« ForrigeFortsett »
"The experience of the company for the re-, posed changed and increased rates, joint rates, maining eight months of 1923, viz. May 1st to charges, rentals, classifications and practices December 31st, inclusive, which the Commis- set forth in its said proposed schedule, desig. sion has ascertained from its independent in- | nated P. U. C. 0. No. 2, filed with this Comquiry, discloses that the total operating reve mission to become effective August 1, 1920, nue in Hamilton county for this period amount. are just and reasonable and that the mainteed to $3,176,904.00; that its total operating nance, imposition and collection thereof will expenses in Hamilton county amounted to $1, not provide it a greater rate of return than it 968,314.00, and that there was, for said period, is entitled to earn upon its property devoted a balance available for the depreciation reserve to and used and useful for the convenience of charge and interest and dividends of $1,208,- the public in the furnishing of telephonic serv590.00. Computing the depreciation reserve ice in Hamilton county, Ohio." charge for this period of the year 1923 on the present value of the depreciable physical prop
The Commission, having held that with erty amounting as of May 1, 1923, to $15,777,013.00 (arrived at by adding to the value of the the exception of the practice of the company physical depreciable property as of January 1, in requiring toll charges between limited 1923, which amounted to $15,617,733.00, the and unlimited subscribers the telephone comnet additions and betterments provided in the pany had otherwise sustained the burden of period January 1-April 30, 1923, inclusive, of proof imposed by law, and had shown that $419,576.00 and subtracting from that amount these rates, charges, etc., set forth in its the accrued depreciation for said period, or the schedule filed June 25, 1920, to become efsum of $200,296.00), at the rate of 5% per fective August 1 of that year, were just and annum, results in the sum of $525.900.00, which latter sum, deducted from $1,208,590.00' leaves reasonable and would not provide a greater a sum of $682,690.00 as a balance available rate of return than it was entitled to earn for interest and dividends, which is equivalent, upon its property devoted to and used and when expanded for the year to the sum of useful for the convenience of the public, $1,024,035.00, to an annual return of 5.668% made the following order : upon the total value of the property as of May
"Ordered, that said the Cincinnati & Subur1, 1923, amounting to $18,066,412.00, which is ban Bell Telephone Company be, and hereby it - arrived at by taking the total value as of is notified, directed and required: (a) To cease January 1, 1923, adding thereto the net_addi- from collecting, or attempting to impose and tions and betterments, aforesaid, of $419,576.00 collect a toll charge for communication by and deducting the sum of $260,296.00, accrued
means of its facilities by any subscriber for depreciation.
universal service in Hamilton county, Ohio, to "And the Commission having also heretofore any other subscriber for its service in said found that the proposed practice of the com- Hamilton county, Ohio, and to correct its schedpany in attempting to impose a toll charge on
ules accordingly, and (b) to refund in cash, those subscribers who have subscribed for the
on or before the first day of January, 1925. universal or unlimited service in Hamilton
to all subscribers who have subscribed county when communicating to a subscriber for the universal, or unlimited, service in Hamwho has selected the so-called optional, or lim
ilton county, Ohio, all tolls collected from ited service, in said Hamilton county to be un
May 1, 1923, to the date such practice is disreasonable, the Commission further finds that continued, for communications, by such unithe telephone company should refund to all of versal, or unlimited subscribers to the subsuch universal, or unlimited, subscribers in scribers in Hamilton county. Ohio, for said Hamilton county all tolls collected from such company's optional, or limited service. It is subscribers from May 1, 1923, to the date when further ordered, that this proceeding be, and such practice is discontinued, for calls to sub- hereby it is discontinued." scribers in Hamilton county, having the optional, or limited service.
