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FINES will be charged if book is returned after the date stamped below. If: .: {NT-30%;? I MAGE/c “V‘fiWfis APR 2 9 7001 03 0 1 0 1 0 MIR 3) a 2002 AN INVESTIGATION INTO THE REGULATORY POLICIES OF THE MICHIGAN PUBLIC SERVICE CQVMISSION IN THE 19503 WITH REGARD TO THE MICHIGAN BELL TELEPHONE CCMPANY AND THE CONSUMERS POWER CCMPANY By James R. Anderson A THESIS Suhnitted to Michigan State University in partial fulfillment of the requirements for the degree of MASTEROF ARTS Department of History 1984 ABSTRACT AN INVESTIGATION INTO THE REGULATORY POLICIES OF THE MICHIGAN PUBLIC SERVICE C(NMISSION IN THE 19505 WITH REGARD TO THE MICHIGAN BELL TELEPHONE OCIVIPANY AND THE C(NSIMERS POWER COMPANY By James R. Anderson The purpose of this study is to ascertain the regulatory policies, developed by the Michigan Public Service Commission in the 19508, by examin- ing the rate orders approved for two utility con'panies . Rate cases were becoming a regular part of the yearly activities of the Commission, and were no longer a relatively infrequent occurrence as in prior decades . The rate orders indicate that in the early 19505, substantial rate increases were authorized for the purpose of supplying increased revenues to utility conpanies to construct additional facilities to provide services to more customers . However, rate orders issued in the late 19503 indicate a growing awareness of consumer activism aimed at keeping rates for residen- tial users of utility services as low as possible. PhilosoPhically moderate members of the Carmission approved more substantial rate increases than were supported by more liberal trembers by utilizing liberal accounting and financial concepts. TABLE OF CONTENTS Page LIST OF TABLES . 0 O O O O O O C 0 0 O O C O O C C . iii SECI‘ION I: INI'ROHJCIIION O O 0 O O O O 0 C O C O O O C O O 0 O O 1 SECTIONII: THEPUBLICSERVICECOEMISSION 4 PART A: BRIEF HISTORY OF THE REGULATION OF PUBLIC UTILITIES IN MICHIGAN PRIOR To 1950. . . . . . . . . 4 PART B: REVIEW OF THE DEVEIDPMEN'I‘ OF THE MICHIGAN PUBLIC SERVICE COMMISSION DURING THE 1950s . . . . . 9 SECTION III: REVIEW OF THE POLICIES OF THE MICHIGAN PUBLIC SERVICE COMMISSION WITH REGARD TO THE MICHI- GANBEILTELEPHCNECQIPANYIN'I‘HEI9505....... 29 PART A: BRIEF HISTORICAL REVIEN OF THE DEVELOPMENT OF THE TELEPHONE INDUSTRY IN MICHIGAN PRIOR m 1950. O C Q C O O O O O C 0 O O 0 O O O O O O 0 O 29 PART B: REVIEW OF THE REGULATORY ORDERS ISSUED BY THE MICHIGAN PUBLIC SERVICE COMMISSION DURING THE 1950s WITH REGARD TO THE MICHI- GANBELLTEIEPHONECOMPANY.............31 SECTION IV: REVIEW OF THE POLICIES OF THE MICHIGAN PUBLIC SERVICE COMMSSION WITH REGARD To THE CON- SUMERSPOWERCCMPANYINTHE19SOS.......... 62 PART A: BRIEF HISTORICAL REVIEW OF THE DEVELOPMENT OFCONSUIERSPOVJERCQIPANYTIROUGIITIE19SOS.... 62 PART B: REVIEW OF THE REGULATORY ORDERS ISSUED BY THE MICHIGAN PUBLIC SERVICE CCMVIISSION DURING THE 1950s WITH REGARD To THE CONSLMERS PONER mm. C O O O O O C O O O O C O O C O O O O O O O 75 SECTIONV: CONCLUSIONS.....................103 APPENDIX 0 O O O O O 0 O O O O O O O O O O 0 0 O O Q 1.10 BIBLImRAH-IY O O O I O O 0 O O O 0 0 O O 0 O O 0 O O 120 ii TABLE TABLE TABLE TABLE TABLE TABLE TABLE TABLE TABLE TABLE TABLE TABLE TABLE TABLE TABLE 10 11 12 13 14 15 LIST OF TABLES PROFILE OF MICHIGAN UTILITY INDUSTRY AT THE CMLJSIWI OF 1960 I O O O O O O O O O O C O NUVIBER OF TELEPHONE COMPANIES IN MICHIGAN mm TEE 19508 O O O O O O O O O O O O O NUVIBER OF TELEPHONES IN SERVICE IN MICHIGAN HIRING M 19508. O O O O O O O O O O O O O REVENUES RECEIVED BY THE MICHIGAN PUBLIC SEWICE WSSIWO O O O O O O O O O O O O APPROPRIATIONS AND EXPENDITURES FOR THE MICHIGAN PUBLIC SERVICE COMMISSION . . . . . ALLOCATION OF SALARIES AND WAGES WITHIN THE MICHIGAN PUBLIC SERVICE COMISSION FORTHE 1953/54FISCALYEAR . . . . . . . . ALIDCATION OF SALARIES AND WAGES WITHIN THE MICHIGAN PUBLIC SERVICE COT/MISSION FORTHEl959/6OFISCALYEAR . . . . . . . . WADRKLDAD DATA FOR THE UTILITIES DIVISION OF THE MICHIGAN PUBLIC SERVICE CCMMISSION . WORKLDAD DATA FOR THE MOTOR CARRIER DIVISION OF THE MICHIGAN PUBLIC SERVICE CMSSION. O O O O O O 0 O O O O O O O O 0 SUMMARY OF NET INCQVIE PER TELEPHONE FOR THEMICHIGANBELLTELEPHONECOMPANY. . . . SUMMARY OF OPERATING INCCIVIE AND EXPENSES FOR THE MICHIGAN BELL TELEPHONE CCXVIPANY . . SUMMARYOFTEIEPHONEPLAN‘TINWTFOR THEMICHIGANBELLTELEPHONECCMPANY. . . . SIMMARY OF CAPITAL, SI‘CXIK, SURPLUS AND LONG-TERM DEBT FOR THE MICHIGAN BELL mm MANY C O O O O O O O O O O O O SIM’IARYOFSHARESOFCQ'MONSTOCXOUT- STANDING AND DIVIDENDS DECLARED FOR THE MICHIGANBELLTELEPHONECQ‘IPANY. . . . . . STATISTICAL DATA REGARDING GRONIH OF THEMICHIGANBEILTEIEPHONECQVIPANY. . . . iii 12 15 20 21 21 22 45 55 57 58 60 61 TABLE TABLE TABLE TABLE TABLE TABLE TABLE TABLE TABLE TABLE 16 17 18 19 20 21 22 23 24 25 AVERAGE ELECTRIC RATES BILLED‘TO CUSTOMERS OF CONSUMERS POWER.COMPANY} NET EARNINGS PER SHARE OF COMMON STOCK OF'CONSUMERS POWER.COMPANY. SUMMARY OF OPERATING INCOME AND EXPENSES - ELECTRIC.AND GAS SERVICES OF THE CONSUMERS POWER.COMPANY . . . OPERATING STATISTICS OF THE ELECTRIC AND GAS DIVISIONS OF THE CONSUMERS POWER CQTPANY O O O O O 0 SUMMARY OF UTILITY PLANT INVESTMENT OF THE CONSUMERS POWER.COMPANY . SUMMARY OF STOCK ISSUES AND LONG‘TERM O O O DEBT OF THE CONSUMERS POWER.COMRANY . SUMMARY OF CAPITAL STRUCTURE OF THE CONSUMERS POWER.COMPANY . MAKEUP OF THE MICHIGAN PUBLIC SERVICE COMMISSION, 1947 - 1960 . LAWS CONTROLLING THE JURISDICTION OF 0 0 THE MICHIGAN PUBLIC SERVICE COMMISSION. SUMMARY OF MAJOR UTILITY RATE PROCEED— INGS, 1947 — 1960 . iv 79 88 91 96 98 99 101 111 112 114 SECTION I INTRODUCTION The purpose of this master' S thesis is to present a review of the develognent of the Michigan Public Service Conmission (MPSC) in the 1950s: and to present an analysis of the policies Of the same state regulatory agency for the corresponding period of time. The focus of this study is the 1950s, because this is the first decade for which relatively conplete primary source materials are available. Many of the documents issued by the MPSC prior to 1950 are no longer in existence, due to their destruction in the early 1950s by fire Which occurred in the Lewis Cass Building in Lansing, Michigan or by flooding within the State Capitol Building in Lansing, Michigan. Prior to examining the development of the MPSC in the 19505, a brief review of public utility regulation in Michigan prior to 1950 will be pre- sented. 'Ihis master' s thesis will also review the statutory framework for public utility regulation in Michigan, and will also analyze the fiscal foundation of this mission. Since the primary function of the MPSC is to regulate the rates and charges assessed by the public utility corrpanies for the services they provide to the public, this study will review several different rate orders issued by the MPSC in the 19503 so as to ascertain the policy objectives of the MPSC. In order to limit the SCOpe of this inquiry, the rate orders of tm n'ajor utility conpanies will be examined: (1) the Michigan Bell Tele- phone Carpany (Michigan Bell), and (2) the Consumers Power Carpany (Con- Swners Power). Michigan Bell was chosen as one of the utility carpanies to be studied because it is the largest telephone company in the state of Michigan. Consumers Power was selected to be studied because it is the largest combination gas and electric utility in the state. However, due to self imposed limitations on the length of this study, only the rate orders relating to the electric operations Of Consumers Power will be studied. In this regard, it Should be noted that Consumers Power is the second largest electric utility in the state. A brief history of Consumers Power through the 19505 is presented in this study because the materials were available. Since no materials are publicly available regarding the historical development of Michigan Bell, no such presentation is made . Finally, is should be noted that this study will proceed upon the assumptions developed by James Willard Hurst in his book, Law and Econconic __Gr<_3_w__th__. 1 Hurst's basic theme was that since the law sanctions's the ultimate distribution of power in society, it can have a tremendous impact on the allocation of resources within a society. Thus, a major premise of this study is that the regulatory orders issued by the MPSC with regard to Michigan Bell and Consumers Power Company in the 19505 had a significant influence on their growth and development, inasmuch as these rate orders had an impact on where a major portion of the monetary resources of this state' 5 residents would be channeled. It would also be appr0priate to note here that it is the Opinion of this writer that none of the evidence pre- sented in this study supports on the state level the theory that has been developed on the federal level that federal regulatory agencies have been “captured" by the entities sought to be regulated. 2 The "captive“ theory of business regulation had its birth in the progressive era. Literature began to appear claiming that regulated cor- porations could directly and favorably influence the policies of the reg- ulators through their enormous financial resources, particularly through legislative lobbying . Although the "capture" idea was abated in the period of the New Deal due to the expansion of regulatory activities, it was resurrected in the 19505. Scholars such as Samuel P. Huntington and Louis L. Jaffe began to analyze the ties between regulator and regulated. By the early 19605, it was the comton assumption of many historians and other scholarly Observers of the regulatory process that the regulatory agencies had been captured by the industries which they were established to control and that the promotion of the "public interest" played little or no part in the formulation of regulatory policy. Over much of the literature in the 19605 concerning the "capture" thesis, one historian, Gabriel Kolko, exerted a dominent influence. In his study of railroad regulation from 1877 to 1916, Kolko concluded that railroad men were the most important single advocates of railroad regulation in that era . The evidence indicated to Kolko that railroads relied on the Interstate Commerce Cormission to attain their own ends. For Kolko, it was clear that federal economic regulation was essentially designed by regulated industries to meet their om ends, and not those of the "public interest". A major theme of this study, is that in the 19505 the Michigan Public Service Commission endorsed rate increases in amounts that were intended to promote new investment by Michigan Bell and Consumers Power in new telephone and electric plant facilities so as to promote such utility services to an expanding custorer base. While this could be construed as evidence that the Michigan Public Service Commission was a captive of the interests of the business entities they regulated, it appears to this observer that such rate increases were intended to protote the perceived "public interest" in the 19505 of providing new and improved utility services to an increasing population base within the state of Michigan. That the Michigan Public Service Commission was not a "captive" of the telephone or electric in- dustries in the 19505 is evidenced partially by the fact that members of the Michigan Public Service Commission in this era were not generally employed by any utility companies. SECTION II THE MICHIGAN PUBLIC SERVICE (DENISSION PART A: BRIEF HISTORY OF THE REGULATION OF HJBLIC UTILITIES IN MICHIGAN PRIOR TO 1950 The present condition of public utility supervision by the MPSC is the result of a process of evolution. 3 In exercising its supervisory powers, the MPSC has been aided by the applicable statutory enactments of the Michigan legislature, and perhaps even more importantly, by the judicial decisions of the Michigan and federal courts. In the decade of the 18705, economic distress in the agricultural West, and the consequent Granger movement, brought the question of railroad rate regulation to the fore front. As a result, the state commenced to enact railroad laws . 'Ihese state laws were contested in the courts upon essentially two grounds : (1) that the authority to determine the reasonable- ness of rates lay with the judiciary, and (2) the charters under which the railroads were incorporated granted them the power to set reasonable rates as a matter of contract immne to impairment. Tnese arguments were event— ually rejected by the 0.5. Supreme Court in a number Of cases. 4 The fact that the courts traditionally could afford redress in cases of unreasonable charges for public service did not preclude legislative deter— mination of what the reasonable charges should be . On the contrary, it was considered that price—fixing was clearly a legislative power, which, when exercised, was conclusive upon the courts.5 Later, in dictum which antici- pated the ultimate judicial resolution of the issue, the U.S. Supreme Court defined the role of the judiciary in reviewing rate legislation, whether directly or in orders of administrative tribunals, in the following terms: This power to regulate is not a power to destroy, and limitation is not the equivalent of confiscation. Under pretence of regulating fares and freights , the State cannot require a railroad corporation to carry persons or property without reward; neither can it do that which in law amounts to a taking of private property for public use without just corpensation, or without due process of law . . . (Stone v Farmers Loan 8: Trust _C_o_, 116 US 307, 29 LEd 636, 6 S Ct 334 (1886)). Cotprehensive regulation of public utilities in Michigan was initiated with railroads by the adoption of the Railroad Commission Act in 1907. Act NO. 312 of the Public Acts of 1907 was reenacted, after the adoption of the 1909 Michigan Constitution, by Act No. 300 of the Public Acts of 1909. The prototype Of the initial Michigan regulatory law was the Federal Act to Regulate Commerce of 1887, especially as amended and supplemented by the Hepburn Act of 1906. Until the Hepburn Act, the Interstate Commerce Com— mission did not possess rate making powers. The Michigan Railroad Commission Act served the primary purpose of making the provisions of the Federal Act to Regulate Commerce applicable to the intrastate rail transportation of the state. The abuses Which the Michigan legislation sought to remedy and prevent were in large measure peculiar to the railroad business. At the time the Michigan Railroad Commission was created, a much debated question was Whether the delegation of legislative power to an administrative tribunal was permissible. In an effort to avoid the issue of the legality of the delegation of legislative power to an administrative agency, there had come into use a form of language which equated the process of rate making to a matter of simple factual determination. In an earlier case, the Mimesota Supreme Court had stated that the legislature had not dele- gated to the Minnesota commission any discretion as to what the law Shall be, but had merely granted a power to determine what rates were equitable and reasonable in a particular case.6 This theory of fact finding seems to have been necessary at this time to sustain the vesting of rate making power in a regulatory commission, in the absence of express authority in a state constitution. In fact, it was the considered Opinion of the Michigan Constitutional Convention of 1907- 1908 that such a commission could not be created without constitutional sanction. For instance, the Michigan Constitutional Convention defeated a proposal to authorize the establishment of a public utilities commission, with the intention that it Should not be authorized (2 Debates , Constitu- tional Convention 1907-1908, page 1034); and it approved another preposal which permitted the legislature to create a railroad commission with power to fix maximum freight rates (2 Debates, Consitutional Convention 1907-1908, page 1439, Const, 1908, Art XII, Section 7). Eventually, the legal system came to recognize that in certain Situations legislative powers could be delegated to regulatory commissions, and no longer attempted to justify such a procedure under the suspect theory that administrative commissions were engaged merely in fact finding functions . 