In Re Northwestern Bell Telephone Co.

In Re BELL NORTHWESTERN TELEPHONE COMPANY

(43 553) N. W.2d (Filе 1950) Opinion July 10, Nos. 9169. filed Sigurd Anderson, Gen., Atty. Williamson, William Asst. Gen., Atty. and General Counsel for Public Utilities Commis- sion, for Appellant 9161. No.

Joseph Robbie', Jr., Fellows, Mitchell, Donald for Appel- lants in No. Farmers Union Educational and Cooper- ative Ass’n. of South Dakota and Junior Chamber of Com- merce of Mitchell. Poley, Neb.,

H. A. Omaha, Burke, Omaha, Neb., H. G. Warren, Falls, F. G. R. Aberdeen, Sioux F. Williamson J.T. Peycke, Omaha, Neb., counsel, North- Respondent western Bell Telephone Co.

PER November, 1947, CURIAM. In the Northwestern Bell Telephone Company made application to the Public Utilities Commission to increase rates telephone exchange and intrastate toll service claiming that the rates then in ef- fect were confiscatory and unlawful. Company The filed with its application a proposed schedule of increased rates. Pre- sentation of testimony began 15, 1948, on March hearings were 8, 1949, continued from time to time and on October the Commission filed report its and made and entered or- der denying the application. The Company appealed from such order to the County. Circuit Court of Charles Mix An permitting order the Company to place effect increased pending rates appeal was annulled in an original proceeding in certiorari validity review the of the order. Farmers’ Educational and Coop. Union v. Circuit Court of Charles Mix County, , 9, 1950, 40 N.W.2d 402. On March S.D.— decision judgment and of the Circuit Court was entered set- ting aside the Commission’s order and remanding pro- ceeding with directions approve a schedule of exchange and intrastate toll rates that will permit a fair rate re- turn. The Commission and intervenors have appealed.

The Telephone Northwestern Bell Company, to which we herein refer to as the Company, is incorporated under the laws of the state of Iowa and operates a telephone sys- Dakota, tem in the Dakota, states South Iowa, North Minnesota and Nebraska. The American Telephone & Telegraph Company, a York corporation New and hereinafter referred to as the American Company, owns the common respondent company practically stock of all the com- Company. latter mon stock of the Western Electric The company and the American own all the stock Bell Laboratories. renders in this three state classes (a) (b) exchange service;

service: or local intrastate toll (c) service; and interstate toll service. The books of the September 30, 1948, indicate that on total cost plant equipment $23,214,027 in this was state $18,054,312 of this amount was devoted to intrastate use. The court found that the evidence is insufficient to show “Telephone Acquisition Adjust- that an account as known amounting ment”, $451,389, constitutes a book cost to be determining considered in the rate base and should be de- property. ducted from the total book cost of intrastate applicable court found that the reserve account September to intrastate 30, 1948, business as of $5,341,- $13,189,336 579 and that on this basis was the minimum rate base which the was entitled to earn a disapproved reasonable rate of return. The court the Com- (1) following mission’s $401,293 reductions amounts: (2) metallicizing pension lines, $55,483 rural as excess (3) alleged profits $428,427 accruals and excess received respond- the Western Electric its transactions with company. ent

The Court found that the total intrastate revenue of Company the for the first nine $4,001,- months of 1948 was 001, which annuаlized $5,334,668; amounted to that the expenses respective periods total intrastate for those were $4,020,814 operations $5,361,084; and that intrastate Company year of the for the first nine of months re- $19,813, sulted in a loss of which annualized amounted to $26,416. The Commission found that the total intrastate $5,427,617. revenue for 1948 was $92,949 The difference of between the Court’s and the Commission’s totals results annualizing from the methods of revenue. The gross submitted evidence of revenue for the first nine its estimate on the basing months of 1948. The Commission year previous added the above amount to cover increased quarter revenue for the last of 1948. findings per that cent

The of the Court indicate 77.77 Company’sproperty in was in 1948 devoted this state per expenses intrastate use and that 80.2 cent total operations. from used resulted intrastate The Commission per allocating expenses to intra- the 77.77 cent as basis in a operations. state The found that the allocation should court per re- have been made sulted of 80.2 This basis cent. $124,543. in a difference The Commission held depreciation expense prop- $392,567 that amount was the erly chargeable $665,- for while thе that Court found chargeable. disapproved 469 was The Court Com- expenses $80,000 mission’s deduction of claimed alleged 1948 on account of deferred maintenance. The expenses found a Court Company that deduction from claimed alleged $85,573 in the amount of because of un- profits reasonable found to have been made Western in Electric transactions with was without support pay- in the evidence. The Commission held that Company during year ments made to the American chargeable under a so-called license contract were not exchange expenses. to there was also and intrastate that Court found

no basis the record for such action. The Court disapproved finding of the Commission’s to the effect required pensions that accruals in excess the amount “pay-as-you-go” chargeable on a for 1948 was basis not expenses year. request- for that The Court found that if the applicable year ed rate increases had been $601,416 net income of the would have been per that this would have resulted in a net return of 4.56 cent. authority investigate regulate intra telephone

state rates is vested the Public Utilities Com fixing inherently leg mission. 52.02. The SDC of rates is a performed directly legislature islative act whether body power delegated. an administrative to which the is Coop. supra, Farmers’ Educational and Un. Court, v. Circuit principle making utility A fundamental of rate a that yield entitled to rates will fair return on the reason property public able value of the devoted to service after paying operating expenses carrying charges. not Rates