Saul Zielonka, City Sol., and Oliver M. “The Commission, having found that refunds should be made as hereinabove set forth, and, Dock and Landon L. Forchheimer, Asst. City realizing that the work necessary to determine Sols., all of Cincinnati, for City of Cincinthe amount of such refunders will be exten- | nati. sive and that considerable time will be required J. W. Heintzman and H. L. Nichols, both to figure out the individual items, finds that a of Cincinnati, and S. H. Tolles, of Cleveland, reasonable time should be granted to the com for Cincinnati & Suburban Bell Telephone pany within which to make the said refunders
Co. and that a reasonable time within which all of such refunders shall be made will be on or be- Bricker, of Columbus, for Public Utilities
C. C. Crabbe, Atty. Gen., and John W. fore the first day of January, 1925. "The Commission further finds that no other
Commission. cause of complaint was made the subject of testimony presented at any of the sessions of JONES, J. Since the original schedules hearing had herein and that, in so far as the were filed, as stated in the order of the petitions filed herein set forth or plead other Commission, it conducted an extensive hearcauses of complaint, the same should be, anding continuing over a number of sessions. hereby they, and each of them, are dismissed. "The Commission therefore further finds
The record is very lengthy, consisting of a that, with the exceptions above set forth, that large number of exhibits and testimony of said the Cincinnati & Suburban Bell Telephone various witnesses, including expert engineers Company has sustained the burden of proof employed by the city and the telephone comimposed by law and has shown that the pro- pany. The Commission had the benefit of its
(148 N.E.) own inspection of the utility plant, as well, city opposed it. In that conection the oras of the inspection made and testimony giv- der of the Commission recites: en by its own engineers. Before the final
“The inventory produced by the company of order was made, the Commission had before its physical property has been accepted as suffiit the experiences and operations of the tele. ciently accurate to make a valuation. This inphone company, covering a period of 342 ventory has not been challenged in any way by years, from the fall of 1920 until July 17, the city-in fact has been adopted by the city's 1924, when the final order of the Commis- experts-and, heretofore, was high-spotted by sion was made.
the Commission's engineers, so that the ComIn the two cases here presented the Pub-mission feels justifed in accepting it.” lic Utilities Commission is also represented Furthermore, the city in its application for by its own counsel, its Attorney General and
a rehearing before the Commission did not special counsel having filed a brief wherein urge that a statutory valuation was relied the Commission opposes the reversal of its
on and denied, as is required by section 543, order, whether sought by the city or the utili- General Code. ty. Both parties insist that the valuation
[1, 2] The ultimate question for our deciof the telephone property made by the Com- sion is: Has the telephone company estabmission is erroneous, and each makes sundry lished by proper proof the justness and reaclaims as to particular items allowed or ig- sonableness of the rates and charges filed in nored in making the total valuation upon its schedules, which were to become effective which the rate base is fixed.
August 1, 1920? The determination of that It has been stated that this case has been question largely rests upon the fact whether twice before this court. The first case was a proper and fair value has been placed upon decided May 16, 1922, and reported in 105 the utility's property used and useful to the Ohio St. at page 181, 137 N. E. 36. The public. This telephone company is a utility Journal entry in that case recites that no of some importance, operating not only in authoritative opinion was filed therein, "in
one of the largest cities of the state, but with asmuch as the judges who concur in the an extension of its plant to other communijudgment in this case do not agree upon the ties in outlying territory. As shown by its grounds upon which the judgment is put.” | findings, which are fully supported by the After a remand to the Commission, the cause evidence, the fair value of this property was again reached this court, resulting in a de- found by the commission to be as follows: cision on March 27, 1923, reported in 107
Physical property, less depreciation..... $15,387,094 00 Ohio St. 370, 140 N. E. 86, wherein this court Overheads, including working capital, again remanded the case to the Public Utili materials, and supplies ($150,000.00)... 1,846,451 00 ties Commission, “to hear and determine ac
$17,233,545 00 cording to law the just and reasonable rate to be charged by” the telephone company. The city claims that the reserve for ac
While both parties claim that error in- crued depreciation, as shown by the compatervened in fixing the valuation of the utili-ny's record, has been invested in plant in ty upon which the rates are based, the most 11 years, beginning with January 1, 1913. important claims in that respect are as fol- and ending December 31, 1922; and that in lows: (1) The city claims that, since the the 11-year period the company has accumuutility carried upon its books a large amount lated an excess of $3,712,759 in the account for accrued depreciation, such amount should “reserve for accrued depreciation" which has be deducted from the total valuation of the been invested in plant. Therefore it is utility to the extent that such valuation had claimed that, although the previous earnings been increased by new construction and bet- of this company had been invested in new terments made by the utility. (2) The tele- construction and betterments, giving value phone company claims that error intervened to the plant, and being used and useful to when the Commission ordered that an un- the public, that sum should be deducted from limited subscriber for telephone service should its entire valuation as found by the Comnot be required to pay a toll charge to limit- mission. The telephone company claims that, ed subscribers in other zones, and ordered in addition to replacements, it has added a refund of all toll charges collected there thereto new property actually costing $3,for.
