practice of "charging subscribers to universal service in one zone a toll for communicating with a limited subscriber in another zone." under its filed schedules of April 11, 1923. Finally, the order of the Commission held: "While it is a proper practice for the company to allow and provide for an optional service at a lesser cost to those subscribers who select the limited service and to charge such a subscriber a toll when he communicates outside of the optional district, the practice of the company in charging a subscriber, who subtoll when this latter subscriber attempts to call scribes for the universal or unlimited service, a one with the limited service is an unjust, unreasonable and unjustly discriminatory practice."

that the toll charges designated in the util-, tion of the Commission in condemning the ty's filed substituted schedule of April 11, 1923, were "unreasonable and unjustly discriminatory practice." The Commission not only ordered the utility's discontinuance of the collection of such charges, but ordered a refunder of all tolls collected thereunder after May 1, 1923. The utility now contends that upon the face of the final order of the Commission the return yield of 3.29 per cent. of the total valuation of the property is confiscatory, especially in view of the fact that this percentage will be further reduced by the refunder of the toll charges collected by the utility under its schedules. The Commission found the total valuation of the property to be $17,233,545. The amount of return after annual depreciation for the period of one year ending August 1, 1920, was $567.518, representing but 3.29 per cent. available after interest and dividends.

The Commission accordingly ordered the utility to refund "to all of such universal, or unlimited, subscribers in Hamilton county all tolls collected from such subscribers from May 1, 1923, to the date when such practice is discontinued, for calls to subscribers in Hamilton county, having the optional, or limited, service."

The order of the commission recites that the annual income or total revenue includes the toll charges collected and ordered to be refunded. Counsel for the utility claimed in their brief that such was the fact, Under the foregoing order, while it found and it is not denied by the city. Such being that a limited subscriber who had secured a the case, the return of 3.29 per cent. would lesser rate might be charged a toll for comnecessarily be reduced, as would the other municating with an unlimited subscriber outpercentages of return found by the Commis- side of his zone, the Commission held it was sion from the actual experience of the com- a discriminatory practice to charge a subpany for the later periods. The Commission scriber to the universal service a toll for found that after allowance for annual depre- communicating with a limited subscriber in ciation the total net income available for in- another zone. A schedule which classities terest and dividends yielded but 3.29 per service between an unlimited or universal cent. plus in 1920; from the later actual ex- subscriber and one who contracts for service perience of the company it found that the at a lesser rate is lawful and reasonable. net yield in 1921 was equivalent to but 4.29 The subscriber who chooses a service at a per cent. of the total value of the property; lesser cost naturally should not be placed on in 1922, but 5.39 per cent. plus; and in 1923, an equality with one who chooses a greater 5.668 per cent. With the refunders ordered service at a higher cost. The former would these percentages would be further reduced. procure an incoming message, under the ComThere can be no doubt that if the valua- mission's order, without any charge therefor. tion was fairly made the return yield, espe- The unlimited subscriber is not required to cially that for 1920, would amount to a con- pay a toll for communicating with another fiscation of property. This brings us to the unlimited subscriber, although in a different threshold of a unique situation developed aft-zone. Why should he be permitted to obtain er the original schedules were filed on June 25, 1920. In the meantime the case had been twice before this court.

munications one may have as much value as the other. But the limited subscriber is given free toll service on communications to him.

free toll service for a communication with a limited subscriber through the medium of an outgoing call and be denied the privilege it [4] On April 11, 1923, the utility filed sub- the call is an incoming one-the latter prac stituted schedules, including certain toll tice being sustained by the Commission? In charges to become effective May 1, 1923. | actual practice and in ordinary business comThese schedules were filed by consent of the parties and received the approval of the Commission; but all questions of rates, charges, and refunders were reserved for future determination. The previous decisions of this We hold, therefore, that the practice concourt no doubt led to the consent entry. We demned by the Commission is a reasonable are of opinion that the utility thereby chose and lawful one, and not discriminatory, and to rest upon what it thus designates as a sub- that the Commission erred in ordering its disstituted toll service, and especially upon that continuance and in requiring a refunder of which required tolls to be paid for communi- toll charges collected thereunder after May cations between unlimited and limited sub- 1, 1923. That error is accentuated by the scribers in the different zone areas. The com- fact that otherwise the return would be conpany's brief sanctions this view. Therein, fiscatory. Upon that feature we cite the folits entire attack is directed against the ac-lowing cases: Bluefield Waterworks v. Pub

(148 N.E.)

lic Service Commission, supra, and Ohio Utilities Co. v. Public Utilities Commission of Ohio, supra.

