This appeal is the product of the inexorable march of inflation. Appellant, Southwestern Bell Telphone Company (hereafter referred to as Bell) seeks a reversal of the circuit court’s affirmance of the order of the appellee Arkansas Public Service Commission (hereafter called PSC) setting aside proposed new intrastate rate schedules filed by the telephone company on March 1, 1976, and allowing the company to file a new rate schedule designed to produce additional revenues amounting to slightly more than one-third of those anticipated from the schedule proposed by the company.
On March 1, 1976, the telephone company sought PSC approval of a new rate schedule pursuant to Ark. Stat. Ann. § 73-217 (Repl. 1957). It would have produced an increase of annual revenues to the company amounting to approximately $ 18,180,000. By an order entered March 29,1976, the commission suspended the proposed rates for six months, the maximum period of suspension allowed under Ark. Stat. Ann. § 73-217 (b), the applicable statute. Pursuant to the provisions of that statute, the telephone company, on August 1, 1976, made the proposed tariffs effective under an “Agreement & Undertaking” approved by PSC, and these rates were collected until June 20, 1978. The six months’ suspension expired on September 29, 1976, both by the terms of the order and by operation of law. Hearings on appellant’s application were not even commenced until November 15,1976. They were concluded on November 24, 1976. Briefing time was allowed thereafter and the last briefs were filed on January 3,1977. No order was entered by PSC until September 1, 1977. That order not only set aside the rates proposed by the telephone company, it also required the refund of all revenues collected by the company on the basis of its proposed rates in excess of those authorized in the order. On December 9, 1977, PSC entered an amended order authorizing an additional $26,120 in annual revenues.
The application filed by the telephone company was based upon a rate of return of 9.27 percent on the original cost of its property used in providing intrastate telecommunications service in Arkansas based on a test year ending December 31, 1976., This rate of return had been approved by PSC just six months prior to the filing of this application in the last previous rate proceeding involving appellant. Appellant asserted that the increase authorized by the earlier proceeding had proven insufficient to produce the rate of return allowed. The order entered September 1,1977, as amended, fixed the rate of return at 8.31 percent and allowed increased annual revenues based on that rate applied to a test year rate base valued as of June 30, 1976.
Appellant’s petition for review by the circuit court was filed November 11, 1977, after PSC had failed to act upon appellant’s petition for rehearing filed September 21, 1977. The circuit court affirmed the PSC order on March 22,1979.
Bell has presented its arguments in nine (stated) points for reversal. The arguments and contentions made under those points are to some extent overlapping and sometimes repetitive. Many of them would be more appropriately addressed to PSC than to the courts. We will endeavor to deal with Bell’s basic arguments without attempting to treat the individual points separately. We must, however, give due regard to the limitations on the scope of judicial review and to the expertise of the commission. The scope of judicial review is neither so narrow as PSC would have it nor so broad as Bell asks us to make it. It is fixed by Ark. Stat. Ann. § 73-229.1 (Repl. 1979). The courts can only determine whether: (1) the commission’s findings as to the facts are supported by substantial evidence; (2) the commission has regularly pursued its authority; and (2a) the order or decision under review violated any right of the petitioner under the laws or Constitution of the United States or the State of Arkansas. It is only the findings of fact that are tested by the standard of substantial evidence, which is a question of law. Arkansas Public Service Com’n. v. Continental Telephone Co.,
We must remember that the commission action has been reviewed in the circuit court and that the burden is on the appellant to demonstrate error in that court’s judgment. See Fisher v. Branscum, supra.