162,444, as disclosed by the record. The While other errors are claimed, and will | Commission found that “net additions and be alluded to in this opinion, it is only up- betterments" amounting to $2,921,149 had on the first of the two claims referred to been made by the telephone company bethat members of this court are in serious tween August 1, 1920, and May 1, 1923. disagreement. The claim of the city that no The record discloses that ordinary depreciastatutory examination was made as a basis tion of its plant had been taken care of by the for these rate schedules is not now impor- utility, and that on August 1, 1920, the Comtant. The city cannot complain of that fact, mission found that its present condition is 92 since the record discloses that the telephone per cent. of its reproduction cost new." company requested such a valuation, and the If said sum of $3,712,759, which is about
2142 per cent. of the total valuation, should return is based upon the fair value of the be deducted from the total valuation of the net investment of property used and useful, Commission, the question becomes vitally im- without deduction of any depreciation, save portant to the utility, since, without such that existing at the time of inquiry. deduction, the findings of the Commission The Commission in its finding says: disclose that from actual experience and op
“The inventory produced by the company of eration, covering a period of 31/2 years, the its physical property has been accepted as sufutility would have been able to earn from ficiently accurate to make a valuation. This in3.29 per cent. minimum to 5.668 per cent. ventory has not been challenged in any way maximum on the net investment of its prop- by the city-in fact has been adopted by the erty actually used and useful during the city's experts-and, heretofore, was high-spotyears 1920 to 1923, inclusive, if the 5 perted by the Commission's engineers so that the cent. annual depreciation accorded it by the Commission feels justified in accepting it.” Commission were allowed.
It recites that as to the various valuations Section 614–23, General Code, provides it “has given consideration and weight to that when the Commission shall be of opin- | the experience and qualifications of the vaion “that the maximum rates, charges, tolls rious witnesses produced both by the comor rentals chargeable by any such public pany and the city.” It accepted the testiutility are insufficient to yield reasonable mony of disinterested members of the real compensation for the service rendered, and estate board of Cincinnati as to the value of are unjust and unreasonable, the Commission the land; the testimony of a witness proshall, with due regard among other things, to duced by the city as to the reproductive valthe value of all of the property of the public ue of the buildings. It accepted the percentutility actually used and useful for the con- ages of accrued depreciation of the buildvenience of the public * fix and de- ings, testified to by one Miller, a witness termine the just and reasonable rate, fare, for the company, and the values of physical charge, toll, rental or service to be there property (other than, land, buildings, and after rendered, charged, demanded, exacted right of way), testified to by various engior collected for the performance or rendi- neers, especially one Snook, produced by the tion of the service.” The value of the utility city. Various witnesses, the Commission recit. property which is actually used and useful es, were in substantial accord as to the 8 per for the convenience of the