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HomeMy WebLinkAbout1975-0980 - Ordinance - 09/25/1975ORDINANCE NO. 980 AN ORDINANCE FINDING FACTS, FIXING, DETERMINING, AND REGULATING THE MAXIMUM RATES FOR LOCAL TELEPHONE SERVICE THAT THE GENERAL TELEPHONE COMPANY OF THE SOUTHWEST, A CORPORATION, ITS SUCCESSORS AND ASSIGNS, MAY CHARGE FOR ITS SERVICES WITHIN THE CITY OF COLLEGE STATION, TEXAS: CONTAINING SAVINGS CLAUSE, AND REPEALING ALL ORDINANCES IN CONFLICT HEREWITH; AND PROVIDING FOR AN EFFECTIVE DATE. WHEREAS, GENERAL TELEPHONE COMPANY OF THE SOUTHWEST requested a rate increase in the City of College Station and a public hearing before the City Council was had on July 17, 1975 and September 9, 1975 and WHEREAS, at said hearing officials of General Telephone Company of the Southwest testified as to the information submitted to the City for consideration of a rate increase in telephone rates, and WHEREAS, the City Council found that said company in calculating its operating expense and rate base did not calculate such operating expense and rate base in accordance with the guidelines recommended by the Texas Municipal League Utility Regulation Study Committee nor by House Bill 819 passed by the last Legislature of the State of Texas nor by other proper guidelines, and the following is the findings of the City Council in connection with such hearing: Operating Revenues General Telephone Company selected as the test year the 12 months ending June 30, 1974 and assured the City Officials on September 18, 1975, that this was the latest data available and was the data for which the City is requested to make its findings and decisions. It showed an operating revenue of $3,798,744.00 for the local exchange at level operations for the 12 months ended June 30, 1974, at present rates and requested a local service increase of $1,071,951.00 per year after allowance for uncollectibles. Operating Expenses General Telephone Company shows its operating expenses exclusive of federal income taxes to be $2,703,075.00 based upon a depreciation expense of $969,734.00 based upon the fair value of its property and upon statewide usage for separation of property instead of $750,563.00 which is the amount of the book depreciation expense based upon this exchange. The Company shows its federal income tax to be $286,608.00 for the year. General has overstated its depreciation expense by the difference between $969,734 and $750,563 or $219,171. The City Council has not knowingly allowed any previous utility to charge depreciation expense based on anything other than actual book depreciation. The federal income tax of $286,608.00 claimed by General was computed on the basis of yet another depreciation expense of $885,367. A 48% income tax factor was applied to the taxable income in lieu of the actual effective income tax rate of 43.3% experienced by the Company. The operating expense of $2,703,075.00 shown by General is overstated by the $219,171.00 depreciation expense overcharge. The operating expenses claimed by General include $704,561.00 for maintenance expenses. The Company does not keep separated the expenses associated with the different classes or types of service. Expenses associated with toll operation and local service are generally intermingled and the Company uses the Ozark Separation Method approved by FCC to separate the portion of the total expenses and properties applicable to interstate and intrastate toll. General did not use full Ozark Separation down to the exchange level and failed to recognize the high toll usage for this exchange. Instead, General assigned to toll only, expenses and properties that would reflect statewide average toll usage and then, General subtracted these toll expenses and properties from the exchange amounts and the residue expenses and properties were then as ORDINANCE NO. 980 Page 2 the local service expenses and properties. While General Telephone benefits from the higher than usual toll revenues from this higher toll usage of the telephone facilities it did not recognize that because of this increased usage that more expenses and properties should be assigned to the toll class of service and thereby the remaining expenses and properties to be assigned to local service would be less. It is noted that intrastate toll calls for this exchange shows some 32.7% more usage than the average for the State. The City Council finds that the maintenance expenses assigned on a local basis is estimated not to exceed $640,716 in lieu of the $704,561 claimed by General Telephone Company. The total operating expenses excluding federal income tax is therefore $2,420,059 ($2,703,075 minus 219,171 minus 63,845) and is based upon a reduction of $219,171 in depreciation expense and $63,845 ($704,561 minus 640,716) in main- tenance expenses. The federal income tax is estimated to be $368,076 based upon a net operating income of $1,378,685 (3,798,744 minus 2,420,059) and a deduction of $474,161 company's fixed charges, a 43.3% experienced tax rate, and less $23,583 of investment credit. The total operation expenses including federal income taxes are $2,788,135 ($2,420,059 plus 368,076). The net operating income before adding interest earned during construction is therefore $1,010,609 ($3,798,744 minus 2,788,135). The income available for rate of return is therefore $1,150,243 after adding the $139,634 interest earned during construction. Ratp, Base The fair value rate base presented by the company is based upon a balance of 50% of original cost depreciated and 50% of replacement cost new less an adjust- ment for age and condition. General