnhill, J., later C. J., in speaking for the Court, said:

"Necessarily, what is a ``just and reasonable' rate which will produce a fair return on the investment depends on (1) the value of the investment—usually referred to in ratemaking cases as the Rate Base—which earns the return; (2) the gross income received by the applicant from its authorized operations; (3) the amount to be deducted for operating expenses, which must include the amount of capital investment currently consumed in rendering the service; and (4) what rate constitutes a just and reasonable rate of return on the predetermined Rate Base. When these essential ultimate facts are established by findings of the Commission, the amount of additional gross revenue required to produce the desired net return becomes a mere matter of calculation. Due to changing economic conditions and other factors, the rate of return so fixed is not exact. Necessarily it is nothing more than an estimate.

"In finding these essential, ultimate facts, the Commission must consider all the factors particularized in the statute and ``all other facts that will enable it to determine what are reasonable and just rates, charges and tariffs.' G.S. § 62-124 (superseded by G.S. § 62-133). It must then arrive at its own independent conclusion, without reference to any specific formula, as to (1) what constitutes a fair value, for rate-making purposes, of applicant's investment used in rendering intrastate service—the Rate Base, and (2) what rate of return on the pre-determined Rate Base will constitute a rate that is just and reasonable both to the applicant and to the public. While both original cost and replacement value are to be considered, neither constitutes a proper Rate Base."

According to the evidence in the hearing before the Commission and the findings of the Commission, Westco received an increase in rates under the order entered in P-58, Sub 37, 11 March 1964, effective 1 April 1964, that would produce an increase in annual gross revenue of $80,318, while the order entered by the Commission on 13 August 1963, effective 1 September 1964, further increased the gross annual income in the amount of $39,936. Consequently, these increases in 1964 amounted to $120,254. Therefore, based on the estimated revenues and operating expenses made by the Commission as required by G.S. § 62-133(b) (2) and (3), a rate of return of 3.8% would produce a net operating income of $156,560. This sum, according to finding of fact No. 17, will produce a return on the equity investment of 11.74% which is sufficient to pay an annual dividend of 8% on Westco's capital stock and leave approximately 50% of its net earnings as surplus.

The Commission dealt only with the North Carolina properties of Westco which approximate 80% of Westco's holdings. Approximately 80% of the investment in Westco in North Carolina and Georgia is represented by a loan from REA at an annual interest rate of 2%. The appellant assails the rate of return as fixed by the Commission at 3.8% as being unreasonably low. We realize the area served by Westco is largely a mountainous area and not as densely populated as most areas of the State. Even so, the low interest rate granted by the REA to electric cooperatives and companies like Westco is for the purpose of making it possible to extend electric power service and telephone service to areas which in all probability would not be served otherwise. The Commission must consider its duty to the public as well as to the utility. The area served by Westco would seem to be developing rather satisfactorily since, at the end of 1963, Westco had 7,234 total telephone stations in North Carolina, an increase of 45.4% over the 4,975 telephones at the time of the spin-off from Western. Moreover, according to Westco's evidence, its plans at the time of the hearing before the Commission called for the expansion of its system in North Carolina by the end of 1964 to serve 9,784 telephone stations, an increase of 35.3%.

When Westco put into operation the additional telephones, such service carried the increased rates established by the two orders entered by the Commission in 1964.

The General Assembly has delegated to the Commission, and not to the courts, the duty and power to establish rates for public utilities. State ex rel. Utilities Commission v. Champion Papers, Inc., 259 N.C. 449, 130 S.E.2d 890. Furthermore, under the provisions of G.S. § 62-94 (e), upon appeal, rates fixed by the Commission shall be deemed prima facie just and reasonable. State ex rel. North Carolina Utilities Commission v. Norfolk Southern R. R., 249 N.C. 477, 107 S.E.2d 681; State ex rel. North Carolina Utilities Commission v. Casey, 245 N.C. 297, 96 S.E.2d 8; State ex rel. North Carolina Utilities Commission v. Municipal Corporations, 243 N.C. 193, 90 S.E.2d 519; Utilities Commission of North Carolina v. Great Southern Trucking Co., 223 N.C. 687, 28 S.E.2d 201. Moreover, since we find no evidence of capricious, unreasonable, or arbitrary action, or disregard of the law, the discretionary power of the Commission, in fixing the rate of return at 3.8% on the predetermined value of Westco's property as of 31 December 1963, will be upheld. North Carolina Utilities Commission v. McLean, 227 N.C. 679, 44 S.E.2d 210; In re Department of Archives & History, 246 N.C. 392, 98 S.E.2d 487.

If it developes that the rate fixed on the predetermined fair value of Westco's property as of 31 December 1963 is not a fair and just rate of return either to Westco or to its customers, the Commission may, upon a proper petition, establish a different rate of return. G.S. § 62-133(e).

The judgment of the court below is

Affirmed.

LAKE, J., took no part in the consideration or decision of this case.