7 The principles governing the delegation of power and the exercise of the delegated authority were definitively stated in 1935 by the U.S. Supreme Court:8 A proceeding of this sort requiring the taking and weighing of evidence, determinations of fact based upon the consideration of the evidence , and the making of an order supported by such findings, has a quality resembling that of a juducal proceeding. Hence, it is frequently described as a proceeding of a quasi juducal character . The requiremt of a ' full hearing' has obvious reference to the tradition of judicial proceedings in which evidence is received and weighed by the trier of the facts. The 'hearing' is designed to afford the safeguard that the one who decides shall be bound in good conscience to consider the evidence, to be guided by that alone, and to reach his conclusion uninfluenced by extraneous considerations which in other fields might have play in deter- mining purely exective action. The 'hearing' is the hearing of evidence and argument. If we who determines the facts which underlie the order has not considered evidence or argument, it is manifest that the hearing has not been given. Initially, the authority of the Midhigan Railroad Commission was confined to the railroad business. However, at this time, both the telephone utility industry and the electric utility industry were in a period of considerable expansion, and there was public concern to ensure that sudh services could be secured at reasonable rates. To implement the element of rate regulation whidh was lacking under the general electric franchise law, a general statute was enacted in 1909.9 Thereafter, a general law for the regulation of telephone rates was enacted in 1911.10 These statutes, each independent and self—sufficient, conferred upon the Midhigan Railroad Commission rate regulatory powers, together with other regulatory authority appropriate to the respective businesses. Pursuant to the provisions of Act No. 419 of the Public Acts of 1919, the Railroad Commission was abolished, the offices were terminated, and the governor was authorized to appoint a new commission of five members to be called the MiChigan Public Utilities Commission (MPUC). This statute further extended the scope of the regulatory authority to include the gas business, and it conferred, with respect to gas, electric and telephone utilities, the same measure of authority as over railroads. By subsequent amendment, the furniShing of steam was included. By statute enacted in 1923, the business of common carriage by motor vehicle was made subject to regulation by the MPUC. Supervisory and regu— latory authority over the intrastate business of transmitting natural gas was conferred under a special statute in 1929. In the same year, identical powers with respect to oil pipelines was granted by the legislature. In 1939, the MPSC was created, the MPUC was aboliShed, and its func- tions and powers were transferred to the new commission. (Act No. 3 of the Public Acts of 1939). Section 4 of this Act suggests why the MPUC was abolished and the MPSC was created: The Michigan public utilities cotmission, having failed and refused to properly carry out the legis— lative mandates with respect to the public safety, and having failed and refused to properly enforce the provisions of the several acts conferring jurisdiction upon it with respect to the use of the various highways of the state in a safe and proper manner, is hereby abolished . . . Act 3 of the Public Acts of 1939 vested the MPSC with complete power and jurisdiction to regulate all public utilities in the state, except any municipally—owned utility, and except as otherwise restricted by law. It is vested with power and jurisdiction to regulate all rates, fares, fees, charges, services, rules, conditions of service, and all other matters pertaining to the formation, operation, or direction of such public util— ities. It also possesses authority to regulate the issuance of securities by public utilities ; and exercise important powers over the extension of telephone, gas, and electric services into new territories, under the requirement of first obtaining from it a certificate of public convenience and necessity. Finally, it was granted the same measure of authority over railroads and railroad companies as had been granted to the predecessor commission, the MPUC. PART B: REVIEW OF THE DEVELOHMENT OF THE MICHIGAN PUBLIC SERVICE COMMISSION DURING THE 19505. The utility industry regulated by the MPSC at the conclusion of 1960 11 had a profile as follows: 16 38 8 11 96 400 14 24 TABLE 1 electric corpanies, 2 of major size gas producing companies gas transmission co1panies gas distribution cotpanies (selling directly to consumers) telephone companies, 2 of major size major, 1200 small bus and truck corpanies oil transmission companies railroad companies During the 19503, the number of telephone corpanies regulated by the MPSC decreased, primarily due to mergers of smaller companies by larger corpanies:12 TABLE 2 Number Of Telgghone Cotpanies 1954 1955 1956 1957 - 133 1958 - 110 - 130 1959 - 105 - 120 1960 - 96 - 113 Correspondingly, the number of telephone serviced by independent telephone companies and Michigan Bell increased:1 3 TABLE 3 Number Of Telephone Serviced By Independent Corpanies 1954 1955 1956 1957 - 235,918 1958 - 305,131 - 253,364 1959 - 323,737 - 271,606 1960 — 338,831 — 290,838 Number Of Telephones Serviced 31 Michigan Bell 1954 1955 1956 1957 2,247,787 1958 - 2,754,143 - 2,403,653 1959 - 2,887,079 2,556,352 1960 - 2,975,394 2,690,885 10 During the 1950s, the activities of the MPSC were generally divided into two broad categories: (1) General Commission Activities, Which were concerned primarily with public utility corpanies; and (2) Motor Carrier Activities, which were concerned primarily with bus and truck companies . The fiscal year for the MPSC corresponded to the fiscal year for the State of Michigan: the first day of July through the thirtieth day of June of the following year. With regard to each fiscal year occuring during the 19503, the activities of the MPSC were financed through two sources: (1) fees collected by the MPSC from the entities regulated by the MPSC; and (2) the general fund of the State of Michigan. The following table indicates the 1 types of fees collected by the MPSC: 4 (1) Utility Investigation Reimbursements : charges are made to various utility cotpanies for the cost of salaries and expenses for conducting original cost audits, rate case work , and property inventories. (2) Security Issue Fees: this fee was corputed at 1/ 10th of 1 percent of the total amount of the security issue, based on the property located within the state . The minimum fee was $50, except for rural telephone corpanies, when borrowing money, the minimum fee was $5. (3) Mileage Fees: for motor carriers. (4) Annual Fees: in lieu of mileage fees for motor carriers. (5) Application Filing Fees. (6) Miscellaneous Fees: includes charges for transcripts of testimony, booklets, duplicate license plates, etc. (7) Exemption Plate Fees. Approximately 40% of the motor carrier mileage fees collected by the MPSC were appropriated to the MPSC to defray the expenses or regulating comon carriers. 15 At the end of each fiscal year any unexpended and un- encumbered balance of this 40% appropriation, and the retaining 60% of the fees collected were credited to the highway fund. The MPSC also received 11 an apprOpriation from the general fund. Fees paid by the public utilities for prOposed security issues, were transferred to the state treasurer to be held in trust until the security issue was approved by the MPSC. As the security issue was approved, the fees were credited to the general fund . In the event the security issue was not approved, the fee was returned to the utility. Whenever the MPSC conducted an audit or appraisal of any public utility for rate making, capitalization, or any other purpose, it had the right to make such audit or appraisal through its accounting, engineering and other personnel, and was required to keep an accurate, detailed account of all expenses incurred. 'Ihe expenses of the audit or appraisal were to be paid by the utility into the state treasury. All money paid into the state treasury was credited to the general fund. The following table presents a summary cotpiled from existing records of the revenues received by the MPSC from the various fees it charged during the 19503: 16 12 <\z aao.vm¢.om 00m.s~ <\z hmm.hm~.aw <\z <\z <\z sm~.mmm w <\z mm\Nmo~ <\z NNO.HNN.~w oom.v~ <\z NNA.©mH.Aw <\z <\z <\z amo.om~ w <\z mm\amo~ <\z mmv.¢®~.~m m~s.m~ <\z Omn.H¢N.Aw <\z <\z <\z oom.m~o m <\z ~m\omoa moo.oom.mw ovfi.mmo.~w cow.m~ <\z $668.; vao.ahv.ow «\z <\z «\z <\z mmwmmmm cam.om~.~w vom.omm m OOm.a~ <\z v0m.mmm w sov.mom.dw <\z <\z <\z <\z mv\mvoa N¢0.~mo.aw own..mmm w om~.- <\z osv.o~m » om~.omo.aw <\z <\z <\z <\z mica; EHmeY—fib mUH>mmm UHJmDm ZfiHIUHZ ma. >m flag 82% v m4m<fi mandafimz< uoz ”(\z «J¢Fhfi.02¢zo dugoulnsm mama dmzucum a unsung mow."— muoao gaunt-Sam «mom womoaaz "mmbzm>mm mMHmmdU mOEQz HQOOOlndm wwwpm GSA H 8“? owes mananm womb msumH xuwusuom mucmfimeSQEaum scaumwnuoo>cH suwaau: ”mszm>mm AdKWZMD £13 vmm.v0m.dw mmm.~n~.aw ONH.Om m0m.®mm.aw mmm.mm~ w omo.mo oam.o¢ mmo.mmo mmo.Om m O©\mmma VMN.N®¢.~W Amm.mm~.aw moo.mm w~m.o-.am mom.m0~ m amo.v~ mmm.mm OOO.mNH ®m©.om w mm\mmma nnv.mwm.qw mom .8m 77w mama .mmm J» <\z <\z <\z v-.o- w <\2 ¢\z <\z <\z mm\smoH <\z <\z <\z <\z (\z <\z <\z <\z <\z Nm\omm3 <\z (\Z <\z <\z <\z <\z <\z <\z <\z <\z am\mmm3 (\z <\z <\z <\z <\z <\z <\z <\z <\Z <2 mm\vmoH <\z ©m~.~¢~.~w ONB.N¢ <\z wav.mva.aw (\z 4\z 4\z <\z <\z Vm\mmoH ZOHmmHZZOO mu~>mmm UHJmDm ZdUHIUHZ mm? wm QD>HNUQM mmbzm>mm v MdmdF woanhm>< uoz u<\z fidBEDP Ddeo flavoulnsm $00.» H353 d dam—Fawn new.» 303 c3505 moon mmmoaflz "mmbzm>mm mm~mm<0 zoenz AmuOOlndm womb csoocmaawomaz moms madame mock msmm~ augusuow mucmemusnEwmm conumanuuo>cH sunanu: umMDZm>mm AdKNZmD 14 As can be seen from this table, the revenues generated by the MPSC for the 1957/58, 1959/60 fiscal years were approximately $1,500,000 in each fiscal year. From the 1951/52 fiscal year through the 1959/60 fiscal year, the Michigan legislature steadily increased the state appr0priation to the MPSC at a relatively modest rate. The state appropriation for the 1951/52 fiscal year was $271,103 and $406,544 for the 1959/60 fiscal year. The increase from $271, 103 to $406,544 represented an approximate 50% growth over the decade in the state apprOpriation to the MPSC . The following table, prepared from available records , presents a surmary of the appropriations received by the MPSC from the legislature and . 1 the amount of the expenditures actually made by the MPSC: 7 15 ©00.mnm m m0~.an~ w Amoo.pvm wv A000.0mm we ssm.o~m m mom.mmm m mam.wm 000.00 10.. .0: .o' w m-.s¢ m moo.Hmv w maw.am¢ w o>o.~ OOO.N 0mm.0m 00m.mw m~o.ovM m mam.mnm w mmusfi gm 833mg; Nm\omm~ m0v.voa m N¢0.nv¢ m Aooo.OOM we Aooo.00m m0 mov.vmv w Nv0.>vn w www.mo 000.0mm -o- .o- :01 w :0: w mmh.mom w Nvo.hmm w O®~.N OOO.N o0m.mn 000.0m omn.h~m w Nv0.mam w mwncufimcvmmm :OflumflumOummfi ~m\0moa vmv.va w O~®.mw¢ w A000.00m mv A000.00m wv vmv.vN© w O~®.mmh w hmm.mON 000.0mm .ou .0. :0: m :0: w has.m~¢ » odo.mm¢ w Nov.m OON.h NON.NN 0mm.Nm mum.mmm w oom.mvm w mama“ gm 6% umflufluug cm\m¢mH ZOHmmHZZOO MUH>mmw UHAmDm zuow uomuucoo mmomsz nowadamm 16 H00.N~m w ohm.50m w Apm0.0am my Am0h.m0m mo www.mmo m mmn.moo w vm0.Hp Ana.~m :o: .o: :0: m :0: w moo.~sm w Hoo.moo w ~v0.m 00v.~ mmc.vms mov.om~ soo.v¢¢ m ma~.osv m 93.33 gm Swumflumoummw mm\vmma 334.9. m oom.mam w Ao-.so~ we Aoam.00m we Omoéhm m 03.20 m ¢o5.mm vmm.0n :o: .o: :0: w :0: m www.mam w Nmm.mvm w mNO.¢ OOO.m ~h¢.OL~ OOO.mNL 5mm.¢ov w Nmm.m~v w amusuagm Seamanaummma owing: oma.mmm w Amaa.ms~ we cmo.sm~ w Ahmm.N0m my Lam.mmm w 5mm.m0m w Cam.~o 5mm.mh :o: :o: :o: w :o: w ~0m.mov w Omo.oam w www.cm ooo.mm mmm.mh ooo.mm voo.¢mm w Omo.mo¢ m Hague mam Saumflmug mm\mmmH ZOmedhthmfifi>mmm UHdem Z m emo.QVh w mem.m 005.~ moo.amfi pfim.mma mmv.ooo w o-.~mm m monsfi gm codamgg mm\nmofi mam.mmm m ~mo.m©m m Imam.msm my imam.oaa we th.hOh w oov.vmh w mOH.Om ®¢~.vm .o: :o: :0: w :0: m vma.hh® w Omm.0m5 w mam.m OON.m mom.mm~ www.0ma www.mmm w v¢¢.m©m w 8.3”: gm Seamflumofimé hm\©mo~ mmo.mmm w asm.m¢m w 3.de 3 $8.8m 8 www.mmo w mwo.mn~ w Nam.Vm vmm.mo :o: .o: :o: w :o: w som.s~6 m Has.moo w ome.a omm.v vo¢.~mA 656.4ma moo.omv w mma.oom w moudawmcumwm cOwumwummmmmfi om\mmoa ZOmedLLHumfizskmm UHAmDm ZdUHIUHZ MI? mOm m momma mmmDEHszhxm 024 ZOHECHmQOzmmd JCQDE.QEZ¢U moon auOQHCdua moan: aqua anpoulnom lawnmona Anaconw acueuwsnoc moon: a ovauoaom «a nacueaucnnt acoaanuoao macaw amaoa:nam Jahwzuasum oozmcoucam: a wmwaoosm .umofi>uow aomuacoo camp: 3 ooaumamm .18 five.omm Adam.mmm www.mao www.mm 10...: I01 fimw.vhm HNN.¢ 00¢.voa avo.ooh mv w vom.oov Ammv.omm mom.woo mm¢.Hm pmm.m '0' oo~.-m 00m.a Nam.mm~ w¢N.m~h wv w www.va Ammm.mN¢ hom.mhh Idl- IO! IOI: hom.mhh mmv.~ wvm.va v~o.mam we m Nh¢.®hm Asma.ma¢ oma.0¢m who.h~ I01. lo- mm0.mmm 00m.a Nam.mbfi Hho.N¢o we w mmusuwucwmwm codamAumouomfl 00\mmmH mmusawncumwm coauMflprxwfla mm\mmaa ZOmed&thmfi:5&Mm UHJmDL zcwHIUHE mm? mOm mmmDEHQZmem Qz< 20HfideoO¢mm< m Mdmdfi Auom accuacoo moon: 3 maaumaom 19 As previous 1y indicated, the functions of the MPSC were generally divided into two main categories: (1) General Commission Activities, involving primarily the regulation of public utilities: and (2) Motor Carrier Activities . With regard to the Public Utilities Division, the expenditures listed as Special Programs in the prior table were for rate investigations of public utilities. For the fiscal year 1949/50 and 1950/51 the appropriations for the Special Programs were listed at about $350, 000 . During the 19503 , the appmpriations for Special Programs decreased dramatically and averaged approximately $75, 000. The Budget Report for the State of Michigan for the appropriation for the Special Programs account from former years was due to the fact that the public utility rate investigation function was incorporated into the general operating budget of the agency which resulted in a lower money figure being needed for the Special Programs Account .18 The Budget Report went on to conclude that a need still remained for a sum to be appr0priated into the Special Programs account in the nature of a contingency fund to meet the expenses of expert testimony and consulting services of a statistical, accounting or engineering nature . 