public is the valu- cent. accrued depreciation. Eight per cent. acation, under the Ohio act, upon which the crued depreciation was deducted by the Combase rate is fixed. What that value should mission, thus leaving its present condition be, and how it may be determined, has been at 92 per cent. of its "reproductive cost new." frequently decided in both state and federal / While the Commission did not have before courts. The federal rule upon that subject it express testimony as to the "amounts acwas announced in Smyth v. Ames, 169 U. S. tually paid” for the various items constitut466, 18 S. Ct. 418, 42 L. Ed. 819, where the ing "overheads” in producing the property, court held that, while various elements were it allowed a percentage of 12 per cent. of to be considered in ascertaining the reason the value of the physical property for items ableness of rates, what the company is en- of "overheads" composed of allowances for titled to ask is a fair return upon that which engineering, administration and legal expensis employed for the public convenience. This es, liability insurance, taxes and interest case has frequently been commented upon by during construction, and working capital, inthe high federal court, but the rule announc- cluding materials and supplies, $450,000—the ed has been adhered to in later and very overheads totaling $1,846,451. recent decisions of the Supreme Court of While but little challenge is made that the the United States. The following cases hold physical valuation of this property as found that there must be a fair return upon the by the Commission is excessive, it is urged reasonable value of the property, which is that since more than $3,000,000 were added to be determined at the time the inquiry is to the property for new construction and bet. made: Willcox v. Consolidated Gas Co., 212 terments out of the former earnings of the U. S. 19, 52, 29 S. Ct. 192, 53 L. Ed. 382, 15 company, the public should not be made to Ann. Cas. 1034, 48 L. R. A. (N. S.) 1134; pay a rate based upon the amount so erMinnesota Rate Cases, 230 U. S. 352, 454, pended, because of the fact that an excess 33 S. Ct. 729, 57 L. Ed. 1511, 48 L. R. A. (N. reserve depreciation account was carried upS.) 1151, Ann. Cas. 1916A, 18; State ex rel. on the books of the company. No claim is S. W. Tel. Co. v. Public Service Commission, urged that the so-called depreciation reserve 262 U. S. 276, 287, 43 S. Ct. 544, 67 L. Ed. account represented moneys or credits that 981, 31 A. L. R. 807; Georgia Ry. & Power were appraised by the Commission in making Co. v. Railroad Commission, 262 V. S. 625, up its valuation. The fact is that the cur43 S. Ct. 680, 67 L. Ed. 1144; Bluefield Wa- rent annual depreciation of the property was terworks & Improvement Co. v. Public Serv- taken care of by the company, and its earnice Commission, 262 U. S. 679, 43 S. Ct. 675, ings not required therefor were applied to 67 L. Ed. 1176.
new constructions, additions, or betterments. Those cases sustain the principle that the Whether the moneys upon the books of the
(148 N.E.) company appeared, as alleged by counsel, in, from the net investment of a utility in asthe accrued depreciation account, or in the certaining what the fair valuation should company's surplus, it was company money. be. Excess capitalization or under capitaliNot only had the company the right to ex- zation cannot be used as a basis of deterpend it in making additions to its plant, but mining the valuation of property.
City of the Ohio law explicitly gives it that au- Knoxville v. Knoxville Water Co., 212 U. S. thority.