Appellant first contends that its proposed rates became effective upon the. expiration of the suspension and, as a result, none of the revenue collected prior to September 1, 1977, is subject to refund. The suspension order provided that the rates were suspended for six months, “or until such earlier time as the Commission may order.” Appellant argues that its proposed rates became effective on September 30,1976, and that PS C lost its power to act with regard to the rates and any revenues collected under them. The commission is authorized to suspend proposed rates pending its investigation and decision, but not for a period to exceed six months. There is no indication whatever of any legislative intent that PSC should entirely lose jurisdiction of the rate proceeding by its failure to reach a decision within the suspension period. By the same token, the time limitation is not meaningless, as it would be, if the refund order is held valid. It should be remembered that the hearings on the rate increase were not even commenced during the suspension period. The only purpose of the limitation on the suspension is to prevent the “regulatory lag” between the filing of an application for a rate increase and the commission’s decision from having a confiscatory tendency. If the commission’s decision can be delayed for 18 months after the filing of the application by the utility, it could be delayed for two or three times that long. In these days of galloping inflation, the passage of time can be crucial. Perhaps the delay was attributable to the heavy load falling upon PS C as a result of inflationary trends. If, however, the utility has no protection from a long delayed decision which requires a refund, repetitive applications for rate increases will be filed by it during the pendency of its initial application. This would only serve to increase the workload of the commission and produce additional delay. The time limitation must be given some meaning. We take it to mean that, in this case, the commission had no authority to order a refund of revenues collected on the basis of the proposed rates between the date of the expiration of the suspension order and the date of the order fixing the rates allowed. By the clear language of § 73-217, it is only the operation of the rates that may be suspended, but that suspension cannot exceed six months. See New England Telephone & Telegraph Co. v. Public Utilities Co.,
We reject PSC’s suggestion that a holding that it may not order a refund of revenues collected after the expiration of the suspension period would constitute a court-imposed time limit on the commission’s deliberations. The time limit was imposed by the General Assembly. It must be remembered that the PSC is a creature of the legislature and that, in rate-making, it is performing a legislative function, which has been delegated to it. City of Ft. Smith v. Department of Public Utilities,
If PSC does not enter a suspenion order prior to the stated effective date of the proposed rates, those rates, by the clear language of Ark. Stat. Ann. § 73-217 (a) and (b), would “go into effect” or “become effective.” The suspension order simply suspends the proposed rates for six months “beyond the time when such rate or rates would otherwise go into effect.” Appellee has not suggested any other meaningful application of the six months’ limitation.
PSC does argue that its action was proper under Ark. Stat. Ann. § 73-217 (c) because it is directed to determine and fix the just and reasonable rate or rates to be charged or applied by the utility for service ‘ ‘from and after the time said new rate or rates took effect,” and in the same order fix the amount or amounts plus interest, if any, to be refunded to the consumer which were collected by the utility “during the time such new rate or rates were in effect.” When all the subsections of § 73-217 are read together, it is clear to us that it was contemplated by the General Assembly that the investigation and hearing should be completed and an order for a refund made during the suspension period. We agree that PSC had the power and authority to order the refund or any rates collected during the suspension period which it ultimately found to be excessive, in spite of the time limitations in § 73-217. We did not even approach the questions involved here in Department of Public Utilities v. McConnell,
PSC also argues that Bell’s “Agreement and Undertaking” guaranteed repayment of any amount which the commission found excessive. The particular language relied upon is:
Should any portion of such rates in excess of the rates in effect immediately prior to August 1, 1976, be finally determined to be excessive by the Commission, Southwestern Bell Telephone Company does hereby agree and undertake to insure the prompt payment of any refunds ordered by the Commission together with interest thereon not to exceed Ten Percent (10%) per annum.
Certainly this agreement is not to be taken as an open-ended commitment to pay a refund directed by an order that is made without authority. Furthermore, we take this agreement to be the “bond” or substitute therefor required by Ark. Stat. Ann. § 73-217 (b). Thus, the agreement was, in effect, a statutory bond. As such, the terms of the statute are considered as if they are written into the bond, and, in determining the extent of liability on the bond, the language of the statute is controlling over the language of the bond. Miller v. State,
In ordering the refunds for rates collected after the expiration of the suspension order, PSC did not regularly pursue its authority, so that portion of its order must be set aside upon judicial review, and the judgment of the trial court reversed to that extent.
Appellant also contends that the PSC order of September 1,1977, is totally void, or, in the alternative, can only have prospective effect because the commission failed to enter its order within 60 days of the hearing as required by Ark. Stat. Ann. § 73-229 (Repl. 1979). This 60-day period expired on January 23, 1977, if it began to run when the hearing of evidence was concluded. If the filing of briefs is considered as a part of the hearing, the 60-day period expired on March 4, 1977, which was nearly six months prior to the date when the order was finally entered.
