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from the net investment of a utility in ascertaining what the fair valuation should be. Excess capitalization or under capitali

(148 N.E.) company appeared, as alleged by counsel, in the accrued depreciation account, or in the company's surplus, it was company money. Not 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 the Ohio law explicitly gives it that authority.

Section 614-50, General Code, provides as follows:

"The moneys in such fund [depreciation] may be expended in new construction, extensions or additions to the property of the public utility."

That section provides that the fund may be used, (a) for renewing, restoring, replacing, or substituting depreciated property; or (b) may be expended in new construction, extensions, or additions of its property. These expenditures, from whatever account, increased the plant investment, and on August 1, 1920, were property used and useful serving the public, who received the benefits of the betterments and extensions of the utility's telephone service in the Cincinnati area and its outlying exchanges. If the moneys expended had been borrowed by the company and applied to new construction, we apprehend that no such claim as is now made would be advanced, even though the alleged item of "accrued depreciation" appeared up on the books of the company. The company, instead of paying out the money to its stockholders as dividends, merely used it as part of the stockholders' investment. By that method there was no necessity of borrowing or of issuing further capital to accomplish

that purpose.

mining the valuation of property. City of Knoxville v. Knoxville Water Co., 212 U. S. 1, 29 S. Ct. 148, 53 L. Ed. 371.

In the case of City of Minneapolis v. Rand, 285 F. 818-823, the Circuit Court of Appeals of the Eighth Circuit, citing cases in its support, announced this rule:

"The claim that past profits justify a present rate that is not reasonable is no more tenable than the converse contention that if a public service corporation has operated at a loss in prior years, it is therefore entitled to more than a reasonable present rate of return in order to make up for past deficits."

In Newton, Atty. Gen., v. Consolidated Gas Co., 258 U. S. 165 at page 175, 42 S. Ct. 264, 267 (66 L. Ed. 538), Mr. Justice McReynolds, delivering the opinion, said:

"Mere past success could not support a demand that it continue to operate indefinitely at a loss. The public has no such right in respect to private property although dedicated to public use."

278 Pa. 512, 123 A. 471, the Supreme Court of Pennsylvania held that because “property of a gas company was secured largely from earnings received from ratepayers does not change its status as private property so as to eliminate it from consideration in fixing the total value of the company property as

In Erie City v. Public Service Commission.

the rate base."

To the same effect is the decision of the

three judges in Monroe Gas Light Co. v. Michigan Public Utilities Commission (D. C.) 292 F. 139.

In this respect the argument of the city is specious. Surely there can be no valid reason which requires those who were stockholders on August 1, 1920, to be penalized because the stockholders of earlier years permitted the earnings to be placed in plant extension, instead of drawing them out in dividends. Likewise, should stockholders of earlier years receive heavier dividends than wise business policy permitted, this would not justify the requirement that present stockholders should suffer by a refusal to

Counsel for the city claims that the sum in the account "reserve for accrued depreciation," and invested in the plant, amounted to more than $3.000,000. Whether this is true or not is unimportant. As a matter of fact, the Commission finds that between August 1, 1920, and May 1. 1923, a period of two years and nine months, sums aggregating $2.921,149 were expended in additions and betterments to the utility plant. But it is claimed that the company had no right to expend its previous earnings in additions and betterments to the plant, for the reason that it was equivalent to a capitalization of earnings received from consumers in the past; and it is also urged, and this is sustained by 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 paid to the stockholders upon the capital stock of the company. In 1920 a dividend of 8 per cent. was paid upon a capitalization of about $8,000,000, but, in fact, because of appreciation of values, and of additions and betterments, the Commission found that the valuation on August 1, 1920, was more than $17,000,000. While the history of the company, including its ability or inability to earn a profit, is an element that might receive consideration in fixing a rate, it does not justify the deduction of earlier profits

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present fair value of the plant used and useful to the public. Nor would the fact that a deficit resulted, and stockholders received no dividends in former years, justify an reasonable rate in 1920 in order to recoup the deficit sustained. An extreme case might be conceived, where, during a long term of years, by the liberal allowance of depreciation, the book item for "accrued reserve depreciation" would became equal to the value of a newly built and larger plant, all of it constructed out of its meantime earnings. In such event could it be claimed that because

the larger plant investment had been constructed and paid for out of the earnings of its original parent, covering a period of years, the public would be entitled to substantially free rates or charges because the new investments were paid for out of the former earnings?