What amounts of toll charges (other than those collected since May 1, 1923) have been collected we are unable to determine. The Commission, in its order, realized that the work "necessary to determine the amount of such refunders will be excessive, and that considerable time would be required" to determine the amount. This court therefore reverses so much of the Commission's order as relates to the aforesaid toll charges collected after May 1, 1923, and remands the cause to the Commission for determination of the tolls theretofore collected. We are of opinion, since the substituted schedule measures the full claim advanced by the utility, that it should not receive further allowance in rates in this proceeding, especially since the record discloses that in 1923 its rate of return has been substantially advancing.

"The evidence in the case shows that the company's affairs had been economically administered, and that its business had been conducted in the state of Louisiana, ever since economy; that the stock had not been watered; its entrance into that state, with great care and that its capital was contributed in cash and every economy possible had been practiced."

If there is a case to be found where liberality should be indulged toward the utility, it is such a case as that above described.

vest the depreciation reserve in extensions and betterments, and to use the same as a basis for increased rates, the court said, at page 424 (29 S. Ct. 362):

this time the case of Pollitz v. Public Utilities Commission, 97 Ohio St. 191, 119 N. E. 507. A careful study of that case shows that sections 614-49 and 614—50 were there under consideration and discussed at length in the opinion in that case. An examination of the record on file in that case shows that it was sought by the railroad company to capitalize its accumulated surplus. The railroad company had not faithfully complied with those sections, and had not kept its depreciation reserve separate from its accu-Treating of the power of the utility to inmulated surplus account, and this court therefore went to much greater lengths than it is required to do in the instant case and criticized the utility for not keeping its depreciation reserve separate, and declared not only that it was its duty to do so, but, further, that whatever sum was properly to be credited to a depreciation reserve in compliance with those sections would be withdrawn from the capital account and could not be used as a basis for increase of capital stock. That case not only becomes a very pertinent authority, which is in principle on all fours with the instant case, but it is a much stronger illustration of the soundness of the principles for which we contend than is the case now under consideration. It is significant that no one has ever attempted to answer the reasoning of that case, and certainly no one has been successful in disput-it, to use it in another way, upon which the ing its applicability to the case at bar.

Another case referred to at page 204 of the case reported in volume 105 is Railroad Comm. of Louisiana v. Cumberland Tel. & Teleg. Co., 212 U. S. 414, 29 S. Ct. 357, 53 L. Ed. 577. A great deal of space in the majority opinion of this case has been devoted

to a discussion of that case, and the briefs of counsel, and the opinions of other courts of inferior jurisdiction predisposed toward liberal rates, have attempted to explain what Judge Peckham had in mind when making many of the statements found in the opinion in the Cumberland Case. It should be remarked that while the language is that of Judge Peckham, the principles declared must necessarily be charged to the entire

court, because it was a unanimous opinion, except that it lacked the concurrence of Chief Justice White; he not having heard the argument and therefore not taking any part in the decision of the case. It should

"It was obligatory upon the complainant to show that no part of the money raised to pay for depreciation was added to capital, upon which a return was to be made to stockholders in the way of dividends for the future. It cannot be left to conjecture, but the burden rests with the complainant to show it. It certainly the money, or any portion of it, which it rewas not proper for the complainant to take

ceived as a result of the rates under which it was operating, and so to use it, or any part of it, as to permit the company to add it to its capital account, upon which it was paying div. idends to shareholders. If that were allowable, it would be collecting money to pay for depreciation of the property, and, having collected

complainant would obtain a return and distribute it to its stockholders. That it was right to raise more money to pay for depreciation than was actually disbursed for the particular year there can be no doubt, for a reserve is necessary in any business of this kind, and so it might accumulate, but to raise more than balance to the credit of capital upon which to money enough for the purpose and place the pay dividends cannot be proper treatment." (Italics ours.)