We have previously held that PSC was not deprived of jurisdiction after the expiration of the 60-day period to act on a petition to close a business office of a utility. City of DeWitt v. Public Service Com’n.,
Appellant’s arguments are appealing, but we reject them largely because there would be gross inconsistency in saying that the same words in the same statute have the effect of voiding commission action in one type of case governed by the statute and not in another. It is hardly possible to say that the statutory provision is directory in one type of case and mandatory in another, and there is no language in DeWitt that admits that possibility.
To hold PSC action in this case void because it was robbed of jurisdiction and power on the basis of this statute would, in effect, overrule DeWitt. Since DeWitt itself involved a construction of the statute, we are reluctant to do this, particularly in view of the fact that the General Assembly made changes in the section involved after our decision in DeWitt without affecting our interpretation. Our statute is unlike the one considered in Mt. Konocti Light & Power Co. v. Thelen,
Bell contends that it was deprived of due process of law because the PSC, without notice to Bell until the PSC staff filed its testimony only 14 days before commencement of the hearing on Bell’s application, changed the methodology followed by the commission in its order of September 4, 1975, upon Bell’s application for a rate increase made in that year. As a result, PSC concluded that Bell was entitled to a rate of return of 8.31 percent rather than the 9.27 percent rate of return authorized by PSC in the 1975 order. Bell argues that, in filing the application involved here, it relied and had a right to rely, upon the rate then fixed. Bell emphasizes the fact that its application was in strict conformity with the previous order and the accounting procedures adopted in that proceeding by PSC as proposed by Touche Ross & Company, an independent accounting firm employed by the PSC staff. The staff conceded that this was true. Bell’s statement that the rates allowed in 1975 had failed to produce the rate of return allowed in the same order and that its application was based upon that failure is not seriously contested.
The differences in methodology and changes in procedure of which Bell complains relate to the end of test periods used in determining company expenses, revenues and investment in plant and to the approach to the rate of return necessary to enable the company to obtain capital necessary for its operations.
Bell’s proposed test year ended December 31, 1976, ten months after the date of the application. Bell calculated that, at the end of the test year, its capital structure would consist of 54.11 percent common equity, 39.79 percent debt and 6.10 percent cost-free capital, and its embedded cost of debt would be 7.11 percent. Applying 12 percent return on equity, as authorized by the 1975 rate order, would produce an overall rate of return of 9.32 percent, but Bell sought rates which would produce only an overall return of 9.27 percent on the December 31, 1976, rate base. Bell calculated that, based upon adjustments to the December 31,1976 test year, in conformity with methods approved by PSC, Bell’s return, based on the rates allowed in the 1975 order, would amount to only 6.85 percent. J. B. Nichols, Bell’s vice-president and general manager for Arkansas, testified that, in framing the application, the methodology employed by PSC in its last previous rate case, including all the disallowances to revenues, expenses and investments, was utilized. This was also conceded. This witness said that the test year was chosen because of the attrition that occurs over a period of time due to the addition of new plant investment at higher cost than previous plant investment and the effect of delay which would occur during the consideration of Bell’s request for rate relief. He stated that rate relief based solely upon the relationship among revenues, expenses, and investment that existed in the past would prevent a utility from realizing the allowed rate of return either at the time of the order or at any time in the future and that Bell never caught up with its growth when a truly historical test period was used. He said that, at the time he testified, he had found it necessary to change certain projections made in April for the end of 1976. At least one of the changes was based upon data from the first seven months of 1976. Nichols pointed out that a future test year, consisting of nine months of actual data and three months of projected data, had been used in its last previous rate case. He said that Bell had furnished monthly data to the commission staff on actual performance as compared to forecast performance which showed that revenues and expenses had been within one to one and one-half percent of the forecasts, and that Bell’s record for forecasting, which had been furnished to the commission staff, demonstrated a very high degree of accuracy over a period of ten years. W. W. Lampkin, Bell’s chief supervising accountant for Arkansas, testified that, during that period, Bell’s actual operating revenues had averaged 0.6 percent below that budgeted and its operating expenses, 1.1 percent above that budgeted. Bell’s witnesses pointed out that at the time of the hearings in the middle of November, 1976, the idea that their proposed test year was a future test year was virtually moot. They also testified that, in calendar year 1975, no commission in the country had allowed the Bell system a rate of return on common equity as low as its actual return. According to them, this fact demonstrated that future test years had become necessary for utilities because the expense of future growth was greater than the growth in revenue produced. Bell’s chief supervising accountant said that a future test year required certain forecasts of changes in the economy that might occur and that projections were made from historical trends.
