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HomeMy WebLinkAboutRes1955-075 r -----~ Law OHices Hellenthal, Hellenthal and Cotti. Anchorage - Juneau Alaska B~fUllb Tl-L:; CIT'iT COUNCIl, Ol~l TE~ CITY Of 3E~'Jfu~D, Al~~KA ) ) \ ) ) ) \ ) REJ()LUT'Iv1J 1:0.7 r IlliJEC'l'IHG APlLICATIGN AIm LA1<:LiG F'LWL,GS CJF' FACT 'J.:JJ C3HT;UIS C'~ <CLU:3IC;:S In the J.:atter of the January, 1955, Application of ietitioner, ALASKA 'I'l!:LEPHOlJE CORl'ORATIuU, for a 'I'ele:,hone Rate Adjustment. Pursuant to written request for adjustment in telephone rates con- tained in letter dated Janua.ry 28, 1955, addressed to the Honorable City Coun- cil of the City of Seward from Alaska Telephone Corporation, hereinafter termed Petitionpr, (City's Exhibit A) and pursuant to Permanent Injunction dated January 25, 1955, granted in Cause No. A-9280 in the District Court. for the lJistrict of Alaska, Third Division at Anchorage, entitled Town of Seward vs. Alaska Telerhone Corporation (. City .Kxhibit C), a he"ring was held before the City Council of the City of Seward at 8 o'clock p.m., honday, February 21, 1955, in the council chambers after notice thereof' had been posted in accordance "lith Section 4 (d) of Ordinance 205 of th~ City of Seward, passed and ap},.;roved Nov- ember 24, 1950. Present at said hearing were a quorum of the City Council, Hr. idward Arnell, attorney, Anchorat!;e, Alaska, representinG Alaslm Teler:.hone Corporation, j.~. Elton B. Jones, Seattle, Washington, Secretary-Treasurer anidirector of Alaska Telephone Corporation, and attorney for Alaska Telephone Corporation; Albert J. Proctor, Seattle, WashinIC;ton, President and director of Alaska Tele- phone Corporation and George L. Hull, of Seattle, Washington, certified public accountant for Alaska Telephone Corporation. Also present, on behalf of the City of Seward, were Jorn S. Hellenthal, of the firm of Hellenthal, Hellenthal & Cottis, attorneys representing the City of Seward; ~~. Anthony Van Seventer, certified public accountant, engaged by the City of Seward, Mr. J. W. Bauler of the Alaska Engineering Associates, tele- phone engineering consultcmts for the City of Seward and Hr. Raymond O'Hara, Cit~T Eanager of the City of Seward. A transcript of the proceedings was made by tape recorder and by stipulation a copy of' the tape v,as furnished to the Cit=" of Seward; a T'an;e -1- r- law Office. HoUonlhal, Hollonthal and Call', Anchorage - Juneau Ala.ka transcript of the substance of the testimony at the hearing was made by l'lrs. Bettie Jacobs, public stenographer, Anchorage, Alaska; exhibits were entered and filed and made a part of the permanent records of the City of Seward by the city clerk, City of Seward, Mrs. Sigrid Stearns. The proceedings began at 8:10 p. m., and the hearing adjourned at approximately 12:15 o'clock a.m. Many witnesses appeared from among the townspeopleof Seward, all of whom objected to the practices and methods of the telephone corporation dur- ing the period of its franchise, included among these protestants were Dick ltrers, Harry Southard, l-fildred Kirkpatrick, Hrs. Areta Howell, Ben Walters, ':lilbert Anthony, Harry West ,Y-Stan Niegemann anti P Jim Shafemyer, lJ.,J. dtii8'....<1iI~ gave a at the conclusion of their testimony Raymond O'Hara, City Hanager, synopsis and s~~ry of the many complaints he had received in his capacity as City Hanager. These witnesses were heard and their testimony recorded and tra- nscribed as above outlined, together with all other testimony, including the statement of r4r. Albert Proctor, President of the telephone corporation. Based upon the transcript of the proceedings, the minutes of the council meeting and the tape recording, the City Council of the City of Seward now find the facts with regard to the requested rate adjustment to be as follows: FINDINGS Allin FRELIMINARY CONCLUSIONS 1. That the telephone corporation, hereinafter referred to as Petitioner, failed to show affirmatively that it was entitled to be adjustments requested; that Petitioner did not furnish to the City of Seward, as requested (Exhibit B) and as provided in Ordinance 205 (Section 4 (a)), records pertinent to the es- tablishment of any rates or adjusting existing rates until the morning of Feb- uary 21, 1955, and then only in the form of the telephone company's Exhibit fi~l, a part of the record herein, together with two untitled pencilled foolscap sheets (Exhibits #2 and #3 herein), all of which failed to furnish justificatio for the requested adjustments in that Exhibit #1 lIas not broken down in Page -2- r ! Law Offices Hollenthal, Hellonthal and Cotti. Anchorage - Juneau Alaska detail as to the Seward operation and covered a period of but one year; namely, the calendar year 1954, and alone, or together with such other scanty information as was furnished by petitioners failed to shed sufficient light on the requested adjustments. That petitioners evidence was further defective in the following particulars as well as in other matters not set forth herein in detail:- (a) P~titioner's .. financial information presented lacked essential statements normally required and cons:id ered essential in rate ll4Iarings such as balance sheet, and surplus statement. (b) Exhibit 11 cannot be considered an independent audit report; Exhibit "Ett of Exhibit 1 refers to ttallowancesll for working capital and inventory, not to whether these assets exist or not. (c) No justification was offered to support methods used in allocating overall company expenses