375 yield and con- sufficient to such return are unreasonable fiscatory. scope judicial of review of the issue of con- Application of fiscation was considered this court Telephone Co., Bell 6 N.W.2d Northwestern S.D. Judge speaking 165, 170. Denu for the court said: (Art. 13) VI, §§ “The State and the Constitution (Amendments XIV) pro- United States Constitution V and person liberty deprived life, alike that no vide shall be of property process private law, or without due of and that property just compensation. shall not be taken without provisions many

“These constitutional have been times applied public utility the courts in it was cases which sought language Perhaps strongest to fix rates. and thе best application opinion

of its is found in the of Chief Hughes Joseph Justice in St. Stock Yards Co. v. United States, opin- U.S. [298 S.Ct. 80 L.Ed. 1033]. The says: fixing legislative ion termining ‘The of rates ais act. In de- judicial scope act, review of that there is sphere legisla- a distinction between action within the authority tive and action transcends the limits of which legislative power. Exercising rate-making authority, its Legislature may has a broad discretion. It exercise that authority directly, through agency ap- it creates or points purpose appropri- to act for that in accordance with ate standards. The court does not sit as a board of revision judgment Legislature to substitute its for that of the or its * * * agents province as to matters within the of either. Legislature When itself acts within the broad field of legislative discretion, its determinations are conclusive. Legislature appoints agent When the sphere an to act within that legislative authority, may agent it endow the with power findings pro- make conclusive, of fact which are requirements process specially vided of due which are applicable agency according met, an such are as in a fair * * * hearing acting upon arbitrarily. evidence and not

“ rate-making ‘But the Constitution fixes limits to the power by prohibiting deprivation property without process taking private property due or the law just public compensation. Legisla- use without When the directly, subject judicial scrutiny ture acts action is 376 prevent transgression

and determination order to of power. Legislature preclude these limits of cannot scrutiny by any legislative or or determination declaration finding. Legislative subject necessarily finding declaration or is independent judicial upon review and facts jurisdiction competent of law courts to the end that supreme may the Constitution as the maintained. Nor can the law the land be

Legislature escape the constitu- by authorizing agent findings tional limitation its to make agent kept Legislative that the has within that limitation. agencies, varying qualifications, pecu- with work in a field liarly exposed political may expert demands. Some and impartial. Others subservient. It is not difficult for them requirements giving hearing to observe the of law in a receiving may say findings evidence. But to that their of fact rights

be made conclusive where constitutional of liber- ty property although clearly involved, are the evidence findings wrong establishes that the are and constitutional rights place rights invaded, have been tois those at the mer- cy ‍‌​​‌‌​‌​​‌​​‌​​​​‌​​​​‌‌​​​‌‌‌‌‌‌​‌‌​​​​‌​‌‌‌​‌‌‍seriously impair of administrative officials and the se- curity judicial safeguards. prospect, our inherent in That multiplication agencies, with our of administrative is not lightly regarded.’ one to be merely taking private property

“Confiscation is just compensation, without and offends If the Constitution. property just domain, itself is taken eminent com- pensation taking. legisla- is its value at the time of If the through ture, either own act of an creation agency, prescribes charges administrative rates or for a utility, public compensation property just taken, the use of the

is a rate return reasonable the value property being public of the at the time it is used utility words, service. In other a entitled rates that yield payment op- will erating expenses, reasonable rate return after charges,

taxes and financial for the use property public Anything devoted to service. less Chesapeake than that is unfair and unreasonable. West v. Telеphone Baltimore, Potomac Co. of 662, 295 U.S. 55 S. & Utility 894, 1640; L.Ed. Board of Ct. ers v. 79 Public Commission- Telephone Co., 23, York New 271 U.S. 46 S.Ct. 808; States, 70 L.E’d. Baltimore & R. v. Ohio Co. United U.S. 80 L.Ed. 1209.” S.Ct. Application Transpor

What said in Dakota tation, Inc., Falls, of Sioux 67 S.D. 291 and N.W. respect judicial scope cited with the of of cases to review appli orders and determinations the no of Commission has rights respecting cation where constitutional rates are in requirements process ordinarily volved. of due are met by acting upon arbitrarily. not evidence and Where con process judicial requires claimed, fiscation due determina tion as to both law and facts.

It will be observed that the difference between the findings Court’s and the as fair Commission’s to the value Company’s property of the used in and intrastate business computation of net to revenue the same business relate (1) (2) separation expenses; of interstate and intrastate arising transactions out of the relation of the to (3) Company; the Western Electric and to the American annual allowances and deferred mainten- (4) (5) plan paying pensions; ance; actual of and cost metallicizing telephone classifying rural lines as same investment.