1 9 The change in the appropriations for public utility rate invest- igations from the Special Programs account to a item within the General Operating Budget of the MPSC, together with the need for increased sums to be apprOpriated for expert witnesses in rate cases , indicates that rate cases for public utilities were becoming a regular part of the yearly activities of the MPSC, and were no longer a relatively infrequent occurrence as in prior decades. The Budget Report for the State of Michigan for the Fiscal Year Ended June 30, 1954, indicated that since the activities for the MPSC were financed from two sources, the General Fund and Motor Carrier Fees, the budget recommendations for the fiscal year 1953/54 and succeeding years would be 20 presented in two parts. One part, General Commission Activities, reflected the recommendation covering the expenses properly chargeable to the General FUnd, and the second part, Motor Carrier Activities, reflected the recommendation covering costs attributable to the enforcement of the Motor Carrier.Act and financed.fromlthe motor carrier fees. This Budget Report then.went on to note that the personnel of certain divisions within the organization of the MPSC were properly financed'Wholly'frcmlthe General Fund, or wholly from the motor carrier fees. Certain divisions, however, had overlapping assignments as far as general commission activities and motor carrier activities were concerned, and the Salaries and.Wages recommendations were split as to the apprOpriate source. The breakdown of the Salaries and Wages recommendation for the 1953/54 fiscal year as between General Commission Activities and Motor Carrier Activities was based on the fellowing percentages gained from the 1951/52 fiscal year expenditure . 20 experience: TABLE 6 GENERAL CCIVMISSION MOIOR CARRIER ACTIVITIES ACTIVITIES l. MPSC Commissioners 40% 60% 2. MPSC Secretaries 40% 60% 3. Accounting Division 40% 60% 4. Administrative Division 50% 50% 5. Utilities Division 100% 6. Railroad Division 100% 7. Rates 8: Tariffs Division 100% 8. Enforcement Division 100% 9. Motor carrier Division 100% 10. Motor Carrier Audit Division 100% 21 According to the Budget Report for the Fiscal Year Ended June 30, 1960, the allocation of Salaries and Wages recommendation for the 1959/60 fiscal year, was based on the following percentages gained from the expenditure 21 experience of prior years in the 19503: TABLE 7 GENERAL MISSION NDI'OR CARRIER ACTIVITIES ACTIVITIES l. Unclassified 40% 60% 2 . Administration 45% 55% 3 . Utilities 100% 4. Railroad 100% 5. Transportation 100% Thus, the allocation between Salaries and Wages with regard General Commission Activities and Motor Carrier Activities remained fairly constant throughout the 19503 . The following table summarizes the workload for the Utilities Division as determined from presently available records : 2 2 TABLE 8 1947 _1_9_4__8_ 1249 1950 1951 _1_9_5_2_ 1953 Employee Man Hours 295 595 567 457 315 - - Formal Cases Rendered (orders) 187 191 224 191 214 261 252 Latters Written Re Cmplaints, etc. 2, 520 2, 560 4, 526 4, 950 4, 940 4, 016 4, 368 Telephone Boundary Revision Orders 53 31 109 95 4O 80 53 Formal Rate Orders 48 75 59 43 33 32 37 As determined from the presently available records , the mrkload for the Motor Carrier Division was as follows: 23 22 <\Z <\z <\z <\z <\z {\z <\Z a\z 0®N.mva v00.~ cmma m~ <\z Hso.m~ w ana.m0a » omo.~ mmm.m 0nd.v ©A~.vm hm0.NvA 0vm.~ mmma 0H (\2 www.mm w unh.mo w 0mm 05m.m 0V0.m www.mm mmo.mmh 00H.N Nmoa 0H 44¢.ma oma.ma w voo.m~ w mam oso.¢ 0~#.m N00.m~ 000.0LL 005.N Hmma ma mwo.m Hm0.NH w ¢¢v.Nv w mom m~h.~ vmo.m Nm0.- 000.m0L 00©.N a ma ¢N~.0H <\z <\z <\z <\z <\z <\z 000.00 00v.~ mood m mdfldfi <\z mmm.m~ <\z <\z <\z <\z (\z <\z 000.m~ 00H.N mood <\2 mom.ma <\z <\z <\z <\z <\z <\z 000.05 0mm.a hvma uneconomcu we .02 ommum>< 83006 «5320; Banana... 380 3884 85a 5:59 no .oz 835:3 no .02 ocoaammaauo>cH Hmaooow no .02 acofiaoooncH no .02 awaoac0> Banana 3.50 No .02 muonuumo no .02 23 During the 19503, the actual hearings of various types of utility cases were held with one or more of the commissioners actually presiding and listening to the testimony. At the end of the decade, this task was becoming quite time consuming, and the Budget Raport for the State of Michigan for the Fiscal Year Ended June 30, 1961, recomrended that as to the routine motor carrier hearings, WhiCh required the time equivalent of one full-time commissioner, that these should be handled by a hearing examiner, thereby permitting the three commissioners to concentrate on decision and policy making activities. The same Budget Report also noted that although it was not being recommended at that time in View of the financial situation, a strengthening of the enforcement function of the Motor Carrier Division was needed to COpe with problems arising from the competitive struggle for business in the motor carrier industry, which had resulted in illegal leasing arrangements and price cutting by many truck— ing concerns. With regard to the activities of the Public Utilities Division at the end of the mid-century decade, the Budget Raport for the Fiscal Year Ending June 30, 1961 noted that given a more favorable financial climate, an increased appropriation should be granted to permit the Public Utilities Division to be more active in checking consumers ' cotplaints on the quality of service of various utility cotpanies. The Budget Report went on to note that adequate staff was not then available to investigate those corplaints , and that they currently were being referred to the utility corpany to perform its own investigation. The Budget Report for the Fiscal Year Ended June 30, 1962, noted that during the 19503, there had been a growth in the overall workload of the Public Utilities Division, particularly with the activity involving rate case preparation .24 For example, as of December 31 , 1956, there was $1.4 billion of utility plant additions and retirements 24 to be audited by the staff of the MPSC. By December 31, 1959, this figure had risen to $2.6 billion. 'Ihe Budget Report observed that the auditing performed to determine original cost of public utility plant was essential in preparing for frequent, major rate cases . The determination of the appropriate original cost for public utility plant was crucial for the MPSC Commissioners to make a determination as to rates which would be fair to both the public and the utility corpanies. In order to more readily evaluate the issues discussed in the various rate orders involving the Michigan Bell Telephone Cotpany and Consumers Power Corpany in the 19503, it will be useful to becote acquainted in a preliminary fashion with various regulatory concepts employed by the MPSC in the 19503. The constitutional right of a public utility to a just and reasonable return requires the establishment of a rate base, or an evaluation of the property devoted by the utility to public service, on which an appropriate rate of return will be allowed by the regulatory agency, resulting in the amount of money which the utility may attempt to earn from the marketing of its utility services. In the 19503, three principal methods of determining the rate base of a public utility were considered.26 The first of these is original cost. The Federal Power Cormission has defined this as the cost of the utility plant to the person first devoting it to the public service. This is the definition most comxonly accepted for regulatory purposes . There are sore variations on the original cost method. The "prudent investment" method is based upon the valuation of the plant at the cost of the original investment if prudently made. "Historical cost" is an estimate of the prudent investment made when actual cost figures are not available . The second method of comuting the rate base of a public utility is at its fair value, on the theory that the public utility is entitled to a 25 return based on the value of its property at the time of the inquiry as to rates and at the time the property is being used in the public service. The third method of valuation for setting a rate base is by determination of the reproduction cost of the existing plant . In its original form, reproduction cost was ascertained by assuming that the existing plant.was to be reconstructed or a Whole, in one Operation, at prices applicable on a Chosen date, or averaged over an appropriate construction period. In recent years, cost trending has frequently been utilized to update existing reproduction cost figures, or to reach a rate base by applying specific price indices to original cost. The measurement of the rate base is merely the first step in the calculation.of a fair return on the cost of "value" of the property of the public utility. The second step is the allowance of a "fair" or "reason- able" annual rate of return on this rate'base. A great deal of the conflict in the testimony of various expert witnesses in a rate case revolves around the issue of What constitutes a "fair" rate of return or the relative weights that should be given to multiple standards of fairness . Most regulatory commission accept the basic standard that a fair rate of return should cover the cost of capital for a utility; The twofold rule that a public utility may charge rates designed to cover its operating costs plus a fair return has been converted into the apparently singular rule that the rates of charge shall cover the company's total costs including its costs of capital. The costs of capital are the fixed costs of long-term debt and preferred 3tOCK, plus a provision for reasonable dividends on common stock. .A fair rate of return must enable a utility to cover its cost of capital so as to enable the utility to maintain its credit standing and enable it to attract new capital on terms favorable to the utility and its customers?7 In addition, regulatory commissions may also evaluate four additional 26 criterion in arriving at a decision as to what constitutes a fair rate of return on investment for a particular utility: (1) stimulation of managerial efficiency 3 (2) maintenance of rate level stability; (3) prorotion of "consumer—rationing" through rates designed to encourage all consumption for which consumers are ready to pay escapable, marginal costs; and (4) provision of sufficient profits to insure "fairness" to investors.28 A determination of a fair rate of return requires a balancing of these various criterion, since the various criterion are not necessarily cotpatible with each other . Once the level of the reasonable and prudent operating expenses, and an appropriate rate of return on total plant investment has been determined for a utility cotpany, the next issue to be addressed is what rate structure is to be adOpted by the regulatory commission for the collection of these revenues. Essentially, there are three basic categories of custorers from which to collect revenues: residential custoters, commercial customers, and industrial custorers. What proportion of the total revenue requirement for the utility corpany each of these custoter categories will be responsible for can be determined by essentially two methods. The most comronly accepted method is the establishment of reasonable rates based on the standard of cost of service. Under this approach an attempt is made to attribute to each custorer category only those investments and operating costs which are directly associated with providing utility service to that particular category of custorer. Under a cost standard, the price per unit of service is supposed to be equal to the cost per unit. This is not true under the second method of rate determination: the standard of value of service . Under this approach, weight is also given to the "value" of the utility service to each of the categories of custorers as distinct from the cost of production to each category of custorer. Pricing under the value of service concept would be similar to the process whereby the tailor determines 27 a price to charge a custoter for a suit of clothes or a department store for a lady's hat. Whether the regulatory commission has used a cost of service or a value of service approaCh to rate making, it is generally conceded that industrial and business users of utility services have been Charged rates fOr service that are higher than strictly cost justified. Thus, business users of utility services have traditionally subsidized the provision of lower than cost justified rates to residential custorers. This is true in the telephone industry, Where rates for local service used primarily by residential custorers have been kept at extremely reasonable levels because the overall cost of providing service by the telephone utility have been subsidized by higher than cost justified rates being Charged for toll services primarily used by business customers. In the 19503, higher than cost justified rates were not a.problem.for businesses as evidenced by the fact that no business groups formally intervened in the telephone or electric utility rate proceeding'befOre the MiChigan Public Service Commission. Higher than cost justified rates for utility services were no major problem fer businesses because these costs were included in the cost of the product and.were a small percentage of the total cost involved in producing most products. Since utility costs were a small percentage of total manufacturer costs and easily included in the price of the product, the fact that products may have been sold in a competitive market.was not a problem for most manufacturers in the 19503 . This situation would change in the late 19603 and.beyond.When the rates fOr.most utility services experienced a dramatic increase. In the 19503, the issue as to the appropriate levels of rates to be Charged to various customer'categories was not a source of conflict bet- ween residential and business interests or between business and the utility 28 corpany. Business generally accepted that rate levels set for utility services by the various regulatory agencies . It was only toward the late 19503 that one can discern a conflict of interest as to the rate levels between residential custorers and the utility corpanies . Although residen- tial custorers were generally receiving utility services at less than cost justified rates, in the late 19503 sore residential custorers noted that utility expenses were taking a significantly higher percentage of their own personal disposable incote. With regard to the various members of the MPSC during the 19503, three of these are particularly important to the analysis put forth in this study: (1) Chairman James McCarthy; (2) Chairman Otis Smith: and (3) Commissioner James lee. None of these particular persons was employed by a utility company either before or after serving on the MPSC. Chairman McCarthy was employed by the State of Michigan as a highway engineer prior to being a member of the MPSC. When he left the MPSC he was employed as a highway engineer by a private firm. Chairman Smith was the Auditor General of the State of Michigan prior to joining the MPSC. After leaving the MPSC, he was appointed a Justice of the Michigan Supreme Court and eventually became Vice—President and General Counsel of General Motors. Commissioner Lee was an attorney engaged in the private practice of law before joining the MPSC . He eventually entered retirement when he left the MPSC . With regard to the other members of the MPSC during the 19503, none were employed by or affiliated with utility cotpanies, except for William Elmer. Mr. Elmer was an attorney, who engaged in the private practice of law after leaving the MPSC . Mr . Elmer, however, only represented various motor carrier clients, and never represented any of the major gas, electric, 29 or telephone corpanies . This evidence as to the employment history of the various members of the MPSC in the 19503 would lend support to the tenative 29 conclusion that the MPSC was not a captive of the utility cotpanies that it regulated in the 19503 . SECTION III REVIEN OF THE POLICIES OF THE MICHIGAN PUBLIC SERVICE CGVMISSION WIIHREXSARDTOTHEMICHIGANBEILTELEPHONECOMPANYINIHE19SOS PART A: BRIEF HISTORICAL REVIEW OF THE DEVELOPMENT OF THE TELEPHONE3O INDUSTIU IN MICHIGAN PRIOR TO 1950 In order to attain a proper perspective as to the operations of Michigan Bell, it is helpful to provide a picture of the telephone industry in Michigan around the year 1950. The records of the MPSC show that in 1951 there were three major telephone cotpanies operating in the state. A total Of 2,039,259 telephones were connected with the wire lines of these cotpanies. Approximately 93% of these were Operated by Michigan Bell. Next in size was the Michigan Associated Telephone Cotpany (now the General Telephone Corpany Of Michigan), with 83,303 telephones (4%), while the Union Telephone Cotpany had 59,849 (2.9%) . In addition to these three large corpanies, a total Of 141 "independents" were registered with the MPSC. This figure compares with 183 such corpanies in 1938, indicating a tendency for these small corpanies to be absorbed by the larger ones, or to merge among themselves. The total nurber Of telephones connected with the 141 "independents" as of May 26, 1952, was 26,933, or only a little over 1% Of the number connected with the wire lines of the major corpanies. Generally, the independent telephone companies were organized in Michigan shortly after 1893, when the Bell patents expired. The independent telephone corpanies varied widely in character and size. Among the smallest was the Alger Telephone Company with only 15 telephones . Several of the independent telephone corpanies had no rate tariffs on file with the MPSC, apparently being maintained and Operated on a voluntary basis . 3O Adthough the Charges Of the "independents" were generally lower than those of the major companies, their service was usually muCh inferior. For example, few Offered their subscribers dial service. At the close of 1951, almost oneéhalf of the telephones in the MiChigan Associated Telephone Corpany were dial operated, while just under one-quarter of those of the Union Telephone Company were so Operated. The MiChigan.Associated Telephone Company had its main.office in Mu3kegon. Mu3kegon.was the largest city in the state not served by MiChigan Bell. The service area for Michigan Associated reached north from Muskegon as far as Ludington, and included a.major portion of St. JOseph and BranCh counties, scattered exChanges in southwest MiChigan, six in central MiChigan, and several in the thumb area of MiChigan. The Union Telephone Company absorbed the Tri—County Telephone Cbmpany (van Buren, Cass, and Allegan counties) after WOrld.War II. Its main.offices were in Owosso. Aside from this tri—county area, the union exChanges were situated in the central and northeast.portion Of the Lower Peninsula. The largest concentration Of rural and independent companies was fOund in the southeastern and south central counties Of the Lower Peninsula, the northwest part of the Lower Peninsula, around Saginaw Bay, and in the Upper Peninsula. Large areas of the northeastern part of the Lower Peninsula and in the Upper Peninsula were classified as "unassign " by the MPSC. At the midepoint of the 20th century, improvements in telephone service had been numerous since the first crude exChange was installed in Detroit in 1887. At first, a single instrument, placed alternately at the mouth and the ear, was used for talking and listening. Shortly, however, it was found.desirable to furni3h the user with two identical instruments, one for talking (the transmitter) and one for hearing (the receiver). For many years, batteries were required at eaCh subscriber's station to furniSh the 31 current for actuating the transmitter. later, the comon, or centralized battery system of operation was devised, with a storage battery at the central Office. In the early days it was necessary to turn a crank in order to get the central Office. When the Operator responded, you gave her the name (later the number) of the subscriber whom you desired to reach. Dial telephone systems were becoming common in Michigan in the 19203 . The first dial central office was placed in operation in Detroit in 1923. By 1930, a little over 46% of all the telephones in the Michigan Bell system had dial service. By 1951 over 87% were operated by the dial system. ‘Ihe provision Of dial service was slower by the independents, and most Of the small rural independents at mid-century were still without this type of service. The evolution of various types of telephone instruments was also striking. The Old time wall telephone gave way to the desk models, consisting of a pedestal rising from a substantial base and supporting the transmitter, with the receiver hung on a hook. In the 19303, the desk set was giving way to the hand set, in which the transmitter and the receiver were attached to the Opposite ends Of a handle, which rested on a cradle surmounting a base. Elaborate switchboard systems , connected with the "outside" lines served thousands of Michigan industrial and comrercial firms at the mid- century. PART B: REVIEW OF THE REGULATORY ORDERS ISSUED BY TEE MICHIGAN PUBLIC SERVICE CQVMISSION DURING THE 19505 WITH REGARD TO TI-E MICHIGAN BELL TELEPHONE COMPANY Michigan Bell was incorporated on January 26, 1904 under Act 129 of the Public Acts Of 1883, as amended. At the time Of its incorporation, and throughout the period of this study, Michigan Bell was a subsidiary corpora- tion Of American Telephone & Telegraph Corpany (AT&T) . Control by AT&T over Michigan Bell was exercised by the ownership of a majority of the 32 shares of the cormon stock of Michigan Bell. AT&T is a corporation existing under the laws of the State of New York. The activities of AT&T fell into three categories. It acted as a holding corpany; as a servicing company; and as an operating cotpany. On July 18, 1944, the MPSC gave notice to Michigan Bell (and other utility companies in Michigan subject to its jurisdiction), that an investigation would be conducted to determine if during the year 1944 it had paid any federal "excess profits taxes"; and if so, that adjustments would be made in its rates and charges to avoid the incurring of any such liability and the subsequent payment of any such tax. After an investigation conducted in the fall of 1944, in which the Attorney General, the staff of the MPSC, and Michigan Bell were parties thereto, the MPSC issued an Opinion and Order on December 28, 1944, in Case NO. T-252.90. In this Opinion and Order, the MPSC made note that the issue of the appropriate regulatory treatment Of the corporate interrelationship between AT&T and Michigan Bell had been before the Michigan Supreme Court on more than one occasion. In the case of People v Michigan Bell Telephone my, 246 Mich 198, 204, 205, the Michigan Supreme Court determined that Michigan Bell was a mere agent or instrumentality of AT&T. rIhe court held "where a corporation is so organized and controlled and its affairs so conducted as to make it a mere instrumentality or agent or adjunct of another corporation, its separate existence as a distinct corporate entity will be ignored and the two corporations will be regarded in legal contemplation as one unit". In a second case, Michigan Bell Telephone C3131“)! v Public Utilities Commission, 297 Mich 92, 113, the Michigan supreme Court held: "The cotpanies are so closely interwoven through the use of joint facilities, they must be considered together for regulatory purposes, notwithstanding that the forms of separate entities are maintained." 33 In this proceeding, and in subsequent rate proceedings before the MPSC, the two corporations were considered together for regulatory purposes . In Case No. T-252.90, the MPSC ordered Michigan Bell to reduce its annual revenues by approximately $3, 500, 000 because it found Michigan Bell' 3 gross revenues for the year 1944 to have been excessive by that particular amount. It also ordered Michigan Bell to make a refund to its customers of the said $3,500,000 for the year 1944. The $3, $00,000 excessive revenues were based on a finding that Michigan Bell had paid an excess profits tax to the U.S. Government in the total amount of $4,404,000 of which $3,000,000 was deemed to have been avoidable. The MPSC also found $250,000 paid by Michigan Bell to AT&T under a license contract to have been excessive. The license contract with AT&T required that various legal , accounting and management services be rendered by AT&T to Michigan Bell. The amount of the license contract payments was based on a percentage of Michigan Bell's gross revenues for a particular year. The MPSC expressed its opinion that in order for such services to be properly chargeable to Michigan Bell ' s ratepayers , the services should not be based on a percentage of Michigan Bell's gross revenues, but on a specific value for each service category, with the specific value being based on evidence relating thereto which had been introduced and cross-examined at a rate hearing . This particular order of the MPSC was subsequently reversed by the Michigan Supreme Court as being one that the MPSC had no statutory authority to render. This conclusion was based on the fact that the MPSC had no authority to make retroactive rates , and therefore, an order issued in December of 1944 could not reset rates for 1944 and could not require a refund of that portion of the rates collected in 1944 that were found to have been excessive. Approximately one year later, on December 13, 1945, the MPSC rendered 34 its final order in Case No. T—252.90, wherein it determined that Michigan Bell's rates for 1944 had been excessive in the amount of $3,500,000, and that Michigan Bell ' 3 rates subsequent to the date of the order would be reduced by that amount . 'I’nus , in compliance with the mandate of the Michigan Supreme Court that rate reductions were to be prospective in nature, and not retroactive. The particular elements of Michigan Bell‘ 3 rates that were found to be excessive were: (1) $3,000,000 of excess profits taxes that were avoidable; (2) $250, 000 of excess depreciation that was also avoidable; and (3) $250,000 of excessive payments made to AT&T under the license contract. In 1948, the MPSC issued several regulatory orders regarding Michigan Bell. Each of these orders was issued by the MPSC because Michigan Bell was facing a condition of increasing demand for its telephone services . The decision with the least amount of immediate financial impact was issued on September 18, 1948 in Case No. T—252-48.14, wherein the MPSC authorized Michigan Bell to offer in the Detroit metrOpolitan area mobile radio telephone services and established a rate therefor. A more important decision was rendered on April 1, 1948 in Case No. T—252-48.7, whereby the MPSC evidenced its desire to see that telephone service in rural areas would be technologically upgraded, even if it meant higher rates to the rural area subscribers . 'lhe MPSC ad0pted a plan whereby short-haul toll traffic previously handled by manually Operated switchboards would now be handled by direct dial autamated switching equipment. Rates for this service would be immediately increased in rural areas due to increased investment for the automated equipment, but would eventually be reduced in five years to the benefit of the rural subscribers. It was the conclusion of the MPSC that under the proposed rates, thousands of customers would pay no more, whereas others, to whom the cost would be increase, would be the 35 ones who would benefit the most by being brought into the larger trading centers and.who eventually would save the most in toll'bills. The most important order issued in 1948'by the MPSC was on September 28th of that year in case No. T—252—48.16. In that case, the MPSC authorized Michigan Bell to increase its annual revenues by $8,210,000 above the revenues then being collected, to effectuate a net return of 6% upon its net intrastate telephone plant investment. The application in this case had been filed.by Michigan Bell on.Apri1 27, 1947. In the application, Nfichigan Bell requested a rate increase of approximately $10,500,000. All three of the commissioners on the MPSC voted to approve an increase of $8,217,000, Which was approximately 80% of the rate increase requested by Michigan Bell. Participants to this proceeding were the Attorney General, the Staff of the MPSC, MiChigan Bell, and numerous representatives of civic, business and labor organizations, including Division 43 of the Communications Workers of America. All parties to this particular proceeding were in agreement that Michigan Bell was rendering service in abnormal times, but that Budh ccndition.was a healthy one in that it required.Michigan Bell to expand its telephone facilities throughout the state. In fact, Michigan Bell was enr gaged in an extensive construction program in an effort to supply telephone service for all those persons Who desired it, and to relieve existing congestion in'both its local exchange and toll plant. The net additions for the year 1948 were estimated by Michigan Bell to be $60,087,000, and for the year 1949 at $57,000,000. MiChigan Bell's program included the conversion.of all its manual offices to dial operation; and it expected to 'have this conversion completed by the end of 1951. Under this program» Michigan Bell anticipated that it would furnish extended area service to all but 37 of its 242 exdhanges. 