State v. State

80 S.E.2d 133 (1954)

239 N.C. 333

STATE ex rel. UTILITIES COMMISSION v. STATE et al. STATE ex rel. UTILITIES COMMISSION v. SOUTHERN BELL TEL. & TEL. CO.

No. 534.

Supreme Court of North Carolina.

January 29, 1954.

*139 Harry McMullan, Atty. Gen., and John Hill Paylor and I. Beverly Lake, Asst. Attys. Gen., for appellants.

Joyner & Howison, Raleigh, Taylor, Kitchin & Taylor, Wadesboro, and Pierce & Blakeney, Charlotte, for appellee, and Dan M. Byrd, Jr., Norman C. Frost, Jefferson Davis, and E. W. Smith, Atlanta, Ga., appearing by brief.

BARNHILL, Justice.

The judgment of the court below, together with the explanatory statement and conclusions of law incorporated therein, evidences a very careful study and analysis of the record. In many respects its discussion might well be adopted as the opinion of this Court.

The primary questions posed by appellant's assignments of error may be boiled down to one simple issue: Did the Commission, in the consideration of the application of Southern Bell, follow the clear *140 mandate of this statute, G.S. § 62-124? The court below answered in the negative. A full consideration of the record compels an affirmance.

A quasi-public utility receives well-defined and valuable privileges not accorded a private, unregulated corporation. The government purposely grants it monopolistic rights and vests in it some of the powers of government such as the right of eminent domain. By no means the least of these governmental benefits is the assurance that its stockholders shall have a fair return on their investment.

In return the State reserves the right to supervise and regulate its operations and fix or approve the schedule of rates to be charged by it for its intrastate service.

This right to grant franchises to public service corporations and to fix or approve the rates to be charged by them for the services rendered the public rests in the Legislature. The General Assembly may act directly or it may delegate its authority to an administrative agency or commission of its own creation. However, no Act undertaking to delegate the rate-making function of the Legislature is valid unless the General Assembly prescribes rules and standards to guide the legislative agency in exercising the delegated authority. Motsinger v. Perryman, 218 N.C. 15, 9 S.E.2d 511; State v. Harris, 216 N.C. 746, 6 S.E. 2d. 854, 128 A.L.R. 658; Hamlet Hospital & Training School for Nurses v. Joint Committee, 234 N.C. 673, concurring opinion at page 684, 68 S.E.2d 862; Carolina-Virginia Coastal Highway v. Coastal Turnpike Authority, 237 N.C. 52, 74 S.E.2d 310.

There is no defect in this respect in the Act delegating to the Utilities Commission the authority to grant franchises to, and fix the charges to be made for services rendered by, telephone and other public service corporations.

Having provided that "Every rate made, demanded or received by any public utility * * * shall be just and reasonable", G. S. § 62-66, the Legislature then prescribed the considerations which should be weighed by the Commission in determining what is a: just and reasonable rate in any particular case in the following language, to wit:

"In fixing any maximum rate or charge, or tariff of rates or charges for any common carrier, person or corporation subject to the provisions of this chapter, the Commission shall take into consideration if proved, or may require proof of, the value of the property of such carrier * * * used for the public in the consideration of such rate or charge or the fair value of the service rendered in determining the value of the property so being used for the convenience of the public. It shall furthermore consider the original cost of construction thereof and the amount expended in permanent improvements thereon and the present compared with the original cost of construction of all its property within the State; the probable earning capacity of such property under the particular rates proposed and the sum required to meet the operating expenses of such carrier * * * and all other facts that will enable it to determine what are reasonable and just rates, charges and tariffs." G.S. § 62-124.

This statute has been characterized as an "old, rambling, and misty statutory declaration of the matters to be taken into account by the commission. * * *" 12 N.C.L. 298. Be that as it may, it is the law in this State and will continue to be the law until amended, revised, or repealed by the Legislature. We have no intention to shut our eyes to its provisions or to circumvent the clear import of its language.

Necessarily, what is a "just and reasonable" rate which will produce a fair return on the investment depends on (1) the value of the investmentusually referred to in rate-making cases as the Rate Basewhich 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 *141 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. 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 predetermined 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.

In its order of 21 April the Commission discussed many, if not all, the factors which must be considered in determining the proper Rate Base, and concluded that there are four Rate Bases (set out in the foregoing statement of facts), any one of which it might accept. It then adopted the "book value" or "cost less depreciation" as the proper Rate Base.

Clearly this was in conflict with the express terms of the standard prescribed by the Legislature in G.S. § 62-124. The conclusion is inescapable that by accepting the book value as the Rate Base, it, ex necessitate, excluded consideration of present cost of replacement and all other factors from effective consideration.