If out of the sum of $5,000 earned by a utility in earlier years, $2,000 were applied to replacement of worn-out or depreciated property, and the balance, or $3,000, were invested in new buildings, betterments, or extensions, can it be reasonably argued that the added betterments should not be valued? The claim of counsel for the city leads to a reductio ad absurdum. If it be conceded that the rates paid by earlier consumers were higher than they should be, we are unable to see any valid reason why the present consumers should profit at the expense of the earlier. Had the former earnings of the utility not been expended in new construction and betterment of the plant, but still remained in its treasury to an amount in excess of necessary working capital, certainly such an amount would not enter into the valuation of the utility. It would not be part of the utility's property "used and useful for the convenience of the public." It should not be added to the plant valuation as a basis to obtain an increase of rates. Likewise, should stock dividends be issued against such earnings, resulting in no addition to the plant, that would not affect its valuation, since its property would remain unchanged thereby. There is no evidence sustaining any claim that the so-called "reserve for accrued depreciation" entered into the valuation or was considered part of the property. It was in no wise considered by the Commission as a plant asset furnishing a rate base. Were we to consider the wisdom of a policy investing a utility's earnings in its extensions and betterments, in order to meet the growing demands for the public service, we believe that would naturally be the wise and prudent policy whereby such earnings would be invested in the plant rather than paid out as dividends to stockholders. At best, the balance in the account "reserve for accrued depreciation" is merely an item of bookkeeping. What the allowance for depreciation should be is usually left to the sound judgment of the utility.

One of the engineers testified:

"The reserve for accrued depreciation is not a fund in which certain moneys are set aside. It is the effect of accounting machinery that is set up to show the facts with respect to depreciation; that is, to show the amount set aside for depreciation as of any particular period. The actual money, however, is not set aside in that fund and specifically devoted to the particular purpose, but it finds its way into the general funds of the company."

The same view is taken in the per curiam opinion of Judges Denison, Tuttle, and Si

mons, in Monroe Gaslight & Fuel Co. v. Michigan Public Utilities Commission, supra, at page 147. They say a retirement reserve “of this kind is not a fund in hand; it is a bookkeeping estimate of depreciation which accrues beyond and above the amount kept good by repairs and replacements."

In this particular case 5 per cent. per annum was allowed by the Commission for future annual depreciation, and it deducted 8 per cent. for actual observable depreciation. But eventualities might arise where the depreciation reserve might be heavily depleted by disastrous storms such as recently occurred, sweeping over five or more nearby states, playing havoc with telephone properties, much of which are peculiarly subject to casualties arising therefrom.

The case of N. Y. Telephone Co. v. Prendergast (D. C.) 300 F. 822, 825, 826, decided less than a year ago, approved the principle that the entire book reserve for depreciation should not be deducted from the fair value of the utility's property. The three federal judges sitting in that case rendered a per curiam opinion, in the course of which they said:

"To deduct from the fair value of plaintiff's property the entire book reserve for depreciation, in order to reach a rate base, was error of law. In point of fact the property had not depreciated that much; the Commission did not find any such depreciation."

That federal court, adverting to the fact that the Commission held that the utility was bound by its own book figures representing its reserves, said of the Commission's contention:

"This is merely untrue; the book charges represent what observation and experience suggested as likely to happen, with some margin over. The legal error is in not recognizing that the law requires deduction only for actual depreciation, just as actual as the present value, and the extent of that depreciation must be ascertained by the same kind of evidence; in the last analysis, opinion based on contemporary investigation. The rule enforced by the Commission would cause some alarm, if a catastrophe of nature instantly produced a deterioration of 50 per cent. when the book reserve was but half that amount; yet a real estoppel must always be mutual, and it is a poor rule that does not work both ways."

While counsel for the city and company are in disagreement as to the deduction of the entire accrued book depreciation account from the net plant investments, the state in the brief filed by its Attorney General sanctions the view which the State Commission has uniformly taken, and which this court approves. states:

The Attorney General

"An unbroken line of authoritative decisions support the action of the Commission in including the plant constructed from reserve for accrued depreciation as the property of the company and to be included in valuation."

(148 N.E.)

While we have referred to the sections of the Ohio Utility Act authorizing the utility to expend the depreciation reserve for new construction, extensions, and betterments, and its further requirement that the Commission should value the property used and useful as of August 1, 1920, it might be well to refer to the various authorities sanctioning the rule approved by this court.