36 In its written order, the MPSC noted that Michigan Bell had had a large growth since 1941, having added a total of 581,465 telephones between December Blst of 1941 and December 3lst of 1947. Such grwth constituted an increase of 62.6%. Over one and one-half million telephones were being served as of December 31, 1947. As of June 30, 1948, there had been a station gain of 82,761. This was an increase of 32,729 stations over the gain for the same period in the year 1947. The MPSC observed that the derand for telephones continued, and because of the increase in this demand, hold orders for service as of January 1, 1948 were 50,972, and as of June 30, 1948 this had decreased only to 33,558. None of the parties to this case, including the labor unions, or the three commissioners on the MPSC, questioned this need for Michigan Bell to construct additional facilities to provide additional services in the amounts that were represented by Michigan Bell to be necessary. In View of the acceptance of the fact that Michigan Bell had to have additional funds to construct these additional facilities , the MPSC unanimously granted substantially all of the rate increase requested by Michigan Bell. The major item of reduction between the request of Michigan Bell and the amount of the increase eventually authorized by the MPSC was the appropriate amount of the fees to be paid to AT&T for services provided under the license contract. In this case, there was no disagreement as to whether to utilize an original cost rate base or a fair value rate base. All parties agreed on using an original cost rate base, despite the fact that later decisions of the MPSC would indicate that legal precedent appeared to require the use of a fair value rate base. As with the case of Consumers Power in the setting of electric rates, the MPSC determined to utilize a state—wide method of rate making for Michigan Bell, despite the request of the City of Detroit to be considered separately for rate making purposes . 37 It is important to note that in 1948, all the commissioners on the MPSC, both Democrats and Republicans, approved a substantial rate increase for Michigan Bell primarily for the purpose of providing monies for additional investment in telephone plant to meet the increasing demand for telephone service. None of the commissioners, nor any of the parties to this rate increase proceeding, were concerned with the effect of the increased rates on residential users of telephone services. Thus, it appears that at this time the MPSC was almost wholly concerned with the financial integrity of Michigan Bell, and paid little attention to any possible devergence in interest of residential users of telephone services from the interests of Michigan Bell. A review of the parties to these various rate proceedings and a reading of the orders issued by the MPSC at this time gives no indication that there was a divergence or conflict of interest between residential users of local exchange telephone services and business users of toll services. Apparently, the business subscribers to toll telephone service were of the Opinion that rate increases that were applied to them could be passed on to the users of their services and products without any slippage in their competitive position in the market place . On June 19, 1950, the MPSC granted its first rate increase of the 19503 to Michigan Bell. The rate increase was authorized in case No. T~252~ 50.6, which case was the corpanion case to an earlier decision by the MPSC in Case No. T—252—49.14. The decisions in Case Nos. T-252-49.14 and T-252- 50.6 were the result of an application filed by Michigan Bell requesting authority to increase its annual gross revenues by $20, 400, 000. With regard to the total requested rate increase of $20,400,000, Michigan Bell sought from the MPSC immediate authority to increase its rates by $9, 800, 000 prior to the holding of any evidentiary hearings in this matter. In Case No. T-252-49.l4, the MPSC granted immediate rate relief to Michigan Bell in 38 the amount of $4, 861 , 000, or approximately one—half of the amount requested by Michigan Bell. In Case No. Th252-50.6, the MPSC granted final rate increases in the amount of $8,200,000. The two rate increases of $4,861,000 and $8,200,000 granted by the MPSC, were approximately 65% of the $20,400,000 rate increase originally sought by Michigan Bell. With regard to the order issued on June 30, 1949 in.Case No. T—252- 49.14, all three of the commissioners on the MPSC approved the immediate annual rate increase in the amount of $4,861,000. To produce this increase in.gross revenues, rate increases were authorized in the toll message telephone services provided by Michigan Bell, but not in the local exchange service rates. Increased rates in toll services were authorized because the MPSC found that the testimony and eXhibits filed with the application of Michigan Bell deronstrated that the earnings from the toll telephone services were such that MiChigan Bell fOund itself in a ”severe" financial position. At page 6 of the order, the MPSC stated the following: "The evidence indicates that the Company is earning considerably less than a 6 percent rate of return on its net plant investment and that intrastate toll rates are producing gross revenues considerably less than the cost of such services." In fact, the MPSC stated in a later portion of its order that Michigan Bell was only earning 3.73% from its toll telephone services. Such a situation constituted an "emergency" in the opinion of the MPSC, and on this basis it granted an.immediate rate increase in toll services in the amount of $4,861,000, so as to produce a 5.3% return upon net plant invest- ment for toll services. ‘With regard to the order issued in case No. T—252—50.7 on June 19, 1950, the MPSC granted a final rate increase to Michigan Bell for both toll and local exchange telephone services in the amount of $8,200,000. Although the application had been filed in 1947, the increased rates were based on 39 projections for the Operating results in 1950. In addition to Michigan Bell, the Attorney General, and the staff of the MPSC, other parties to this proceeding were various municipalities located throughout the state of Michigan. TWO commissioners on the MPSC, both Republicans, voted for the final rate increase Of $8,200,000. One Commissioner, Chairman James H. McCarthy, a Detocrat, wrote a dissenting Opinion wherein he expressed his belief that no increase should be authorized. The most significant factor accounting for Chairman McCarthy's conclusion that no rate increase was merited, as Opposed to the approval Of the rate increase by Commissioners Stuart B. White and Schuyler L. Marshall, was the difference Of Opinion as to ham to determine the value Of Michigan Bell ‘ 3 investment in facilities to provide telephone service (i.e. rate base). Before determining a specific value for Michigan Bell's facilities for 1950, the majority Opinion set forth certain principles to be utilized in determining rate base: It is a fundamental principle of regulation, with respect to the fixing of rates, that the utility in question shall be entitled to earn a fair return upon its property used and useful in its business. A utility is a public service corporation and, as such, its property is devoted to public use which, in turn, subjects it to the regulation of the state. Conversely, the constitution guarantees that property Of the utility shall not be taken for public use without just corpensation. At the same time, the utility may not be permitted to charge rates which are exorbitant or unreasonable from the standpoint of the ratepayer . Accordingly, between a return which is fair and a charge which is unreasonable lies a zone of reason within which the regulatory body must, in the end result, establish and fix the rates to be charged for the service rendered .32 (Emphasis added). Michigan Bell presented evidence which utilized a reproduction cost method to determine a value for its estimated 1950 rate base. This value was $399,457,000. The staff of the MPSC calculated the 1950 rate base on the basis of an original cost approach. The value it derived was $296,379,000. 40 Commissioners White and Marshall were Of the Opinion that the state and federal legal precedents mandated the utilization Of a "fair value" rate base, and that this value would be somewhere between the original cost estimate of the staff and the reproduction cost calculation Of Michigan Bell. Accordingly, they arrived at a value of $350,000,000, to which they applied a 6% rate Of return, so as to arrive at the amount of yearly revenues Michigan Bell would be entitled to for providing public utility telephone services. These commissioners determined that Michigan Bell was not presently earning the amount of annual revenues to which it was entitled by their calculations, and therefore, authorized Michigan Bell to increase its rates by $8,200,000 on an annual basis. On the other hand, Chairman McCarthy was Of the belief that state and federal legal precedents required the MPSC to utilize an original cost approach to rate base valuation, and adOpted the staff' 5 estimate Of $296,370,000. He also disagreed with the other two members of the MPSC who thought that 6% was a fair rate of return on investment. Chairman McCarthy stated that 5.7% was a fair rate of return for a regulated telephone company. Applying the 5.7% rate of return to the rate base of $296,379,000, Chairman McCarthy concluded that the revenues that Michigan Bell would be entitled to by such a computation were less than the revenues actual 1y being earned by Michigan Bell, and therefore, Michigan Bell was not entitled to a rate increase. Chairman McCarthy made sore interesting observations concerning what he characterized as the "arbitrary nature" of the fair value rate base approach used by the other two members Of the MPSC: The conclusion Of my colleagues is that 'Upon a careful consideration of all the elerents entering into the formation of a sound judgment ' they deem to decide the present fair value to be $350,000, 000. They also state that they have made "due allowance" for depreciation and depreciation reserves but do 41 not divulge the amount nor the way in which they arrive at this "due allowance". I find these nebulously arrived at concepts to be difficult to reconcile with the decision in the Consurmers Power Corpany (Gas) Case D-2948—49.2 (1949), in which they participated, which stated that "The determination Of fair value Of utility prOperty requires a consistent standar " . Where is the standard in this instance, and where is the consistency in View of previously cited cases where net investment rate bases were adOpted? . . . . . On what is their "fair value" based and on what study have they made to determine the amount Of existing depreciation in the property?33 In addition to dissenting as to the amount Of the rate increase granted to Michigan Bell, Chairman McCarthy also dissented as to the method of distributing the increases among customers by his two colleagues. The other members of the MPSC had adOpted increased rates which would be prOpor- tionately higher for certain classes of custoters in the Detroit area than fOr similar classes of custorers in other parts of the state. Chairman McCarthy was of the Opinion that this would result in legally prohibited rate discrimination. The rate discrimination to which Chairman McCarthy objected was essentially a geographical one between the Detroit metrOpolitan area and the out—state areas, as Opposed to a rate discrimination between various classes of custoters such as residential and business classes. In his dissenting Opinion, Chairman McCarthy stated the following: The rates and charges approved by the majority are based on arbitrary selection related to the "value" of the service. The rate schedule Of the Company as proposed and adOpted includes specific rates for different classes of service in Detroit and suburban zones and in several outstate groups determined by number of stations . It is the duty of this Commission not only to prescribe reasonable rates for the Company on an over-all basis, but also as to test the reasonable- ness of individual rates . Discrimination exists if the differences in price between two classes Of ser- vice or different groups is greater or less than the differences in the conditions surrounding the service. Mere difference in price is not a criterion for the determination of discrimination. Such differences may 42 be justified upon both the basis of the cost and other economic conditions affecting price differential. In theory, prices for each service Should be predicated upon actual costs for rendering services. It is apparent that the application of rate increases in the majority opinion have'been predicated upon bases other than cost, since there was no basis before them for determining them.on costs. The results of a determunation of increases on the so-called value basis will impose upon the Detroit area unequitable rates unless it can'be Shown that the determinations are properly related to the costs of the serviceéM From this particular case, one can discern in the majority opinion as opposed to the dissenting opinion, a difference in approach to rate making by the various members of the MPSC. It is my Opinion that these differences in approach to rate:making reflect differences in political philosophy among the commission members. Chairman McCarthy, a Democrat, appears to be Of a more liberal philosophy than his other two colleagues. This is reflected by the fact that his dissenting opinion reflects a concern with the impact of increased rates on the ratepayers of Michigan Bell, and a sensitivity to the issue of discriminatory rate treatment with.regard to users of telephone services situated in the Detroit metropolitan area. McCarthey's conclusions that Michigan Bell did not need a rate increase, indicates that he was not as concerned with the promotion of Michigan Bell's financial integrity so as to provide the necessary revenues for increased investment in telephone facilities to meet increasing demands for services, as were his other colleagues on the MPSC. In order to minimize the need for a rate increase for Michigan Bell, McCarthy was more willing to employ conservative methods Of financial analysis, such as original cost rate base, than were his colleagues. On the other'hand, Cbmmdssicners White and Marshall, both Republicans, were more inclined to utilize the more liberal analytical tool of fair value rate base, so as to provide additional revenues to Michigan Bell for expansion purposes. These two commissioners appear to 43 have been more politically conservative than McCarthy, since their majority opinion reflects no consideration of the impact of increased rates on the current subscribers of Michigan Bell's telephone services. On May 14, 1951, Michigan Bell filed another application with the MPSC seeking an increase in its gross annual revenues of approximately $22,000,000. The application requested that this increase be implemented immediately . Parties to this proceeding were Michigan Bell , the Attorney General , the staff of the MPSC, and various municipalities purporting to represent rate payer interests. The municipalities requested that the MPSC dismiss the application. The MPSC, with all of its members concurring, issued a written opinion in Case No. T-252-51.l9, which denied an immediate rate increase to Michigan Bell, but which authorized further hearings to be held in the near future for the purpose of taking additional evidence. The MPSC in Case No. T—252.51.9 made note that one of the arguments advanced by Michigan Bell to justify increased rates was that telephone rates, on the average, had increased 21% since the end of World War II while the "earnings of the public generally" had increased 100% and price levels had increased 84%. Michigan Bell also noted that the weekly pay rate in the manufacturing industries had increased by about 136% between 1940 and February of 1950 as contrasted with the 21% increase in telephone rates for the same period. The MPSC determined that these comparisons were relatively meaningless for the purpose of establishing rates for telephone service for the following reasons : The statute charges this Commission with finding rates that are 'just and reasonable' which we have always interpreted to mean that the rates should be adequate to cover total costs of providing service, including a fair return and reasonable return on the capital investment necessary to supply the service. This is entirely independent of what wages, prices, or other costs might have done except as these enter into the cost of providing telephone service .35 C Emphasis added) . 