Jerrell Clark, Chief of Accounting & Finance with PSC, chose the test year ending June 30, 1976, because it was based upon actual audited results of operations for that 12-month period. He said that it had been adjusted to year end level and for known changes in revenue and expenses for one year, assuming no growth. Clark said that Bell’s future test year required projections with projections.
Lampkin elaborated on the reasons for the test year selection made by Bell, saying that there were three reasons: first, an attempt to reflect the condition which could reasonably be expected to exist at the time of the hearing, recognizing that rates are made for the future; secondly, the company’s historically good job of estimating future levels of revenues, expenses and investment, and, lastly, counteraction of the regulatory lag. He said that, at the time of the hearing, the staffs test period did not give an accurate picture of Bell’s financial picture, and that the use of such a test period would require Bell to seek additional rate relief in a very short time, which he believed was not in the best interest of the public, the commission, or Bell.
Bell produced evidence that a minimum return of 14 percent on equity capital was required by it in order to raise large amounts of equity capital, that Bell’s cost of long term debt was 8.42 percent and that its embedded cost of debt was 6.75 percent as of February, 1976. This testimony was given by Bell officers.
Basil L. Copeland, an economist on the staff of PSC since August, 1975, recommended a rate of return of 8.28 percent on the rate base, which he said would produce a return of 8.82 percent on investor supplied capital, including a return of 11.5 percent on American Telephone & Telegraph Company (hereafter referred to as A T & T) common equity. According to him, the 9.27 percent rate previously allowed did not take into consideration the effect of A T & T leverage on A T & T’s ability to earn a given return on equity. This was important because Bell is a wholly owned subsidiary of A T & T. In this situation, according to Copeland, there is a “double leverage” which exists in a holding company arrangement when leverage, i.e., debt, exists at the parent as well as the subsidiary level, and, unless this double leverage is given effect by a compensating adjustment in calculating the cost of capital, that cost will be incorrectly calculated and the subsidiary may earn more than its true cost of capital. Copeland explained two acceptable methods of calculating the cost of capital for a wholly owned subsidiary when double leverage exists. One of them used the subsidiary’s debt and equity ratios, but only permitted the subsidiary to earn its parent’s cost of capital on its equity. The other used a consolidated capital structure. He recommended that the commission use the first method, because there would likely be variations in capital structures and embedded debt costs among subsidiaries. Copeland said that the method he had used to calculate Bell’s cost of capital had been adopted by commissions in Iowa, Minnesota, New Jersey, New York and Wisconsin. He said that the methods universally employed by experts to estimate the cost of equity were subjective and amenable to any result desired. He explained a rather complicated mathematical formula which he said produced an objective result.
In rebuttal, Bell offered the testimony of William P. Dukes, Professor of Finance at the College of Business Administration of Texas Tech University. He pointed out that Copeland’s recommended rate of return was below the 8.31 percent reported in the Wall Street Journal on November 10,1976, as the AAA utility bond rate. He disagreed with Copeland’s approach and took the position taken by the Tennessee Public Service Commission, i.e., cost of equity is a subjective factor which cannot be determined by precise mathematical formula but requires the application of informed judgment. He and other witnesses stated that Copeland had misapplied the basic model from which he had derived his formula, and that the formula incorporated economic variables which were unlikely to be repeated and assumed market equilibrium during a period when the “swings” were the widest in market history. These witnesses pointed out other matters which they took to be flaws in Copeland’s approach and in his formula.
