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B-154937, MAY 25, 1965

B-154937 May 25, 1965
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PART OF THE SOUTHWESTERN BELL'S RELOCATION COSTS CONSISTED OF AMOUNTS IT PAID TO WESTERN ELECTRIC COMPANY FOR SUPPLIES WHICH WERE INCORPORATED INTO THE RELOCATED FACILITY. BECAUSE BOTH COMPANIES WERE VIRTUALLY WHOLLY OWNED BY THE AMERICAN TELEPHONE AND TELEGRAPH COMPANY. THAT THE INTERCOMPANY PROFIT WAS NOT REIMBURSABLE AS A COST PROPERLY ATTRIBUTABLE TO THE RELOCATION WITHIN THE INTENT OF SECTION 123 OF TITLE 23. THE RATIONALE UNDERLYING OUR CONCLUSIONS WAS THAT THE OVER-ALL INTENT OF THE STATUTE IS TO REIMBURSE THE STATES FOR ONLY THOSE PAYMENTS MADE BY THEM NECESSARY TO MAKE AFFECTED UTILITIES WHOLE AND THAT IN THE AMERICAN TELEPHONE AND TELEGRAPH COMPANY CORPORATE COMPLEX. THE FOLLOWING COMMENTS WITH RESPECT TO EACH OF THE POINTS MADE SHOULD BE HELPFUL IN PLACING THE ISSUES INVOLVED IN PROPER PERSPECTIVE: "1.THE PURPOSE OF REIMBURSEMENT IS TO AVOID BURDENING THE RATEPAYER WITH THE COSTS OF RELOCATION. "2.

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B-154937, MAY 25, 1965

TO MR. FRANK A. HUTSON, JR.:

BY LETTERS OF JANUARY 25 AND FEBRUARY 11, 1965, YOU PRESENTED YOUR VIEWS AND SUPPORTING ADDITIONAL INFORMATION AS TO WHY THE POSITION WE STATED IN OUR DECISION OF DECEMBER 16, 1964, B-154937, REGARDING REIMBURSEMENT OF UTILITY RELOCATION COSTS UNDER THE FEDERAL-AID HIGHWAY PROGRAM SHOULD BE REVISED.

THE CITED DECISION INVOLVED REIMBURSEMENT TO THE STATE OF ARKANSAS FOR UTILITY RELOCATION COSTS PAID BY IT TO SOUTHWESTERN BELL TELEPHONE COMPANY. PART OF THE SOUTHWESTERN BELL'S RELOCATION COSTS CONSISTED OF AMOUNTS IT PAID TO WESTERN ELECTRIC COMPANY FOR SUPPLIES WHICH WERE INCORPORATED INTO THE RELOCATED FACILITY. WE CONCLUDED THAT THE PRICES CHARGED SOUTHWESTERN BELL BY WESTERN ELECTRIC INCLUDED AN ELEMENT OF PROFIT AND, FURTHER, BECAUSE BOTH COMPANIES WERE VIRTUALLY WHOLLY OWNED BY THE AMERICAN TELEPHONE AND TELEGRAPH COMPANY, THAT THE INTERCOMPANY PROFIT WAS NOT REIMBURSABLE AS A COST PROPERLY ATTRIBUTABLE TO THE RELOCATION WITHIN THE INTENT OF SECTION 123 OF TITLE 23, UNITED STATES CODE. THE RATIONALE UNDERLYING OUR CONCLUSIONS WAS THAT THE OVER-ALL INTENT OF THE STATUTE IS TO REIMBURSE THE STATES FOR ONLY THOSE PAYMENTS MADE BY THEM NECESSARY TO MAKE AFFECTED UTILITIES WHOLE AND THAT IN THE AMERICAN TELEPHONE AND TELEGRAPH COMPANY CORPORATE COMPLEX, REIMBURSEMENT OF AN INTERCOMPANY PROFIT GOES BEYOND SUCH INTENT.