44 One of the most interesting observations made by the MPSC for rejecting the use of the comparisons presented by Michigan Bell for the purpose of making rates, was that the use of such comparisons would be of little consolation to the ratepayer WhO‘would be required to pay higher rates which were not related to increased operating expenses. Thus, the MPSC expressed the following conclusion in its order: It is granted that the cost of living has increased from earlier days. we do not see that this is any argument that telephone rates should increase prOportionately without regard to increased usage, advancements in the art, technological improvements, operating economies or other factors. Would the company be happy with unconsidered rate reductions proportionate to any decline that might take place in the customer's price index in the future?36 Despite the sound reasoning put forth by all the members of the MPSC for not setting rate increases on the basis of comparisons with price increases in other sectors of the economy, Michigan Bell in its annual reports for the years 1955 through 1958 continued to present such dubious comparisons to its stockholders as reasons justifying continuing requests to the MPSC for rate increases. For instance, in its 1957 annual report, Michigan Bell stated the following: Since 1940, rate increases have raised our revenues by only 21 percent While the price of most things has about doubled. . . . Since we'have not been permitted by regulation to reprice our service in a realistic manner, Michigan Bell has been earning a rate about half that of typical industrial companies with which it competes for 37 capital necessary to:meet the public demand for service. A major reason why the MPSC denied Michigan Bell's request for a rate increase in Case No. 'I\-252—51.l9 was that certain evidence indicated a substantial improvement in the financial position experienced by Michigan Bell, as indicated by the fact that since 1948, operating revenues had increased 18 percent, operating expenses and taxes 10 percent, and net Operating income 108 percent. TABLE 10 Operating Revenues Expenses Net Incote Year Per Telephone and Taxes Per Telephone 1945 $71.62 $61.85 $ 9.77 1946 67.44 62.03 5.41 1947 71.14 65.40 5.74 1948 75.35 67.36 7.99 1950 79.96 68.54 11.42 1951 84.03 72.07 11.96 From the above table, the MPSC concluded that although prior to 1948, the Operating expenses per telephone were increasing faster than revenues , thereby reducing net income to Michigan Bell , under the rates then in existence in 1951, net Operating income, after all operating expenses and taxes, were still increasing. In such a situation, all members of the MPSC felt that there was no need to provide a rate increase to Michigan Bell . On June 5, 1952, the MPSC issued an order in Case NO. T—252-52.13, wherein it evaluated the $22, 000, 000 rate increase applied for by Michigan Bell on May 14, 1951, and concluded that Michigan Bell was only entitled to an increase of $7,221,882, or approximately one-third of the Michigan Bell request. This rate increase was approved by all three members Of the MPSC, including Chairman McCarthy. Although a small portion of the rate increase was due to the need of Michigan Bell for additional revenues to construct new telephone facilities to meet increased demand for service, most of the rate increase was related to specific increases in Operating expenses : (a) Federal incote taxes had increased from 47% to 52% of Michigan Bell's taxable net incote due to a revision of the Federal Revenue Act. (b) State incote taxes had increased due to new legislation. (c) Increased wages and pension costs for employees due to a new labor contract. 45 -l.:.uu=l.A-__&_‘__.__— _ 46 Because the rate increase was related almost wholly to increased Operating expenses, even Chairman McCarthy, a Democrat, approved this substantial increase. If the increase had been primarily for construction of additional telephone facilities , it is my opinion that McCarthy might not have approved the rate increase. One of the most important elerents necessitating the increase in rates was the MPSC's conclusion that Michigan Bell was entitled to an increase in the rate of return on its rate base from 6.0% to 6.45%. Such an increase in the rate Of return was endorsed by Chairman McCarthy as necessitated by changed economic conditions . As further justification for the rate increase , the MPSC noted that in 1951 the net operating income per telephone was $11.34, but that this figure had declined in 1952 to $9.74. As an indication that the mid—1950s would be a period of inflation which might require Michigan Bell to seek frequent rate increases, the MPSC stated the following in its order: Rate making, it has been said, looks to the future. However, because of the tempo of present economic conditions, the discernible distance ahead approaches zero. Under such circumstances the pragmatic adjustment of rates and charges seems most reasonable. Suffice it to say that applicant' 3 net revenues for the year 1952, will permit it a reasonable return that the rates and charges required to produce such return are presently just and reasonable. It is possible that future events may render such rates and charges unjust and unreasonable and in that event, we have adequate power to correct the situation. . . 38 Having only been granted a rate increase in 1952, Michigan Bell filed an application with the MPSC on June 9, 1953 seeking a rate increase of $22,283,481. By unanimous consent of all three commissioners, this particular application was denied on May 11, 1954 in Case NO. T—252-54.10, inasmuch as the MPSC determined that net earnings for the test period were in excess of 6.5% and such a return was deemed to be adequate. .. —. '_. 47 Subsequently, on June 10, 1954, Michigan Bell filed a petition for rehearing, setting forth new evidence regarding its need for increased revenues. Michigan Bell noted that the value of its telephone plant had increased about $25,000, 000 since the last rate case; expenses had increased about $6, 800, 000; but, that intrastate operating revenues had increased only $5,600,000. By order dated July 28, 1955 in Case NO. T—252—SS.15, all three commissioners of the MPSC approved a rate increase for Michigan Bell of $2,802,000. This rate increase was less than one—tenth of the $22, 282,481 rate increase requested by Michigan Bell on June 9, 1953. The rate increase was justified by the MPSC on the basis that Michigan Bell had experienced a decline in its earnings whereas its telephone plant had increased in value . This increase in the telephone plant was based on the utilization of the original cost method. All three of the commissioners felt that the use of an original cost rate base was appropriate since this was the valuation method employed by Michigan Bell in its application. Thus, the issue of the original cost rate base versus fair value rate base did not need to be addressed in this particular proceeding. The MPSC concluded that a rate increase of $2, 802, 000 would produce a rate of return of 6.22% or better, and that such a rate of return was well "within the regulatory zone of reasonableness" . On November 16, 1956, Michigan Bell filed another application for a rate increase with the MPSC, requesting additional annual revenues in the amount of $12,542,000. On August 6, 1957, the MPSC issued an Opinion and Order in Case No. T-252—57.26, wherein it authorized a rate increase of $2,835,000, or approximately one-sixth of the amount sought by Michigan Bell. This rate increase was approved by two of the three commission mem- bers: Democrats Otis M. Smith and James H. lee. The third member of the 48 MPSC, Republican Maurice E. Hunt, dissented from the Opinion and Order of his colleagues on the basis that the evidence demonstrated that Michigan Bell was entitled to a much larger rate increase. The majority Opinim written by the two Democrats, utilized an original cost rate base whose value was determined to be $445,711,535. Republican Hunt thought that a larger rate base value was warranted, based on a fair value approach. Hunt was of the Opinion that legal precedent required the use of a fair value rate base, while the Democrats were of the opinion that an original cost rate base was appropriate since this was the approach used by Michigan Bell in this proceeding. The Democrats determined that a 6.6% rate of return was necessitated from the evidence introduced at the hearings , which was an increase from 6 . 5% in 1954 . Republican Hunt thought that economic factors indicated that an even higher rate of return would be apprOpriate . As a final reason for providing less of a rate increase than was sought by Michigan Bell, the Democratic majority reviewed the incore taxes that Michigan Bell was paying with regard to its existing capital structure, and concluded that Michigan Bell could have avoided a certain amount of these incore taxes if it had a more appropriate capital structure. At page 15 of the order issued in Case No. T-252-57.26, the MPSC observed that Michigan Bell's actual capital structure at the end of 1956 consisted of the following: Ratio long Term Debt $105, 000, 000 21% Notes 5, 000, 000 1% Equity 383, 235, 000 78% Because the long term debt ratio was only 21%, the MPSC noted that Michigan Bell had paid greater amounts of incore tax than it would have if the long- term debt ratio had been higher . 'Ihus , the MPSC employed the accepted regulatory practice of adopting a hypothetical capital structure, increasing 49 the debt ratio when it was clearly low and decreasing it when it was too high. ‘Ihe MPSC then concluded that a 40% long term-debt structure would be appropriate for Michigan Bell, and made a determination as to what the avoidable incote tax expense would have been in 1956 if such a long-term debt ratio had in fact existed. Republican Hunt dissented from the use of a hypothetical capital structure, and thought that Michigan Bell was entitled to recoup all of the incore taxes it had paid on the basis of a 21% long- term debt ratio. From an analysis of the rate cases for Michigan Bell through the year 1957, one might be tempted to conclude that the Democratic members of the MPSC were more inclined to approve smaller rate increases for Michigan Bell than were their Republican colleagues. This observation would be correct through 1957, but with the advent of Otis M. Smith as Chairman of the MPSC, this pattern was to change slightly with the next rate case decided in 1958. Although Smith was a black, he tended to be a moderate conservative Detocrat, whose interests were more aligned with the protection of the financial interests Of utility corpanies than with the interests of residential ratepayers for the lowest possible rates . Thus, with the alignment of Smith with his Republican colleagues in sore Of the rate cases, the analysis must move from Democrat versus Republican, to political liberals versus political conservatives. As a follow up to the rate increase approved by the MPSC on August 6, 1957 in Case No. T-252—57.26, Michigan Bell filed a petition with the MPSC on September 11, 1957, for a reopening and rehearing of the case. This petition was granted by the MPSC, and additional hearings were held. ()1 June 26, 1958, the MPSC Issued an Opinion and Order in Gase NO. T-252—58.23, wherein it concluded that although it had previously granted a rate increase in Case No. T—252-57.26 in the amount of $2,835,000, a review of the record 50 on rehearing indicated that such a rate increase was not totally adequate and that Michigan Bell was entitled to additional revenues on an annual ‘basis. Thus, the MPSC approved an additional rate increase for Michigan Bell in the amount of $2,212,000. This particular rate increase was approved'by two commissioners, with one commissioner dissenting. Approving the rate increase were Chairman Otis M. Smith, a Democrat, and Commissioner Thomas M. Burns, a Republican. Dissenting was Commissioner James H. Lee, a Derocrat. The majority opinion adopted a fair value rate'base, valued at $506,693,000. Smith and Burns also adopted an increased rate of return on telephone plant investment of 6.60%. ‘When the 6.60% rate Of return was applied to a rate base of $506,693,000, the result was an income requirement of $32,379,886, the majority calculated that Michigan Bell was experiencing an income deficiency of $1,061,852. Such a deficiency, when adjusted for the effect of Federal Incore Taxes , resulted in an additional revenue requirement of approximately $2,212,000. As previously discussed in this thesis, a Republican and a moderate Democrat, evidenced a conservative approach to utility rate making by giving primary concern to the financial growth of Michigan Bell. To provide additional revenues to Michigan Bell, the majority'memtems were willing to utilize liberal financial concepts of fair value rate base and increased rates of return in excess of those recommended by the staff of the MPSC. The more politically liberal member of the MPSC, Democrat James H. Lee, revealed in his dissenting opinion his primary concern was the effect that the increased rates would'have on the residential users of telephone services, rather than with the financial improvement of Michigan Bell. Lee was of the Opinion that the evidence demonstrated that Michigan Bell should be required to reduce its revenues by approximately $3, 000, 000 per year. 51 The staff Of the MPSC recomended that Michigan Bell be limited to a 6.50% rate of return on rate base, not 6 . 