Separations. question first the We consider the allocation ex- penses operations. It to intrastate and interstate is con- by accounting ceded made entries were system by prescribed accord with the accounts Regulatory juris- Federal Communications Commission. telephone companies diction over was transferred from the Interstate Commerce Commission to the Federal Communi- by Congress 19, 1934, cations Commission Act of June 220(a) seq. pro- § 48 Stat. vides: “The Commission the forms of to be U.S.C.A. et Section may, prescribe discretion, any accounts, records, and all and memoranda subject chapter, including kept to carriers this accounts, records, and memoranda of the movement of traf- moneys.” receipts expenditures fic, as of the well 220(g) provides Section that “it shall be unlawful such any person keep accounts, records, or to other memoranda may approved prescribed those so or such as than any keep other man- or to the accounts in Commission prescribed approved ner than that the Commission.” report appellant said: “Ac in its commission assigned cording company A-93, intra Exhibit to has operations expenses $4,020,814, of the state which is 80.2% expenses period. In the main total for the nine months assigned expense percentage intrastate is tenance assigned larger, although plant at even maintained is * * * only operations. Dakota intrastate South 77.77% unjust. an think We think such that the amount of such up by allocation is Instead we expenses upon proportions set plant separation for the of the value of * * * equipment should be followed. And it would seem procedure propose follow to us that such a would also meet the which we laid in the case test rule down Telephone Co., 133, v. Illinois Bell 282 51 Smith U.S. S. Supreme 68, 65, cited, Ct. 75 L.Ed. 255.” In the case separation pointed out that Court intrastate and inter property, expenses state appropriate recognition revenues and “is essential to the governmental competent authority regulation.” field A each state commission deprived power telephone is not to fix rates for intrastate by regulations by prescribed service and is not bound Federal Communications Commission. See Northwestern Railway Commission, Bell Tel. Co. v. Nеbraska State 297 expenses 471, 536, 56 U.S. utable trarily S.Ct. 80 L.Ed. 810. The attrib operations may not, however, intrastate be arbi pointed per fixed. As has been out 77.77 cent of the Company’s property in this state was devoted to intrastate may findings upon assumed, use. It not be without based percentage proper.basis evidence, that such is also the for allocating operating expenses. From what has been said findings respect it follows that the to the allocation of of the Court below with

expenses must be sustained. Western Electric.

Complaint pro- was made before the Commission that goods Company made Western Electric on fits sold the were excessive. The Commission determined that such profits profits excessive and disallowed all were such making operating deductions from the rate base and from

379 expense. The trial court determined that the disallowance profits of these determined arbi- Commission was trary upon and based no substantial evidence. We concur in the view of trial court.

The trial court made a studied statement this of West- quote part: issue, ern Electric which we Company noted, “As hereinbefore the American owns practically Company, all of the stock of Western Electric under rule announced in Smith v. Illinois Bell Tele- phone Co., 51 U.S. S.Ct. L.Ed. it was necessary only appellant prices to show not that the charged by appellant Western Electric were reasonable by comparison prices suppliers with the of other but also profits appel- Western Electric its sales to lant have been reasonable. This same situation has existed telephone in other rate cases which have been before the Commissions and Courts the United States. The West- manufacturing depart- ern Electric inis fact the Company, ment of the American and the American Com- pany great many operating companies, including owns a appellant, question, upon sup- so that the identical based substantially posedly evidence, the same has been before Young, the Courts. Mr. Burton R. who is chief statistician Company, of the Western Electric who has been in em- ploy accounting department nearly in its and statistical years, length. testified at The American first acquired stock in Western Electric in 1918 when purchased percent outstanding it of the stock then and holding present this has been increased until at time percent 99.8 of the stock of Western Electric is owned Company. engaged the American is Western Electric chiefly telephone apparatus, in the manufacture of switch- by operating telephone boards, cables, wires, etc., used companies. many plants manufacturing It has at various places including States, Paul, United one at Min- St. nesota, Duluth, Minnesota, Lincoln, one at and one at Ne- distributing principal braska; it has 29 houses located in the throughout the cities United from States which the manu- products operating telephone factured are distributed to the purchaser companies supplies and it also acts as which it op- manufacture, does not which are sold and furnished to erating companies, including appellant. apparatus equipment is standard- manufactured Western Electric produced large quantities operating ized, sold to telephone companies purchased at less than the cost when appears entirely manufacturers, from other un- and it disputed in this case as well as in other before the cases very arrangement advantageous Courts that this to the operating companies, including appellant. this Western developed Electric also has standardized methods repairing telephone equipment taking op- over from erating companies parts their wornout and materials. The Western Electric has entered into a contract with appellant buy appellant sup- materials, which enables plies, through prices, etc. it at reduced but does not obli- gate appellant purchase Company. from Western Electric Appellant’s Company’s Exhibit A-36 shows Western Electric earnings available for interest and dividends related to net year by year period through investment for the from 1916 average percent 1946 inclusive and shows its of return on through years percent. net investment those to be 6.6 Dur- ing depression years, including 1932, 1933, some and war Company operated and 1944and Western Electric period at a loss. Exhibit No. A-40 for shows that average 1925 to 1946 inclusive its return on net investment percent average was 6.9 return and that the on net invest- leading manufacturing corporations ment of 50 in period percent. United for the same was 9.41 Ex- States A-59 the return on net hibit shows investment for the largest manufacturing corporations in the United be- States years average tween the 1925 to 1947 inclusive. The percent, the Western Electric 6.98 while for was percent. the others it 8.72 reports Company

“The annual of Western Electric being inclusive, 1939 to both Exhibits A-125 to A-134 years except during inclusive, both disclose war great of Western Electric business was with the bulk years telephone companies, during the Bell the but that war great bulk of its business was with the United States Exhibit A-57 shows the total sales of the Government. company, profits together percentage of net with percentage with sales and the total sales to Bell customers profits years 1947, in- both net to sales for the clusive. figures there unreason-

“These disclose that were no by earnings able Western and further show that Electric earnings telephone operating to Bell com- sales panies materially greater appellant were not than profits compet- on to non-Bell customers. There is no sales negatives ent evidence which these matters.” acknowledged report The Commission its its figures “approx- with referencе to Western Electric were' only. imations” agree dissenting

We with the views of the Commission- finding er. He stated with reference to the Commission’s by profits reasoning on Electric, excessive Western “The interesting which is at this arrived but too devious * * * analyzed by Special to be here. It not contended figures Counsel Protestants that these are other than approximations. figures appear No such in the evidence they and the manner in which have been arrived isat bas- assumptions ed on and calculations which make them little guess better than work.”

