148 N.E. 817 | Ohio | 1925
Lead Opinion
Since the original schedules were filed, as stated in the order of the Commission, it conducted an extensive hearing continuing over a number of sessions. The record is very lengthy, consisting of a large number of exhibits and testimony *273 of various witnesses, including expert engineers employed by the city and the telephone company. The Commission had the benefit of its own inspection of the utility plant, as well as of the inspection made and testimony given by its own engineers. Before the final order was made, the Commission had before it the experiences and operations of the telephone company, covering a period of 3 1/2 years, from the fall of 1920 until July 17, 1924, when the final order of the Commission was made.
In the two cases here presented the Public Utilities Commission is also represented by its own counsel, its attorney general and special counsel having filed a brief wherein the Commission opposes the reversal of its order, whether sought by the city or the utility. Both parties insist that the valuation of the telephone property made by the Commission is erroneous, and each makes sundry claims as to particular items allowed or ignored in making the total valuation upon which the rate base is fixed.
It has been stated that this case has been twice before this court. The first case was decided May 16, 1922, and reported in 105 Ohio St., at page 181, 137 N.E. 36. The journal entry in that case recites that no authoritative opinion was filed therein, "inasmuch as the judges who concur in the judgment in this case do not agree upon the grounds upon which the judgment is put." After a remand to the Commission, the cause again reached this court, resulting in a decision on March 27, 1923, reported in
While both parties claim that error intervened in fixing the valuation of the utility upon which the rates are based, the most important claims in that respect are as follows: (1) The city claims that, since the utility carried upon its books a large amount for accrued depreciation, such amount should be deducted from the total valuation of the utility to the extent that such valuation had been increased by new construction and betterments made by the utility. (2) The telephone company claims that error intervened when the Commission ordered that an unlimited subscriber for telephone service should not be required to pay a toll charge to limited subscribers in other zones, and ordered a refund of all toll charges collected therefor.
While other errors are claimed, and will be alluded to in this opinion, it is only upon the first of the two claims referred to that members of this court are in serious disagreement. The claim of the city that no statutory examination was made as a basis for these rate schedules is not now important. The city cannot complain of that fact, since the record discloses that the telephone company requested such a valuation, and the city opposed it. In that connection the order of the Commission recites:
"The inventory produced by the company of its physical property has been accepted as sufficiently accurate to make a valuation. This inventory has not been challenged in any way by the city — in fact has been adopted by the city's experts — and, heretofore, was high-spotted by the *275 Commission's engineers, so that the Commission feels justified in accepting it."
Furthermore, the city in its application for a rehearing before the Commission did not urge that a statutory valuation was relied on and denied, as is required by Section 543, General Code.
The ultimate question for our decision is: Has the telephone company established by proper proof the justness and reasonableness of the rates and charges filed in its schedules, which were to become effective August 1, 1920? The determination of that question largely rests upon the fact whether a proper and fair value has been placed upon the utility's property used and useful to the public. This telephone company is a utility of some importance, operating not only in one of the largest cities of the state, but with an extension of its plant to other communities in outlying territory. As shown by its findings, which are fully supported by the evidence, the fair value of this property was found by the commission to be as follows:
Physical property, less depreciation ......... $15,387,094.00 Overheads, including working capital, materials, and supplies ($450,000.00) ........ 1,846,451.00
Total valuation .......................... $17,233,545.00
The city claims that the reserve for accrued depreciation, as shown by the company's record, has been invested in plant in 11 years, beginning with January 1, 1913, and ending December 31, 1922; and that in the 11-year period the company has accumulated an excess of $3,712,759 in the account "reserve for accrued depreciation" which has been invested in plant. Therefore it is claimed that, although the previous earnings of this company *276 had been invested in new construction and betterments, giving value to, the plant, and being used and useful to the public, that sum should be deducted from its entire valuation as found by the Commission. The telephone company claims that, in addition to replacements, it has added thereto new property actually costing $3,162,444, as disclosed by the record. The Commission found that "net additions and betterments" amounting to $2,921,149 had been made by the telephone company between August 1, 1920, and May 1, 1923.
