State Ex Rel. Utilities Commission v. General Telephone Co. of the Southeast

208 S.E.2d 681 (1974) 285 N.C. 671

STATE of North Carolina ex rel. UTILITIES COMMISSION et al.
v.
GENERAL TELEPHONE COMPANY OF the SOUTHEAST.

No. 43.

Supreme Court of North Carolina.

October 10, 1974.

Robert Morgan, Atty. Gen., I. Beverly Lake, Jr., Deputy Atty. Gen., and Jerry J. Rutledge, Associate Atty., Raleigh, for the Using and Consuming Public.

Edward B. Hipp, Commission Atty., Maurice W. Horne, Asst. Commission Atty., and John R. Molm, Associate Commission Atty., Raleigh, for North Carolina Utilities Commission.

Claude V. Jones, Durham, for the City of Durham, intervenor.

Ward W. Wueste, Jr., Newsom, Graham, Strayhorn, Hedrick, Murray & Bryson by A. H. Graham, Jr., and K. Byron McCoy, Durham, Power, Jones & Schneider by John Robert Jones and William R. White, Columbus, Ohio, for Gen. Tel. Co. of the Southeast.

LAKE, Justice.

The crucial question upon this appeal is: When, upon substantial evidence, a public utility is found to be rendering grossly inadequate service, due to bad management and managerial indifference, and the rates presently charged by it yield a return sufficient to pay the interest on its indebtedness and a substantial dividend upon its stock, but less than that which would be deemed a fair return upon the fair value of its properties were the service adequate, may the Utilities Commission lawfully deny it authority to increase its rates for such service? The answer is yes.

There is ample evidence in the record to support the Commission's findings that General is rendering "chronically poor service" and that this is due to "bad management" and demonstrates "an attitude of a complacement monopoly." Although the company presented evidence to the contrary, these findings of the Commission, being supported by substantial, competent evidence in the record are conclusive. Utilities Commission v. General Telephone Co., 281 N.C. 318, 336, 189 S.E.2d 705; Utilities Commission v. Coach Co., 269 N.C. 717, 153 S.E.2d 461; Utilities Commission v. Telegraph Co., 267 N.C. 257, 148 S.E.2d 100; Utilities Commission v. Champion Papers, Inc., 259 N.C. 449, 130 S.E.2d 890.

Pursuant to G.S. § 62-110, the State, through the Utilities Commission, has granted to General a monopoly upon the business of rendering telephone service to the public within its several service areas in North Carolina. The primary purpose of Chapter 62 of the General Statutes is not to guarantee to the stockholders of a public utility constant growth in the value of and in the dividend yield from their investment, but is to assure the public of adequate service at a reasonable charge. It became evident long ago that the attainment of this primary objective is endangered both by unrestrained competition and by the creation of a "complacent monopoly" in the public utility business. Consequently, Chapter 62 provides for the granting of a monopoly and for the regulation of its service and its charges by the Utilities Commission. The entire chapter is a single, integrated plan. Its several provisions must be construed together so as to accomplish its primary purpose. Its provisions, such as G.S. § 62-133, designed to assure the utility of adequate revenues, are in the nature of corollaries to the basic proposition that the public is entitled to adequate service at reasonable rates and safeguards against administrative action which would violate constitutional protections by confiscation of the utility's property. Without such assurance, the owners of capital would not invest it in the utility's bonds or stock and the utility could not provide the plant necessary for the rendering of adequate service.

G.S. § 62-133 lays down the procedure by which the Commission is to fix rates which will enable the utility "by sound management" to pay all of its costs of operation, including maintenance, depreciation and taxes, and have left a fair return upon the fair value of its properties. This, however, must be applied in the light of the provisions of Chapter 62 relating to the duty of the utility to render adequate service. G.S. § 62-32(b) provides: "The Commission is hereby vested with all power necessary to require and compel any public utility to provide and furnish to the citizens of this State reasonable service of the kind it undertakes to furnish and fix and regulate the reasonable rates and charges to be made for such service." (Emphasis added.) G.S. § 62-131 provides: "(a) Every rate made, demanded or received by any public utility, or by any two or more public utilities jointly, shall be just and reasonable. (b) Every public utility shall furnish adequate, efficient and reasonable service."