The city solicitor places reliance upon Railroad Commission of Louisiana v. Cumberland Telephone & Telegraph Co., 212 U. S. 414, 29 S. Ct. 357, 53 L. Ed. 577, Mr. Justice Peckham delivering the opinion of the court. It is sufficient to say that the question here under consideration was not decided in that Mr. Justice Peckham distinctly says, on page 425 (29 S. Ct. 362):

case.

"We are not considering a case where there are surplus earnings after providing for a depreciation fund, and the surplus is invested in extensions and additions. We can deal with such a case when it arises."

rates to pay a return to the company upon
that which they themselves had contributed.
""The accrued depreciation reserve paid by
the public and reinvested in plant or property
should not be made the basis of return to the
stockholders. The total present value of the
company's property should be decreased in the
proportion which such reserve for depreciation
bears to the total investment of the company,
to ascertain the basis of return to the stock-
holders.'

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The Michigan Supreme Court then held that since the depreciation fund had been expended upon extensions and betterments for the property, the state commission had acted erroneously in deducting $9,500,000 from the value of the property, and that the fair valuation without the deduction should be restored. Chief Justice Clark of the Michigan court commented upon the language of Mr. Justice Peckham in the Cumberland Case, and cited, among other cases, Monroe Gaslight & Fuel Co. v. Michigan Public Utilities Commission (D. C.) 292 F. 139. The opinion in the latter is a per curiam by Justices Denison, Tuttle, and Simons, wherein they say:

"The utility carried upon its books a depreciation account, which (after a correction directed by the Commission), January 1, 1923, amounted to about $37,000. This was called a retirement reserve.' In its answer the Commission says: 'Included in the item of $272,000, above mentioned, was property paid for by the use of the reserve fund, or retirement fund of the utility; a retirement reserve of approximately $39,000 being reinvested in the property.""

Every court which has considered the opinion of Mr. Justice Peckham has stated that the language used in that opinion was not intended to and did not apply to the instant question. He was considering the question of the burden of proof. Reciting the decision of the circuit court, wherein the latter stated that counsel for the telephone company had not undertaken to indicate the sum "earned in the business and reinvested in the business," he held that the burden of proof was upon the complainant telephone company; and it not having sustained the burden of proof upon that issue, the learned justice used the language in the opinion carefully excluding the point here under consideration. 'The Cumberland Case was decided 16 years ago. the present fair value of the property, but there Since that time other courts of this country, is a suggestion that such deduction might be both federal and state, have sustained the made. We think this is an entire misappreprinciple that the account for reserve deprehension. An account of this kind is not a ciation should not be deducted from the total valuation of the plant, where such valuation was enhanced by additions and extensions made out of the earnings of the company.

In the case of Michican Public Utilities Commission v. Michigan State Telephone Co., 228 Mich. 658, 200 N. W. 749, the Supreme Court of Michigan, composed of eight judges, held, one judge dissenting:

The federal court proceeds:

"The Commission does not definitely undertake to deduct this retirement reserve from

fund in hand; it is a bookkeeping estimate of depreciation which accrues beyond and above the amount kept good by repairs and replacements. It appears in the list of assets only because it represents a supposed loss of capstock is carried as a liability at par, along with ital (or of accumulations); and if the capital undivided profits and surplus, then the depreciation must appear upon the other side of the account. If the bookkeeping estimate is accu

difference between the present value of the

(5) "Depreciation fund maintained by tele-rately made, it will precisely balance the actual phone company is definitely the property of the utility, and not of the public."

(8) "Telephone company has the right to invest depreciation fund and earn on it, and such fund should not be deducted from present fair value in fixing rate bases."

In that case the State Commission had stated in respect to the depreciation fund:

"It is derived from rates paid by subscribers and users of its service, and, not having been obtained by capital contributions from stockholders, but from the public through earnings or revenues, the public ought not to be charged

depreciated items and the future cost of proper replacements or substitutions. If the estimate is liberally made, there will be a surplus above the true amount of actual depreciation.

just as there is here a surplus or difference of about $11.000 between the Commission's engineer's estimate, as applied to prudent investment cost, and the defendant's books. The existence of such a surplus on the books has little evidential force. It means only that at the rates which have been charged. the company has collected that amount in addition to what now appears to be the true amount of depreciation plus the amount which it has seen fit

to pay out in fixed charges and dividends, or carry as surplus and undivided profits. The idea that such a depreciation account or retirement reserve, which grew up through the collection of lawful rates, is some sort of a trust fund in which the ratepayers are interested and upon which the utty has no right to earn a return, which idea has found favor with some commissions (although the Michigan Commission has not indicated its adherence thereto), is without foundation. The fact that such excess, along with what is called surplus or undivided profits, has been invested in further property, does not deprive the utility of its full right to earn a return thereon."