The record discloses that ordinary depreciation of its plant had been taken care of by the utility, and that on August 1, 1920, the Commission found that "its present condition is 92 per cent. of its reproduction cost new." If said sum of $3,712,759, which is about 21 1/2 per cent. of the total valuation, should be deducted from the total valuation of the Commission, the question becomes vitally important to the utility, since, without such deduction, the findings of the Commission disclose that from actual experience and operation, covering a period of 3 1/2 years, the utility would have been able to earn from 3.29 per cent. minimum to 5.668 per cent. maximum on the net investment of its property actually used and useful during the years 1920 to 1923, inclusive, if the 5 per cent. annual depreciation accorded it by the Commission were allowed.
Section 614-23, General Code, provides that when the Commission shall be of opinion "that the maximum rates, charges, tolls or rentals chargeable by any such public utility are insufficient to yield reasonable compensation for the service rendered, and are unjust and unreasonable, the Commission shall, *277
with due regard among other things, to the value of all the property of the public utility actually used and useful for the convenience of the public * * * fix and determine the just and reasonable rate, fare, charge, toll, rental or service to be thereafter rendered, charged, demanded, exacted or collected for the performance or rendition of the service." The value of the utility property which is actually used and useful for the convenience of the public is the valuation, under the Ohio act, upon which the base rate is fixed. What that value should be, and how it may be determined, has been frequently decided in both state and federal courts. The federal rule upon that subject was announced in Smyth v. Ames,
Those cases sustain the principle that the return is based upon the fair value of the net investment of property used and useful, without deduction of any depreciation, save that existing at the time of inquiry.
The Commission in its finding says:
"The inventory produced by the company of its physical property has been accepted as sufficiently accurate to make a valuation. This inventory has not been challenged in any way by the city — in fact has been adopted by the city's experts — and, heretofore, was high-spotted by the Commission's engineers so that the Commission feels justified in accepting it."
It recites that as to the various valuations it "has given consideration and weight to the experience and qualifications of the various witnesses produced both by the company and the city." It accepted the testimony of disinterested members of the real estate board of Cincinnati as to the value of the land; the testimony of a witness produced by the city as to the reproductive value of the buildings. It accepted the percentages of accrued depreciation of the buildings, testified to by one Miller, a witness for the company, and the values of physical property (other than land, buildings, and right of way), testified to by various engineers, especially one Snook, produced by the city. Various witnesses, the Commission recites, were in substantial *279 accord as to the 8 per cent. accrued depreciation. Eight per cent. accrued depreciation was deducted by the Commission, thus leaving its present condition at 92 per cent. of its "reproductive cost new." While the Commission did not have before it express testimony as to the "amounts actually paid" for the various items constituting "overheads" in producing the property, it allowed a percentage of 12 per cent. of the value of the physical property for items of "overheads" composed of allowances for engineering, administration and legal expenses, liability insurance, taxes and interest during construction, and working capital, including materials and supplies, $450,000 — the overheads totaling $1,846,451.
While but little challenge is made that the physical valuation of this property as found by the Commission is excessive, it is urged that since more than $3,000,000 were added to the property for new construction and betterments out of the former earnings of the company, the public should not be made to pay a rate based upon the amount so expended, because of the fact that an excess reserve depreciation account was carried upon the books of the company. No claim is urged that the so-called depreciation reserve account represented moneys or credits that were appraised by the Commission in making up its valuation. The fact is that the current annual depreciation of the property was taken care of by the company, and its earnings not required therefor were applied to new constructions, additions, or betterments. Whether the moneys upon the books of the company appeared, as alleged by counsel, in the accrued depreciation *280 account, or in the company's surplus, it was company money. Not only had the company the right to expend 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 upon 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.
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. *281
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 that this is sustained by the fact that in 1920, and previously, 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 from the net investment of a utility in ascertaining what the fair valuation should be. Excess capitalization or under capitalization cannot be used as a basis of determining the valuation of property. City of Knoxville v. Knoxville WaterCo.,
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 *282 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.,
"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."