Obviously, it was not the intent of the Legislature to require the Commission to fix rates without any regard to the quality of the service rendered by the utility and thus to assure a "complacent monopoly" a "fair return upon the fair value of its properties," while it persists in rendering mediocre service and turns a deaf ear both to customer complaints and to Commission orders for improvement. On the contrary, the quality of the service rendered is, necessarily, a factor to be considered in fixing the "just and reasonable" rate therefor.

As we said in Utilities Commission v. General Telephone Co., supra, 281 N.C. at page 370, 189 S.E.2d 705, the rate making procedure prescribed in G.S. § 62-133 is designed to yield to the utility a return which will meet the test laid down in Bluefield Water Works & Improvement Co. v. Public Service Commission, 262 U.S. 679, 43 S. Ct. 675, 67 L. Ed. 1176. In that case the Supreme Court of the United States gave more precise meaning to the constitutional requirement of a "fair return on fair value," declared by it in Smyth v. Ames, 169 U.S. 466, 18 S. Ct. 418, 42 L. Ed. 819. The quality of the utility's service was not in question. The Bluefield test assumes reasonably good service. Since the rate of return on the fair value of its properties which will enable a utility company to attract the capital it needs (the essence of the Bluefield test) cannot be pinpointed with absolute accuracy, it is universally recognized that, for a utility rendering acceptable service, there is a zone of reasonableness extending over a few hundredths of one per cent, within which a rate of return fixed by a regulatory commission will not be disturbed by the courts.

General contends that, however poor may be its service, a utility has a constitutional right to charge therefor rates which will enable it to earn upon the fair value of its properties a return not less than the lower limit of this zone of reasonableness. No decision of this Court so holds. Neither the Bluefield case, supra, Smyth v. Ames, supra, nor any other decision of the Supreme Court of the United States which has been brought to our attention gives support to this contention. Neither of those cases dealt with a utility which was rendering a grossly inadequate service. In Smyth v. Ames, supra, at page 545, 18 S.Ct. at page 433, the Court quoted with approval Covington & Lexington Turnpike Road Co. v. Sandford, 164 U.S. 578, 596-597, 17 S. Ct. 198, 41 L. Ed. 560, as follows:

"It cannot be said that a corporation is entitled, as of right, and without reference to the interests of the public, to realize a given per cent upon its capital stock. When the question arises whether the legislature has exceeded its constitutional power in prescribing rates to be charged by a corporation controlling a public highway, stockholders are not the only persons whose rights or interests are to be considered. The rights of the public are not to be ignored. It is alleged here that the rates prescribed are unreasonable and unjust to the company and its stockholders. But that involves an inquiry as to what is reasonable and just for the public. * * * The public cannot properly be subjected to unreasonable rates in order simply that stockholders may earn dividends. * * * So that the right of the public to use the defendant's turnpike upon payment of such tolls as, in view of the nature and value of the service rendered by the company, are reasonable, is an element in the general inquiry whether the rates established by law are unjust and unreasonable."

In Utilities Commission v. Morgan, Attorney General, 277 N.C. 255, 177 S.E.2d 405, the appellant utility made the same contention now made by General; that is, that the Utilities Commission could not lawfully refuse to approve rates which would yield the utility a fair return on the fair value of its properties, regardless of the quality of its service. We said (at page 266, 177 S.E.2d at page 412):

"It is not reasonable to construe G.S. 62-133(b) to require the Commission to shut its eyes to ``poor' and ``substandard' service resulting from a company's wilful, or negligent, failure to maintain its properties or to heed complaints from its subscribers when the Commission is called upon by the company to permit it to increase its rates for its inadequate service. We reject the contention of the company upon this question."

We adhere to that construction of G.S. § 62-133.