We have been troubled by the apparent inconsistency in PSC’s approval of different methods of accounting and different methods of computation of rates of return on different occasions, fully recognizing that it may be quite difficult to establish hard and fast rules to be utilized and followed in determining a fair rate of return but, at the same time, thinking that a more uniform application of established and predictable criteria would lead to fairer and more understandable results. Arkansas Power & Light Co. v. Arkansas Public Service Com’n.,
In effect, Bell is asking us to apply the doctrine of res judicata to require PSC to apply the methodology used by it in entering the 1975 order. But res judicata has little application to regulatory action by an agency in fixing utility rates, because rate-making is a legislative, not a judicial function. Duquesne Light Co. v. Pennsylvania Public Utility Com’n.,
In Arkansas Power & Light Co. v. Arkansas Public Service Com’n.,
We are not possessed of the expertise necessary to evaluate the testimony of the experts in the field of economics. Evaluation of the testimony was for the commission, not the courts. Arkansas Public Service Com’n. v. Continental Telephone Co.,
The test year to be used is a matter lying within the discretion of the commission, although the commission should consider complete and accurate information with respect to a later period of time, when available, as a check on the continuing validity of the test year experience in a period of rapid change. Matter of Wilmington Suburban Water Corp.,
In further pursuing Bell’s argument that its constitutional rights were violated, we first point out that we do not consider the fact that Bell had no notice that the PSC staff would recommend a change in methodology and procedures followed in considering Bell’s last previous rate application until 14 days prior to the hearing, because Bell proceeded without asking that it be given additional time to rebut the testimony offered by the staff upon its assumption that PSC would reject the staffs approach, and because Bell did actually attack the staffs methods by rebuttal testimony, including that of an independent expert witness whose qualifications were impressive.
Since Bell had no vested right in the methodology or formulas previously used or the procedures followed by the commission and since it was afforded full opportunity to show that the changes made by the commission in the methods and procedures used in regard to Bell’s last previous rate application were improper, we find no denial of due process of law. The Fourteenth Amendment’s protection of property is a safeguard of the security of interests that one has already acquired in specific benefits, to which he has a legitimate claim of entitlement, rather than an abstract need or desire. Board of Regents v. Roth,
In considering contentions that a PSC order prescribing rates is repugnant to the due process clause of the Furteenth Amendment and that it deprives a utility of its property without just compensation, the order must be viewed as having the same force as would a like enactment by the General Assembly. Bluefield Waterworks & Improvement Co. v. Public Service Com’n.,
Bell also contends that the commission abused its discretion and denied Bell due process of law by failing to grant its petition for rehearing. This petition was filed on September 20, 1977. In that petition, Bell alleged that the delay in acting upon its rate application, coupled with the use of a rate base which represented values 14 months prior to the PSC order, resulted in a confiscation of Bell’s property in violation of the state and federal constitutions. It also incorporated many of its contentions previously set out in this opinion. The basis of Bell’s argument that the rates fixed by the PSC order were confiscatory was its contention that the PSC finding that Bell’s cost of equity was 10.2 percent was unreasonably low and not based upon substantial evidence, and that the adoption of the test period ending June 30,1976, was inconsistent with inflationary economic development during the period intervening between the end of that period and the date of the order. Most of the petition was devoted to arguments and contentions made in the trial court and in this court as to limitations on the commission’s powers by time schedules set out in the governing statutes. Bell asked that the PSC order of September 1, 1977, be abrogated or modified to approve the rates as filed and to eliminate or modify the obligation to make refunds and for all other relief to which it might be entitled. The petition was supported by affidavits of James B. Nichols, Vice-President and General Manager for Arkansas, and W. W. Lampkin, an accountant who had testified on behalf of Bell. By his affidavit, Nichols undertook to demonstrate that between June 30, 1976, the end of the test year adopted by the commission, and September 1, 1977, the date of the PSC order, Bell had invested $139,000,000 in Arkansas, only part of which was assigned to interstate operations. In his affidavit, Lampkin stated that Bell had an annual revenue deficiency of $16,885,000, even at the 8.31 percent rate of return authorized by PS C and that, as of June 30, 1977, appellant would earn no more than 7.2 percent on its investment.