License Contract with the American Telephone Telegraph Company. opinion approve following

We of the trial court on issue: this

“As hereinbefore forth deductions from set one expenses paid appellant arriving expense at the year, operation paid for the the amount to the American under the so-called license contract amounting $50,454. This license contract was fully quite a described in the evidence and is contract sim- ilar or identical between American and the operating companies system. of the Bell This contract call- payment appellant ed for to the American year, during and the nine first months of 1948 of receipts. percentage gross a flat one and one-half On required payment October 1948 this was reduced one percent gross receipts. general vice-president Johnson,

“Mr. R. and W. the manager length appellant, nature of on the testified at some by and value of the license services rendered contract Company. American itself received The contract furnished evidence. Mr. Johnson testified that services telephone continuing have a effect business which extremely part: Company. He valuable to said in “ provide high telephone quality ‘To a nation-wide requires service in the continued scientific advancement uniformity operation, art, coordination of and of standard- training practices, equipment, employment and ization of equipment procedures to the methods 'and and of essential accomplished be at the This best best overall results. can arrangement whereby by a lowest cost specialized the license contract organization performs for services central such companies Long Depart- all the associated of and Lines Company. T. ment the A. T. & Without the benefit of procedures and the nation’s best scientific discoveries necessary application them, to determine the the best practices training personnel, known and the most effici- operation, telephone users will denied the ent methods be they right advantages expect. a ad- which have These may vantages operation either in economical or in more * * * application improved or both. of scientific service continuously improved and the methods—has discoveries telephone outstanding a made nation’s service and our world leader.’ Company noted, and

“As hereinbefore the American Company Laboratories, own Bell the Western Electric constantly engaged research, un- in extensive and which is appellant der this license contract is licensed to use and purchase patented all Western Electric new and tele- Company, phone devices. American Western Electric many things centrally op- do for the and Bell Laboratories erating companies; right Company it, under has daily operations telephone devices, use and does use in its systems equipments, ‍‌​​‌‌​‌​​‌​​‌​​​​‌​​​​‌‌​​​‌‌‌‌‌‌​‌‌​​​​‌​‌‌‌​‌‌‍methods covered thousands patents and has the serv- owned the American operating engineering ices patent the American financing. accounting protection, testi- He also impossible fled the exten- that it would have been finance public improvement sive to meet the demand service provided South Dakota the financial assistance without in the also testified that the license contract. Mr. Johnson appellant’s organization equipped is not to do the staffed necessary work done and that American available, if these license were not the contract services Company get competent would not know where to the in the scientists ing additional number to do research now be- many done, he and that was unable to estimate how ad- employees require company attempting the ditional would in independently to for furnish the service itself. It would purpose serve no useful this in to discuss evidence further quota- detail. Reference to the service will in be contained passed upon tions from other Courts which have the matter. comptroller Gretz, H. “Mr. C. assistant of the American Company, Company testified as to the cost to the American rendering provided in explained the services for in the contract. He financing arrangement

how the between the Company appellant permitted appellant American to having relatively large capital avoid amounts of idle in its capital structure which it otherwise if would have have entirely by independent it was forced to finance itself bond capital capital stock issues it which would incur capital earning costs before the translated into was tele- phone plant. showing He also introduced several exhibits among things payments other the received the American appellant during year and that the cost of furnishing applicable license services contract to South Da- year by payments $21,- kota exceeded its for that the sum of $5,823 999 after federal income taxes and before federal in- years, come taxes. He also showed that 1944 to applicable 1946, the license contract cost to South Dakota payments exсeeded received that service and that in Company’s rendering 1947 the American cost of the service payment allocable Dakota its South exceeded in the $2,155 amount of after federal income taxes. As hereinbe- payment stated, fore the rate reduced on .was October percent. figures 1948 to one The exact for the cost of the services under the contract to American for 1948 hearings. were at the time of not available actually was expense item of “It is that this undisputed It was Company. to the American paid appellant expense this disallowing position Commission before by appellant introduced entirety that the evidence insuf- was Commission, entirely undisputed, although appellant of the service both the value ficient to establish the American profit of excess making negative and to by the Su- by the rule announced required Co., 282 Bell Telephone v. Illinois preme Court Smith 255. 133, 51 L.Ed. S.Ct. U.S. business of the telephone from the inception

“Almost in exist- have been of this kind country, in this contracts between contract under the license and transactions ence companies Bell opеrating and the the American In the many occasions. on have been before Courts considered only was legitimate inquiry earlier cases value re- getting operating whether * * * Co., 259 Bell of Houston v. Southwestern City ceived. * * * 961; of Missouri 486, State 318, 42 66 L.Ed. S.Ct. U.S. v. Missouri Public Co. Telephone ex rel. Bell Southern 544, 981, 276, L.Ed. Commission, 43 67 262 U.S. S.Ct. Service * * * 807; v. Hopkins ex rel. Southwestern A.L.R. State 31 ** 771, 781, 236, *. Co., Kan. 223 P. 115 Telephone Bell Co., supra, Bell Telephone “In v. Illinois Smith American held that the cost to the further and Court went mat- proper services were the license Company rendering The Court said: inquiry. ters of “ both of the state commissions findings, ‘In view of the court, to doubt that valuable we see no reason and of the but Company, the American were rendered services statutory court with findings by the specific there should be these services the American Com- to the cost of regard amount which should be allocated the reasonable pany and of the intrastate expenses respect operating in this years in the covered Illinois business ” 133, 51 U.S. S.Ct. the decree.’ 72.] [282 case, the Commission considered “In the present was ‘allocated’ to expense because the insufficient evidence very nature of the services rend- From the Dakota. South fix exactly it impossible that apparent it must ered 385 rendered, the value of each item of the but the services clearly requirements method used this case satisfies the- supra. Telephone Co., of the case v. Illinois Bell of Smith very Telephone In & Tele- recent case of Southern Bell Georgia, graph v. 203 Ga. Co. Public Service Commission Supreme Georgia 832, 38, 63, 49 S.E.2d Court of said: “ annually paid $360,765 ‘The first item in class is this Telephone Telegraph to the under a American & contract for of the Bell at a cost services furnished per gross receipts. undisputed cent of its evi- IV2 petitioner dence shows obtained substantial benefits under this contract. It shows that the realizes many amounting benefits this ex- times the amount of penditure as a result of and in virtue this contract. finding court,

