*1 only himself objected representing strenuously appellant of two objectionable be the least what he considered chose choices. undesirable trial, continue the not to trial court error for the
It was for a new cause remand the reverse and reason we for that raised. issues the other as to all is affirmed The case trial. new trial. for a and remanded Reversed Cooper Corbin, JJ., agree. COMPANY TELEPHONE BELL
SOUTHWESTERN
COMMISSION
SERVICE
PUBLIC
v. ARKANSAS
Southwestern contends calculation; in refusing accept “repression cost equity “lost” due for revenues up make adjustments,” attempt as which occurs a result a service consumption to decrease increase;1 recommendation the PSC staffs a price adopting for the pro year; Yellow revenues Page advertising forma wage for disallowing ratemaking portion purposes that those ground and associated costs salary expenses in this the average comparable positions exceed expenses We find no and affirm. region. error Ark. Ann. governed Our review is limited Stat. 1985), Section 73-229.1 which states: (Supp. facts, as to if finding of the Commission supported evidence, be conclusive. The review
by substantial
shall
whether
shall not be extended further than to determine
findings
are so
supported
Commission’s
evidence,
has regularly
and whether
determination
including
its
pursued
authority,
review violated any
whether the order or decision under
the laws or Constitution
under
right
petition [er]
*5
or of
State of Arkansas.
United States
1
response
change
price
change
consumption
in
is
economic
in
to a
an
A
“elasticity
phenomenon
to as
sometimes referred
demand.”
therefore,
duty,
(1)
Our
is to
Commis-
determine whether
sion’s
as to the facts
findings
are
supported
evidence; (2) the Commission has
its
regularly pursued
authority;
(3)
the order
any
or decision under review violated
right
Southwestern Bell under the laws or Constitutions of the United
States or State of
v.
Arkansas. Southwestern Bell
Co.
Telephone
Commission,
550,
Arkansas Public Service
267 Ark.
S.W.2d 434 (1980); Walnut Hill
Co. v. Arkansas
Telephone
Commission,
259,
Public Service
17 Ark.
On we must appeal, give regard due the limitations on the scope judicial review and of the expertise Commission. We may not the wisdom the Commis pass upon sion’s Commission, actions and must defer to the expertise which derives its ratemaking authority from the Arkansas However, General Assembly. judicial review is a mere not and it is formality, our task to determine whether there has been or arbitrary unwarranted abuse of the Commission’s discre tion, although judicial considerable restraint should be observed finding such an abuse. It is not this court to advise the Commission how to discharge its functions in at findings arriving of fact or in exercising its discretion. The question reasonable ness of the actions of the Commission relates to its only findings fact and to a determination of whether its actions were arbitrary. Bell, Southwestern supra. free,
The Commission is
within the ambit of its
statutory
authority,
adjustments
make the pragmatic
be called for
may
by particular circumstances. No public utility
has a vested right to any particular method of
or
valuation
rate
return. The Commission has wide
discretion
its
choosing
approach to rate regulation. This court on
is
appeal
not
generally
concerned with the
used
methodology
by the Commission in
at a
arriving
result as
as its
long
findings are based on substantial
cases,
reached,
evidence. In
rate
is
utility
it
the result
controls;
method employed, which
and judicial
is con
inquiry
cluded if the decision is
evidence
supported by substantial
unreasonable,
total effect of the
rate order not unjust,
unlawful
Federal Power
v.
discriminatory.
Natural
Hope
Co.,
(1944);
Gas
Arkansas Public 346, Southwestern Co., (1980); 20 271 Ark. 609 S.W.2d phone Hill, but Bell, It not the the theory, is Walnut supra; supra. rates determining in whether rate order that counts of the impact, lawful, reasonable, under Ark. non-discriminatory are just, of If the total effect the 1985). Stat. Ann. Section (Supp. 73-217 unreasonable, or unlawful unjust, rate be said to be order cannot concluded, in is and infirmities judicial inquiry discriminatory, supra; unimportant. Hope, are rendered employed method Hill, Bell, these by Guided supra. Walnut supra; Southwestern review, we address with our standard regard considerations Bell’s points appeal.