We agree with appellee that the granting or denial of a petition for a rehearing is a matter resting largely within the discretion of a regulatory agency in rate cases. The real question before us is whether the denial of the petition for rehearing was an abuse of the commission’s discretion. Bell’s arguments that it is not receiving any return on approximately $62,000,000 invested in its plant between the end of the test year and the PSC order, and the obvious fact that a regulated business cannot adjust its prices to meet inflationary increases in its costs, as an unregulated business can, are very appealing. They emphasize the necessity for more prompt action on a rate application than was taken here. After deliberate consideration of these arguments, we have finally concluded that we should not say that there was an abuse of discretion in this case. It seems to be the general rule that the denial of a petition for rehearing by an agency such ás PSC should be set aside on judicial review only for the clearest abuse of discretion. See United States v. Pierce Auto Freight Lines,
In view of the limited scope of judicial review of the action of an agency performing a legislative function, we deem this rule to be appropriate and conclude that appellant has not shown such a clear abuse of discretion that overturning the commission’s action is warranted in this case, in spite of the fact that we feel that PSC approached the outer limits of its latitude of discretion. It was pointed out in Interstate Commerce Com’n. v. Jersey City,
Bell has also failed to show that the fact that the commission’s order did not consider Bell’s investment between June 30, 1976 and September 1, 1977, even though it was in use on the date of the order was, in this case, a violation of either the due process clauses of the Arkansas and United States Constitutions or of the prohibition against the taking of private property for public use without compensation. If Bell had shown that the rates allowed were confiscatory, then its contention would be sustained. The affidavit of Tompkin, and its supporting exhibits, showed that the rate base actually grew from $350,585,089 on June 30, 1976, to $390,877,000 on December 31, 1976, and to $412,827,000 on June 30,1977. The parties agree that if Lampkin’s unaudited valuations are used, there would be an earnings deficiency of $10,000,000. On the record before us, we are unable to say that these rates were confiscatory, as a matter of law. Bell’s proposed test period was December 30,1976, and was based largely on projections. The determination of the appropriate test period is to a great extent a matter addressing itself to the expertise of the commission. It is extremely difficult for the courts to say that the commission’s determination is erroneous, unless it is confiscatory. No problem would have presented itself to us had PSC acted within the statutory time frames.
In arriving at the conclusion that the belated action was not confiscatory, we take into consideration the fact that Bell will not be required to make refunds for collections on its proposed rates between September 29, 1976, and the date of the commission order and the fact that PSC fixed the rate of return at 8.31 percent, the rate Bell witnesses indicated would be essential to retention of its AAA bond rating.
Bell contends that, according to the holding in Bluefield Waterworks & Improvement Co. v. Public Service Com’n.,
Bell also says that PSC’s requirement that it pay interest at the rate of 10 percent per annum upon the refunds to be made by it is unreasonable, arbitrary and not supported by substantial evidence. Bell points out that PSC allowed the maximum interest rate permissible under Ark. Stat. Ann. § 73-217 (d), and that no evidence was introduced or offered as to the appropriate rate of interest. Bell contends that it is patently unreasonable to allow this rate of interest when, in the same order, it was held that Bell was entitled to only 8.31 percent return on its investment. The statute leaves the rate of interest to the discretion of the commission. Even though there was no evidence on the question, we may take judicial notice of the fact that interest rates are presently very high, and also were high at the time of the commission’s decision. We agree with Bell that it did not have the burden of showing the interest rate appropriate to the case, or even to offer evidence on the question. We also agree that any evidence on this particular point given at a hearing would, in these times, have been rendered insubstantial by lapse of time between the hearing and the entry of the PSC order because of the steady increase in interest rates during that period. We do not think that the interest rate was dictated by Ark. Stat. Ann. § 73-214 (Repl. 1979), fixing the rate of interest to be paid upon customer deposits, although that provision might be worthy of consideration by the commission. We are unable to say, however, that there was an abuse of the commission’ s discretion in view of the statute allowing interest at the rate of 10 percent per annum on judgments in favor of creditors, unless the court rendering the judgment, in his discretion, reduces the rate. See Ark. Stat. Ann. § 29-124 (Repl. 1979).
The judgment of the trial court is reversed insofar as the refunds ordered by the Public Service Commission are concerned, but otherwise it is affirmed. The cause is remanded to the trial court for the entry of a judgment directing the commission to enter an order setting aside its order for a refund of refunds collected between September 29,1976 and September 1, 1977 by Southwestern Bell Telephone Company on the basis of its proposed rates and otherwise consistent with this opinion.
Notes
It may be that the march of inflation will require different approaches in the future. We recognized in the cited case that rates fixed must be reasonable and just for a reasonable time in the future. There we approved consideration of anticipated future extensions by a utility. It may well be that a factor for anticipated inflation will become a necessary ingredient in rate determinations, if annual, or even more frequent rate applications are to be avoided, but we are in no position to say that there was proof in this case that would have required the incorporation of such a factor in the formula used by PSC.