"`Few words are so plain that the context or the occasion is without capacity to enlarge or narrow their extension.' Crawford, Stat.Constr., 276, § 174; Watson Industries v. Shaw, Comr. of Revenue, 235 N.C. 203, 69 S.E.2d 505;" Perry v. Stancil, 237 N.C. 442, 75 S.E.2d 512, 514. The Legislature, in using the term "value" in G.S. § 62-124, was not referring to the original or the replacement cost or to the exchange or sales price it would command, as used or secondhand property, on the market. It had reference to the value of the property actually in use, serving its purpose as a part of a composite public utility, earning an income for its owner. It is, of course, in the main, "used" or "secondhand" but it is not for exchange or sale, as such. It is actually in use and will continue in use until it becomes obsolete or outworn. Its value, under these circumstances, is the value the Commission must seek to determine as the Rate Base for ascertaining what is a just and reasonable schedule of rates to be approved by it.

Smyth v. Ames, 169 U.S. 466, 18 S. Ct. 418, 42 L. Ed. 819, is the parent of G.S. § 62-124. The language of our statute is lifted almost verbatim out of the opinion in that case. The subject here under consideration is there fully discussed. It is also discussed in Corporation Comm. v. Cannon Mfg. Co., 185 N.C. 17, 116 S.E. 178, and in numerous other cases cited by the appellant and appellee. As the case must be remanded for further hearing, we refrain from citing all the cases bearing directly upon the question. They are available to counsel and open to anyone interested in a further study of the subject.

Strictly speaking what is the fair value of applicant's investment in its intrastate business in this State and what constitutes a fair return thereon are the primary questions before the Commission for decision. Yet this corporation operates in eighteen other states and is a part of a nationwide system, controlled by one parent corporation, the capital stock of which occupies a commanding position on the market. It functions as one corporation. And, necessarily, its financial condition is affected by the rates charged and income received from its intrastate business in each and every *142 one of the nineteen states in which it functions.

The record discloses that the applicant is in excellent financial condition, notwithstanding its net average return is only 4.8%. Since it is at least 5.4% in North Carolina, the net return in some of the other states must be lower than the average. North Carolina users of telephones are not to be required to furnish revenue to maintain applicant's financial condition which other states refuse to provide or to pay at rates materially higher than those charged in other territory served by the same corporation. A substantial differential might be considered some evidence that the rates charged in this State are unreasonable and unjust to the local public.

Furthermore, the financial condition of a public utility and the demand for its bonds and securities which affect its capacity to compete, on the open market, for additional equity and debt capital are ordinarily material considerations. But these factors are of little moment here, for the applicant has available at all times a fund provided by its parent company from which it may borrow at will for needed improvements or enlargements. Under the circumstances here disclosed, what it has to pay for its borrowings from this fund is of more importance.

These are some of the "other facts" the statute requires the Commission to consider. They may cause it to pause and consider whether the applicant is in the right forum.

The court below directed the Commission "in its determination of net operating income to allow depreciation as an expense of operation in such amount as in its judgment will be reasonably sufficient to restore currently the portion of capital investment currently consumed."

It is apparent the parties construe this instruction to mean that the current rather than the cost value shall be the basis for estimating depreciation allowances. If this is the correct interpretation of the language used by the trial judge, the instruction must be held for error.

For rate-making purposes a public utility is allowed to deduct annually as an operating expense so much of its capital investment as is actually consumed during the current year in rendering the service required of it. But the cost represents the amount of the investment, and it is the actual cost, not theretofore recouped by depreciation deductions, that must constitute the base for this allowance.

Broadly speaking, depreciation is the loss not restored by current maintenance which is due to all the factors causing the ultimate retirement of the property. "While property remains in the plant, the estimated depreciation rate is applied to the book cost and the resulting amounts are charged currently as expenses of operation." Lindheimer v. Illinois Bell Telephone Co., 292 U.S. 151, 54 S. Ct. 658, 665, 78 L. Ed. 1182; Alexandria Water Co. v. City Council of Alexandria, 163 Va. 512, 177 S.E. 454; Federal Power Comm. v. Hope Natural Gas Co., 320 U.S. 591, 64 S. Ct. 281, 88 L. Ed. 333.

