State ex rel. Southwestern Bell Telephone Co. v. Public Service Commission of Missouri

262 U.S. 276, 67 L. Ed. 981, 43 S. Ct. 544, 31 A.L.R. 807, 1923 U.S. LEXIS 2642

• Court: Supreme Court of the United States
• Decided: May 21, 1923
• Docket: No. 158
• Status: Published

Opinions

Me. Justice McReynolds

delivered the opinion of the Court.

The Supreme Court of Missouri (233 S. W. 425) affirmed a judgment of the Cole County Circuit Court which sustained an order of the Public Service Commission of Missouri, effective -December 1, 1919. That order undertook to reduce rates for exchange service and to abolish the installation and moving charges theretofore demanded by plaintiff in error. It is challenged as confiscatory and in conflict with the Fourteenth Amendment.

During the period of federal control — August 1, 1918, to August 1, 1919 — the Postmaster General advanced the rates for telephone service and prescribed a schedule of charges for installing and moving instruments. The Act of Congress approved July 11, 1919, c. 10, 41 Stat. 157, directed that the lines be returned to their owners at midnight July 31, 1919, and further—

“That the existing toll and exchange telephone rates as established or approved by the Postmaster General on or prior to June 6, 1919^ shall continue in force for a period not to exceed four months after this Act takes effect, unless sooner modified or changed by the public authorities — State, municipal, or otherwise — having control or jurisdiction of tolls, charges, and rates or by contract or by voluntary reduction.”

August 4, 1919, the Commission directed plaintiff in error to show why exchange service rates and charges for installation and moving as fixed by the Postmaster General should be continued. After a hearing, it made an elaborate report and directed that the service rates should be reduced and the charges discontinued.

The Company produced voluminous evidence, including its books, to establish the value of its property dedicated to public use. The books showed that the actual cost of “total plant, supplies, equipment and working capital,” amounted to $22,888,943. Its engineers estimated the reproduction cost new as of June 30, 1919, thus — Physical telephone property, $28,454,488; working capital, $1,051,564; establishing business, $5,594,816; total $35,100,868. They also estimated existing values (after allowing depreciation) upon the same date — Physical telephone property, $24,709,295; working capital, $1,051,564; establishing business, $5,594,816; total; $31,355,675.

The only evidence offered in opposition to values claimed by the Company, were appraisals of its property at St. Louis, Caruthersville and Springfield, respectively, as of December 1913, February 1914 and September 1916, prepared by the Commission’s engineers and accountants, together with statements showing actual cost of additions subsequent to those dates.

Omitting a paragraph relative to an unimportant reduction — $17,513.52—from working capital account, that part of the Commission’s report which deals with property values follows.

“The Company offered in evidence exhibits showing the value of its property in the entire State (outside the cities of Kansas City and Independence, whose rates are not involved in this case), and also at forty-six of its local exchanges in the State. It shows by such exhibits that the value of the property in the entire State (and when speaking of the property in the State in this report we mean exclusive of Kansas City and Independence) is as follows: Reproduction cost new, $35,100,471; reproduction cost new, less depreciation, $31,355,278; and cost as per books, $22,888,943. It also shows the Company’s estimate of reproduction cost new, reproduction cost new less depreciation, and the prorated book cost, at each of the forty-six local exchanges mentioned.

“The engineers of this Commission have made a detailed inventory and appraisal and this Commission has formally valued the Company’s property at only three of its exchanges, viz: at the City of Caruthersville, reported in re Southwestern Tel. & Tel. Company, 2 Mo. P. S. C. 492; at the City of St. Louis in cases No. 234 and No. 235 as yet unreported; and at the City of Springfield, reported in re Missouri and Kansas Telephone Company, 6 Mo. P. S. C. 279, and as a result we have only the estimates and appraisals of the Company before us -in relation to the value of the property at the other exchanges. We think it is clear, however, from the data at hand that the values placed by the Company upon the property are excessive and not a just basis for rate making.