1, 29 S. Ct. 148, 53 L. Ed. 371. Section 614–50, General Code, provides as In the case of City of Minneapolis v. Rand, follows:
285 F. 818-823, the Circuit Court of Appeals “The moneys in such fund [depreciation] may of the Eighth Circuit, citing cases in its supbe expended in new construction, extensions or port, announced this rule: additions to the property of the public utility." "The claim that past profits justify a present
rate that is not reasonable is no more tenable That section provides that the fund may be than the converse contention that if a public used, (a) for renewing, restoring, replacing, service corporation has operated at a loss in or substituting depreciated property; or (b) than a reasonable present rate of return in
prior years, it is therefore entitled to more may be expended in new construction, ex
order to make up for past deficits.” tensions, or additions of its property. These expenditures, from whatever account, in In Newton, Atty. Gen., v. Consolidated Gas creased the plant investment, and on Au-Co., 258 U. S. 165 at page 175, 42 S. Ct. 264, gust 1, 1920, were property used and useful 267 (66 L. Ed. 538), Mr, Justice McReynolds, serving the public, who received the benefits delivering the opinion, said: of the betterments and extensions of the
"Mere past success could not support a deutility's telephone service in the Cincinnati | mand that it continue to operate indefinitely area and its outlying exchanges. If the mon at a loss. The public has no such right in eys expended had been borrowed by the com- respect to private property although dedicated pany and applied to new construction, we ap- to public use." prehend that no such claim as is now made would be advanced, even though the alleged 278 Pa. 512, 123 A. 471, the Supreme Court
In Erie City v. Public Service Commission. item of "accrued depreciation" appeared up- of Pennsylvania held that because “property on the books of the company. The company, instead of paying out the money to its stock- of a gas company was secured largely from holders as dividends, merely used it as part earnings received from ratepayers does not of the stockholders' investment.
By that change its status as private property so as method there was no necessity of borrowing to eliminate it from consideration in fixing or of issuing further capital to accomplish the total value of the company property as that purpose.
the rate base.” Counsel for the city claims that the sum in
To the same effect is the decision of the the account “reserve for accrued deprecia- three judges in Monroe Gas Light Co. v. tion," and invested in the plant, amounted Michigan Public Utilities Commission (D. C.) to more than $3.000,000. Whether this is 292 F. 139. true or not is unimportant. As a matter of
In this respect the argument of the city fact, the Commission finds that between Au- is specious. Surely there can be no valid gust 1, 1920, and May 1, 1923, a period of reason which requires those who were stocktwo years and nine months, sums aggregat- holders on August 1, 1920, to be penalized being $2,921,149 were expended in additions cause the stockholders of earlier years perand betterments to the utility plant. But it mitted the earnings to be placed in plant exis claimed that the company had no right tension, instead of drawing them out in divito expend its previous earnings in additions dends. Likewise, should stockholders of and betterments to the plant, for the reason earlier years receive heavier dividends than that it was equivalent to a capitalization of wise business policy permitted, this would earnings received from consumers in the not justify the requirement that present past; and it is also urged, and this is sus- stockholders should suffer by a refusal to tained hy the fact that in 1920, and previous- grant them a reasonable rate based upon the ly, dividends of 8 per cent. or more had been present fair value of the plant used and usepaid to the stockholders upon the capital ful to the public. Nor would the fact that a stock of the company. In 1920 a dividend of deficit resulted, and stockholders received no 8 per cent. was paid upon a capitalization dividends in former years, justify an of about $8,000,000, but, in fact, because of reasonable rate in 1920 in order to recoup appreciation of values, and of additions and the deficit sustained. An extreme case might betterments, the Commission found that the be conceived, where, during a long term of valuation on August 1, 1920, was more than years, by the liberal allowance of deprecia$17,000,000. While the history of the com- tion, the book item for “accrued reserve depany, including its ability or inability to preciation” would became equal to the value earn a profit, is an element that might re- of a newly built and larger plant, all of it ceive consideration in fixing a rate, it does constructed out of its meantime earnings. In not justify the deduction of earlier profits such event could it be claimed that because
the larger plant investment had been con-, mons, in Monroe Gaslight & Fuel Co. v. Michistructed and paid for out of the earnings of gan Public Utilities Commission, supra, at its original parent, covering a period of page 147. They say a retirement reserve "of years, the public would be entitled to sub- this kind is not a fund in hand; it is a bookstantially free rates or charges because the keeping estimate of depreciation which acnew investments were paid for out of the crues beyond and above the amount kept former earnings?