In the present case, we do not reach the question of the authority of the Commission to fix rates at a confiscatory level as a penalty for inadequate service. The Commission found that the existing rates for service, which the order continued in effect, were sufficient, after payment of all expenses, including maintenance, depreciation and taxes, to yield to General a return of 6.65% on the fair value of its properties. This finding is not challenged. Schedule II of Exhibit 1, introduced by the Commission's staff, shows that, during the twelve-month test period, the rates produced net operating income for return of $3,778,527 from North Carolina intrastate service, a figure slightly less than that found by the Commission. After paying all interest on General's indebtedness, taxes and the dividends on the portion of its preferred stock allocable to North Carolina intrastate service, this left $1,740,282 for the common stockholders. This was sufficient to pay a 6% dividend on the portion of the common stock allocable to North Carolina intrastate service and still leave for addition to surplus $359,770. The staff's computation of results achieved during the test period does not include any adjustment for excessive profits paid by General to Automatic for materials and supplies purchased by General during the test period. This is not confiscation. See: Lindheimer v. Illinois Bell Telephone Co., 292 U.S. 151, 163-164, 54 S. Ct. 658, 78 L. Ed. 1182.

General contends that it has been penalized twice for poor service in that the Commission, in its computation of the fair value of General's property considered "the inadequacy of telephone service provided by the plant." There is no merit in this contention. As we said on the previous appeal of this company (Utilities Commission v. General Telephone Co., supra, 281 N.C. at page 361, 189 S.E.2d at page 732), "It is obvious that consistently poor service, attributable to defective or inadequate or poorly designed equipment or construction, justifies a subtraction from both the original cost and the reproduction cost of the existing plant before weighing these factors in ascertaining the present ``fair value' of the properties." (Emphasis added.) To the same effect is Utilities Commission v. Morgan, supra. This is not the imposition of a penalty. It is merely the consideration of a factor in the computation of the "fair value" of the properties.

Inadequacy of service due, not to the condition of the properties but to inefficient personnel, bad management and the indifference of a "complacent monopoly" is an entirely different matter. This does not relate to the value of the properties. But it does relate to the value of the service and to the reasonableness of the rates proposed to be charged therefor. The record now before us contains ample evidence to support the Commission's findings of service inadequacies due to the condition of the properties and others due to the quality of the management and personnel of this company.

In 1968, General applied to the Commission for an increase in rates. The Commission granted an increase but warned General that its service was inadequate and must be improved. In 1971, General again applied for an increase in rates. Again, the Commission allowed a part of the requested increase but found the service inadequate and specified eleven respects in which it must be improved promptly. On appeal this order was remanded to the Commission for further consideration. See: Utilities Commission v. General Telephone Co., supra. On remand the Commission again allowed a portion of the requested increase and reaffirmed its orders requiring improvement in service. General did not appeal from the portion of the Commission's original order relating to service improvements and did not appeal from any portion of its order on remand. In the present case, the Commission found that two of the previously ordered improvements in service have not been made. General contended before the Commission that these two improvements are "unreasonable," thus clearly indicating that it does not intend to make them unless compelled to do so.

Thus, three times in a period of five years the Commission has granted General increases in rates, notwithstanding its finding of serious inadequacies in General's service. This was within the administrative discretion of the Commission. Utilities Commission v. Morgan, supra, 277 N.C. at page 266, 177 S.E.2d 405. Having labored patiently with General in an effort to induce it to improve its service by allowing it rate increases, the Commission cannot be deemed to have acted arbitrarily in saying, as it has now done, that it would permit General to raise its rates so as to increase its return on the fair value of its properties from 6.65% to at least 8.02% if its service were adequate but it will not now permit such increase in view of General's persistent disregard of such inadequacy of service. See: D.C. Transit System, Inc. v. Washington Metropolitan Area Transit Commission, 151 U.S.App.D.C. 223, 466 F.2d 394, 407, 418, cert. den. 409 U.S. 1086, 93 S. Ct. 688, 34 L. Ed. 2d 673; United Telephone Co. of Florida v. Mayo (Fla.), 215 So. 2d 609, app. dism. 394 U.S. 995, 89 S. Ct. 1589, 22 L. Ed. 2d 774.