from the company wide books, which were apj.'arently the basis in part of accounting data reflected in Exhibit #1, to the Seward operation. (d) FCC accounting practices as set out in Exhibit F were not followed. (e) A.ccounting data related almost invariably to one yearts operations; no comparative data 1'1aS presented in statement form; no attempt was made to project into the future. (f) No detailed accounting data with regard to the telephone plant of the Seward division was presented-- a complete system of plant accounting would show original cost of each item, acquisition cost to petitioner, additions, dismantled and abandoned plant, depreciation, etc. (g) Plant valuation was not intelligibly or adequately supported or justified; accounts for telephone plant adjustment and for telephone j:lant acquisition adjustment in accord 1'1ith FCC uniform system of accounts (.6xl-.ibit F ) were not pro- duced. Page -3- (h) The basis for the deductions fro,n the start:',ng figure of Exhibit "A" of Exhibit 1 is not shown. ~i) No serviceability data is shown as to plant held for future use, stand-:w equipment, equipment O-,hysically held but ~~u3able dnd }lant in current use and avai12~le, for ieterwina- t'OD of a rate base. (j) Overvaluation, as indicated by t esti;Jwny of Bauler, is itl1jJossible to determine ,-lith suficient ",recision without '~etailed .estimates of proper life, s~ecific data on plant additions and retirements, salvag~and a detailed allocation of fair depreciation schedules to the various classes of plant. (k) Cost of operations is relatively high due to substandard and inefficient management and obsolescent equipment; if automatic plant were installed costs per subscriber would be cut materi- ally (See testimony of Bal~er). (1) No eff'icienc;y ratios, comparisons with other systems, area costs and standard costs have been produced so that inefficiency factor in present cost of operations can be measured. Cm) No projection of income based upon an economic and accounting forecast or budget was presented in exhibit form, i. e., no receipts and expense estimates, estimated number of subscribers for each class of service offered or general analysis of revenue compared with present and past periods of operations; no evidence was presented tending to prove that proposed rate structure would be fair and equitable for the several kinds of service offered to the various classes of subscribers. Cn) No debt service information was supplied nor was the basis of allocation of debt service expense to Seward division; it is im- Law Offices Hollonthal, Hollonthal and Cottl. Anchorage - Juneau Alaska possible to determine which bonds, if any, (discount or non- discount) sLould be considered as outstanding against the Seward Page -4- division; the total bonded debt appears to exceed book values of assets and thus it is possible Seward subscribers would be required to pay rates to finance assets which have been lost; the figure of $16,129.09 (Ex. D of Exhibit 1) capitalized at approximately 9 per cent for analysis' purposes only would indicate that the Seward subscribers are asked to compensate petitioner for interest on bonded indebtedness of approximately $90,000.00 in excess of petitioner's claimed rate base invested capital of $89,659.08 (Ex. E of J<.M1ibit 1). (0) Because of the substandard condition of the Seward plant and its inefficient management, admitted by petitioner (See Exhibit E), petitioner may have to resort to bond financing at exhorbitaht interest rates--the rate structure should not be used to com- pensate petitioner for its inefficiency. No adjustments can be made in interest expense because petitioner did not admit, pre- sent, suggest or support any in the financial data presented. (p) If Seward plant is rehabilitated or modernized, no data was presented to reflect estimate of savings resulting and their affect on future or present rates. (q) Exhibit ItF" of Exhibit 1 is in error, is inequitable, misleading and irreconcilable with the evaluation of the financial data submitted by petitioner in that return on net worth and invested capital according to the allocation made by petitioner involved duplication. According to the allocation made by petitioner the Seward division has no net worth because the allocated bonded indebtedness exceeds the stated value of the plant assets located in Seward. In spite of this, Exhibit "Fit of Exhibit 1 would re- quire a return sufficient to l;a;}' allocated bonded indebtedness plus a return on claimed invested capital in Seward. The per- missable return should be based on invested capital alone. Petitioner should not be entitled to both a fair return on capital invested in plant and the costs of debt service. (r) Petitioner claims it is entitled to a return of is per cent after Law OffIces Henenthal, Henonthal and Cottls Anchorage .. Jun~u Alaska taxes (Ex. F of Exhibit 1); Federal income taxes are apparently overstated because compensation did not include an allowable deduction for territorial income tax. Page -5 -- Law OffIce. Hellonthal, Hollonthal ond Co"l. Anchorage - Juneau Ala.ka (s) Insufficient data has been presented to substantiate petitioner' accounting methods. Due to the use of subtotals without sufficient details the coun:: il ca.'1not ascertain whether the amounts charged for various maintenance expenses, travel, and various general expenses were fair and whether some s110uld have been capitalized or disallowed as extraordinary maintenance and retirement expenses (See City I s Exhibit F , or Part 31- Uniform System of Accounts, Class A and Class B Telerhone Companies, Section 31.138, l<'.C.C. Rules and Regulations) 0 (t) Petitioner stated at the hearing that if the adjustments requested were not made petitioners Febuary 1955 gross revenue would 'be $1890.CO less than otherwise; using this figure in conjunction with the divisional income of $56,965.96 reported in Ex. D of Ex 1 for th e calendar year 1954 (based on the requested and then illegal rates) the overall average increase requested would approximate 65 per cent; the record shows no facts to justify such a request. Only the most extraordinary circumstances could justify this request and none has been shown. 