Washington State

Office of the Attorney General

Attorney General

Bob Ferguson

AGO 1954 No. 321 -
Attorney General Don Eastvold


The Action of the Washington Public Service Commission in rejecting an asset from a carrier's rate base for making purposes does not itself bind the Commission to disallow the asset for dividend purposes.

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                                                              September 23, 1954

Honorable E. W. Anderson
Washington Public Service Commission
Olympia, Washington                                                                                                              Cite as:  AGO 53-55 No. 321

Dear Sir:

            On August 26, 1954, we received an inquiry from you concerning the legality of a proposed dividend on common stock which a public service corporation doing business as a bus company desires to pay.  You stated in your letter that according to the balance sheet submitted by this bus company the amount of the proposed dividend is less than the corporation's earned surplus.  However, you pointed out that some doubt has arisen as to the legality of this dividend by reason of the fact that the commission had previously disallowed the value of certain franchises shown on the balance sheet as intangible property from this corporation's rate base for rate making purposes.  You also stated that if the commission's disallowance of this property were repeated and the value of this asset as shown on the balance sheet were again written off according to your prior action the surplus account would then be placed some $183,000 in the red.  Based on these facts your specific question was whether or not the action of the commission in disallowing this item of the tangible property for rate making purposes would be binding on the commission's determination of this company's present right to pay dividends on its common stock.

            It is our opinion that the action of the commission in rejecting this asset for rate making purposes would not of itself compel the commission to disallow this asset for dividend purposes.

             [[Orig. Op. Page 2]]


            The answer to your question calls for an analysis of the tests and procedure used to determine what assets should be included in the carrier's rate base for rate making purposes as compared with the tests that are used for determining whether a company's assets are sufficient to allow a dividend to be paid on common stock.  An examination of the Code of the State of Washington and the cases interpreting its sections indicates that the Washington Public Service Commission is not limited to any particular method of establishing a just and reasonable rate base for transportation rate making purposes.  RCW 81.04.250 of the Revised Code of Washington pertains to determination of rates for carriers and sets forth the standards the commission may use in determining the value of a carrier's property.  This statute reads as follows:

            "The commission shall have the power upon complaint or upon its own motion to prescribe and authorize just and reasonable rates for the transportation of persons or property by carriers, and shall exercise such power whenever and as often as it shall deem necessary or proper.  The commission shall, before any hearing is had upon such complaint or motion, notify the complainants and the carrier concerned of the time and place of such hearing by giving at least ten days' written notice thereof, specifying that at the time and place designated a hearing will be held for the purpose of prescribing and authorizing such rates, which notice shall be sufficient to authorize the commission to inquire into and pass upon the matters designated in this section.

            "In exercising its aforesaid power the commission may use any standard, formula, method or theory of valuation reasonably calculated to arrive at the objective of prescribing and authorizing just and reasonable rates."

            While this statute offers no specific tests for determining what property should be included in the rate base we do find that the test of whether an asset can be stated to be "used and useful in the utility or transportation business" has been sustained by our courts in the determination of whether property may be excluded from a company's rate base.  State ex rel. Pacific Telephone and Telegraph  [[Orig. Op. Page 3]] Company v. Department of Public Service, 19 Wn. (2d) 200.  Under this test property not held for transportation purposes, abandoned property, and donated property, might be excluded from a carrier's rate base.  SeePacific Coast Elevator Company v. Department of Public Works, 130 Wash. 620 in which a warehouse that was not in use or in repair was excluded from an elevator company's rate base.

            However, we believe all of these assets such as nonutility property, abandoned property, and contributed property could still be assets on a carrier's balance sheet from which a dividend on common stock might be paid provided the earnings and surplus of the corporation are sufficient to comply with the terms of RCW 81.04.340.  This statute authorizes the Washington Public Service Commission to control dividends of public service companies operating within the State of Washington, and reads as follows:

            "No public service company engaged in intrastate business in this state shall pay any dividend upon its common stock until:

            "(1) Its earnings and earned surplus are sufficient to declare and pay the same after provisions are made for reasonable and proper reserves.

            "(2) The dividend proposed to be paid can reasonably be paid without impairing the ability of the company to render reasonable and adequate service at reasonable rates.

            "Before any common stock dividend is paid, the company shall make application to the commission for approval, and shall furnish to the commission such information and data relating thereto as the commission shall require.

            "If the commission finds after notice and an opportunity to be heard that the payment of the dividend will not be violation of the provisions of this section it shall approve the declaration and payment thereof,  [[Orig. Op. Page 4]] otherwise it shall disapprove it.  No dividend so disapproved shall be paid unless the findings and order of the commission with respect thereto have been vacated and set aside in proper proceeding for review thereof.

            "If at any time the commission finds that the capital of any company is impaired, it may, after due notice, investigation, and hearing, issue an order directing the company to cease paying dividends on its common stock until reasonable proof has been made to the commission that such impairment has been made good, and the status of the company has become such that common stock dividends may reasonably and properly be paid in full compliance with this section."

            While the cases construing this type of statute are not numerous we do find that the courts in other jurisdictions have considered questions concerning the legality of the public service company's proposed dividends.  These cases have pointed out that the nature of such legislation is mainly preventative in character.  The object of such a statute is of course to preserve a utility's property from being depleted through the payment of unearned dividends in order that the character of the service necessary for public convenience may be maintained.  Ohio Central Telephone Corporation v. Public Utilities Commission, 189 N.E. 650.  See alsoState ex rel. Washington, Etc. Co. v. E. K. Murray, 181 Wash. 27.

            In order to ascertain whether a particular dividend meets the requirements of this statute the Washington Public Service Commission must determine whether the earnings and earned surplus of the corporation are sufficient to pay the proposed dividend.  This type of problem requires an investigation and consideration of the financial condition of the company.  Such an inquiry presents an altogether different problem than those that were presented when the commission decided that an item of intangible property should be disallowed from a company's rate base in the determination of a just compensation for the use of the utility's property by the public.  Therefore, while the prior action of the commission in disallowing this asset for rate making purposes might well be considered in the determination of whether this asset has a value upon which a dividend might be paid, we are of the opinion that the prior disallowance of this action is not now binding upon the commission.

             [[Orig. Op. Page 5]]

            From the facts set forth in your letter we are unable to conclude as a matter of law if this asset can be considered for dividend purposes.  It would seem that the determination of whether any proposed dividend meets the requirements of RCW 81.04.340 must, in each particular situation, rest upon the facts peculiar to that case.  For this reason we note that this statute has provided that notice and opportunity to be heard must be given to each company prior to refusing its application to pay a dividend.  We also believe that at any future hearing on this proposed dividend the Washington Public Service Commission should consider the effects of RCW 81.08.080 upon this bus company's assets.  This statute reads as follows:

            "The commission shall not authorize the capitalization of the right to be a corporation, or the capitalization of any franchise or permit whatsoever, or the right to own, operate, or enjoy any such franchise or permit, in excess of the amount, exclusive of any tax or annual charge, actually paid to the state or to a political subdivision thereof as the consideration for the grant of the franchise, permit, or right; nor shall any contract for consolidation or lease be capitalized, nor shall any public service company hereafter issue any bonds, notes or other evidence of indebtedness against or as a lien upon any contract for consolidation or merger."

Very truly yours,

Attorney General

Assistant Attorney General