"An annual depreciation allowance cannot logically or consistently be based upon fair value or reproduction cost, but rather the basis for computation should be upon the book cost of depreciable and depletable property." Equitable Gas Co. v. Pennsylvania Public Utility Comm., 160 Pa.Super. 458, 51 A.2d 497, 504; Utah Power & Light Co. v. Public Service Commission, 107 Utah 155, 152 P.2d 542; City of Pittsburgh v. Pennsylvania Public Utility Comm., 171 Pa.Super. 187, 90 A.2d 607.

The whole purpose of the allowance is to maintain the integrity of the investmentto prevent a loss, not to assure a profit.

In this connection we note that the rate of depreciation allowed by the government for income tax purposes is not necessarily the proper rate to be allowed for ratemaking purposes. Indeed, for rate-making purposes it would ordinarily be excessive, especially in respect to buildings and like permanent improvements.

Of necessity the government is required to adopt somewhat arbitrary rates for estimating *143 allowable deductions in an income tax return as a result of which property is not infrequently fully depreciated before it is exhausted by its use. No doubt the applicant now has property that has been fully depreciated and yet has a "fair value" for use in its business.

The applicant is entitled to deduct each year as an operating expense only such depreciation as represents the investment currently consumed and not provided against by maintenance. Thus the integrity of the investment is maintained, and this is all the applicant has a right to demand. The rate should be fixed, as near as may be, so that it will extend over the usable life of the property being depreciated. Otherwise the allowance will be unjust either to the corporation or to the public.

Oftentimes property, particularly buildings and other structures, has a fair value long after it has been fully depreciated for income or ordinary bookkeeping purposes. Yet it cannot be gainsaid that such property still possesses and will continue to possess for many years a fair value for the purposes for which it is being used. It follows that it would be unfair to Southern Bell, under our rule, not to take into consideration the present fair value of property now in use but which has been fully depreciated for other purposes.

On the other hand, if the rate of depreciation allowed for rate-making purposes is in excess of the investment currently consumed, over and above maintenance costs, it is unfair to the public, for then the company is permitted to recover annually a part of its investment which is not currently consumed.

We fully realize that this problem cannot be reduced to a mathematical certainty. For that reason it might be well for the Commission to promulgate a schedule of allowable rates of depreciation, for ratemaking purposes, for different classes of property which will be as fair to all parties concerned as it is humanly possible to make it. However, that is a question for the Commission to decide. It may prefer to deal with each case as it arises.

The former allowance of a 6.50% rate of return is not res judicata, barring the Commission from fixing a lesser rate in this proceeding. Nor is the Commission compelled to provide a 6% rate of return which, under present conditions, may be considered by some a high rate for a corporation that is in effect assured a "reasonable and just" rate of return on its investment in good times and bad. It is only required to fix rates that are reasonable and just under the conditions as they now exist. And when it fixes a schedule of rates under the standard prescribed by the Legislature which is within the bounds of reason, it is as binding upon the courts as it is upon the interested parties.

Presently we are not prepared to say that a net return of 5.40%over and above all taxesis inadequate. That is a question for the Commission to decide.

Neither the Utilities Commission nor the courts are the keepers of the morals of a public utility. When, in fixing rates which will produce a fair return on the investment of a utility, it is made to appear it has on hand continuously a large sum of money it is using as working capital and to pay current bills for materials and supplies, that is a fact which must be taken into consideration. And if the fund on hand is sufficient, no additional sum should be allowed at the expense of the public.

The action of the public utility is neither condemned nor condoned, approved or disapproved. The question of any impropriety or illegality involved in such conduct is one that rests strictly between the public utility and the government to which the fund eventually will be paid. And, incidentally, we understand it is a common practice known to the government. In any event we do not feel that we are condoning improper conduct in approving this part of the judgment of the court below.

The appellant insists that this Court should reverse the judgment entered in the court below. But this we may not do. A reversal, in effect, would affirm the order of the Commission fixing a rate under a misconstruction *144 of the applicable law. And it is for the Commission to say whether, on the showing made, considered in the light of the controlling statutory standard as here construed, Southern Bell should be permitted, at this time, to increase its schedule of rates for intrastate service.

It is the prerogative of that agency to decide that question. It is an agency composed of men of special knowledge, observation, and experience in their field, and it has at hand a staff trained for this type of work. And the law imposes on it, not us, the duty to fix rates.

Of course, in determining the net operating income of applicant the Commission must take into consideration the net income to be produced by the greater number of telephones in service at the end of any test period adopted by it. Of this fact we assume the Commission is fully aware. Perhaps that is why the court below declined to incorporate a direction to that effect in its judgment.

The judgment entered in the court below must be modified in accord with this opinion. Thereupon the cause will be remanded to the Commission for further proceedings in accord therewith. It is so ordered.

Modified and affirmed.