2. That the Alaska Telephone Company's Seward operation has been uneconomical, inefficient and characterized by poor TJallagement and repeated and constant failure to adhere to the provisions of its franchise contract or Ordinance 205 (Exhibit E, plus transcript). 3. That the weight of the evjd ence adduced at the hearing .indicates that the capital plant of the Alaska Telephone Corporation or its invested capj..tal in Seward is less than $45,000.00 (See testimony of Bauler and Exhibit G , wherein the telephone corporation protested the 1\753 property tax valuation of its plant). 4. 'l'hat the Alaska 'felephone Corporation is and has been in violation of law and of Ordinance 205 in the following particulars: (a) It has not furnished a "telel,hone system adequate to serve all residents of the City oJ: Seward" nor extended "its service within the City of Seward as population growth and service demands shall require" Fags -6- ."....'r"~fi..,<. r~"---' _.~~ (Paragraph (k) of Ordinance 205). ( b) It has not "within three years from date of approval of this ordinance" or within three years from lJovember 24, 1950, installed a dial telephone system or adequate facilities in Seward as in its fran- chise provided as the most material consideration therefor. (c) Throughout the duration of its franchise, it never paid pole rent as required by Section 2 (a) of Ordinance 205 until it tendered the same two days prior to the rate hearing of February 21, 1955. (d) It has without justification whatsoever placed into operation in Seward four-party and six-party telephone services in complete violation and disregard of Ordinance 205 and without any authority from the City of Seward. (e) It without authority whatsoever placed into effect two general overall rate increases during the year 1953 and continued said illegal rates until permanently enjoined from so doing by the U. S. District Court for the District of Alaska in the above-referenced Cause No. A-9,280; that it has not complied with saiid injunction in that it has not paid the city nor its agents the sums therein ordered to be paid. (r) That the said Alaska Teleptone Corporation has since November 24, 1950, disregarded and failed to comply with the provisions of Territorial law dealing witl the furnishing of annual statements by l'ublic service corporations to cit,ies as set out in 'i.'it1e 49, Chapter 1, Section 4 of the Alaska Compiled Laws, Annotated, 1949. (g) That the Alaska Telephone Corporation has failed to maintai an accounting system and a system of !'ecords in accordance with Federal COITllaunication Commission requirements and to furnish these or any other re- cords pertinent to the est ablis hnent' of rates or adjusting existing rates to the City of Seward. Based on the foregoing findings and preliminary conclusions and the record of this hearing and the exhibits incorporated therein, the City Council adopts the following conclusions: Law Office. Hello.thal, Helle.thal and Cottis Anchorage. Juneau Alaska Page -7- r- I - - . 'r .. . ..... ~ . . . FINAL CONCLUSIONS 1. That Alaska Telephone Corporation has failed to meet its burden of affirmatively showing that an adjustment of telephone rates is justified. 2. That assuming that Alaska Telephone Corporation has met its burden, it would be impossible to grant any adjustment in connection with four and six party service as these services are not made a part of the franchise contract or Ordinance 205 and cannot be so included without resubmission of the matter to the people of Seward in the form of a proposed amendment to the franchise, provided the City Council determined that such a proposed amendment should be submitted to the voters. 3. That the substantiating data is insufficient to justify the request, but assuming that it were sufficient, it would be rendered in- sufficient once more because four and six-party service is requested, a nd it is impossible on the information furnished to analyze the request after eliminating these requested services. 4. That assuming that Alaska Telephone Corporation had met its affirmative burden and assuming that its requests were in order and justi- fied, its operation being uneconomical and inefficient and in constant and repeated violation of its franchise contract since the chte of said contract, is not such as merits the requested adjustments. Based upon the above, it is hereby resolved by the City Council of the City of Seward that the application of Alaska Telephone Corporation be wholly rejected and that the rules governing the introduction of resol~ tions be and hereby are suspended and that this resolution be passed and approved this 7th day of March, 1955. ~iZ~) ssm.!.. PAINTER, ~or City of Seward Attest: Law OffIce. HoIlonthal, Hollonthal and Cottl. ~_.. Junoau . . AIa.ka Page-a-