In Erie City v. Public Service Commission,
To the same effect is the decision of the three judges inMonroe Gaslight Fuel Co. v. Michigan Public UtilitiesCommission (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 *283 the requirement that present stockholders should suffer by a refusal to grant them a reasonable rate based upon the 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 unreasonable 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 become 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 adabsurdum. 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 *284 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, *285 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 Simons, 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 is 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 *286 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. The Attorney General states:
"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."
While, we have referred to the sections of the Ohio Utility Act authorizing the utility to expend *287 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 Commissionof Louisiana v. Cumberland Telephone Telegraph Co.,
"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."
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. Since that time other courts of this *288 country, both federal and state, have sustained the principle that the account for reserve depreciation 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 Michigan Public Utilities Commission v.Michigan State Telephone Co.,
(5) "Depreciation fund maintained by telephone 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 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 stockholders.' " *289
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 theCumberland 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 $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.' "
The federal court proceeds:
"The Commission does not definitely undertake to deduct this retirement reserve from the present fair value of the property, but there is a suggestion that such deduction might be made. We think this is an entire misapprehension. An account 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. It appears in the list of assets only because it represents a supposed loss of capital (or *290 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. 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 utility 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 *291 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.,
Since the date of the Commission's final order, the case ofOhio Utilities Co. v. Public Utilities *292 Commission of Ohio,
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." *293
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 theOhio 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 Fuelcase, supra.
On the hearing before the Commission the city questioned the 4 1/2 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 *294
own affairs. Similar contracts with utilities have been recognized by the United States Supreme Court in various cases, and recently, in State ex rel. S.W. Telephone Co. v. PublicService Commission,
The record discloses that, in the hearing before the Commission, counsel for the city stated to the Commission that he felt "personally that the 4 1/2 per cent. is not exorbitant. I am not making a fight on that." However, he thought that the 4 1/2 per cent. should be apportioned between operating expenses and capital investment. This suggestion 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 4 1/2 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.
(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 occupied 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 be taken into consideration in fixing the rate base of the utility.
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 included in the item denominated "overheads," amounting to $1,846,451. Included in that *296 amount was an allowance for "engineering, administrative and legal expenses, liability insurance, taxes and interest during construction." All of these entered into the development 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 successful plant of this character is valued for rate-making purposes, and the value of the property fixed as the Master certifies upon the basis of a plant in successful operation, and overhead charges have been allowed for the items and in the sums 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,
In City of Houston v. Southwestern Bell Telephone Co.,
"Whether going concern value should be considered and allowed at all in determining the base for rate making, and if allowed what the amount of it should be, depends upon the financial history *297
of the company (Galveston Electric Co. v. Galveston,
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 that the toll charges designated in the utility'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 finial 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 *298 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 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, and it is not denied by the city. Such being the case, the return of 3.29 per cent. would necessarily be reduced, as would the other percentages of return found by the Commission from the actual experience of the company for the later periods. The Commission found that after allowance for annual depreciation the total net income available for interest and dividends yielded but 3.29 per cent. plus in 1920; from the later actual experience of the company it found that the net yield in 1921 was equivalent to but 4.29 per cent. of the total value of the property; in 1922, but 5.39 per cent. plus; and in 1923, 5.668 per cent. With the refunders ordered these percentages would be further reduced. There can be no doubt that if the valuation was fairly made the return yield, especially that for 1920, would amount to a confiscation of property. This brings us to the thresh-hold of a unique situation developed after the original schedules were filed on June 25, 1920. In the meantime the case had been twice before this court.
On April 11, 1923, the utility filed substituted schedules, including certain toll charges to become *299 effective May 1, 1923. These 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 court no doubt led to the consent entry. We are of opinion that the utility thereby chose to rest upon what it thus designates as a substituted toll service, and especially upon that which required tolls to be paid for communications between unlimited and limited subscribers in the different zone areas. The company's brief sanctions this view. Therein, its entire attack is directed against the action of the Commission in condemning the 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 subscribes for the universal or unlimited service, a toll when this latter subscriber attempts to call one with the limited service is an unjust, unreasonable and unjustly discriminatory practice."