To remove inadequacies of service resulting from the indifference of top level management and from incompetence or indifference of operating personnel does not require the attraction of additional capital. It does not require time consuming construction programs or the acquisition of equipment. These circumstances distinguish the present case from Elyria Telephone Co. v. Public Utilities Commission, 158 Ohio St. 441, 110 N.E.2d 59, and General Telephone Co. v. Michigan Public Service Commission, 341 Mich. 620, 67 N.W.2d 882, which approved and followed the Elyria case. In Village of Apple River v. Illinois Commerce Commission, 18 Ill. 2d 518, 165 N.E.2d 329, also relied upon by General, the Supreme Court of Illinois reversed the decision of the lower court, which had held that the Commission did not have administrative discretion to allow a rate increase where the service was inadequate. This reversal is in accord with our holding in Utilities Commission v. Morgan, supra. In the present case, General is faced with no emergency or sudden demand for improved service.

The remaining questions raised by General in this appeal do not require extended discussion. The principles of law governing the authority of the Commission to make a deduction from the original cost, and so from the replacement cost and the fair value, of the properties of General on account of excessive prices paid to Automatic for equipment and materials are set forth in Utilities Commission v. General Telephone Co., supra, 281 N.C. at pages 341 to 348, 189 S.E.2d 705, and need not be repeated here. See also: Utilities Commission v. Morgan, Attorney General, supra, 277 N.C. at pages 270 to 273, 177 S.E.2d 405.

In the former General Telephone case, we concluded that the evidence in the record did not support the finding that the prices charged by Automatic to General were so excessive as to indicate bad faith or mismanagement by those who control General. In the present record, there is evidence sufficient to support the Commission's finding in this respect. This evidence is to the effect that, in instance after instance, General paid to Automatic for equipment and materials prices far in excess of those paid by operating companies in the Bell System to Western Electric Company for like or superior equipment and materials. This evidence was not introduced by the Commission's staff, or considered by the Commission, as evidence that General could have purchased its equipment and materials more cheaply from Western Electric. Western Electric sells only to the Bell System operating companies, with exceptions not here material. The significance of this evidence is that it affords basis for a finding that GT&E has consistently used its complete control over its two subsidiaries so as to cause General to pay excessive prices to Automatic, thus decreasing General's rate of return while increasing the profits of its only stockholder.

Neither in sales by Automatic to General nor by Western Electric to the Bell System operating companies is there bargaining between seller and purchaser at arm's length. Judicial notice may be taken, however, of the well known fact that Western Electric is not operated as an eleemosynary institution but is a significant source of the overall profit of the Bell System. The evidence of the prices charged by it to its affiliates is relevant in determining the reasonableness of prices charged by Automatic to General.

The principles of law governing the authority of the Commission to make a deduction from original cost, and so from replacement cost and fair value, of the properties of General because of the overbuilding of the plant and the resulting excessive plant margins are also set forth in Utilities Commission v. General Telephone Co., supra, 281 N.C. at pages 351 to 355, 189 S.E.2d 705, and need not be repeated. While, in the present case, the company offered substantial evidence to show that there was no significant excess plant margin, this conflict of evidence presented a question of fact upon which the finding of the Commission is conclusive and may not be disturbed by the reviewing court, even though the court might have reached a different conclusion thereon. Utilities Commission v. Telephone Co., supra, at page 336, 189 S.E.2d 705, and cases therein cited.

There was no error in the Commission's finding as to the cash working capital requirements of General, based upon the Commission's long established formula for making that determination, notwithstanding evidence by a witness for General that a lead-lag study made by him led him to the conclusion that a larger allowance was appropriate. The lead-lag study, itself, was not introduced in evidence. The credibility of the evidence was for the Commission, and the amount of cash working capital reasonably required in the company's operations is an administrative question upon which the Commission's determination is conclusive. Utilities Commission v. Virginia Electric and Power Co., 285 N.C. 398, 415, 206 S.E.2d 283.