First, that the rate of return authorized argues and not based unreasonable Commission is arbitrary, capricious, of fact. findings Specifi- evidence sufficient upon incorrectly applied that the Commission cally, complains calculating Bell’s cost (DCF) Discounted Cash Flow formula utilized a newly- and that the Commission should have equity a dividend in applying declared rather than historical dividend do agree. the DCF formula. We use of A overall rate of return calculated utility’s method, cost In this “weighted capital” approach. capital various of a structure are components company’s as to cost with to each relative weighted component’s respect and then together the total structure added proportion capital Of the overall structure. the several capital obtain cost go calculating weighted capital, elements which into cost is in here. Bell’s only equity the cost of component dispute 11.16% overall rate of return on its rate base of requested $731,866,000 16% using was calculated cost PSC equity. cost staff witness Donna Kilburn recommended that a of equity be General of Arkansas Attorney 13.75% used. sponsored be witness who calculated Bell’s cost 14.02%. After equity the Commission utilized a considering testimony presented, cost of of 13.5% in its cost of calculation equity capital overall rate of return of 9.98%.2 results adjustment rate to reflect 14.81% of Arkansas interstate base This includes an to Investment Tax Credits and Accumulated Deferred Income Taxes. attributable witnesses, Commission,
All the well as the utilized the DCF to calculate Bell’s cost of This methodology equity.3 share, mathematical formula takes into account dividends per *7 share, market and the price per rate in dividends expected growth share. The per result is a percentage figure representing return on required for the equity particular utility under consid eration. The DCF formula is an designed to derive allowable return on equity based upon investors’ estimate expectations. witness,
Both Kaufman, Kilburn Michael testified that components the DCF formula must be contemporaneous, which we to understand mean that the ele dividend, ments of price, and growth should be representative the same or point period time. The of this is that premise theory investors decide to purchase stock based on considerations which include dividend and growth expectations for the future. Bell argues that the Commission has mismatched arbitrarily yield and growth (D/P) (g) of the formula components from different time periods to understate the cost of While we have equity. neither been cited to nor have we found any cases other for the authority proposition that the elements utilized ain DCF calculation must be contemporaneous, common sense and logic would indicate that the elements should be contemporaneous is, (that synchronized as time). to
Kaufman and Kilburn both utilized an annualized $5.60 dividend (d) of based on historical Attorney data. General witness Richard $5.60 Wilson range $6.00 used a testified that Value (a Line publication financial utilized investment had community) predicted that the dividend would $6.00. go to probably $5.60historical With regard to the dividend used Commission in its calculation, DCF we cannot say that its use not supported by substantial evidence. All the expert witnesses suggested the historical annualized dividend in their calculations, DCF and the Commission noted in its final order its 3 = mathematically The DCF expressed g, model is (D/P) K + follows: where required (cost dividend, “K” is the equity), expected investors’ rate return “D” is the stock, price “P” is the “g” equals long-term growth current market of investors’ expectation. dividend. for a historical