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 *300 date when such practice is discontinued, for calls to subscribers in Hamilton county, having the optional, or limited, service."
Under the foregoing order, while it found that a limited subscriber who had secured a lesser rate might be charged a toll for communicating with an unlimited subscriber outside of his zone, the Commission held it was a discriminatory practice to charge a subscriber to the universal service a toll for communicating with a limited subscriber in another zone. A schedule which classifies service between an unlimited or universal subscriber and one who contracts for service at a lesser rate is lawful and reasonable. The subscriber who chooses a service at a lesser cost naturally should not be placed on an equality with one who chooses a greater service at a higher cost. The former would procure an incoming message, under the Commission's order, without any charge therefor. The unlimited subscriber is not required to pay a toll for communicating with another unlimited subscriber, although in a different zone. Why should he be permitted to obtain free toll service for a communication with a limited subscriber through the medium of an outgoing call and be denied the privilege if the call is an incoming one — the latter practice being sustained by the Commission? In actual practice and in ordinary business communications one may have as much value as the other. But the limited subscriber is given, free toll service on communications to him.
We hold, therefore, that the practice condemned by the Commission is a reasonable and lawful one, and not discriminatory, and that the Commission *301 erred in ordering its discontinuance and in requiring a refunder of toll charges collected thereunder after May 1, 1923. That error is accentuated by the fact that otherwise the return would be confiscatory. Upon that feature we cite the following cases: Bluefield Waterworks v. Public ServiceCommission, supra, and Ohio Utilities Co. v. Public UtilitiesCommission 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.
Case No. 18777: Order affirmed in part.
JONES, MATTHIAS, DAY and ROBINSON, JJ., concur.
MARSHALL, C.J., ALLEN and KINKADE, JJ., dissent.
Case No. 18779: Order reversed in part.
MARSHALL, C.J., JONES, MATTHIAS, DAY, ALLEN, KINKADE and ROBINSON, JJ., concur.
Dissenting Opinion
As stated in the *302 majority opinion, this is the third time this cause has been before this court, involving the same identical schedules. Upon the first review this court decided that the same schedules now before the court were not just and reasonable, and the cause was remanded for further proceedings. The schedules involved in this controversy were first published on June 25, 1920, to become effective August 21, 1920.
Counsel for the city of Cincinnati have seen fit to narrow the issues in this review to two fundamental propositions: First, that the valuation of the property used and useful, while an important factor in the establishment of rates, is not the only consideration which should move the Commission; and, second, that a "depreciation or deferred maintenance account," commonly called a "depreciation reserve," should not be added to the other capital assets of the utility in determining the value of the property used and useful.
Upon the first of these propositions, the Public Utilities Commission and this court must be governed by the provisions of the General Code. Section 499-8, General Code, provides that as a part of the proceeding in ascertaining the reasonableness and justness of rates and charges the Commission may investigate and ascertain the value of the property of the utility. Subsequent sections, and especially 499-10, provide that many additional facts shall be investigated and ascertained, including the bonded indebtedness, the original capital stock, and moneys received from the issue of such stock, bonds, or other securities. It is incontrovertible, and the majority opinion does not seek *303 to controvert the proposition, that the valuation of the property used and useful is only one of the circumstances necessary to be considered; that the capital stock, and the moneys received from the sale of such stock, is also a very pertinent subject of inquiry.
All this has been discussed at length in a concurring opinion in Cincinnati v. Public Utilities Commission, 105 Ohio St., at pages 190 to 198, inclusive, 137 N.E. 37, and will not be discussed at length in this dissenting opinion. It is only necessary to state that the stockholders for the past 15 years have never received less than 8 per cent. on their stock, and for a period of six years received 10 per cent. per annum, and in the year 1918, just prior to the publication of the schedules now being investigated, a dividend of 20 1/2 per cent. was paid.