YOUR LETTER OF JANUARY 25, CONTAINS A SUMMARY OF THE MAIN POINTS YOU MAKE IN SUPPORT OF THE CONTENTION THAT OUR EARLIER DECISION SHOULD BE REVISED. THE FOLLOWING COMMENTS WITH RESPECT TO EACH OF THE POINTS MADE SHOULD BE HELPFUL IN PLACING THE ISSUES INVOLVED IN PROPER PERSPECTIVE:

"1.THE PURPOSE OF REIMBURSEMENT IS TO AVOID BURDENING THE RATEPAYER WITH THE COSTS OF RELOCATION.

"2. THIS IS TO BE ACCOMPLISHED BY PLACING THE UTILITY IN THE SAME POSITION--- NO BETTER AND NO WORSE--- THEN IT WOULD HAVE BEEN HAD THERE BEEN NO RELOCATION.

"3. DISALLOWANCE OF ANY AMOUNT PROPERLY PAID BY THE UTILITY WILL DEFEAT THIS PURPOSE.'

WE AGREE WITH THE GENERAL IMPLICATION OF THESE THREE POINTS. HOWEVER, WHERE A UTILITY, SUCH AS SOUTHWESTERN BELL IN THIS CASE, IS PART OF ACLOSE CORPORATE SYSTEM WHICH REAPS A PROFIT ON SALES TO THE UTILITY, WE DO NOT AGREE THAT THE STATUTE NECESSARILY CONTEMPLATES REIMBURSEMENT SO AS TO RELIEVE THE UTILITY'S CUSTOMERS OF THE FULL BURDEN AT THE EXPENSE OF ALLOWING A PROFIT ELSEWHERE IN THE SYSTEM, NOTWITHSTANDING THAT THE PRICES PAID MAY BE CONSIDERED PROPER WITHIN THE FRAMEWORK OF CORPORATE PRACTICES. THE RATIONALE OF THE STATUTE IS TO EFFECT ITS PURPOSE THROUGH REIMBURSEMENT OF AN APPROPRIATE SHARE OF COST. THE REAL QUESTION THEN IS WHETHER WE LOOK TO COST FROM THE STANDPOINT OF SOUTHWESTERN BELL ALONE OR WHETHER WE VIEW THE DETERMINATION TO BE MADE IN TERMS OF THE ENTIRE ENTERPRISE OF WHICH SOUTHWESTERN BELL IS BUT A PART. IN OTHER WORDS, DOES THE STATUTORY INTENT GO SO FAR AS TO ENVISION THE USE OF FEDERAL FUNDS TO RELIEVE UTILITY CUSTOMERS OF CHARGE AT THE EXPENSE OF MAKING PAYMENT FOR A PROFIT TO THE UTILITY'S SOLE STOCKHOLDER?

"4. COST OF CAPITAL IS A PROPER COST OF DOING BUSINESS. THIS INCLUDES THE COST OF EQUITY (DIVIDENDS) AS WELL AS THE COST OF DEBT (INTEREST).'