preference to utilize Commission’s refusal contends that the after $6.00 dividend declared annualized in its DCF calculation took adminis of which the Commission (but held hearings were Ann. Section violates Ark. Stat. order) in its final trative notice period what test statute 1985). specifies That 73-217.5 (Supp. “the Commission and further says used may by utility be utilized to reflect so any year test adjustments shall permit also changes in and all any an annualized basis the effects on the end of after occur within months may circumstances known and are both changes reasonably such test where such year does not We that the statute note measurable [emphasis added].” but only to make such adjustments require its test data adjust period be permitted that the requires utility *8 changes may known and measurable reasonably to reflect the of the test The year. occur within twelve months of end such to make attempted not reflect that Bell evidence does Indeed, witness Kaufman its adjustment to test period. calculation, did the as $5.60 dividend in his used a annualized other experts. the should
We of the that are opinion administrative the record before it take not venture outside in the most setting except for use in rates notice of facts or events Likewise, do think it advisable of circumstances. we not unusual for The of process utilities to this of the Commission. expect best, at and the use of very rates is its setting utility imprecise to add the generally information outside the record would or logical of the It seems that a imperfections point process. at during ratemaking in time must be fixed the period process which the of variables must cease and rate calcula interjection to then can be an element of tions committed there paper. Only often uncertain certainty process. this considerable evi- The various witnesses expert presented (P) dence a the DCF formula suggesting price component $68.50. mid-$50 This range range from the to anywhere repre- 1984, during from period April, sents the of Bell’s stock the price December, a adopted price range to 1984. The Commission $74.75. $68.50 on cross-examination that Kaufman testified $74.75; however, 19,1985 at February Bell’s stock closed on had DCF suggest he did not this be used in the calculation price here did (and stated that carefully sponsor price). he DCF
The in the witnesses’ growth (g) component various has also in this case. This given calculations rise to controversy element attempts the sustaina- approximate investor-expected ble dividend growth rate. All the witnesses expert apparently used known what is as the “br” to calculate the growth approach of the The component DCF formula. “b” is the component expected retention ratio.4 All the and the experts to be agreed this between .35 and .40 and utilized component in that The “r” is the something range. component expected However, return on investors. it is not equity anticipated by the same the return the necessarily allowed equity utility a The witnesses regulatory agency. evidence expert presented 15%, that “r” should be from 12.5%to with a anywhere resulting “g” factor growth anywhere calculating from 4.05% to 7%. In the cost $68.50 equity, range Commission used price $74.75 $5.60. dividend of $74.75
The 1985, pairing from with price February, $5.60 dividend from the 1984 time along with the period, growth component from the middle of 1984 and an adjustment flotation, 11.905%, results in a cost of figure which is equity the lower end of $68.50 use of range. Commission’s in DCF price calculation in a cost results at the equity top the Commission’s range (13.41%). It is from the 13.41% that *9 Commission “rounded” the on return to the equity up 13.5% awarded Bell.
While the Commission’s
of
DCF
application
the
inconsistencies,
formula is afflicted
logical
with
we cannot say
that the
it
result
is
has
yields unjust
that
shown such a
appellant
clear abuse of discretion that overturning the Commission’s
action is warranted. We feel in
case
as
this
much
the Arkansas
Bell,
did
Supreme Court
when it stated in Southwestern
at
supra
566-67,
costs which is retained the to the remainder those net paid which is out to in stockholders the form of dividends.
270 inconsistency the apparent
We have been troubled
accounting
methods
of different
in PSC’s approval
on
of return
of rates
of computation
different methods
be
occasions,
it may
quite
that
recognizing
fully
different
rules to be utilized
fast
difficult to establish hard and
but,
return
at
fair rate of
determining
followed
time,
application
that a more
thinking
uniform
same
to fairer
would lead
established and
criteria
predictable
&
Power
results. Arkansas
and more understandable
Com’n.,
Ark.
Public Service
v. Arkansas
Co.
