State Ex Rel. Henry v. Southwestern Bell Telephone Co.
1991 WL 272542, 825 P.2d 1305 (1992)
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Rule of Law:
A public utility is not required to refund to its ratepayers surplus cash generated solely by a reduction in federal corporate income tax rates if the rates charged were otherwise lawful. However, the utility is accountable for interest on such surplus funds, and a regulatory commission may direct these funds toward service improvements, provided such policy and specific implementation plans are supported by substantial evidence presented to the commission itself.
Facts:
- The 1986 Tax Reform Act reduced the federal corporate income tax rate from 46% to 34%, effective July 1, 1987.
- Between January 1, 1987, and September 30, 1989, Southwestern Bell Telephone Company (SWB) accumulated $30,677,167.00 in surplus cash solely due to this federal income tax rate reduction.
- During the period in question, the rates charged by SWB were authorized by the Corporation Commission.
- The American Association of Retired Persons (AARP) intervened in the proceedings, advocating for a refund of SWB's surplus cash to ratepayers.
- SWB did not possess a 'labor-tracking mechanism' adequate for Staff to fully verify annualized wage levels and allocate wage/non-wage data between state and interstate jurisdictions, which led to a dispute over severance pay expenses.
- The Corporation Commission's finding of a $180 million depreciation reserve deficiency for SWB was based on a Staff witness's testimony, which, in turn, relied on the Federal Communications Commission's (FCC) assessment of data SWB had supplied to the FCC, rather than data presented directly to the Corporation Commission for its own consideration.
- Staff's 'Project Priority List' for central office upgrades, upon which the Commission relied, was presented as merely 'a listing of projects that one might consider,' and there was no specific information provided to the Commission to justify upgrading the listed central offices.
Procedural Posture:
- In October 1986, Howard W. Motley, Jr., Director of the Corporation Commission’s Public Utility Division, initiated proceedings to inquire into the effect of the 1986 Tax Reform Act on Oklahoma utilities.
- Southwestern Bell Telephone Company (SWB) and eleven other companies were named as respondents and ordered to participate in a 'technical conference' with the Commission’s staff (Staff).
- On June 12, 1987, notice was given for a 'hearing on the rates of Southwestern Bell Telephone Company.'
- On June 23, 1987, Staff and SWB stipulated that if a rate reduction was warranted after considering 'all known and measurable changes' in SWB’s business, the reduced rates would become effective July 1, 1987. The Commission approved this stipulation.
- The case was assigned to a hearing officer for the purpose of taking evidence, hearing, and reporting thereon to the Commission.
- Several parties, including American Association of Retired Persons (AARP), intervened in the proceeding, leading to multiple postponements of the hearing.
- The hearing eventually took place over four days in January and February 1989, with many witnesses testifying and offering pre-filed testimony and exhibits.
- After the hearing, each party submitted proposed findings of fact and conclusions of law; the hearing officer adopted Staff’s recommendations in toto.
- The Corporation Commission (Commission) adopted nearly all of the hearing officer's findings and issued an order addressing the disposition of SWB's surplus cash and other financial adjustments.
- The State, AARP, and SWB each sought corrective relief (appealed) from various portions of the Commission’s order to the Oklahoma Supreme Court.
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Issue:
1. Is a public service corporation, such as Southwestern Bell Telephone Company, required to refund to its ratepayers surplus cash generated solely by a federal income tax law change? 2. May the Corporation Commission hold the utility accountable for interest on such surplus cash? 3. Is a Corporation Commission's decision to use surplus cash for service upgrades, and its specific findings regarding utility financial adjustments and particular service upgrades, subject to the 'substantial evidence' standard of review, requiring the Commission's own assessment of evidence presented before it?
Opinions:
Majority - Opala, Chief Justice
No, a public service corporation is not required to refund surplus cash generated solely by a federal income tax law change to its ratepayers. The rates charged by SWB during the period were authorized by the Commission, and thus, the surplus funds were not obtained by overcharging ratepayers within the meaning of 17 O.S.1981 § 121. Yes, the Commission may hold the utility accountable for interest on such surplus cash. The court held that SWB had the use of the funds without consideration of its rate base, and the presumption in business and equity is that the use of money normally calls for the payment of interest, preventing unjust enrichment. No, the Corporation Commission's decision to use SWB’s surplus cash for general service improvements, specifically converting multi-party lines to single-party service, was not error because it was a valid policy decision supported by substantial evidence. The Commission viewed this as a 'unique opportunity' to accomplish service upgrades without adversely impacting basic exchange rates, and the improvements are 'inherently beneficial,' particularly given the impossibility of identifying specific ratepayers for refunds. However, the Commission's decision to upgrade certain specific central offices was error because it was not supported by substantial evidence. The Staff's list was merely a suggestion, and no specific information was presented to the Commission to justify the selection of those particular facilities. Furthermore, the Commission did not impermissibly enlarge its inquiry by considering changes in SWB's business operations in addition to the tax law changes, as AARP failed to demonstrate prejudice. However, the Commission's finding of a depreciation reserve deficiency lacked substantial evidentiary support because it relied on expert testimony about data dehors the record (not presented to the Commission itself), which is insufficient for the 'substantial evidence' standard and violates the summary rule requiring raw data availability. The Commission also erred by disallowing SWB's severance pay expenses on arbitrary grounds, as the inability to verify annualized wage levels did not logically preclude allowance for otherwise auditable severance pay. The Commission also miscalculated SWB’s 'cash working capital' requirement due to a lack of substantial evidence regarding its assumptions. Conversely, the Commission's decision not to charge interest on SWB’s excess deferred income taxes was affirmed because it was supported by substantial evidence showing ratepayer benefits (through rate base deduction) and AARP failed to overcome the presumption of correctness given the Commission's expertise.
Analysis:
This case clarifies the Oklahoma Corporation Commission's powers and limitations in regulating public utilities, especially concerning financial windfalls from external factors like tax law changes. It establishes that while utilities are not automatically required to refund such surpluses as 'overcharges,' the Commission can ensure the public benefits through directed service improvements or by imposing interest on the retained funds. Crucially, the ruling reinforces the stringent 'substantial evidence' standard for the Commission's factual findings and specific policy implementations, underscoring that decisions must be grounded in evidence directly presented and assessed by the Commission, not merely external reports or summaries without underlying data available for inspection. This ensures accountability and transparency in regulatory actions affecting utility rates and services, preventing arbitrary decisions even by expert agencies.