IN SUPPORT OF THIS PROPOSITION YOU CITE, AMONG MANY OTHER CASES, SOUTHWESTERN TELEPHONE COMPANY V. PUBLIC SERVICE COMMISSION, 262 U.S. 276 (1923) WHEREIN TWO JUSTICES IN A CONCURRING OPINION STATED THAT COST COVERS CAPITAL CHARGES INCLUDING AN ALLOWANCE FOR ATTRACTING MORE CAPITAL. AGAIN WE AGREE WITH YOUR STATEMENT, BUT ONLY IN ITS GENERAL RELATION TO UTILITY RATE MATTERS. WE MUST KEEP IN MIND THAT THE JUSTICES IN THE CITED CASE WERE REFERRING TO THE NECESSITY FOR PROVIDING AN ADEQUATE RETURN ON INVESTED CAPITAL IN ORDER TO AVOID UNCONSTITUTIONAL CONFISCATORY RATES IN A REGULATED UTILITY SITUATION. BUT REFERENCE TO A FAIR RATE OF RETURN AS A COST IN THIS CONTEXT DOES NOT ALTER THE FACT THAT WHAT IS REALLY AT ISSUE IS THE UTILITY'S PROFIT. IN THE INSTANT CASE WE ARE NOT CONCERNED WITH THE CONSTITUTIONAL ASPECTS OF A FAIR RATE OF RETURN. INDEED, THERE IS NO CONSTITUTIONAL REQUIREMENT THAT ANY OF THE RELOCATION COSTS HERE INVOLVED BE REIMBURSED. REIMBURSEMENT IS BEING MADE ONLY BY WAY OF RECOGNIZING EQUITABLY BUT GRATUITOUSLY THE EXCESSIVE BURDEN PLACED UPON UTILITIES AND THEIR CUSTOMERS AS A RESULT OF THE HIGHLY EXPANDED FEDERALLY AIDED HIGHWAY PROGRAM WHICH GIVES RISE TO THE NECESSITY FOR AN INORDINATE NUMBER OF UTILITY RELOCATIONS. THE ENTIRE CONCEPT IS ONE OF FAIRNESS. IS IT FAIR FOR A UTILITY COMPLEX TO EARN THE SAME PROFIT ON ITS INDIGENOUS MATERIALS USED IN A RELOCATION UNDER THESE CIRCUMSTANCES AS IT WOULD EARN ON SUCH MATERIALS USED IN THE ORDINARY COURSE OF ITS BUSINESS?

"6. WESTERN IS NOT A UTILITY, AND THE CORPORATE VEIL MAY NOT BE PIERCED TO EXCLUDE ITS PROFIT FROM THE UTILITY'S COSTS EXCEPT TO THE EXTENT THAT SUCH PROFIT IS FOUND UNREASONABLE, WHICH FINDING WOULD BE CONTRARY TO HUNDREDS OF COURT AND COMMISSION DECISIONS.'

THE VERY EXAMINATION OF WESTERN'S PRICES TO DETERMINE THEIR REASONABLENESS ADMITS OF THE NECESSITY FOR GOING BEHIND THE VEIL OF ITS SEPARATE CORPORATE EXISTENCE; AND, AS SUGGESTED, THE COURTS HAVE NEVER BEEN REPULSED BY THE CORPORATE BARRIER IN RATE MAKING CASES. AS WE STATED ABOVE, THE COURTS IN RATE MAKING SITUATIONS GO NO FURTHER THAN THE REASONABLENESS OF WESTERN'S PRICES PRIMARILY, IF NOT SOLELY, BECAUSE THEY ARE CONCERNED WITH THE DETERMINATION OF RATES WHICH WILL AT ONCE BE REASONABLE TO THE CONSUMER AND NONCONFISCATORY TO THE INVESTORS. THE SAME REASONS FOR THE COURTS' TREATMENT OF THE AMERICAN TELEPHONE AND TELEGRAPH COMPANY COMPLEX AS A SINGLE ENTERPRISE AND THEIR DESIRE TO ASSURE NOT MORE THAN A REASONABLE RATE OF RETURN TO WESTERN IMPEL US TO THE IDENTICAL TREATMENT FOR THE PURPOSE OF ASSURING NO RETURN ABOVE ACTUAL COST. WESTERN AND SOUTHWESTERN BELL WERE NOT SEPARATE CORPORATIONS BUT ONLY MANUFACTURING AND SERVICE DIVISIONS OF ONE COMPANY, AMERICAN TELEPHONE AND TELEGRAPH COMPANY, THE ULTIMATE RESULTS REACHED IN THE RATE MAKING CASES AS TO A FAIR RATE OF RETURN WOULD NOT BE ESSENTIALLY DIFFERENT FROM THOSE ACTUALLY REACHED UNDER THEIR SEPARATE CORPORATE STRUCTURE. BUT SURELY, IT COULD NOT BE REASONABLY MAINTAINED THAT AS ONE CORPORATION IT WOULD BE APPROPRIATE TO ALLOW A FAIR RETURN ON THE INVESTMENT IN ITS MANUFACTURING FACILITIES IN ORDER TO ARRIVE AT THE COST OF ITS MANUFACTURED ITEMS WHERE THE QUESTION OF CONFISCATORY RATES IS NOT AT ISSUE.