Light
184,
appellant’s
While we understand
In its second point arbitrarily, capriciously Commission acted that the argues adjustments. rejecting repression unreasonably that, of a as the price is theory based repression concept decreases, increases, service demanded quantity service in revenues realized a decrease and is usually accompanied by that, of a when the argues price service. Bell from the sale of the raised, estimating for repression service is failure to account in an overstate result may revenues that will be attained actual testimony providing ment of revenues. projected presented coin telephone, operator, for certain figures repression were in for which rates services message telecommunications acknowledged phenomenon creased. The Commission “known,” the evi but concluded occurs and repression satisfy sufficient accuracy dence did not possess degree of Section 73-217.5. “measurable” standard test- which affect adjustments measurable Known and certainty. with be data are if can they determined year proper Service Co. v. Public & Telegraph Mountain States Telephone found Commission, The Commission 1985). P.2d 627 (Wyo. *10 it is (i.e., occurs that, that repression while it is certain fairly that demonstrate did not “known”), the evidence presented could with the of accu- repression’s degree effects be measured to as “known” racy by reasonably statute both required qualify and “measurable” The Commission noted that change. coin do not
calculations used to by prove telephone repression take a decline savings into account the associated with expense volumes, nor did a number of other calling account for they factors, which could affect level including “overpays,” revenues We recovered. also note that the estimates repression $.10 based presented by were increase from anticipated $.25 granted local coin call. The per an increase $.20; therefore, the only model repression demand submitted Bell does not since coin rates were not raised to the apply phone higher amount which were upon its estimates based. was
Evidence also demand re presented concerning in the area of pression services and telecommu operator message nications services. The were based on proposed adjustments studies done in Bell’s service territory,5 attempted measure the in consumers’ demand for these drop services when However, were charges imposed increased. these proposals were based on the assumption consumers other states are directly representative of Bell’s customers in Arkansas. The that, again found is while the theory repression “known,” its effects cannot be degree measured with the accuracy required by Section 73-217.5 to qualify both reasonably known and measurable change that other states’ consumers are not necessarily representative Arkansas con We sumers. say finding cannot that this is not supported substantial evidence.
We cannot from our say review of record that the refusal of the Commission to is accept repression adjustments erroneous. The Commission’s finding Bell’s evidence on demand did repression not meet the known and reasonably measurable standard Section was 73-217.5 arbitrary evidence, capricious, supported by and is therefore affirmed.
Bell also takes issue with the Commission’s to a approach pro includes, Arkansas, Texas, territory Bell’s service in addition to the states of Oklahoma, Missouri and Kansas. *11 Rodney staff witness Merritt adjustment proposed by
forma with Yellow to Bell the revenues and associated expenses impute the test and year of a related both Page operations company Bell the test dispute imputation the did not pro year. forma revenues; however, that it did contend inclu- expenses and year increases was sion of the revenue and year expense pro forma net increase The result was a revenue improper. projected $906,350.00 Page Yellow which adjustment attributable to the took the Commission’s calculation into revenue requirement which account. This was based on were adjustment figures itself, Bell into account an estimated computed by taking price rates Page advertising offsetting increase in Yellow and those additional with associated with expenses revenues increased Yellow Page advertising. it was contending
Bell this not objected adjustment, measurable, known and would on reasonably claiming depend it the level advertising Page Yellow customers as purchased by well as other factors customers’ of the including perceptions effectiveness of the advertising, growth the competition, rates, general state interest and tax economy, changes However, affecting income. Commission found disposable that this was adjustment by based on reliable data supplied and found to be and within the it known measurable reasonably guidelines of the statute. We cannot our review the say from record was evidence. finding by that the not supported Bell contends that the Commission inconsistently applies hand, one “known and measurable” on the finding, standard meet the Page adjustment Yellow standard pro forma while, hand, other estimates for finding repression coin, and other services to fall short of that standard. operator, We do and note stands agree, any adjustment that proposed alone measured standard when the “known measurable” of Section 73-217.5. made adjustments
Finally, complains salary negotiated Commission to certain wage expenses between Bell and the Communications Workers of America Relations to the of the National Labor Act pursuant provisions (NLRA). from the that the Commission erred Aside contention made, in the Bell also manner in these were adjustments of wage claims the NLRA has so the field occupied there- contracts that the Commission salary pre-empted, fore law these making adjustments. federal from prohibited, by in the we are that this issue has been Although litigated aware Arkansas, United Court for the Eastern District of States District and that has ruled the NLRA the Commission prohibits it case,6 from do not making wage and *12 in this we salary adjustments agree that NLRA so as sweeps broadly displace Arkansas to establish ability Commission’s reasonable utility rates. It seems to us that state of intrastate regulation monopoly service be of a telephone regard must with to all permitted salaries, and utility’s expenses, including because wages utility feeling service concerns “interests rooted in local and deeply Hale, Inc. We responsibility.” Belknap, (1983). v. 463 491 U.S. do not believe that Congress intended the NLRA to intrude into state utility regulation, and has not us with appellant presented of any evidence such congressional intent.