It is true that in the findings of the Commission in this case, by using certain figures as the expression of the value of the property used and useful, and by omitting any mention of the fact that an exorbitant amount is added to the surplus each year under the guise of setting aside a depreciation reserve, it is made to appear that the net earnings available to stockholders are slightly less than 6 per cent. upon the valuation so found.
The "depreciation or deferred maintenance account," amounting to approximately $5,000,000, has been included to make up the total valuation of $17,233,545. Without the inclusion of this reserve, even though no other changes were made in the mode and manner of the Commission's calculations, the return would be approximately 8 per cent. upon the property used and useful. The finding of the *304 Commission and the opinion of the majority of the court in this case clearly illustrate the ease with which figures can be made to produce any desired result.
The first proposition is so closely interwoven with certain elements of the second proposition that we will pass to the second proposition without further comment upon the first.
We again desire to refer to the opinion in 105 Ohio St., on the subject of depreciation reserve, at pages 198 to 206. All that was stated in the opinion at that time is equally pertinent at this time, and after careful study of the principles therein discussed for the past three years, while this case has been pending and while it has been shuttled back and forth, I am still of the opinion that everything therein stated is sound.
It is not necessary to discuss at length at this time the case of Pollitz v. Public Utilities Commission,
Another case referred to at page 204 of the case reported in volume 105 is Railroad Comm. of Louisiana v. Cumberland Tel. Teleg. Co.,
"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 its entrance into that state, with great care and economy; that the stock had not been watered; 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. Treating of the power of the utility to invest the depreciation reserve in extensions and betterments, and to use the same as a basis for increased rates, the court said, at page 424 (
"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 was not proper for the complainant to take the money, or any portion of it, which it received 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 *307 its capital account, upon which it was paying dividends to shareholders. If that were allowable, it would be collecting money to pay for depreciation of the property, and, having collected it, to use it in another way, upon which the 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 raisemore than money enough for the purpose and place the balance tothe credit of capital upon which to pay dividends cannot beproper treatment."
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 cannot 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 Cumberland 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."
The majority opinion in the instant case wholly misconceives the meaning of that language. There is no difficulty or mystery about it. Judge Peckham clearly stated that a distinction is to be drawn *308 between "surplus earnings" and a "depreciation reserve." The Cincinnati Telephone Company carries 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 ofMichigan Public Utilities Commission v. Michigan StateTelephone Co.,
The majority opinion in this case has cited the cases ofCity of Minneapolis v. Rand (C.C.A.), 285 F., 818, Newton,Atty. Gen., v. Consolidated Gas Co.,
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 *310 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 PublicUtilities 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 theCumberland case. By reference to page 147 of the opinion in theMonroe 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 bookkeepingestimate is accurately made, it will precisely balance theactual difference between the present value of the depreciateditems and the future cost of proper replacements orsubstitutions."
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 *311 carefully read all of the court's opinion in the MonroeGaslight 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 unforeseen 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. *312
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 necessarily go to the stockholders. The fact that the company has title to the property 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.
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 1 1/2 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 property, 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 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 *313 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 cases. Experience has shown that utilities 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.
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 financed out of profits, is not at all conclusive of this inquiry, but it is at least significant, and for the benefit of those who *314 have not studied the situation, the following table is given:
----------------------------------------------------------------- Year Plant Amt. Reserved Charges to Balance to End- ing and for Depreciation Depreciaton Dec. 31. Equipment. Depreciation. Reserve. Reserve ----------------------------------------------------------------- (Cr.) (Dr.)
