State v. Lee Telephone Company

140 S.E.2d 319 (1965)

263 N.C. 702

STATE of North Carolina ex rel. UTILITIES COMMISSION v. LEE TELEPHONE COMPANY.

No. 530.

Supreme Court of North Carolina.

February 24, 1965.

*322 Maupin, Taylor & Ellis, Lake, Boyce & Lake, Raleigh, for defendant.

Edward B. Hipp, Raleigh, for the Commission.

Atty. Gen. T. W. Bruton, Asst. Atty. Gen. Charles W. Barbee, Jr., and Thomas J. White, Kingston, for protestant.

DENNY, Chief Justice.

The appellant assigns as error the failure of the court below to sustain its exception to the Commission's finding of fact No. 3, as follows: "The fair value of the Company's property in North Carolina used and useful in rendering service and producing revenue is $2,100,000.00," for that such finding of fact is unsupported by competent, material and substantial evidence.

G.S. § 62-124 governed the manner of ascertaining the value of property for rate purposes at the time the petition herein was filed on 16 August 1963. However, Chapter 1165 of the 1963 Session Laws of North Carolina repealed G.S. § 62-124 as of 1 January 1964, which was prior to the date the Commission's order was signed. Even so, we hold there is no conflict between the provisions of the former statute and the present one, that the present statute merely codified the former statute as interpreted by this Court. The present statute, now codified as 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 *323 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."

According to the Commission's conclusions, its own Staff determined the net end of period investment of the defendant in North Carolina to be $2,152,949.00, while the Company determined the depreciated value of its property in North Carolina at the end of the test period to be $2,112,810.00. Insofar as the record shows, no consideration was given to replacement costs in arriving at either of the above figures. Moreover, the Commission's Staff in arriving at a return of 5.20% used "an average net rate base, including working capital and after accounting and pro forma adjustments, and before any increase, of $1,963,236.00." The Company offered evidence tending to show the depreciated replacement costs of its North Carolina properties to be $2,354,174.00.

Whether a 4, 5 or 6% return is just and reasonable depends very largely on whether the Commission has placed a fair value on the property of the utility which is used and useful in producing its revenue. State ex rel. North Carolina Utilities Comm. v. Piedmont Natural Gas. Co., 254 N.C. 536, 119 S.E.2d 469; Smyth v. Ames, 169 U.S. 466, 18 S. Ct. 418, 42 L. Ed. 819.

In State ex rel. Utilities Comm. v. State and State ex rel. Utilities Comm. v. Southern Bell Tel. & Telegraph Co., 239 N.C. 333, 80 S.E.2d 133, Barnhill, J., later C. J., 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 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 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. * * *"

On the findings in this record we are unable to determine whether the value of $2,100,000.00 fixed by the Commission was as of the end of the test period or not. Furthermore there is no evidence tending to show that the Commission gave any consideration whatever to replacement cost as required by the statute. In our opinion, finding of fact No. 3 is not supported by competent, material and substantial evidence.

In State ex rel. Utilities Comm. v. North Carolina Gas Co., supra, the Commission *324 said it gave only minimal consideration to replacement cost but did not exclude it from consideration. In affirming an order of the court below, remanding the case to the Commission for further hearing, Higgins, J., speaking for the Court, said:

"In these times of increased construction costs and decreased dollar value, trended cost evidence deserves weight in proportion to the accuracy of the tests and their intelligent application. The objections to such evidence apparently came from jurisdictions where the base rate is fixed at `book value' or `original cost' rather than present value. Of course, the book value or original cost can be ascertained with exactness from the books and records. Trended cost is useful only when it becomes necessary to fix the present value of facilities constructed when the cost was low and replacement has become expensiveour case. The trended cost takes into account the type of facility, its age, its original and replacement cost, terrain, location, its probable useful life, and other factors. Such evidence is not conclusive but it does appear to be a useful guide in determining value of facilities * * *. Engineers and accountants have, through examination, investigation and experience in the field, devised tables, studies and indices designed and intended as guides in translating original cost into present value. A better method * * * is not suggested."

The mere minimal consideration of the replacement cost was held to be erroneous, citing City of Richmond v. Henrico County, 185 Va. 176, 37 S.E.2d 873, modified 185 Va. 859, 41 S.E.2d 35; Duquesne Light Co. v. Pennsylvania Public Utilities, 176 Pa. Super. 568, 107 A.2d 745; Railroad Commission of Texas v. Houston Nat. Gas Corp., 155 Tex. 502, 289 S.W.2d 559.

This assignment of error is sustained.

It is apparent from a perusal of the record that the Commission and its Staff found it difficult to consider the rate of return from the North Carolina properties separate and apart from the rate of return of the Company as a whole.

The Utilities Commission of this State does not have the right to fix less than a reasonable or fair rate of return on the Company's investment in North Carolina because the Utilities Commission in Virginia may have fixed rates in that State which, in the opinion of the Utilities Commission in this State, gives the Company a reasonable return on its entire properties when its Virginia and North Carolina revenues are combined. Smyth v. Ames, supra.

In the case of Corporation Comm. v. Cannon Mfg. Co., 185 N.C. 17, 116 S.E. 178, in considering the same question involved here, this Court held:

"* * * (T)he Corporation Commission (now the Utilities Commission) in this state is empowered and directed to make reasonable and just rates as applied to the distribution and sale of power in this state and not otherwise, and such power cannot be directly controlled or weakened by conditions existent in other states, either from the action or nonaction of official bodies there, or the dealings between private parties. To hold otherwise would in its practical operation be to withdraw or nullify the powers that the statute professes to confer and should not for a moment be entertained. * * *"

In United Gas Pipe Line Co. v. Louisiana Public Serv. Comm., 241 La. 687, 130 So. 2d 652, the Supreme Court of Louisiana recently said:

"* * * `(T)he reasonableness of the rates to be fixed by the state must be decided with reference exclusively to what is just and reasonable in respect of domestic business.'"

When a company operates in two or more states, the operations are treated as separate businesses for the purpose of rate regulation. An inadequate return in Virginia would not of itself justify a rate *325 increase in North Carolina, nor would a high rate of return in Virginia justify less than a fair and reasonable rate in North Carolina. G.S. § 62-133.

The responsibility for fixing rates rests with the Utilities Commission and not on this Court. However, there is nothing in the statutes that requires the Commission to accept the rate or rates proposed, or to reject them altogether. State ex rel. Utilities Comm. v. Carolina Power & Light Co. and State ex rel. Utilities Comm. v. Carolinas Committee, 250 N.C. 421, 109 S.E.2d 253.

The Superior Court of Wake County will remand this proceeding to the Utilities Commission for further hearing in accord with the provisions of G.S. § 62-133 and this opinion.

Remanded.