"5. AMOUNTS PAID WESTERN WHICH INCLUDE A REASONABLE RETURN ON INVESTMENT ARE PROPER, BECAUSE TO HOLD OTHERWISE WOULD RESULT IN RELOCATION PENALIZING THE UTILITY FAMILY BY REDUCING ITS RETURN ON INVESTMENT BELOW WHAT IT OTHERWISE WOULD HAVE BEEN.'

"7. THE PRACTICAL EFFECT OF DISALLOWANCE OF WESTERN'S RETURN ON ITS INVESTMENT BECAUSE OF THE AFFILIATION WOULD BE TO CAUSE THE TELEPHONE COMPANIES TO LOOK TO NON-AFFILIATED HIGHER COST SUPPLIERS. THIS UNDESIRABLE END RESULT SHOULD CAUSE CAREFUL REVIEW OF THE MATTER AND IT IS THE BELL SYSTEM'S POSITION THAT SUCH A REVIEW MAKES IT CLEAR THAT THE SO- CALLED "PROFIT" IS IN FACT A TRUE COST TO THE UTILITY.'

WHILE WE DO NOT BELIEVE THAT EITHER POINT 5 OR 7 RAISES ISSUES WHICH GO TO THE LEGAL ESSENCE OF WHAT CONSTITUTES COST FOR REIMBURSEMENT PURPOSES, WE DO AGREE THAT THEY RAISE MATTERS WHICH ARE RELEVANT TO THE CONCEPT OF FAIRNESS WHICH WE CONSTRUE TO BE THE UNDERLYING CONCEPT FOR APPLICATION OF THE STATUTE INVOLVED. AS TO THE FACT THAT WESTERN'S PROFIT IS A TRUE COST TO SOUTHWESTERN BELL, WE REITERATE OUR AGREEMENT AND ONCE MORE POINT OUT THAT RECOGNITION OF THIS COST SHOULD BE MADE BY AMERICAN TELEPHONE AND TELEGRAPH COMPANY OR WESTERN RATHER THAN THE FEDERAL GOVERNMENT. SOUTHWESTERN'S CUSTOMERS ARE MADE TO BEAR THIS CHARGE, IT IS THROUGH THE AMERICAN TELEPHONE AND TELEGRAPH COMPANY'S INSISTENCE UPON A PROFIT ON THE TRANSACTION RATHER THAN THE GOVERNMENT'S FAILURE TO REIMBURSE ON THE BASIS OF FULL COST.

CONCERNING THE POSSIBILITY OF SOUTHWESTERN GOING OUTSIDE THE CORPORATE FAMILY AT HIGHER COST WE WOULD ASSUME THAT SUCH HIGHER COSTS ARE ALLOWED FOR REIMBURSEMENT, IN ANY EVENT, ONLY WHERE THERE IS SUBSTANTIAL REASON FOR NOT TAKING ADVANTAGE OF AVAILABLE LOWER PRICES. WE WOULD NOT CONSIDER THAT THE MERE DESIRE TO AVOID THE CONSEQUENCES OF THE CONCLUSIONS DISCUSSED HEREIN WOULD SERVE AS SUFFICIENT REASON TO REQUIRE ALLOWANCE OF HIGHER COSTS PAID. HOWEVER, IF WITHOUT SUBSTANTIAL REASON HIGHER COSTS ARE PAID OUTSIDE OF THE CORPORATE FAMILY, QUESTION IS RAISED AS TO WHAT PORTION OF SUCH HIGHER COST MAY BE DEEMED REASONABLE. IT COULD WELL BE ARGUED THAT SINCE WESTERN'S PRICE IS THE LOWEST AVAILABLE, THAT PRICE SHOULD BE THE MEASURE OF A REASONABLE ALLOWANCE. AND FROM THERE IT WOULD FOLLOW THAT THERE IS NO SOUND BASIS FOR IGNORING THIS MEASURE IF, IN FACT, THE ITEMS ARE PURCHASED FROM WESTERN IN THE FIRST INSTANCE. THE ARGUMENT IS AN APPEALING ONE. BUT WE FIND NOTHING INCONSISTENT IN THE CONCLUSION THAT WESTERN ELECTRIC'S PRICES SHOULD BE THE MEASURE OF REASONABLENESS WHERE SUFFICIENT REASON DOES NOT EXIST FOR PURCHASES AT HIGHER COST OUTSIDE THE CORPORATE FAMILY BUT YET TO DISALLOW WESTERN'S PROFIT WHERE ITEMS ARE PURCHASED FROM IT. IN THE FIRST SITUATION NO PROFIT IS REALIZED. WE DO NOT FIND THAT A PROFIT MAY BE ALLOWED MERELY BECAUSE THE MEASURE OF REASONABLE PRICE IS NOT EXCEEDED.