evidence demanded a as was held the trial legitimate proper expenditure, that this was a it must be considered in and that

computing expendi- rates. Such proper expenses. tures have been held to be State of Telephone Missouri ex rel. Southwestern Bell Co. v. Public Missouri, 276, 544, Service Commission of 262 43 U.S. S.Ct. (1923, 1812); L.Ed. 67 ex rel. 31 A.L.R. 807 Bulletin No. State Hopkins Telephone Co., v. Southwestern Bell (Kansas) (1924, 2021); Kan. 223 P. 771 Bulletin No. Department ex State Service, rel. Pacific Tel. & Tel. v.Co. of Public (1943). (Washington) Wash.2d P.2d 498 ruling Our on this item alone shows a case of confiscation ’.’ the amount this item.’

“To the same effect see Alabama Public Service Com- Ala.Sup., Co., mission v. Southern Bell Tel. & Tel. 42 So.2d 655. Southern Bell T. and T. Co. Tennessee Railroad and Supreme Commission, Public Utilities Decision of [Tenn.] April 30, dated Court 1949.1 paid by

“The disallowance the amount as disclosed was, the evidence in this case in view of the evidence sub- unjustified arbitrary mitted, supported by and not the evidence.”

Depreciation. areWe called to determine whether the required establishing by met has the burden of it in suf- 1 designated publication. Not

388 propriety competent de-

ficient, preciation of its claimed evidence the year telephone plant depreciable 1948. for the on bearing slight significance Resorting figures in but depreciation appraisal Company’s event of the the reserve a true arguing undertaken, account should be assumption figures supposition support “that or these the increasing depreciation stead- reserve has been balance years any ily in far in excess of withdrawals the last few reasonably expected future”, in the foreseeable that could “that this excessive the Commission came to the conclusion in The historical accumulation this fund must be reduced”. figures reflecting upon data, not account were facts and this proceeding in before the and we are not this Commission validity pass upon or of the Com- invited correctness years pany’s depreciation up during reserve of serv- built utility prior of the in this to 1948. are we ice state Nor approve disapprove asked to “straight what is known as determing depre-

line” method amount chargeable expense. Respecting ciation as annual this among things, report Commission, method the state; of the other by figures applicant “The so-called by straight prescribed method, line which is the Federal generally Commission, and has been ac- Communications cepted designed this This method is Commission. evenly spread property over the service life of the the loss ultimately property which is realized when from service.” retired It should be borne mind also thаt the accumulated depreciation reserve was deducted book cost de- termining the net investment rate base.

Relying exclusively upon testimony almost Quinney and the decision in the witness case Lindheimer Telephone Co., v. Illinois Bell U.S. S.Ct. reject L.Ed. the Commission decided that it should the determine the proof and should offered depreciation chargeable expense proper amount of adopting the calculations of said witness 1948. In the Com- depreciation expense that the claimed mission concluded year excessive for that and should be re- $392,569. stated, duced to the trial court As hereinbefore properly chargeable $665,469 found that sum depreciation expense. the 1948 This latter sum is in accord proof part Company. with the and calculations on the of the Worthy of more than casual attention are facts years, particularly December, that in recent since granting many increase, and the scribers, of the last rate new sub-

large areas, numbers of in rural whom are have been added that lines and services of the capital depreciation investment and annual havе mov- expanded Respecting ed to levels related to the services. these and other factors which have had our consideration finding number II of the trial court as follows: present exchange

“That the and intrastate toll rates January, 1947; became effective in Appellant’s that since that time the greatly investment has increased and satisfy order to plant demands service the net additions to years for the $7,000,000 1948 to 1952 will be about present they more. That when the rates became effective per were Appellant’s plies, estimated earn return of less than 3Vi cent on prices investment, sup- but that materials, greatly Appellant and labor have increased and that [Company] operated during at a loss 1948.” exception

theWith of the final recitation that the Com- pany operated during 1948, at a loss ‍‌​​‌‌​‌​​‌​​‌​​​​‌​​​​‌‌​​​‌‌‌‌‌‌​‌‌​​​​‌​‌‌‌​‌‌‍the facts determined by finding altogether undisputed. said are regarding

What we have said the issue here for review proof and the before the issue, Commission on that and the disposition thereof both the Court, Commission and the wholly distinguish is deemed pro- sufficient to this from ceeding reviewed the decision in case, the Lindhеimer supra. We are not here asked to decide that the depreciation credited too much or too little to the account for 1945 or for some other reserve year years and, if too part much, depreciation expense then to disallow a may for 1948 in upon, order to reduce what now be looked guess, depreciation more or less of a as an excessive re- serve. question

We turn then to the of the 1948 expense. In lieu of testimony an extended discussion of the placed

and here forth exhibits before the Commissionwe set reviewing court, the record decision of the learned trial evidence, as follows: pointed appellant required out, to