It is an affront to the memory of that great jurist, and it is equally an affront to the intelligence of any reader of that language to insist that it did not declare that the depreciation, reserve cannot be capitalized. We canot quote the entire opinion, because of its length, but it clearly appears throughout the discussion of that branch of the case that the discussion was pertinent to

the issues involved.

The majority opinion in the instant case quotes Judge Peckham's opinion in the Cum

berland Case as follows:

"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."

be further remarked that it is a distinct affront to the memory of that great jurist, Judge Peckham, to allege at this late date that he said one thing, but that he meant another. A careful scrutiny of his opinions during the entire period of his service on the supreme bench indicates that there The majority opinion in the instant case is very little, if any, ambiguity found in his wholly misconceives the meaning of that lanexpressions, and there is even less of obiter guage. There is no difficulty or mystery dicta. With this preface let us see what was about it. Judge Peckham clearly stated that actually said in the opinion. In the first a distinction is to be drawn between "surplace, a tribute was paid to the management plus earnings" and a "depreciation reserve." of the telephone company in that case: The Cincinnati Telephone Company carries

(148 N.E.)

both funds. The depreciation reserve is provided for by an arbitrary 5 per cent. deduction, and after making this deduction and paying all operating expenses and dividends there has remained each year for the past 15 years an additional considerable sum of money, which is credited to unappropriated surplus. It is such unappropriated surplus that Judge Peckham has clearly declared not to be included within the ban against capitalizing depreciation reserve.

The majority opinion finds much comfort in the case of Michigan Public Utilities Commission v. Michigan State Telephone Co., 228 Mich. 658, 200 N. W. 749. This case is a strong authority, but it is certainly not controlling upon this court, in the face of the United States Supreme Court decision in the Cumberland Case. After having carefully read the opinion of Chief Justice Clark in the Michigan case, we are bound to respectfully insist that his comment upon the Cumberland Case finds no justification. In any event, the statement of facts in that case shows that the actual accrued depreciation was found to be $9,500,000, and the depreciation fund was exactly the same amount. The company was in that case therefore only capitalizing the actual accrued depreciation. It is significant that the General Code of Ohio specifially requires the deduction of the accrued depreciation. The Michigan decision could not therefore be a sound decision if rendered in this state. The dissenting opinion in that case seems much more logical than the majority opinion.

The majority opinion in this case has.cited the cases City of Minneapolis v. Rand (C. C. A.), 285 F. 818, Newton, Atty. Gen., v. Consolidated Gas Co., 258 U. S. 165, 42 S. Ct. 264, 66 L. Ed. 538, and Erie City v. Pub. Service Comm., 278 Pa. 512, 123 A. 471, to show that past successes do not require that the company operate in the future at a loss. We cannot see how that proposition has anything to do with the instant case. Surely all unbiased conservative persons agree that the past has nothing to do with the matter. We are not insisting in this case that the mere fact that the company has had large earnings in the past, and that it has built up a large surplus, requires that it should now be required to adopt a rate which would offset the excesses of the past. We heartily agree with the authority cited and with the majority opinion on this point, only contending that it has no applicability to the case.

If this were a proceeding where the utility was fighting to prevent a reduction of rates and revenues, there might be some justification for a discussion of above cases. The fact is that for the last 15 years the Cincinnati Telephone Company has steadily increased its unappropriated surplus, its depreciation reserve fund, and during the same

period has enormously increased in the value of its property used and useful while at the same time paying to its stockholders dividends averaging approximately 11 per cent. per annum, and at the same time has succeeded in persuading the Utilities Commission to approve a new schedule of rates and charges designed to further increase its surplus and to use such further surplus and enlargements of capital as justification for a higher base rate.

The foregoing is but a momentary diversion from the main question for the purpose of disposing of a few authorities cited in the majority opinion, which in our judgment have no bearing upon the proposition. It will, of course, be readily conceded that Monroe Gaslight & Fuel Co. v. Michigan Public Utilities Commission (D. C.) 292 F. 139, is also an authority in support of the majority opinion, but it must not be overlooked that this is a District Court opinion, and that it also flies in the face of the Supreme Court decision in the Cumberland Case. By reference to page 147 of the opinion in the Monroe Gaslight Case (292 F. 139), we find that depreciation reserve is treated as a mere bookkeeping estimate, and we quote the court as follows:

"It appears in the list of assets only because it represents a supposed loss of capital (or of accumulations); and if the capital stock is carried as a liability at par, along with undivided profits and surplus, then the depreciation must appear upon the other side of the account.