60% as adopted by the other two commissioners. Lee supported the staff on this issue. The MPSC staff also supported the use of an original cost rate base, rather than a fair value rate base. Staff valued the original cost rate base at $518,805,588. Commissioner lee supported the use of the original cost rate base . Applying a 6.50% rate of return to a rate base of $518,805,962, Lee calculated that Michigan Bell was entitled to annual revenues of $30,855,962, or approximately $3,000,000 less than it was presently earning. Thus, the more liberal member of the MPSC was willing to utilize conservative financial concepts of original cost rate base and a stable rate of return as recomrended by the staff of the MPSC. A review of the various Michigan Bell rate cases decided by the MPSC in the 1950s indicates that Michigan Bell requested rate increases totaling $77,270,481; but, that it was granted only $28,931,882, or approximately slightly less than 40% of the amount sought by Michigan Bell. The financial data for Michigan Bell for the 19503 indicates continued growth for Michigan Bell, particularly with regard to the continued construction of new telephone facilities to meet a growing demand for services. For instance, the 1957 Annual Report for Michigan Bell states: Michigan Bell backed its faith in the economic future of the state with a record $105 million expansion and improvement program in 1957, which was $19 million greater than in 1956. In the dozen years since the end of the war, Michigan Bell has spent nearly $674 million in new construction. ****** Fifty-seven new buildings, building additions, or major alterations were corpleted during the year, in— cluding major structures at Detroit, Dearborn, Flint, Jackson, Ianisng, Pontiac, and Wyandotte, and work was started on 59 others . . 52 Nearly $32 million was spent on new central office equipment to provide more and better service. Thousands Of miles of aerial and udnerground wire and cable were installed, along with additional carrier circuits and micro-relay channels . . . 39 Despite a record of continued growth in both gross and net income, and record breaking construction programs to meet increased detands for telephone service, Michigan Bell contended in its Annual Reports for 1957 and 1958 that it needed additional rate increases 4 0 me to the recession in Michigan in 1958, Michigan Bell did experience a decline in the derand for telephone service, which only lasted until the comencement of 1960. Although earnings did decrease in 1958, Michigan Bell was still a very profitable utility corpany. In its Annual Report for 1958, Michigan Bell utilized the untypical financial data of 1958 to try to illustrate the validity of its tenuous position that the rate increases approved by the MPSC throughout the 19505 had been inadequate and unjustifiably low: A continuing postwar problem of this cotpany has been to Obtain adjustments in the price of its service more closely related to the heavy increase in the costs of doing business. In June, the Public Service Cormission granted the corpany authority to increase revenues , through rate adjustments, by $2,212,000 a year - an increase of only one percent. The amount was less than a quater of what the cotpany asked. Since 1940, increased revenues to this corpany, through adjustments in the price of its service, have amounted to only 32 per cent while the price of most things the public buys has more than doubled. In allowing the rate increase, the Cotmission has determined the cotpany was entitled to a return of 6.6 percent on net plant investment . The corpany does not regard such a return as sufficient to permit it to undertake the improvments that, in the long run, would provide the best service for our customers while keeping down its costs. It is significant, moreover, that Mich- igan Bell was unable to earn even the 6.6 percent return to which the Commission said it was entitled. Through the postwar inflationary year, the cotpany has been faced with a constantly increasing investment per telephone in addition to rising costs of doing busi— ness . 53 The average investment for all telephones in ser- vice rose to a new record of more than $300 at the end of the year against $288 a year ago and $230 in 1948. ****** The corpany earned only 6. 08 percent on the invest- ment in 1958 - the approximate level of its earnings throughout the postwar era . In contrast, the postwar profit performance of typical industrial firms has been far above this corpany' 3, even including the recession. A cotpany with the year-after-year financial results in the low area of 6 percent return on investment hardly can assume risks and heavy outlay of funds on projects that can be postponed. That' s true because heavy expenditures , even though leading to improvements and lower costs in the long run, terporarily depress the return on investment that is already too low. This plea by Michigan Bell in its 1958 Annual Report for increased rates that would provide an adequate return on investment from Michigan Bell' 3 perspective, and hence the borrowing power to finance new facilities, appears to be sorewhat exaggerated. As previously stated, a review of the financial performance for Michigan Bell in the 19503, appears to indicate a corpany that had been provided sufficient increases in rates by the MPSC to earn respectable profits and have sufficient monies available to attract new investment monies to construct additional telephone plant facilities . Throughout the 1950s, the Republicans on the MPSC, together with the moderate Derocrat, Otis M. Smith, in the late 19505, approved rate increases for Michigan Bell with the primary purpose of facilitating the construction of additional telephone facilities. It wasn't until the appearance of the Democrat James H. lee on the MPSC in the late 19503 that one can discern a metber of the MPSC who was primarily concerned with the financial impact of the rate increases on the existing residential users of telephone services. Even Chairman McCarthy, a Derocrat in the early 19503, who dissented against certain rate increases approved by the MPSC, did so not so much from the 54 perspective Of the impact of the rate increases on the residential customers , as on the basis that the financial condition of Michigan Bell did not warrant the particular rate increase that'had‘been.appnoved. 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First 2 7/83, due 1975 2. First 2 7/88, due 1977 CAPITAL smcx 1. $4.50 Curmlative Preferred 2. $4.52 Chmulative Preferred 3.00am CAPITAL STRUCTURE: 12/31/55: LONG'I‘ER‘GDEBT Issue 1. First 2 7/8s, due 1975 2. First 2 7/85, due 1977 3. First 3 1/83, due 1981 4. First 3 1/4s, due 1987 5. First 35 , due 1984 6. First 3 1/4s, due 1990 CAPITAL SI’CEK 1. $4.50 Qmulative Preferred 2. $4.52 Qmulative Preferred 3. $4.16 Qmulative Preferred 4. Cam LEI—.129 Par Value NoPar NoPar NoPar E25 $363637 Par Value NoPar NoPar NoPar NoPar Source: Moody's Public Utility Manuals, 1950—1960. Annmt Outstaniiry $113,825,000 25,000,000 Mount Outstardirg 547, 788 shares 199,790 shares 6, 794, 362 shares Mount Outstanding $113,825,000 25,000,000 40,(X)0,000 25,000,000 25,000,000 30, 000, 000 Amount Outstarriing 547,788 shares 199,550 shares 100,000 shares 7,473, 7% shares 102 TABLEZZ WOFCAPImsmoFfi-Emmmm (mum smmURE: 12/31159: lmGTEMDEBT Issue 1. First 2 7/85, 2. First 2 7/85, 3. First 3 1/85, 4. First 3 1/4s, 5. First 35 , 6. First 3 1/4s, 7. First 45 , 8. First 4 3/45, 9. First 4 l/ZS, 10. First 4 5/85, CAPITAL 3mm 1. $4.50 Cunulative Preferred 2. $4.52 Qmulative Preferrei 3 . $4 . l6 Omnlative Preferred 4. Canton due due due due due due due due due due 1975 1977 1981 1987 1%4 1988 1989 £1935 EEEE’EEEEEE Par Value Anamt mtstarflg' $109, 024, 000 24, 775,000 39, 700, 000 25, 000,000 24,750,000 30, 000,000 40,000,000 27,967, 000 40,000,000 35,000,000 Anamt Outstaxflflg’ 547. 788 shares 180,570 shares 100, 000 shares 9, 525, 406 shares SECTION V CONCLUSIONS The primary purpose of this study is to ascertain the regulatory policies pursued by the MPSC in the 19503 with regard to Michigan Bell and Consumers Power. A review of the rate orders issued in the 1950s with regard to these particular utility conpanies indicates that substantial rate increases were provided to these utilities so as to promote their economic growth in terms of earnings and custcmers. The 19503 were a decade of initial inflationary pressures in the state of Michigan, followed by a brief two year period of recessionary trends in 1957—1958. Throughout the 19505, both Michigan Bell and Consumers Power experienced substantial economic growth, while the budget allocations made by the Michigan legislature to the MPSC to perform its regulatory functions remained relatively stable. Thus, although the number of rate cases increased in the 19503, and correspondingly the responsibilities of the MPSC in this area grew in importance, the budget of the MPSC did not increase in a carmensurate degree. That the staff of the MPSC was beginning to need to be enlarged in order to properly perform audits of the major utilities in rate cases is evidenced by the comments made in the state budgetary reports the latter half of the 19505. In addition, the need for increased sums of money to be expended on expert witnesses in rate cases indicates that rate cases for public utilities were becaning a regular part of the yearly activities of the MPSC. Rate cases were no longer a relatively infrequent occurrence as in prior decades . The rate increases granted to Michigan Bell and Consumers Power in the late 19403 and the early 19503 were supported by the Republican menbers of the MPSC. Any proposal for the refusal of the rate increases requested by these utilities was submitted by the Democratic members of the MPSC, 103 104 principally Chairman James H. McCarthy. A review of the written orders issued by the MPSC in the late 19405 and the early 19505 approving rate increases for these utilities indicates that neither the Republicans in the majority or the Democrats that dissented from the rate increases were concerned principally with the effect that the rate increases would have on the financial interest of the residential users of their utility services. Both the Republicans and the Democrats confined their analysis to the protection of the financial position of the utility company. With regard to an analysis of the rate orders issued by the MPSC in the late 19505, one discerns the development of rate increases supported by both Republican and Democrats. The Democrat who supported rate increases for Michigan Bell and Consumers Power in the late 19505 was Chairman Otis M. Smith. In essence, Smith was a moderate, black Denocrat, who sided with Republicans in approving rate increases so as to promote the financial integrity and growth of utility companies. The Democrat who opposed rate increases for Michigan Bell and Consumers Power was James Lee. Lee's dissenting opinions with regard to the rate increases granted to these utility companies in the late 19505 are very important since they evidence for the first time a concern by a commissioner on the MPSC with the impact these rate increases would have on the financial interests of the residential rate payers of these utilities. That the late 19505 were the initial period of consumer concern with increasing utility rates is evidenced by the fact that the Michigan Rate Payers Association was a participating party in the hearings concerning the last rate case of Consumers Power in the 19505. In the late 19505, the analysis of which members of the MPSC supported rate increases for utility corpanies cannot simply be done on the basis of party affiliation. A more relevant criteria is the political philosophy of the various members of the MPSC. It appears that liberal Democrats, namely, 105 Commissioner Lee, were inclined to argue that Michigan Bell and Consumers Power were entitled to no rate increases and perhaps should have their rates reduced by the MPSC, while moderate to conservative Republicans and Democrats (Chairman Otis M. Smith) approved substantial rate increases for these utilities. It is important to note that those moderate to conservative members of the MPSC who approved rate increases for the utility companies did so by employing liberal accounting and financial concepts such as fair value rate base, accelerated depreciation and the actual booked cost of the capital structure. The liberal members of the MPSC who disapproved the rate increases for the utilities and sought to protect the financial interests of the residential rate payers, did so by employing conservative accounting and financial concepts such as original cost rate base, straight line depreciation and hypothetical capital structures. The members of the MPSC who supported substantial rate increases for Michigan Bell and Consumers Power were of the opinion that such increases were necessary if these utility companies were to experience growth in gross and net revenues and were to be able to induce persons to invest in the construction of new facilities to provide service to new customers. The regulatory policy underlying the rate increases to Michigan Bell and Consumers Power was the promotion of expanding utility services which would generate additional revenues for these utility companies. Although Michigan Bell and Consumers Power were granted substantial rate increases in the 19505, at no time did the MPSC approve the full amount of the rate increase requested by the utility company. Quite often, the rate increase approved for the utility company was less than fifty percent of the amount sought by that ccnpany. The documentary evidence examined with regard to the rate increases approved by the MPSC in the 1950s provides little, if any, support to a theory that the MPSC may have been a captive 106 of the utility companies regulated by the MPSC. Moreover, the employment histories of the members of the MPSC, both before and after their tenure on this commission, does not lend support to the "captive" idea. EEZZEEZEE§ 1. James Willard Hurst, Law and Economic Growth: The Legend History of the Lumber Industry in Wisconsin, 1836-1915, (Cambridge: Harvard Univer— sity Press, 1964). 2. Gabriel Kclko, Railroads and Regulation, 1877—1916, (Princeton: Princeton University Press, 1965), and The Triumph of Conservation: A Reinterpretation of American History, 1900—1916, (New YOrk: Free Press of Glencoe, 1963). 3. The material for this particular part of the Master's Thesis was Obtained from 20 Callaghan's Michigan Civil Jurisprudence, Public Utilities, (Mundelein, Illinois: Callaghan & Ccmpany, 1961), Section 16-22, pp. 405—413). 4. Munn v Illinois, 94 US 113, 24 LEd 77 (1877); Chicago, B & Q R Co. v Iowa, 94 US 1555, 24 LEd 94 (1877); and Peik v Chicago & N R Co., 94 US 164, 24 LEd 97 (1877). 5. Pingree v MiChigan Central R Co., 118 Mich 314, 76 NW 635 (1898); and wellman v Chicago & Grand Trunk R Co., 83 Mich 592, 47 NW 489 (1890), aff'd 143 US 339, 36 LEd 176, 12 S Ct 400 (1892). 6. State v Chicago, M & St P R Co., 38 Minn 281, 298. 7. See MiChigan Central R Co v MiChigan Railroad Ccmmussion, 160 Mich 355, 361, 125 NW 549 (1910). 8. Morgan v United States, 298 US 468, 80 LEd 1288, 56 S Ct 906 (1935). 9. Act No. 106 of the Public Acts of 1909. 10. Act No. 138 of the Public Acts of 1911, reenacted and superceded in Act No. 206 of the Public Acts of 1913. 11. Annual Report of the Michigan Public Service Commission — 1963, p. 10 (PubliShed by the State of MiChigan). 