“As hereinbefore keep accounts, in the manner records and memoranda prescribed by set Commission as Federal Communications keep appellant forth in Exhibit A-2 and it is unlawful for to any except prescribed. other books or as memoranda so (See memo.) page 14 of this depreciation pro- rules matter

“These cover the depreciable. telephone plant vide what classes of are On page 5 оf Exhibit A-2 find: we “ ‘ “Depreciation,” applied depreciable telephone (note (dd) plant, paragraph means the loss in service value section) maintenance, of this not restored current in- prospective consumption curred connection with the telephone plant retirement of in the course service operation, against causes which are known to in current be company protected by insurance, which not and the approach effect of which can be forecast a reasonable with accuracy. Among given to be causes consideration decay, inadequacy, tear, elements, are wear and action of the changes changes obsolescence, requirements art, in the in demand and public authorities. “ ‘(dd) “Service value” means the difference between original cost and: “ ‘(1) (note (bb) salvage paragraph value of this section) apparatus. for station “ ‘(2) (note (t) salvage paragraph The net value of this section) telephone plant.’ for other provide depreciation charges “These rules further computеd by applying composite per- shall be annual centage applicable original rates considered to the cost of depreciable telephone plant each class owned or used company, provides: and further “ percentage ‘These rates shall be based the esti- developed study values and service mated service lives company’s history experience engin- and such may eering and other information as be available with re- spect prospective percentage future conditions. These computed conformity group plan rates shall be with the accounting depreciation that the loss and shall be such property except in service value of the for losses excluded may under the un- definition of distributed (note (if) straight-line during der the method 31.01-3 Sec. property.’ the service life of the required

“Under these rules the is also keep property property such records of retirements as property will reflect the life of re- service the that has been permit tired or will the indi- determination service life by mortality, appropriate ovеr, cations turn or other meth- percentage ods, and also such records as will reflect the salvage erty salvage appropriate, prop- value, value, or net as for depreciable telephone plant. retired from each class of

n only “It will thus be seen that the is not re- quired to make its own studies which to base its de- preciation, required keep open records, but is to the F.C. times, C. and State Commissions at all from which such may made, commissions make or cause to be their own accuracy by studies to test the of the studies made the com- pany upon depreciation charges which are based. appellant faithfully kept

“That has its records and made compliance requirements its studies in strict with the of. disputed by any these federal rules is not substantial evi- dence. The appellant for 1948 rates as determined application A-98, are set forth in Exhibit and the depreciation expense of such rates resulted in for 1948 of $665,469as disclosed Exhibit A-93. grand plant

“Exhibit A-92 shows the total book cost of equipment September 30, and $23,214,027. as of 1948 to telephone property exhibit This shows the classes mak- ing up Telephone the total. This total includes the Plant Adjustment Acquisition amounting account, $580,415, portion intrastate was which deducted from the book cost by Commission which deduction has been hereinbe- approved. fore discussed Quinney, engineer employed by

“Mr. E. H. an the Com- August, hearing. mission, 1948, first testified at the He was employed February, engineer for the Commission from 1941 until June, and from then until Department He

Game, Dakota. and Parks of South Fish presented prepared an- Exhibit P-90 he had which appellant reports Commis- nual to Federal Communication operates, covering appellant in sion the five which states having years been called 1933 to 1947. Errors Quinney’s hearings attention, Mr. he at December filed which a revised Exhibit P. but this contained errors computations. appel- pointed in his As out distorted was Quinney Commission, Mr. treated lant’s brief filed with the capital computing apparatus station composite average on life basis property, while service life of the computing composite he net retirement loss treated sta- apparatus throughout period 1947, in- tion of 1933 to although Also, clusive, treated on the location life basis. he рlant separately computing composite his each class of average lumped proper retire- life he service which salvage plant together experience ment of all classes year period. each dissenting report pre- “In the forth a set memoranda pared by attorney Williamson, Commission, William for the by which forth the erroneous results Mr. sets reached Quinney. published reports forth in the This set of the Mr. arrives at the that Williamson conclusion .Commission. average composite depreciation the 1948 rate for is 4.1778% appellant’s but that this is based ex- actual retirement perience by year plant period, classes the fifteen 1933 to 1947. by Quin-

“As noted the studies made Mr. hereinbefore ney only year period for the fifteen and were the results reached were erroneous.” major being confiscation, issue it the became

duty validity of the Court to determine the' the action rejecting proven the in the Commission claim of the Com pany expense due to the and substitut ing expense figure for that calculated to de a reduce the preciation approval reserve, resеrve, all of which with the Commission, excluded from the rate was base. The ruling effect of the of the Commission is to ex transform reaching pense a into income in decision that the rate of re confiscatory. Arguments and turn fair not counsel misjudged have failed to convince us that the has Court require this item. We think the record our is such as to ruling upholding depreciation expense affirmance of the as claimed.

Deferred Maintenance. $80,000 The Commission from deducted the 1948 expense company alleged of the because of deferred main contrary tenance. The trial court held this deduction was agree to the evidence. We with the trial court. only basis for the deduction A- is found Exhibit charges years

77 which shows the maintenance for the charges year to 1947. The maintenance increased year, large with a increase 1946 and 1947. But the evi- undisputed throughout years prior dence is to 1946 plant maintained its in excellent condition. The explained reflecting increase in 1946was higher machinery, labor, vehicles, the an cost of tools and

expansion plant causing rearrangements changes chargeable causing construction, not to new increased great maintenance costs. Other matters are testified into explaining greater expense- detail maintenance com- mencing support in 1946. There is no in the record for the deduction made the Commission. We concur statement of the trial court that the result reached pure speculation Commission “is based on no evidence.” nothing There is in the record to indicate other than that present expense level of maintenance will continue in the foreseeable future.