POINT NUMBERED 5, ABOVE, WE BELIEVE, CONSTITUTES THE SOUNDEST PREMISE FROM WHICH TO ARGUE THAT THE FULL REASONABLE AMOUNTS PAID WESTERN SHOULD BE ALLOWED AS COST FOR REIMBURSEMENT PURPOSES. AS WE UNDERSTAND THE POINT, IT IS BASED UPON THE FACT THAT EACH, OR AT LEAST SUBSTANTIALLY EACH, SALE BY WESTERN FOR ITEMS INCORPORATED INTO A RELOCATED FACILITY WITHIN THE AMERICAN TELEPHONE AND TELEGRAPH COMPLEX RESULTS IN THE LOSS OF AN EQUIVALENT SALE IN CONNECTION WITH THE REGULAR BUSINESS OF THE COMPLEX UPON WHICH A PROFIT WOULD HAVE BEEN REALIZED AND ALLOWED. THUS IT MAY BE SAID THAT FAILURE TO ALLOW THE PROFIT ON A RELOCATION SALE DOES SERVE TO PENALIZE THE UTILITY CONTRARY TO THE INTENT OF THE STATUTE. IN SUPPORT OF THIS BASIS YOU CITE VARIOUS FIGURES TO SHOW THAT WESTERN CONSISTENTLY HAS NOT BEEN ABLE TO MEET BELL SYSTEM NEEDS THEREBY ESTABLISHING THAT SALES FOR RELOCATIONS ARE NOT INCREMENTAL BUT ACTUALLY IN PLACE OF OTHER SALES. IF, IN FACT, SALES BY WESTERN ELECTRIC FOR RELOCATION PURPOSES DISPLACE SALES WHICH WOULD OTHERWISE BE MADE, WE AGREE THAT THE STATUTE SHOULD NOT BE CONSTRUED TO EFFECT WHAT WOULD IN THAT EVENT AMOUNT TO A PENALTY THROUGH LOSS OF PROFITS BY VIRTUE OF UTILIZING THE MOST REASONABLE PRICES AVAILABLE FOR ITEMS NEEDED IN CONNECTION WITH RELOCATIONS. THEREFORE, IF YOUR COMPANY CAN SATISFY THE BUREAU OF PUBLIC ROADS AS TO THE CORRECTNESS OF YOUR CONTENTION THAT RELOCATION SALES BY WESTERN RESULT IN THE LOSS OF A SUBSTANTIALLY EQUIVALENT AMOUNT OF REGULAR SALES, WE WOULD NOT OBJECT TO ALLOWANCE OF THE FULL REASONABLE PRICES CHARGED BY WESTERN ELECTRIC AS COST TO SOUTHWESTERN BELL.

WE ARE ADVISING THE FEDERAL HIGHWAY ADMINISTRATOR THAT OUR DECISION OF DECEMBER 16, 1964, IS MODIFIED ACCORDINGLY. A COPY OF THIS LETTER IS BEING SENT TO THE ADMINISTRATOR.

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