12. Ibid., p. 32. 13. Ibid., p. 33. 14. Ibid., pp. 13 & 14. 15. The Budget Report for the State of Michigan for the Fiscal Year Ended June 30, 1951, vol. 1, p. 122. 16. The financial data for this table was obtained from the various Budget Reports for the State of MiChigan for the Fiscal Years Ended June 30, 1951 through June 30, 1960. 17. Ibid. 107 108 18. The Budget Report for the State of Michigan for the Fiscal Year Ended June 30, 1951, Vol. 1, P. 122. 19. Ibid. 20. The Budget Report for the State of Michigan for the Fiscal Year Ended June 30, 1954, Vol. 1, pp. H-32 and H-33. 21. The Budget Report for the State of Michigan for the Fiscal Year Ended June 30, 1960, Vol. 1, p. H-26. 22. The data for this table was obtained from the Budget Report for the State of Michigan for the Fiscal Year Ended June 30, 1954, Vol. 1, p. H—59. 23. Ibid., p. H-‘60c 24. The Budget Report for the State of Michigan for the Fiscal Year Ended June 30, 1962, V01. 1, p0 H_36c 25. A.J.G. Priest, "The Public Utility Rate Base", 51 Iowa Law Review, p. 283 (1966). 26. See 64 American Jurisprudence 2d, Public Utilities, (Rochester, New York: The Lawyers Co-Operative Publishing Co., 1972), Section 138, p. 665. 27. For an extensive analysis of the "cost of capital" concept as the basic standard of a fair rate of return see James C. Bonbright, Princi les of Public Utility Rates, (New York: Columbia University Press, 1961), pp. 240—256. 28. Ibid., pp. 153-1580 29. Data regarding the employment status of the members of the MPSC in the 19505 was obtained in a personal interview with Albert J. Thorburn on August 21, 1984. Mr. Thorburn is an attorney engaged in the private practice of law, who has practiced before the MPSC since 1948. Mr. 'I'horburn did provide some evidence of "influence" by the utility corpanies with MPSC members and the staff of the MPSC when he indicated that it was not unusual in the 19505 for the utilities to buy drinks for various MPSC members and the staff during social hours at various bars and restaurants in the Lansing area. It is doubt- ful, however, that from this type of evidence, it could be conclusively deter- mined that the MPSC was "captur " by the utility companies. 30. The material for this particular part of the master's thesis was obtained from Willis Frederick Dunbar, Michigan Through the Centuries, (New York: Lewis Historical Publishing Company, Inc., 1955 , Vol. II, pp. 103 & 104. 31. Opinion and Order of the Michigan Public Service Commission issued on April 1' 1948' Ca.se NO. [In-25248.7, p. 4. 32. Majority (pinion of Commissioners Stuart B. White and Schuyler L. Marshall, issued on June 19, 1950, Case No. T—252—50.7, pp. 18 8. 19. 33. Dissenting Opinion of James H. McCarthy, Chairman, issued on June 19, 1950’ ase NO- T"252—5007, p. 17- 109 34. Ibid., p. 27. 35. Opinion and Order of the Michigan Public Service Commission issued on July 16, 1951, Case No. T—252—51.19, p. 16. 36. Ibid., p. 17. 37. 1957 Annual Report of the Michigan Bell Telephone Company, p. 4. 38. Opinion and Order of the Michigan Public Service Commission issued on June 5, 1952, Case No. T—252—52.13, p. 18. 39. 1957 Annual Report of the Michigan Bell Telephone Company pp. 5 & 6. 40. Ibid., pp. 14-16 and 1958 Annual Report of the Michigan Bell Telephone Company. 41. 1958 Annual Report of the Michigan Bell Telephone Company, pp. 5 & 6. 42. The material for this particular part of the Master's Thesis was obtained from George Bush, Future Builders: The Story of Michigan's Consumers Power Cm, (New York: McGraw—Hill Book Company, 1973). 43. Opinion and Order of the Michigan Public Service Commission issued on January 4, 1950, Case No. D-2916—50.l, p. 23. 44. Dissenting Opinion of James H. Lee, Commissioner, issued on May 22, 1959, Case No. D—29l6—59.2, pp. 5 & 6. 45. Ibid., pp. 12 s. 13. 46. Ibid., p. 13. APPENDIX MATERIALS 110 111 Shana «5.8-x 58-x serum unfium angina 2.5-x unsung usrum Earn: 2232-: 2353..-”. 29332.... 22,332.”. a 03in gin OQuID §IO Own—ID §IO 00300 ugmua 0H8> I Q w~m0> l O mHMO> I Q Ouglm SENS» I m noccflmfleebo 5083550 ouniow 0395 coming: 05 um cognatemz mmnooom 50.500. 333: u a rogue 523;. fifllso 33.388212 Carnegie >5.“qu >5...qu >589qu Efimoozso §1o xfiguo 337m 3 2.3 «0 $2 338 no in PE 3 m 09 Boone.“ not: whoop—0E Mo .3955 82 u 3.2 83.32.50 8338 028a c822: no 90.3. MN m. Ede. $2 .3352. 3 $2 £02902 $3 .3996: 3 $3 £356: $3 $338 3 SS 5262 $2 525:4 3 $2 .32. $3 .32. Op 32 .53.. $2 .53: 8 $2 .3968 $3 .3355 B or: .3962 32 .382 3 $2 £35.88 32 £35.58 3 «m2 .3: $3 .3: 3 32 £888 32 £38.00 3 $2 .32. SS .32. 8 $2 .3852. $2 .3858 8 3.2 £8,682 09.: £35.62 8 $2 .32. $2 .32. 8 $2 3% 112 TABLE 24 LAWS CIIHI[KLJNG THE JURISDICTION OF 1135 MICIilGAN PUBLIC SERVICE (IIEIISSION EllierIC, GAS, IEIEIEIIGE, OIL PIPEIJIHSS, AND VUMPER 232 of 1863 1883 1887 1893 1909 1909 Efififiififififi CERTIFICATES OF PUBLIC CIIAHQHENCE AND NECESSITY Authority to construct and grate Electric utilities Gas Utilities Telephone Utilities Oil Pipeline Utilities Water Utilities Act 69 of 1929 Act 69 of 1929; Act 9 of Act 206 of 1913 Act 16 of 1929 Act 44 of 1960 AUTHORIZATION TO ISSUE STOCKS, BONDS, NOTES OR OTHER EVIDENCE Electric Utilities Gas Utilities Oil Pipeline Utilities Steam Utilities Telephone Utilities Telegraph Utilities Water Utilities Act 419 of 1919: Act 144 Act 419 of 1919; Act 144 Act 419 of 1919; Act 144 Act 419 of 1919; Act 144 Act 419 of 1919; Act 144 Act 419 of 1919; Act 144 Act 232 of 1863; Act 202 of 1923 of 1929 of 1929 of 1929 of 1929 of 1939 of 1952 of 1952 of 1952 of 1960 1929 CW INDEBHEIESS of 1909; Act 232 of 1863 of 1909 of 1909 of 1909 of 1909: Act 129 of 1883 of 1909 of 1887; Act 419 of 1919 113 TABLE 24 LAKE CONTROLLING THE JURISDICTION CE'THB MICHIGAN PUBLIC SERVICE COMMISSION (Ilflfi(1.AND REGULATION OF RATES AND CHARGES Electric Utilities Act 106 of 1909; Act 238 of Act 3 of 1939: Act 419 of Act 47 of 1921; Act 243 of Gas Utilities Act 419 of 1919: Act 3 of Act 9 of 1929; Act 47 of Act 238 of 1923; Act 272 of Act 243 of 1952 Steam Utilities Act 419 of 1919; Act 3 of Act 47 of 1921 Telephone Utilities Act 206 of 1913; Act 300 of Act 47 of 1921: Act 3 of Act 173 of 1952: Act 243 of Water Utilities Act 44 of 1960 IUKKHIHTON OF CONDITIONS OF SERVICE Electric Utilities Act 419 of 1919; Act 106 of Gas Utilities Act 419 of 1919 Oil Pipeline Utilities Act 16 of 1929 Steam Utilities Act 419 of 1919 Telephone Utilities Act 206 of 1913; Act 300 of Water Utilities Act 44 of 1960 IUKRHAHTONS AS TO PUBLIC SAFETY (pertains to construction) Electric Utilities Act 3 of 1939; Act 419 of Act 106 of 1909; Act 171 of Gas Utilities Act 3 of 1939; Act 419 of Act 9 of 1929: Act 240 of Steam Utilities Act 3 of 1939 Oil Pipelines Utilities Act 3 of 1939; Act 16 of Telephone Utilities Act 3 of 1939: Act 300 of Act 206 of 1913: Act 171 of Water Utilities Act 3 of 1939 source: Annual Report of the Michigan Public Service crmmussion 1923: 1919: 1952 1939: 1921: 1952: 1929: 1929; 1939: 1952 1909 1909 1919: 1893 1919: 1952 1929 1909: 1893 114 .mp2 I Cosmo—=60 wowiow 0:85 coma—Uh: on.» we phenom Anon—2 .003 .0000 ucwuudo «:0 3000 2053ro urn—50.055 ucnom an: 503qu I : 0:95ch .083 an: omuuo>< I U pounce/5 Andaman. omcuoia I Q 28.300 95.0203 ago 08.3 uoc amount/4 I < Ava): 000m mug 2.0.8.0 ca :03 0.0 0 .0- 8488.8 80.80.02 «0370 C080 3.03: 0.0 I 0.0 o ~003-§ I 00 05.8205 80.80.02 «010.0 0.0 I m0 0 17 8008.2 80.80.02 300?: 0.0 833 it :05: 2 8.80.0 004.70 205.0 3833.80 I 8.8003 23.8.8 :flflfic I 80.0.0.0 . 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A: N0I0NI0 mNm .om0 .8 levoIm A: VmIOMI—q 80.Nom.mm NmIoalma m00 .mmm 6A QVIHOI0 3.062.200 w oVINIm 003$. 888 505 03530.0 guouvmo 80000550 0392. no 38 a 117 .03 momma—oi mo .38 5. €030.60..— Ou 0:0 035 5 030.500 0.0.8qu 3.0% .3 8:00:50 A3 .0088; .0: 00 .33 05 5 .18 308209 88.65 E .mmm 03202 wo uwoo 3 0900.55. mo ucazn 0098 gm $000.08... “$47: Mo .3050 an 98m 3. .9757; "Nuance—use own-£0.30 CA. nonquUU Buflfluo out—um .3 6000.958 AC 05.00.08 00.09.55 00592 I a #3300 93.1.83 03¢ acma um: omouo>< I 4 ion»: 000m ovum 20.070 08 fit 0 00.0 30.2.0.0 80.80.00 80.08.02 m0-8u~ $02 :0: 00.0 0 80.0910 80600.0 «8.2100 00-2.0 $8.205 3; 00.8.0 80.070 0505 at 00.0 0 E 3~.0v~ A2 0.3.000 80.50.00 00.0010 5 A2 000.000; 000.000; 001000.00 00.2-0 Sagan—mo ASSN—6.00:4. 80.08.00 030 «0.00.0 05.05 E: 00.0 0 30.03; 08.02.00 001000.? 3.3.: 800.0018 3 3.00-: 800.3013 3 0.1070 Tufl mvfl .tc 00.0 < 08.5.0.0 0 8063.2 0 000.0850 0 3:3; 330:2. 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Hméla Elma 3% .085 QVIZIQ 30-8.0 :0 a ad: 0300802 50050: :90 009.20 05.5 2552 .00 25 mag 2E0 03.8.0.0 0mImNI~ 80.03.00 00:00-0 0000.24; 0 oTSIN umfiflm 280m .330 2530a 0500.00an 8000.00.50 00.552 mo 38 A0000 .80 5 .oo 48. 80:0 35 00000.: .8 .30 3:80.13 020028 g onz: 030050000 008 005.0 09 @0503 0000.0 0.300005 05 ..>00 093m 8.: 05 :0 80.20» No 80005000 009 00000 005 0:00 000 80000550 05. .5300 00 000.0 no 003 0000 o... 00 0:00:00 000000000 on 00!. 80000550 A3 500 00:3 8.: :0 80.3» «0 80.005000 00000.00 0:0 QTHNIOH 00 8000000050 0000000 c000000500 Any .2720 00009.0 000000000 005:9: x00 00 000000 08 0000.00.00 E00005 009009.350 00005 3; 60:02.60 0003 0.0030: .0000» 0000.005 0... 800000000000 50) 00.000550 b.8950 €900.60 8 000000000 02 00c 350:0 0000.0 0.00 >53 00500 2020 00 03950 0.0000500.“ 00000 005000 80000550 .hmIgIm 8 A2 £30039 E0000: :0 80.005000 9.050500 0000.0 00.0000 .0 005000 80000550 AS .008 00.3 000300 009.5: 00000: 03 0300000 0:0qu 050m 60005.30 060.0000 00 00 um 0:000 002 I 0 00.00000 00.000003 0500 0:000 00c 00.00.0030 I < 0&3; 0000 000m 00.0 4 80.0mm 80.000 «00.0.00; 3.8.00 08 03 03800.3 V 000.000 30.000; aINIS 05000:: I I 000 80.80 80.000 «00.000; 07.3.2 35 E g H.505 8000 .0: 9 0.0 < .0- 000.000 00008.0 5 00.070 1 Ill 1 >245 0% .0 8 26302 - - 81000.00: 000.003 08.000; 00.070 0.0 < 3 000.00 000.00 000.000 00-8-00 ES 8090.05 900 2400000: AvaoMLw E0 ICC c500ucH 000500ch 00.0 0 08.08.00 0000-0 “0000005 000.000ch .. I 000.000.m w 085880 w 08000.8.3 910.070 005004 Amfimv 050000.560 Nm 0000.005 000.00% 0.0800 .0005 E5000 003 oumm 00005.5 0000005 000005090 05c0>0m 900000.000 50000550 00 005. 0055.3 no 008 ES §Ha PHQEHQ E 0000 I Eva." ”20630 E50 501:; 10042 mo 2 mm? BIBLIOGRAPHY 120 BIBLImRAPI-IY PRIMAWSOURCEMATERIAL Constitutional Michigan Constitution of 1909. Other Constitutional Authority 2 Debates, Michigan Constitutional Convention, 1907-1908. Federal Statutes Federal Act to Regulate Commerce of 1887. Hepburn Act of 1906. Michigan Statues Act No. 129 of the Public Acts of 1883. Act No. 312 of the Public Acts of 1907 (Railroad Commission Act). Act No. 106 of the Public Acts of 1909. Act No. 300 of the Public Acts of 1909. Act No. 138 of the Public Acts of 1911. Act NO. 206 of the Public Acts of 1913. Act No. 419 of the Public Acts of 1919 (Public Utilities Commission Act). Act No. 16 of the Public Acts of 1929. Act No. 3 of the Public Acts of 1939 (Public Service Commission Act). Federal Case Law Chicag, B & Q R Co v Iowa, 94 US 1555, 24 LEd 94 (1877). Hope Natural Gas Cm, 320 US 591 (1944) . Morgan v United States, 298 US 468, 80 LEd 1288, 56 S Ct 906 (1935). __Mu£n_ v Illinois, 93 US 113, 24 LEd 77 (1877). Keg v Chicago & N R Co, 94 US 164, 24 LEd 97 (1877). Sto_ne_ v Farmers & Trust Co, 116 US 307, 29 LEd 636, 6 S Ct 334 (1886). Michigan Case Law Michigan Bell Telephone Cmyany v Public Utilitias Commission, 297 Mich 92. Michigan Central R Co v Michigan Railroad Carmission, 160 Mich 355, 125 NW 549 (1910). People v Michigan Bell Telephone Cmpany, 246 Mich 198. 121 122 Pingree v Michigan Central R Co, 118 Mich 314, 76 NW 635 (1898). Wellman v Chicago & Grand Trunk R Co, 83 Mich 592, 47 NW 489 (1890), aff'd 143 US 339, 36 LEd 176, 12 S Ct 400 (1892). Case Law Fran Other Jurisdictions State v Chicago, M & St. P R Co, 38 Minn 281. Michigan Public Service Commission Cases Opinion and Order issued on December 28, 1944, Case No. T—252.90. Opinion and Order issued on December 13, 1945, Case No. T-252.90. Opinion and Order issued on April 1, 1948, Case No. T—252.48.7. Opinion and Order issued on September 6, 1948, Case No. D—29l6—48.4. (pinion and Order issued on September 18, 1948, Case No. T-252—48.14. Opinion and Order issued on September 28, 1948, Case No. T—252—48.l6. Dissenting Opinion of James H. McCarthy, Chairman, issued on January Opinion and Order issued on January 4, 1950, Case No. D—2916—50.l. Dissenting Qainion of James H. McCarthy, Chairman, issued on June 19, 1950, Case No. T—252—50.6. Opinion and Order issued on June 19, 1950, Case No. T—252-50.6. Opinion and Order issued on July 17, 1950, Case No. D-2916—50.6 Opinion and Order issued on September 19, 1951, Case No. T—252-51.19. Opinion and Order issued on June 5, 1952, Case No. T—252—52.13. Opinion and Order issued on May 11, 1954, Case No. T—252-54-10. Opinion and Order issued on July 28, 1955, Case No. T—252-55.15. Dissenting Opinion of Maurice E. Hunt, Commissioner, issued on August 6, 1957, Case No. T—252-57.26. Opinion and Order issued on August 6, 1957, Case No. T—252—57.26. Dissenting Opinion of Janes H. Lee, Commissioner, issued on June 26, 1958, Case No. 'I‘-252-58.23. Opinion and Order issued on June 26, 1958, Case No. T—252—58.23. Dissenting Opinion of James H. Lee, Commissioner, issued on May 22, 123 Opinion and Order issued on May 22, 1959, Case No. D—2916—59.2. State of Michigan Documents Annual Report of the Michigan Public Service Commission - 1963. Budget Reports for the State of Michigan for the Fiscal Year Ended June 30, 1947—1960. Annual Reports of the Michigan Bell Telephone Company filed with the Michigan Public Service Commission, 1950—1960. Other Documents Annual Reports of the Michigan Bell Telephone Company released to the public, 1957 and 1958. Moody's Public Utilities Manuals, 1950-1960. SECONDARYSOURCEMATERIAL Bonbright, James C. Principles of Public Utility Rates. (New York: Columbia University Press, 1961) . Bush, George Future Builders: The Story of Michigan's Consumers Power . (New York: McGraw—Hill Book Company, 1973). Dunbar, Willis Frederick Michigan Through the Centuries. (New York: Lewis Historical Publishing Corpany, Inc., 1955). Hurst, James Willard Law and Economic Growth: The Legal History of the Lumber Industry in Wisconsin, 1836—1915. (Cambridge: Harvard Uni— versity Press, 1964). Kolko, Gabriel Railroads and Regulation, 1877—1916. (Princeton: Princeton University Press, 1965). Kolko, Gabriel The Triumph of Conservation: A Reinterpretation_ of American History, 1900—1916. (New York: Free Press of Glencoe, 1963). Priest, A.J.G. "The Public Utility Rate Base", 51 Iowa Law Review, p. 283, (1966). "Public Utilities". 20 Callaghan's Michigan Civil Jurisprudence. (Mundelein, Illinois: Callaghan & Corpany, 1961). "Public Utilities". 64 American Jurisprudence 2d. (Rochester, New York: The Lawyers Co-Operative Publishing Co., 1972). ORAL SOURCE MATERIAL Interview with Albert J. Thorburn on August 21, 1984. Mr. Thorburn is engaged in the private practice of law and has represented the legal interests of numerous utility companies before the Michigan Public Service Commission since the late 19403. STATE UNIV. LIBRRRIES “Wu H IN (MI HM 93008097861