Pensions. pen indicated, above As the Commission disallowed proper expense Company’s sion accruals as intra rejected pension state business and in effect the latter’s plan years pay-as-you-go converted in more recent from a system upon discussing to a based actuarial calculations. In criticizing plan the transition to the now effect the Commission states the issue as follows: only question “Therefore, the before the Commission (sic) accuring pension is whether the is for its re- necessary pay present amounts in serve excess of those to pensions.”

392 present, clearly is, course, established that

It years during period follows, re- to accruals a of some and quired annually, financial structure in order to effectuate super-annuations support are to withdrawals with which pay- pensions future, now in excess of be met in the are only annually. Consequently, question is whether able present pension plan not an unfair burden sound and telephones. pay From the court's those who for the use of to review of the part plan quote we as follows: Commission, then Interstate Commerce “In 1927 the system companies, regulating telephone of ac- amended permit an actuarial basis on advance accruals counts step Shortly appellant pensions. first thereafter, took the adequate adoption accrual ba- full-service of an toward sis, pension finally completed fund A trust in 1941. year pays deemed each the amount into which it established necessary place a sound accrual basis. same immediately money paid to a trustee and is over beyond appellant.” permanently the reach of fully open question is statements are not That these equally plain before us. It is affirmed the record actually pensions paid for these to the trustee the amount under the plan is not excessive. now in effect reported Appellant’s where- to us no decision brief cites pension plan disapproved the court last resort has rejected Commission, find no such author- and we too up- ity. plans hand, or similar are On the other the same unduly telephone burdensome to- users and not held as sound Telephone following & Tele- v. in the cases: State Tri-State Minn. graph Telephone 294; Co., Bell 284 N.W. Southern 204 Georgia Telegraph Co., v. Public

& Service Com- 38; mission, 832, Alabama Public Service ‍‌​​‌‌​‌​​‌​​‌​​​​‌​​​​‌‌​​​‌‌‌‌‌‌​‌‌​​​​‌​‌‌‌​‌‌‍203 Ga. S.E.2d Telephone Telegraph Co., Bell & v. Southern Commission Telephone Sup., 655; ex rel. & State Pacific Ala. Telegraph So.2d Department Service, 19 Wash.2d v. Public Co. England Telephone 498; Petition of New & 142 P.2d Telegraph Co., We 115 Vt. A.2d 135. are convinced respect to with the action of Commission Com- that pany’s pension plan payments adopted in furtherance of the accruals sustained. cannot be Metallicizing. reaching

In of the rate its determination base expended to include the stated amount Commission refused metallicizing Company such its rural lines. That necessary, expenditures in and in the were are were fully good telephone users, of to conceded. terests The sole service inquiry here is whether the entitled a fair return the cost of this investment. excluding plant improvement

In this item of the Com- points provisions mission to the of Ch. S.L.1939. county referred to of commission-

act but authorizes boards grant highways along public ers the use of areas in the purpose erecting maintaining for counties on lines of there- electricity. conducting grants thereby author- subject conditions, ized are to to stated the last of which is as follows:

“(5) Whenever the erection and of maintenance such elec- any tric lines shall interfere with the lines or service of telephone company, grantee necessary shall furnish all making telephone metallic, wire and attachments lines necessary, poles where ber and such additional num- above the necessary place carry telephone as is the additional equipment pay practices, in accordance with standard shall any necessary moving telephone of

the cost lines.” provisions quoted It is observed that the do not include instаlling equipment necessary by the cost of made reason of interference to be encountered the lines or service telephone company. indulge assumption the this We something negligible

item is than more in a half-mil- many county roadways. lion-dollar installation over miles of fairly We think it deducible that the election rights to waive its 108, S.L.1939, under Ch. policy a matter of business and was not an abuse managerial premises. discretion The disinclination pound to exact its flesh and its desire program an hindrance avoid attitude of toward the of rural electrification, pro- with the attendant benefits of such a flowing gram telephone to vast numbers of subscribers, support plausible part furnish no the view that this 394 just Company’s property com-

the pensation. should be taken without Judgment affirmed. Judge, disquali- sitting J., SMITH,

MEDIN, for Circuit fied. question (dissenting). in this case

SICKEL, J. existing previously rates, as in- intrastate is whether the by have be- commission on December creased come the confiscatory. first, are the Matters to be considered company’s second, investment, its income value of the operating expenses. third, its

Depreciation regarded legitimate of item ex- as a is by pense. maintenance, loss, It “the not current is restored causing is all the the ultimate retire- which ment due to the factors property. of factors wear and These embrace * * * decay, inadequacy tear, ing In determin- and obsolescence. supplying public proper service, it is reasonable rates for operating expenses, is, to producing that in the cost of include in the consumption service, for of the an allowance integrity capital in order to maintain the of the investment Co., rendered.” Lindheimer v. Bell Tel. in the service Illinois 658, 664, L.Ed. 1182. 292 U.S. S.Ct. “straight determining line” investment method “By used the in this case. this method by dividing depreciation charge annual is obtained the

the estimated service value years of the number of estimated evenly designed spread service life. The method is over to. property the service life of the the loss which is realized ultimately property the retired from when service. Ac- cording accounting principle practice, to the this the loss computed upon property of the is upon the actual cost as entered salvage, expected books,