“ The values fixed by this Commission at Caruthers-ville, St. Louis and Springfield in the cases above mentioned aggregate $11,003,898, while the Company estimates the aggregate cost of reproduction new of these plants in this case at $18,971,011. The ratio of the latter figure is 172.4 per cent. This percentage divided into' $35,100,471, the Company’s estimate of the aggregate cost of reproduction new of its property in Missouri in this case, equals $20,350,000, which might be said to be one measure of the value of the property.

“Again, the Company’s estimate of the aggregate cost of reproduction new, less depreciation, of its properties at Caruthersville, St. Louis and Springfield, in this case is $16,913,673. The ratio of this figure to the aggregate value fixed by the Commission at these exchanges, plus additions reported by the Company, is 153.7 per cent. This percentage divided into $31,355,278, the Company’s estimate of the aggregate cost of reproduction new, less depreciation, of Jts .property in Missouri in this case, equals $20,400,000, which may be said to be another measure of the value of the property.

“ The Company also shows by Exhibits 19 and 212 that its return under the Postmaster General’s rates on $22,888,943, the book value of its property in the State, is at the rate of 11.65 per cent per annum for depreciation and return on the investment, which would yield the Company 6 per cent for depreciation and 5.65 per cent for return on the book cost of the property. As stated, however, we do not think that the book cost or the ‘ prorated book cost ’ of the property as claimed by the Company would be a fair basis for rate making.

“As we understand it, the ‘ prorated book cost ’ given in evidence by the Company for the various exchanges is simply the percentage relation of reproduction cost new which the original cost of all property bears to reproduction cost new of all property and in individual instances the actual cost might vary greatly, either up or down, from what an appraisal would show. If the Company, to eliminate competition, paid a price in excess of the value or because of discouraged local operation were enabled to purchase a plant far below its actual value, the ‘ prorated book cost ’ basis would not reflect anything like the original cost.

“We also think that the figure of $22,888,943, claimed by the Company to represent the book cost or original cost of its property in the State, is subject to certain adjustments with reference to the amount of non-useful property included, working capital, and the amount to be deducted account extinguished value recouped from patrons by charges to depreciation.

“ In the St. Louis case, supra, the original cost of the non-useful property deducted and disallowed by the Commission amounted to $454,689.16. It appears from the Company’s Exhibit 256 that the ‘ prorated book cost ’ of the St. Louis exchange is just about half of that given for the State. However, it is clear that the proportion of non-used and non-useful property in St. Louis bears a much larger percentage relation to useful property than would obtain throughout the State. It would appear that estimating the Company’s property not used and useful for the entire State at $500,000 would be a fair approximation. This sum at least should be deducted. . . .

“The depreciation reserve applicable to the Missouri property is not shown by the Company. However, on the Company’s Exhibit 15, the balance sheet as of June 30, 1919, of the Southwestern Bell Telephone Company (Missouri corporation) operating in Missouri, Kansas and Arkansas, the reserve for accrued depreciation and reserve for amortization of intangibles is given as $7,963,082.37. The same exhibit shows the original cost of fixed capital for Missouri, Kansas and Arkansas property as $46,061,162.76. The total fixed capital of the Missouri property shown on the Company’s Exhibit 19 is $21,837,759, which is 47.4 per cent of $46,061,162.76 and 47.4 per cent of the reserve for depreciation, $7,963,082.37 equals $3,774,501, or the portion assignable to the Missouri property.

“Adjusting in accordance with the above, we have: Total plant and equipment, including working capital, as per Company’s Exhibit No. 19, $22,888,943. Deduct property not used or useful, $500,000.00; deduct excess working capital, $17,513.52; deduct depreciation reserve, $3,774,501.00; [total to be deducted] $4,292,014.52. [Net total] $18,596,928.48; add for intangibles, 10 per cent, $1,859,692.85; total adjusted original cost, $20,-456,621.33.

“After carefully considering all the evidence as to values before us in this case, we are of the opinion that the value of the Company’s property in the State, exclusive of Kansas.City and Independence, devoted to exchange service, will not exceed the sum of $20,400,000, and we will tentatively adopt this sum as the value of the property for the purposes of this case. As stated supra, this Commission has formally valued only a part of this property, and we should not be understood as authoritatively fixing the value of the property at this time.”