The City of Durham, a party protestant, introduced as exhibits rate tariffs of Southern Bell Telephone & Telegraph Company, Carolina Telephone & Telegraph Company, General Telephone Company of Kentucky, United Telephone Company of Ohio and Rochester Telephone Company. General assigns the admission of this evidence as error, for the reason that there was no showing of comparable operating conditions. On the contrary, there was testimony by the Commission's staff engineers as to similarity of territories and operating conditions as between General, on the one hand, and Southern Bell Telephone & Telegraph Company and Carolina Telephone & Telegraph Company, on the other. General, itself, through its expert witness on the question of rate of return, offered testimony and exhibits as to the earnings of the other three companies, the witness testifying that they are comparable in size and in investor risk to General.

Obviously, rates charged by one telephone company do not, per se, constitute a standard by which to determine the reasonableness of those of another company, even when the territories served and operating conditions are similar. The probative value of such evidence is slight at best, but where, as here, there is evidence of substantial similarity of conditions, evidence of comparative rates may have some relevancy for use as a guide to the limits of the zone of reasonableness. The order of the Commission does not indicate that it gave any other effect to this evidence and it is inconceivable that the order would have been different in any way whatever had this evidence not been introduced. The statute requires the reviewing court to take due note of the rule of prejudicial error. G.S. § 62-94(c).

There is no merit in General's contention that its properties have been confiscated in that the rates continued in effect by the Commission's order will yield a rate of return below that determined by the Commission to be reasonable in its 1971 order. Such determinations are not res judicata and do not forbid an allowance of either a higher or a lower rate of return in a subsequent proceeding. G.S. § 62-133(e).

The Commission did not exceed its authority in finding the replacement cost of General's properties to be less than that stated by General's expert witness, even though there was no other testimony on the question of replacement cost. The credibility of the testimony was for the determination of the Commission. Utilities Commission v. Virginia Electric and Power Co., supra, at page 409, 206 S.E.2d 283. In this instance, it found the conclusion of the witness unacceptable, to a degree, by reason of specified deficiencies in his method of computation. The Commission is not required to accept in full the conclusion of an expert witness as to replacement cost, even though it be uncontradicted by other evidence in the record. Utilities Commission v. Duke Power Co., 285 N.C. 377, 390, 206 S.E.2d 269; Utilities Commission v. General Telephone Co., supra, 281 N.C. at pages 360-361, 189 S.E.2d 705.

The Court of Appeals adjudged that the proceeding should be remanded to the Commission because the Commission failed "to find facts with respect to the effect it gave the factor of inadequate service in reducing the fair value of the properties." This the Commission should have done. Utilities Commission v. General Telephone Co., supra, 281 N.C. at page 361, 189 S.E.2d 705. However, under the circumstances of this case, this was harmless error and not ground for such remand. G.S. § 62-94(c).

The effect given by the Commission to inadequacy of service due to management is shown clearly and precisely. It is apparent from consideration of the order of the Commission, in its entirety, that the denial of the request for an increase in rates for service was due to the Commission's finding of gross inadequacies of service due to management and personnel deficiencies rather than to plant deficiencies. The effect given by the Commission to inadequacy of service due to plant deficiencies in determining the replacement cost, and so the fair value, of the properties of General does not appear to have been large in relation to its finding of fair value. This was but one of several matters considered by the Commission in refusing to accept at face value the company's evidence of replacement cost.

Under the circumstances of this case, it appears that no useful purpose would be served by a remanding to the Commission for the further finding directed by the Court of Appeals. Such remand would only delay the final determination of the present proceeding. Nothing in the order of the Commission precludes General from filing, at a time selected by it, a new proceeding with the Commission and establishing therein that it has removed the cause of the service inadequacies which, in the present proceeding, caused the Commission to deny its application. The order from which General now appeals shows clearly that such a course would result in the allowance of a higher rate of return.

The judgment of the Court of Appeals remanding this proceeding to the Utilities Commission is, therefore, reversed and the matter is remanded to the Court of Appeals for the entry of a judgment by it affirming the order of the Commission.

Reversed and remanded.

BOBBITT, C. J., not sitting.