Telephone contends for $17,779,151 rate base for the local service part of this exchange. The City Council finds that the reasonable balance in determining fair value should not be less than 60% and not more than 75% to the original cost depreciated component, and in view of the poor service and high inflation in this case that the reasonable balance for weighting of 75% original cost depreciated and 25% replacement cost new less an adjustment for age and condition is the proper basis. Therefore, the Council finds that the fair value rate base for the local service portion of this exchange to be not more than $14,900,000 after correcting for this exchange toll usage. Rate of Return General filed and contends in this case that it is due 8.40% rate or return upon the fair value of its property but at or near the same time it filed in other cities in Texas and accepted rates of return much lower than this. It is noted that Southwestern Bell Telephone Company has been requesting rates of return on fair value of 5% and less during this time period. General contends for a 15.00% rate of return o4i common equity stated at the public hearing. The Council finds that most other telephone companies of like risk are earning not more than 6.7% upon the fair value of their property and that most other telephone companies of like risk are not earning more than 12% rate of return on common equity. U4000 ORDINANCE NO. 980 Page 3 The Council finds that 6.7% rate of return on the fair value rate base is proper. Based upon a rate base of 75% weighting to original cost depreciated, then a 6.7% rate of return on fair value would render 8.72% rate of return on net plant and 12% return on common equity. Net Operating Income The Council finds that General Telephone Company of the Southwest is not entitled to more than 6.7% rate of return on a $14,900,000 rate base or $998,300 in net operating income. The Council finds that General Telephone Company is already earning $1,150,243 under the present rates. This gives a rate of return on a fair value rate base of 7.72%. General has failed in its burden of proof to show that any increase in rate is justified. Final Findings While General Telephone Company of the Southwest has failed to prove that any rate relief is needed, the City Council, in hopes of avoiding costly litigation and in hopes that General will upgrade its telephone service to a reasonable level, and that the enforcement of the hereinafter authorized rates will not deprive General Telephone Company of the Southwest of a fair return upon the fair value of property used and useful in rendering its services to the City, now, therefore, the Council enacts the following rate ordinance: BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF COLLEGE STATION, TEXAS: Section 1. From and after the effective date of this ordinance, the General Telephone Company, its successors and assigns, shall be permitted to charge the following rates for telephone service within the corporate limits of the City of College Station, Texas: Class and Grade of Service Business One Party Business Two Party Business Extension Residence One Party Residence Two Party Residence Four Party Residence Extension Semipublic - Business One Party PABX Trunk Key Line Monthly Rates $14.10 11.45 2.00 6.75 5.60 4.50 1.25 14.10 22.25 14.75 ORDINANCE NO. 980 Page 4 Section 2. That the present levels of rates and charges and the proposed $146,694 increase per year requested for miscellaneous services and equipment not included in the rates specified in this Ordinance were taken into account in establishing the here approved schedule rates and charges, and all such rates and charges for miscellaneous services and equipment shall remain subject to the powers of the City Council. Therefore, in the event that the General Telephone Company of the Southwest desires to increase such rates and charges for miscellaneous services and equipment (except the proposed $146,694 increase requested in this filing which is hereby granted), it shall, prior to instituting any increase in such rates and charges, file with the City a proposed tariff, together with a report showing the.class of service or equipment involved, the present annual revenues being obtained from such service, the prospective number of customers to be affected, the amount of the proposed monthly increase in the rates and charges for such service, and the estimated annual increase in revenues to be generated by such increase in rates and charges. Section 3. That these rates shall become effective at 8:00 a.m. on the 1st day of October, 1975. Section 4. That the rates prescribed in Ordinance No. 884 are hereby rescinded and set aside as of the effective date of the rates prescribed in this Ordinance. Section 5. If any provision of this Ordinance or the application thereof to any person or circumstances is held invalid, such invalidity shall not affect any other provisions or applications of the ordinance which can be given effect without the invalid provision or application, and to this end the provisions of this Ordinance are declared to be severable. Section 6. That nothing in this Ordinance shall be construed as in any manner limiting, modifying, or abrogating the right and power of the City Council, under the Charter of the City of College Station, the constitution and laws of the State and of the United States to regulate the rates charged by General Telephone Company of the Southwest for local exchange telephone service within the City of College Station. READ, PASSED, AND ADOPTED this 25th day of September, 1975.. APPROVED Mayor ATTEST City Secretar