The three earlier valuations to which the Commission referred are — St. Louis, December 1913, $8,500,000; Caruthersville, February 1914, $25,000; Springfield, September 1916, $815,000; total, $9,340,000. Between those dates and June 30, 1919, additions were made to these properties which cost, respectively, $1,623,765, $5,992 and $34,141. Adding these to the original valuations gives $11,003,898, the base sum used by the Commission for the estimates now under consideration.

Obviously, the Commission undertook to value the property without according any weight to the greatly enhanced costs of material, labor, supplies, etc., over those prevailing in 1913, 1914 and 1916. As matter of common knowledge, these increases were large. Competent witnesses estimated them as 45 to 50 per centum.

In Willcox v. Consolidated Gas Co., 212 U. S. 19, 41, 52, this Court said:

“ There must be a fair return upon the reasonable value of the property at the time it is being used for the public. .. . And we concur with the court below in holding that the value of the property 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.”

In the Minnesota Rate Cases, 230 U. S. 352, 454, this was said:

“ The making of a just return for the use of the property involves the recognition of its fair value if it be more than its cost. The property is held in private ownership and it is that property, and not the original cost of it, of which the owner may not be deprived without due process of law.”

See also Denver v. Denver Union Water Co., 246 U. S. 178, 191; Newton v. Consolidated Gas Co., 258 U. S. 165 (March 6, 1922); and Galveston Electric Co. v. Galveston, 258 U. S. 388 (April 10, 1922).

It'is impossible to ascertain what will amount to a fair return upon properties devoted to public service without giving consideration to the cost of labor, supplies, etc., at the time the investigation is made. An honest and intelligent forecast of probable future values made upon a view of all the relevant circumstances, is essential. If the highly important element of present costs is wholly disregarded such a.forecast becomes impossible. Estimates for to-morrow cannot ignore prices of to-day.

Witnesses for the Company asserted — and there was no substantial evidence to the contrary — that excluding cost of establishing the business the property was worth at least 25% more than the Commission’s estimates, and we think the proof shows that for the purposes of the present case the valuation should be at least $25,000,000.

After disallowing an actual expenditure of $174,048.60 for rentals and services by the American Telephone & Telegraph Company and some other items not presently important, the Commission estimated the annual net profits on operations available for depreciation and return as $2,828,617.60 — approximately 114% of $25,000,-000. That 6% should be allowed for depreciation appears to be accepted by the Commission. Deducting this would leave a possible 54% return upon the minimum value of the property, which is wholly inadequate considering the character of the investment and interest rates then prevailing.

The important item of expense disallowed by the Commission — $174,048.60—is 55% of the 4|% of gross revenues paid by plaintiff in error to the American Telephone & Telegraph Company as rents for receivers, transmitters, induction coils, etc., and for licenses and services under the customary form of contract between the latter Company and its subsidiaries. Four and one-half per cent, is the ordinary charge paid voluntarily by local companies of the general system; There is nothing to indicate bad faith. So far as appears, plaintiff in error’s board of directors has exercised a proper discretion about this matter requiring business judgment. It must never be forgotten that while the State may regulate with a view to enforcing reasonable rates and charges, it is not the owner of the property of public utility companies and is not clothed with the general power of management incident to ownership. The applicable general rule is well expressed in State Public Utilities Commission ex rel. Springfield v. Springfield Gas and Electric Company, 291 Ill. 209, 234.

“ The commission is not the financial manager of the corporation and it is not empowered to substitute its judgment for that of the directors of the corporation; nor can it ignore items charged by the utility as operating expenses unless there is an abuse of discretion in that regard by the corporate officers.”

See Interstate Commerce Commission v. Chicago Great Western Ry. Co., 209 U. S. 108; Chicago, Milwaukee & St. Paul R. R. Co. v. Wisconsin, 238 U. S. 491; People ex rel. v. Stevens, 197 N. Y. 1.

Reversed.