the less the the amount year’s yеar charged pro is one rata each share of the total supra. Co., v. Bell Tel. amount.” Lindheimer Illinois depreciation annually charged The amount of the practice entry expense. corresponding In common is a capital practice account, or investment credit but that company in been followed this has case. Instead not depreciation credited the amount to an it has account designated “Depreciation Reserve”. “As allowances depreciation, depreciation reserve ac- credited to the charged operating expenses, count, are represents given property reserve at a invested thus time, the amount of investment which has been made out telephone proceeds purpose rates for the ostensible replacing capital predictions If the consumed. service entirely life were and as these accurate and retirements were made when

predictions precisely depre- fulfilled, were represent consumption capital, ciation reserve would according spreads bаsis, on a cost to the method which respective periods. loss over if service But the amounts charged operating expenses and credited to the account depreciation excessive, for reserve are that extent sub- telephone required provide, scribers for the in service are capital good effect, contributions, not to make in- losses utility curred in the service rendered and thus to keep unimpaired, its investment but to secure additional plant equipment utility expects which the a re- supra. Co., turn.” Lindheimer v. Bell Tel. Illinois company’s Johnson, statistician, W. R. estified that “depreciation expense provision is the meet the loss of depreciable plant investment when is from retired service. properties rendering telephone All the used service will ultimatly retired, out, either because it is worn has be- inadequate, replaced come or because it must be for other replacing plant underground reasons, such as aerial with * * plant. rendering telephone is a This cost of service company’s witness Jensen testified that since 1933 they depreciation for calculatеd accruals and recorded charges They to the reserve for Dakota. South made apportionment depreciation Dakota to South of the re- (Exhibit A-7) 31, 1933, $1,234,845 serve as of December 31, added the net increase in the reserve from December depreciation 1933, 31, 1947, $2,925,933, to December also Company applicable of Dakota Central to South Dakota at merger deprecia- 30, $2,084,064 time of tion reserve of on June 1942

general applicable area office to South Da- $129,182. kota on December The total of this $6,374,024 line shown Exhibit A-7. Of this sum the $5,135,092. share intrastate

39o engineer, appraisal company’s testified:

Swancutt, the expected depreciation provision for the reserve makes “The resulting' capital future retirements ultimate loss of yet inadequacy oc- have not which due to and obsolescence new. $7,415,971 current cost from the He deducted curred.” depreciation represents in- for all kinds of an accrual “That cluding inadequacy, obsolescence, and tear that would wear property assuming built made, to have been this have been at current cost levels and depreciation the accrual rates they purposes He further testi- as were.” to have been any inadequacy in the obsolescence that if there is fied present property, de- into account that would be taken of the reserve of the entire amount duction requirements. pursued question the method is whether testimony proper outlined in the above is the consumption calculating the “allowance

method of integrity capital maintain the of the invest- in order to Lindheimer v. Bell ment in the service rendered.” Tel., Illinois supra. testimony witnesses, related,

Prom as above charges expense appears it are made to and credits are proceeds depreciation reserve, out of the of of made to the only represent consumption telephone rates, the not to capital rendered, basis, the on a cost but also to in service inadequate property replace out, worn obsolete with equipment modern sufficient to meet new and the the needs company’s expanding business, at “current cost new”. provide capital used to The account has been substantially additions depreciation. in exсess accrued The com depreciation pany by reserve used the account as “a has means compelled public Company the is to loan the which a money interest, amount of without substantial which the privileged plant, in to invest its and on is which required pay public to the will be a fair re the depreciation compen additional annuities well as to turn as retirement, on its and so ad infinitum.” the sate Telephone Telegraph Co., & v. Tri-State Minn. State 294, 313. 516, 284 N.W. purpose only legitimate equal- of the reserve is

The in revenue earned the ize so to take from expenditure as extent that To the of the burden. year each fair share requir- not be amounts that will charges the annual include the cost misrepresents ed for that account purpose, service, way no to ascertain is excessive. There is in this case. the record amount ‍‌​​‌‌​‌​​‌​​‌​​​​‌​​​​‌‌​​​‌‌‌‌‌‌​‌‌​​​​‌​‌‌‌​‌‌‍of excess from such contribu- charges “capital These amount to the exaction utility in tions, good not to make the losses incurred un- its investment keep rendered and thus to service impaired plant equipment but to secure additional return.” Lindheimer v. Illinois utility expects whiсh the a Co., supra. Bell Tel.

By the re- company’s own calculation Dakota, serve applicable intrastate business South $5,341,579, amounting fifty per great- is still at least cent time, er than the at this existing plant depreciation spite company’s plant the fact that the value of the has almost years. doubled in the ten past it must maintain large contends casualties,

reserve to cover such as sleet storms. These casualties are out properly chargeable expense, payable working capital experience fund. The of the company on these matters is stating shown Exhibit A-77 casualty repairs amount of in the State of South Dakota $534.00; 1940, $25,637.00; 1941, $36,089.00; follows: 1942, $124,415.00; 1943, $32,091.00; 1944, $76,143.00; $9,695.00. $3,940.00; 1946, $20,401.00; 1947, There is noth- ing the evidence to indicate that working capital likely inadequate to be to meet expenses. such rates were established present by competent au- thority in adequate 1946 and were at that time. The burden confiscatory them proving on the This bur- company. den does shift to the not commission simply because the company books and records of are available to the com- In my opinion mission and its examiners. the company has failed to sustain its burden of this case and that the proof Utilities decision of the Public Commission an in- denying n in rates should be affirmed on the crease record made.

Case Details

Case Name: In Re Northwestern Bell Telephone Co.

Court Name: South Dakota Supreme Court

Date Published: Jul 10, 1950

Citation: 43 N.W.2d 553

Docket Number: File 9161, 9169

Court Abbreviation: S.D.