CULLEN, Commissioner. The City of Lexington and the City of Midway are appealing from a judgment of the Franklin Circuit Court that sustained an order of the Public Service Commission approving a schedule of increased rates for the Kentucky Telephone Company, which company provides telephone service in the two cities and surrounding territory.
In October 1947 the telephone company (then known as the Lexington Telephone Company) proposed the schedule of new rates here in question. Pending a determination as to reasonableness, the schedule was put into effect, as of November 21, 1947, upon the company's filing a refund bond under KRS 278.190. Protests against the new rates were entered by the Cities of Lexington, Midway and Versailles, and after hearings the Public Service Commission rejected the new rates in toto. The company brought action to review the order of the commission, and upon appeal to this Court it was directed that the case be remanded to the commission for further consideration, it being the opinion of this Court that, upon the record, the company was entitled to 'some measure of relief in the way of increased rates.' Lexington Tel. Co. v. Public Service Commission, 311 Ky. 584, 224 S.W.2d 423, 427.
As pointed out in the opinion on the former appeal, the telephone company, at the time the new rate schedule was put into effect, was engaged in converting its system from manual to dial operation, and it was recognized by all parties that a re-examination of the rate structure would be required when the dial system was placed in operation. The question was whether the rates were reasonable as applied to the conversion period. The conversion was completed late in 1949, and the opinion on the former appeal did not become final until December 9, 1949, so the Court took cognizance of the fact that the conversion period had ended, and pointed out that the Public Service Commission, in reconsidering the case, would no longer be required to base its decision upon estimates and expectancies, but would have before it the records of actual operation.
Upon the remanding of the case, the Public Service Commission had before it the annual reports of the company for 1947, 1948 and 1949, the monthly operating statements of the company for the period from October 1947 through January 1950, and an exhibit setting forth the comparative capitalization of the company for the years 1947, 1948 and 1949, exclusive of conversion financing. Upon this evidence, together with the evidence taken upon the former hearings, the commission found that the rates were reasonable, and approved the rate schedule.
The commission found that the net operating revenue of the company for 1947, 1948 and 1949 totalled $732,000. Debt and preferred dividend requirements amounted to $491,100 and common stock dividends at the rate of 6.8% amounted to $132,600, leaving a balance of $108,300 as a surplus available for extensions and improvements.
The debt and preferred dividend requirements were based on first mortgage bonds of $1,800,000, current borrowed debt of $1,300,000, and preferred stock of $800,000.
The commission fixed the rate base at $3,800,000, and it may be observed that the average net operating revenue for the three years in question amounted to a return of 6.4% on this rate base.
Operating expenses during the three-year period were computed at $4,033,700.
Although the appealing cities attack the rate base, the amount allowed for operating expenses, and some of the debt charges, their principal complaint seems to be that the year 1947 should not have been taken into consideration in determining the effect of the new rates, because the new rates were collected only during the last 40 days of 1947. The contention is that the surplus produced by the new rates during 1948 and 1949, whether taken by individual years or averaged, is excessive.
If the rate schedule had been intended to operate for an indefinite period in the future, and if the average surplus during 1948 and 1949 of $72,900 per year should be considered excessive, then there would be some merit in the cities' argument. However, as pointed out above, everyone understood that the new rates were temporary in nature and were designed to apply only during the conversion period. Actually the rates remained in effect until December 6, 1950, when a new schedule was filed by the company, and it is stated in the briefs that the Public Service Commission has approved that schedule in part and no appeal has been taken from the commission's order. The reports of the company for 1950 are not in the record before us, and were not before the commission when it approved the rate schedule that we are concerned with here. We assume that the operating experience of the company during 1950 was taken into consideration by the commission when it made its determination concerning the reasonableness of the rate schedule filed in December 1950, because during that year the company had its dial system in operation, and the conversion financing was then properly to be considered in determining interest and divided requirements.
We are unable to follow the cities' argument that the year 1947 should not be considered. The evidence shows that, even with the new rates being collected during the last 40 days of 1947, the company fell short by $37,500 of meeting its debt and dividend requirements. Had the new rates not been allowed, the deficit for 1947 would have been $55,800. In our opinion on the former appeal we said: 'The Company made a prima facie showing of a situation where relief was necessary if its financial integrity was to be preserved, or perhaps, in the instant case, recouped.' Lexington Tel. Co. v. Public Service Commission, 311 Ky. 584, 224 S.W.2d 423, 426. We can see no reason why the loss in 1947 should not be taken into consideration in determining the reasonableness of the rates during the limited period of time in which the rates were intended to apply.
Concerning the rate base, the contention of the cities is that there is no sound basis in the record for the commission's figure of $3,800,000. The commission's opinion recites: '* * * the evidence herein discloses that the net investment at original cost is around $3,200,000 and the actual net investment in the enterprise reaches some $4,300,000. Surely within the limits of these amounts a proper yardstick can be found. We are of the opinion that an amount of $3,800,000 is sufficient or at least tenable for the purpose of testing whether or not the rates under review are unreasonable. * * *'
The cities maintain that there is nothing in the record to indicate where the commission got the figure of $4,300,000 as actual net investment, and nothing to indicate what the commission means by 'actual net investment' as distinguished from 'net investment at original cost.'
Regardless of the terminology employed by the commission in its opinion, we think there is reasonable support in the record for the determined rate base. There is ample evidence to support the figure of $3,200,000 as representing the net investment at original cost. In addition, the record shows that the capitalization of the company is $4,550,000. We indicated on the former appeal that the commission was required to take the capital structure into consideration in ...