In view of the fact that the Supreme Court of the United States has uniformly decided that a public utility is entitled to reasonable, nonconfiscatory rates upon property used, and which is useful to the public, based upon a fair valuation determined as to the time of the inquiry, citation of further authorities in support of that principle is without value. The basic question has been succinctly stated in Georgia Ry. & Power Co. v. R. R. Comm., 262 U. S. 625, 43 S. Ct. 680, 67 L. Ed. 1144, wherein the opinion quotes from Willcox v. Consolidated Gas Co., 212 U. S. 19, 52, 29 S. Ct. 192, 200 (53 L. Ed. 382, 15 Ann. Cas. 1034, 48 L. R. A. [N. S.] 1134), that it has been clear "that the value of the prop erty is to be determined as of the time when the inquiry is made regarding the rates. If the property, which legally enters into the consideration of the question of rates, has increased in value since it was acquired, the company is entitled to the benefit of such increase." These decisions accord with the provisions of the Ohio Utility Act (section 499-9[F], General Code), which require the State Commission to ascertain "the net value as of a date certain, of all physical property other than land owned by such utility to be derived by deducting the sum of the amounts of depreciation from the sum of the new reproductive costs." The Commission explicitly followed this statute. This court has heretofore held that this subsection governs; that not book depreciation but depreciation on "the actual condition of the property at the time," controls. Lima Telephone & Telegraph Co. v. Public Utilities Commision, 98 Ohio St. 110-119, 120 N. E. 330.

Since the date of the Commission's final order, the case of Ohio Utilities Co. v. Public Utilities Commission of Ohio, 45 S. Ct. 259, 69 L. Ed., decided by the United States Supreme Court on March 2, 1925, has settled some of the controversial questions arising in this case. That case involved rates based upon the valuation of a small electric property located at Hillsboro, Ohio. There the Public Utilities Commission made a valuation "based on reproductive value less depreciation." It allowed, as it did in this case, 5 per cent. for annual depreciation, and also

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overhead items, composed of taxes and interest during construction, working capital, and supplies. The Commission had rejected outright the item for preliminary organization, and reduced its engineers' estimates of items for interest during construction, working capital, and its engineers' valuation of the buildings and plant equipment.

This court is in substantial accord in holding that the State Commission committed no error in this case in the allowance of 5 per cent. for annual depreciation, or in the allowance of 2 per cent. for omissions and contingencies and 12 per cent. for the enumerated "overheads." There is ample evidence in the testimony and exhibits justifying those allowances. The chief attack upon the items comprising the "overheads" is based on the fact that, while the Commission found "that there is no doubt but that there is an actual expenditure for these various items," there was no express testimony "as to the amounts actually paid for these various items." However, basing its finding on the testimony of the engineers, it allowed as overheads “a sum equal to 12 per cent. of the value of the physical property."

In respect to the contention of the plaintiff in error that there was no express proof of the amounts "actually paid" for these "overheads," we desire merely to quote from the opinion of Mr. Justice Sutherland, upon that feature, found in the Ohio Utilities Co. Case, supra. There he said:

"The item of $5,000 seems to have been rejected upon the ground that there was no proof of actual expenditure. Reproduction value. however, is not a matter of outlay, but of estimate, and should include a reasonable allowance for organization and other overhead charges that necessarily would be incurred in reproducing the utility. In estimating what reasonably would be required for such purposes, proof of actual expenditures originally made, while it would be helpful, is not indispensable.

* That such expenditures in a substantial amount would necessarily be made in reproducing the utility is clear."

See, also, in this connection, the Monroe Gaslight & Fuel Case, supra.

On the hearing before the Commission the city questioned the 4 per cent. contract which the utility had with the American Telephone & Telegraph Company for certain facilities which the latter had provided for the utility.

There is nothing to indicate bad faith or the improper exercise of discretion on the part of the utility in making this contract; nor that the amount paid therefor was so exorbitant as to indicate bad faith upon the part of the utility's directors. In the absence of these elements, the utility has the right to control and manage its own affairs. Similar contracts with utilities have been recognized by the United States Supreme Court in various cases, and recently, in State

(148 N.E.)

ex rel. S. W. Telephone Co. v. Public Service | be taken into consideration in fixing the rate Commission, 262 U. S. 276, 288, 43 S. Ct. 544, base of the utility. 67 L. Ed. 981, 31 A. L. R. 807. Our own state 'court has approved a like contract made under similar circumstances in City of Cleveland v. Public Utilities Commission, 102 Ohio St. 341, 347, 131 N. E. 714.