good by repairs and replacements." If out of the sum of $5,000 earned by a In this particular case 5 per cent. per an. utility in earlier years, $2,000 were applied num was allowed by the Commission for futo replacement of worn-out or depreciated ture annual depreciation, and it deducted property, and the balance, or $3,000, were in- 8 per cent. for actual observable depreciavested in new buildings, betterments, or ex. tion. But eventualities might arise where tensions, can it be reasonably argued that the depreciation reserve might be heavily dethe added betterments should not be valued ? pleted by disastrous storms such as recently
The claim of counsel for the city leads to occurred, sweeping over five or more nearby a reductio ad absurdum. If it be conceded states, playing havoc with telephone propthat the rates paid by earlier consumers erties, much of which are peculiarly subject were higher than they should be, we are un- to casualties arising therefrom. able to see any valid reason why the present The case of N. Y. Telephone Co. y. Prenderconsumers should profit at the expense of the gast (D. C.) 300 F. 822, 825, 826, decided less earlier. Had the former earnings of the than a year ago, approved the principle that utility not been expended in new construc- the entire book reserve for depreciation tion and betterment of the plant, but still should not be deducted from the fair value remained in its treasury to an amount in ex- of the utility's property. The three federal cess of necessary working capital, certainly judges sitting in that case rendered a per such an amount would not enter into the curiam opinion, in the course of which they valuation of the utility. It would not be part said: of the utility's property "used and useful for "To deduct from the fair value of plaintiff's the convenience of the public.” It should property the entire book reserve for deprecianot be added to the plant valuation as a basis tion, in order to reach a rate base, was error to obtain an increase of rates. Likewise, of law. In point of fact the property had not should stock dividends be issued against such depreciated that much; the Commission did earnings, resulting in no addition to the not find any such depreciation." plant, that would not affect its valuation, That federal court, adverting to the fact since its property would remain unchanged that the Commission held that the utility thereby. There is no evidence sustaining any was bound by its own book figures representclaim that the so-called “reserve for accrued ing its reserves, said of the Commission's condepreciation" entered into the valuation or tention: was considered part of the property. It was
“This is merely untrue; the book charges in no wise considered by the Commission as represent what observation and experience sug. a plant asset furnishing a rate base. Were gested as likely to happen, with some margin we to consider the wisdom of a policy in- over. The legal error is in not recognizing that vesting a utility's earnings in its extensions the law requires deduction only for actual de. and betterments, in order to meet the grow. preciation, just as actual as the present value, ing demands for the public service, we be- and the extent of that depreciation must be lieve that would naturally be the wise and ascertained by the same kind of evidence; in
the last analysis, opinion based on contemprudent policy whereby such earnings would
porary investigation. The rule enforced by be invested in the plant rather than paid out the Cominission would cause some alarm, if as dividends to stockholders. At best, the a catastrophe of nature instantly produced a balance in the account “reserve for accrued deterioration of 50 per cent. when the book depreciation" is merely an item of bookkeep-reserve was but half that amount; yet a ing. What the allowance for depreciation real estoppel must always be mutual, and it is should be is usually left to the sound judg- a poor rule that does not work both ways." ment of the utility.
While counsel for the city and company One of the engineers testified:
are in disagreement as to the deduction of “The reserve for accrued depreciation is not the entire accrued book depreciation account a fund in which certain moneys are set aside. from the net plant investments, the state It is the effect of accounting machinery that in the brief filed by its Attorney General is set up to show the facts with respect to sanctions the view which the State Commisdepreciation; that is, to show the amount set sion has uniformly taken, and which this aside for depreciation as of any particular
court period. The actual money, however, is not set
approves. The Attorney General aside in that fund and specifically devoted to
states: the particular purpose, but it finds its way into "An unbroken line of authoritative decisions the general funds of the company."
support the action of the Commission in in
cluding the plant constructed from reserve for The same view is taken in the per curiam accrued depreciation as the property of the opinion of Judges Denison, Tuttle, and Si- company and to be included in valuation."