Amt. % Plant Amt. % Plant Amt. % Plant
1916 10,834,789 407,587 3.76 131,674 1.22 1,738,162 16.04 1917 11,754,049 357,524 3.04 56,763 .48 2,038,923 17.35 1918 12,323,632 466,407 3.78 107,218 .87 2,398,112 19.46 1919 13,371,609 684,543 5.12 153,966 1.15 2,906,374 21.74 1920 14,565,390 738,000 5.07 185,454 1.27 3,458,920 23.75 1921 15,896,815 877,325 5.52 233,254 1.47 4,102,991 25.81 1922 17,634,387 954,632 5.41 358,459 2.03 4,699,164 27.65 1923 19,763,347 1,070,797 5.42 391,420 1.98 5,379,541 27.22
----------------------------------------------------------------- 8-yr. aver- 14,518,002 694,602 4.78 202,276 1.39 age. -----------------------------------------------------------------
The foregoing table also clearly indicates the injustice to the public of permitting an arbitrary allowance of 5 per cent. for depreciation reserve when only 1.39 per cent. was required to meet the actual cost of renewals. It should be stated in fairness that the growth in the value of plant and equipment has not all been financed out of profits; but, during the past three years, when the largest growth has taken place, and this being the period which the majority opinion finds has justified the increased rates and revenues, the records show that only $2,298,600 was subscribed to the capital stock and nearly $3,000,000 of the growth during the past three years is surplus revenues over and above the 8 per cent. dividend paid to stockholders.
It should further be added at this time, as a reason why telephone companies are not fairly *315
entitled to such profits as have been earned by the Cincinnati Telephone Company, that by two decisions of this court, both of which were rendered by a bare majority of the court, telephone companies have been given a monopoly in the state of Ohio:Celina Mercer County Telephone Co. v. Union-Center MutualTelephone Ass'n.,
We must again call attention to a subject which was discussed in Cincinnati v. Public Utilities Commission, 105 Ohio St., at pages 198 to 206, 137 N.E. 36, and feel that we must again call special attention to the fact that this case should be decided upon the statutes of Ohio, which provide that although a depreciation reserve may be invested in betterments and extensions the income upon such investment must be turned back into the depreciation reserve account.
The recent session of the General Assembly of Ohio appropriated a fund of $100,000 to make an investigation of telephone rates and charges. It is apparent that in the face of the majority opinion in this case it would be of no use to expend a penny of that fund in investigations. This record clearly shows that the company has been rapidly growing, not through the investment of additional capital alone, but largely through its accumulated *316 surplus, and its depreciation reserve, both of which are permitted to be capitalized. No investigation could more clearly show that which appears clearly in this record. The remedy, if one is needed, must be found in the declaration of more salutary principles of law, rather than in the presentation of additional facts and figures.
A part of the majority opinion is devoted to a justification of the contract with the American Telephone Telegraph Company, whereby 4 1/2 per cent. of the gross revenues are paid to that company for the use of certain patents and equipment. We regret that that matter has been discussed in the majority opinion, because it is clearly not involved in the case. The city solicitor has particularly eliminated that question from the case. However, since it is discussed in the majority opinion, it cannot be permitted to go unchallenged. That portion of the equipment which is rented from the American Telephone Telegraph Company represents less than 3 per cent. of the entire investment of the telephone company, and it would seem, therefore, that unless there are special circumstances justifying a larger payment by the Cincinnati Company to the American Company, 3 per cent. of the net revenue of the utility would be a fair return upon that portion of the property rented, which amount for the year 1923 would have been less than $20,000. As a matter of fact, the Cincinnati Telephone Company paid the American Company 4 1/2 per cent. of the gross revenue, which amounted to approximately $140,000. We do not contend that $20,000 is all that would have been proper, but we certainly contend that $140,000 was *317 grossly exorbitant and unjustifiable from any standpoint. The American Telephone Telegraph Company is engaged in the public service in the same manner as the Cincinnati Telephone Company, and contracts between utilities should be subject to regulation in the same manner and to the same extent as contracts between utilities and the public.
There is another reason why the contract with the American Company should be carefully scrutinized, and that is that the public records show that that company owns approximately 40 per cent. of the capital stock of the Cincinnati Telephone Company. It is equally well known, and provable by public records, that the American Telephone Telegraph Company owns a large percentage of the capital stock of all telephone companies throughout the United States, and that it owns a majority of the capital stock of a great many telephone companies. *318