In its final order, while the Commission does not specifically refer to the item of going value, we are of the opinion that this was considered by it and properly includ ed in the item denominated "overheads," The record discloses that, in the hearing amounting to $1,846,451. Included in that before the Commission, counsel for the city amount was an allowance for "engineering, stated to the Commission that he felt "per-administrative and legal expenses, liability sonally that the 42 per cent. is not exorbi-insurance, taxes and interest during constructant. I am not making a fight on that." tion." All of these entered into the developHowever, he thought that the 42 per cent. should be apportioned between operating expenses and capital investment. This sug gestion did not receive the approval of the Commission, nor does it meet with the approval of this court. Manifestly, such allocation cannot be made since the 41⁄2 per cent, became a part of the operating expenses of the company.

For the reasons stated herein, so much of the final order as is complained of by plaintiff in error in cause No. 18777 is hereby affirmed.

Cause No. 18779.

ment of the utility's property and gave it an added value which was not represented in the valuation of the physical property. It is one of the methods followed by the Commission, justified by the principles enunciated in federal cases.

"Included in going value as usually reckoned is the investment necessary to organizing and establishing the business which is not embraced in the value of its actual physical property. In this case, what may be called the inception cost of the enterprise entering into the establishing of a going concern had long since been incurred. * * When, as here, a long established and succcessful plant of this character is valued property fixed as the master certifies upon the for rate-making purposes, and the value of the basis of a plant in successful operation, and overhead charges have been allowed for the items and in the sum already stated, it cannot be said, in view of the facts in this case, that the element of going value has not been given the consideration it deserves." Des Moines Gas Co. v. City of Des Moines, 238 U. S. 153, 165-171, 35 S. Ct. 811, 815 (59 L. Ed. 1244).

In City of Houston v. Southwestern Bell Telephone Co., 259 U. S. 318, 325, 42 S. Ct. 486, 489 (66 L. Ed. 961) the court said:

[3] In this cause the utility instituted proceedings in error seeking a reversal of a portion of the final order of the Commission made July 17, 1924. While various grounds of error upon the part of the Commission were assigned in the utility's application for the vacation of such order, in the brief the chief reliance of counsel for the utility rests upon the following alleged errors: (a) That the Commission failed to recognize "going concern" as an element of value in the valuation of the utility's property; (b) that the Commission erred in holding that the utility's substituted or supplemental schedule, effect-sidered and allowed at all in determining the ive May 1, 1923, was unlawful and discriminatory, that the toll charges stipulated therein should be discontinued by the utility and free toll service supplied between unlimited subscribers and subscribers who had limited service, and that all toll charges collected thereunder should be refunded; and (c) that by the Commission's own concession in its final order the yield of return on the found valuation of the property was confiscatory.

(a) "Going concern" value. As to this feature it may be said that the application made for a rehearing by the utility on August 15, 1924, did not contain the specific claim that "going concern" had not been taken into consideration in fixing the valuation, as required by section 543, General Code. Evidently the Commission's attention was not called to that question, neither does its finding make any reference thereto. In that respect the utility orcupied the same position as did the city when it failed to specify, in its application for rehearing, the assignment that a statutory valuation was not made. It has been repeatedly held that "going concern," a live plant distinguished from a dead one, should

"Whether going concern value should be conbase for rate making, and if allowed what the amount of it should be, depends upon the financial history of the Company (Galveston Electric Co. v. Galveston, 258 U. S. 388), and it is impossible for us to determine whether the requisite history for deciding this question is to be found in the three large volumes of the transcript of the record of the case, containing 1664 pages, without reading the whole of it."

We find ourselves in substantially the same situation appearing in that case. This record is also very voluminous, and but a small part thereof printed. It is not improbable that the Commission gave full consideration to that item in making up the valuation. For the reasons stated this contention of the utility is denied.

(b and c) These two features of the utility's claim may be considered together. The Commission found that the rates designated in schedule P. U. C. O. No. 2, filed by the utility with the Commission, to become effective August 1, 1920, other than toll charges therein and thereafter filed, were sustained by the proper burden of proof, and were just and reasonable. However, the Commission found

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