If the bookkeeping estimate is accurately made, it will precisely balance the actual difference between the present value of the depreciated items and the future cost of proper replacements or substitutions."

Under the reasoning of the court in that case, the depreciation reserve account could never be more than the accrued depreciation, which in this case is slightly less than 8 per cent., while as a matter of fact the depreciation reserve account has grown to approximately 30 per cent. We have carefully read all of the court's opinion in the Monroe Gaslight Case, and we are unable to agree with the reasoning in support thereof. It is stated at page 147 that the idea has become prevalent that the depreciation reserve is a trust fund. We do not make any such contention; but we do insist that a reserve account is all that that term implies, and that it may not be violated by passing it to the surplus account. We have never complained of the size of the reserve fund in the instant case, and we cannot see that it makes any difference how large it grows, so long as it is maintained as a reserve and the fund is not violated by treating it as capital assets. A reserve is for a specific purpose, and that purpose is to provide against worn-out equipment, which has to be replaced, and against

unforseen casualties. It would seem that ordinary business prudence would dictate that such a fund should be cared for by investment in quick assets in order to be readily available when the equipment must be replaced or the casualty provided for. As illustrating what would be likely to happen-if any great casualty that involved an unforeseen expenditure of $5,000,000 should overtake the Cincinnati Telephone Company-the company, instead of having the $5,000,000 readily available, would find the $5,000,000 reserve account already invested in permanent equipment, and would therefore be compelled to borrow that amount of money to meet the emergency. Surely no one believes that the interest on such borrowed money would not be charged as an operating expense, thereby again making the candle burn at both ends.

of which is done by extracting what we conceive to be an unlawful revenue from the people; and then, to make the matter worse, employing the surplus thus raised as a basis for even greater rates. The record shows that during the past year more than $680,000 has been added to the depreciation reserve account, which sum would pay approximately a 5 per cent. dividend upon all the outstanding capital stock. That there is a large surplus thus added each year seems to be admitted by counsel for the utility, because they have incorporated Exhibit No. 2 as a part of their brief in this case, and that exhibit shows that the average amount expended from the depreciation reserve during the past eight years is 1.39 per cent. It is conceded that the Supreme Court of the United States has in a measure approved of the 5 per cent. allowance for depreciation, but this is only as a general proposition, and we find no case where the court has said that such an allowance should be made arbitrarily in all

We do not deny that this reserve belongs to the utility, and on any distribution of the assets of the company, on dissolution, it would necesarily go to the stockholders. The fact that the company has title to the prop-cases. Experience has shown that utilities erty does not obviate the essential fact that it was permitted to be taken from the public for a certain purpose and that it is being used for a different purpose.

generally build in such temporary fashion that it requires approximately 5 per cent. for replacements, and to provide against casualties; but this cannot be true of the Cincinnati Telephone Company, which builds in a more permanent fashion, and where experience has shown that one-third of that amount is sufficient. We do not criticize the company for building thus permanently, but we think it has been sufficiently rewarded when the expensive construction is appraised at the full value of its cost and a rate is allowed which permits a fair return upon that cost.

A careful examination of this record further shows that the company has pursued a policy of erecting its equipment in a permanent manner, a great portion of which is underground and which requires almost no renewals. The experts who have testified in this case have produced facts and figures which show that while the company has been arbitrarily setting aside 5 per cent. of its entire depreciable property as a reserve fund, it has been found necessary to expend less than 11⁄2 per cent. per year during the last eight years. The effect of this is to increase the company's surplus each year by more than 3 per cent. of its entire depreciable | financed out of profits, is not at all concluproperty, which is in fact approximately 5 per cent. of its outstanding capital stock. By such means the company is able to increase its capital assets very largely each year, all

The fact that the Cincinnati Telephone Company has grown stronger financially, and that this growth has been by leaps and bounds during the past eight years, much the greater portion of which growth has been

sive of this inquiry, but it is at least significant, and for the benefit of those who have not studied the situation, the following table is given:

P. U. C. O. Reports for Ohio Property of Cincinnati & Suburban Bell Telephone Co.
Charges to Maintenance and Reserve for Depreciation.