We now turn to Bell’s that the Commission’s argument of disallowance wage, and related costs was salary arbitrary, capricious, unreasonable and evi- by not supported fact, dence or based on findings sufficient outlined in Bell’s IV and VI points for reversal. We find arguments to be without and merit affirm.
The Commission portion disallowed that of certain and wage, salary related expenses exceeded 110% the regional average for The comparable positions. Commission rejected a proposed adjustment positions which it found to be national, part a than rather labor Bell contends regional, pool. it should be allowed to recover all actual wage, salary related We expenses. agree with that this proposition type expense is a service, basic of the cost of part providing and that utility recognition of all or good a such portion setting costs rates is usually proper. *13 charged in to be scrutinizing the Commission
applied by expenses to consumers.
Here, evidence had wealth of expert that some of before it from which it could conclude reasonably (with fringe wage accompanying salary expenses taxes) average compa- benefits and exceeded the substantially substantial, and we That evidence is region. rable in this positions of fact thereon are findings cannot that the Commission’s say or unreasonable. erroneous arbitrary, capricious Commission erred in that finally argues the context of its to evaluate failing wage salary expenses is without merit bargaining agreement. argument collective This disagree constitutes a restatement of Bell’s merely primary ment with the Our review of the Commis adjustment. expense Commission did or did sion’s order does not reveal whether the end consider the of factors come to bear on the not universe which but that is not our bargaining result of the collective process, concern We have found the Commission’s already on appeal. evidence, and we need not action to be supported by have consid further into what the Commission not may inquire ered in its decision. making of the Public Service Commission affirmed decision
all respects. J., concurs.
Cooper, Glaze, J., concurs, dissents, however, regarding pre- but issue. emption J., not participating.
Corbin, R. Cooper, Judge, concurring. In Southwestern James Commission, al., v. Tel. Co. et No. LR- Arkansas Public Service C-85-832, 18, 1986), — F. Ark. the court Supp_(E.D. July issued has “no declaratory judgment that over authority wage and other benefits negoti- related rates ated interstate commerce.” I not [Opinion, p. agree do 9] issue, and, the District Court correctly decided this while holds, so I majority opinion concur to further basis for explain my that the believing District Court inwas error. bar,
In the at case the Commission did not attempt benefits; exercise any authority wage rates and related over instead, it set reasonable rates for service telephone intrastate which incidentally involved the as to the judgment exercise reasonable wage expenses which were to be recovered from consumers. wage The Commission nor it did dictate rates did attempt to modify those wage negotiated rates had been Rather, under the National Labor Act. it specified Relations the major portion wage rates would be recoverable from consumers and a small of them portion would not.
I cannot agree that the of regulation goes scheme federal nearly so far urges, as Bell Congress do not believe so In intended. Dukakis, Massachusetts v. Nurses Association *14 (1st F.2d 41 1984), Cir. the First Circuit Court of Appeals rejected argument at that a statute aimed in- restraining in hospital creases costs the interfered with collec- impermissibly tive bargaining efforts of the Massachusetts Nurses Association in such a way that the must be held be statute pre-empted Act, Management the Labor Relations stating: — any the of whose service industry price or [I]n product as such electric or power, gas, even rent telephone, natural — controlled real estate would regulated, a state find its system the regulatory pre-emptive vulnerable to on attack inhibiting was too ground the overall control price that however, bargaining. Logic, an influence on collective state or control. price Any would carry beyond simple increased the costs substantially that program municipal would be of a in a market operation competitive business Clean argument. vulnerable to the pre-emption similarly laws, in forest cutting requirements air and water selective — standards, all tax increases industrial operations, safety consti- in that bargaining they tanto hobble collective pro bargaining tute in which collective universe part But do general depression. takes or just prosperity place, and rights, do not add to or from the they practices, detract bargain- our together constitute collective procedures ing system. reasoning
Id. at 45. The same seems particularly applicable this case. me that the NLRA is so broad persuade has failed for
that the Public Service Commission is Arkansas prohibited, rates, disallowing from establishing utility reasonable purposes a small of Bell’s costs. The Commission portion wage salary does not to dictate the terms of Bell’s collective purport any reve- It establishes a bargaining agreement. simply prospective and restricts nue level for one of Bell’s aspect utility operations, the those level with an amount judged by revenues to a consistent Commission to be the cost of service. providing reasonable did not wage salary mandate expenditures — these decisions remain appellant may may not make discretion The Commis- solely management. within the of Bell’s sion set a limit what those merely portion expenses from consumers will be authorized to recover Arkansas appellant in the form of rates services. paid telephone Judge, concurring dissenting part Glaze,
Tom I with the reasoning concur part. majority’s upholding Commission’s authorized of return and rate repression Yellow but I dissent as to the Page adjustments, pre-emption issue. I in the reached
Although largely concur result I in which the majority, am manner truly perplexed by Flow formula. (DCF) Discounted Cash applied *15 not While the that the has agree majority appellant I must with the overturning shown such a clear abuse of discretion that warranted, do feel the Commission has Commission’s action is I the the outer of its discretion
approached by misapplying limits did reaching formula it used and the result it in this case. It makes no use a based on sense to formula certain absolutely premises theories and then those theories disregard premises to the of the formula. The Commission’s application particular of the formula was to the application contrary DCF clearly of the witnesses on both sides. testimony expert Had not the the Commission taken end its cost upper as its a equity range reference I would be unable to affirm point, different, lower cost of of the equity testimony calculation view and recommendations of the witnesses who testified on the expert issue of cost not should equity. adopt method, formula like the DCF then inconsis- incorrectly formula, the tently apply contrary testimony expert it, witnesses before in such a manner as an might yield unfair that, result. I am the if the going opinion formula, employ ratemaking it should stick to formula and choose outside the pick formula’s boundaries order achieve a result. I
Although am concerned with the data used Commis- sion in calculating Bell’s cost of I cannot under the say, equity, case, this result unjust. though reached was Even facts of infirmities, may method be with employed afflicted this court cannot intercede unless method an yields infirm additionally result. When the Commission decides to use a formula such as the DCF, I believe it should avoid with or toying misapplying formula. To continue to do otherwise will cause eventually unjust result and reversible error.
Jose Luis
v. STATE of Arkansas
RUBIO
CA CR 86-44
Court Appeals Arkansas
Division II 10, Opinion delivered September notes its brief that there bemay circum here, stances in which a Commission could do what exactly it did and we find such circumstances indeed exist in this particular case. We do with agree Bell’scontention that a specificfinding of bad faith the Commission is a imprudence by necessary Comm’n., etal., No. Southwestern Bell Tel. Co.v. Arkansas Public Service _ LR-C-85-832, 18, Supp_(E.D. 1986). July F. Ark. costs. of these to disallowance of portion predicate of evidence and volume had before it a considerable Commission large, by reputable conducted analyses the benefit of detailed had staff on these issues. the PSC firms for both consulting by wage salary expenses The disallowance of portion that these expenses, carries with it the implication Commission, reasonably necessary were not judgment to ratepayers. service telephone for providing adequate the Com of these costs Disallowance of some management interfere with the exercise mission does not Bell, unfettered as to how remains judgment by management Instead, that conduct may its affairs. it is the impact it conducts free to must remain on rates with which the Commission have its It is the reasona authority. concern itself within the limits of costs, or wisdom with which bleness of the and not the attitude which the management, those costs were incurred as to must its This is the true test be judgment. exercise