262 U.S. 276 (1923), 158, State of Missouri ex rel. Southwestern Bell Telephone Company

Docket Nº:No. 158
Citation:262 U.S. 276, 43 S.Ct. 544, 67 L.Ed. 981
Party Name:State of Missouri ex rel. Southwestern Bell Telephone Company
Case Date:May 21, 1923
Court:United States Supreme Court

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262 U.S. 276 (1923)

43 S.Ct. 544, 67 L.Ed. 981

State of Missouri ex rel. Southwestern Bell Telephone Company

No. 158

United States Supreme Court

May 21, 1923

v. Public Service Commission of Missouri

Argued December 8, 1922




1. Rates fixed by state authority for a public utility corporation must be such as will yield a fair return upon the value of its property devoted to the public service. P. 287.

2. What will amount to a fair return cannot be ascertained by valuing the property as of past times without giving consideration to greatly increased costs of labor, supplies, etc., prevailing at the time of the investigation. Id.

3. An honest and intelligent forecast of probable future values is also essential, and this cannot be made if the highly important element of present costs be wholly disregarded. Id.

4. Rates admitting of a possible return of but 5 1/2% in net profits after allowing for depreciation, on the minimum value of the property

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of a telephone company held wholly inadequate considering the character of the investment and the interest rates then prevailing. P. 288.

5. A state Commission, in fixing the rates of a public utility corporation, cannot substitute its judgment for the honest discretion of the company's board of directors respecting the necessity and reasonableness of expenditures made in the operations of the company. Id.

233 S.W. 425 reversed.

Error to a judgment of the Supreme Court of Missouri affirming a judgment of the state circuit court which sustained an order by which the Public Service Commission undertook to reduce the rates of the above-named telephone company and to abolish installation and moving charges.

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MCREYNOLDS, J., lead opinion

MR. JUSTICE McREYNOLDS delivered the opinion of the Court.

The Supreme Court of Missouri (233 S.W. 425) affirmed a judgment of the Cole County Circuit Court

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which sustained an order of the Public Service Commission of Missouri effective December 1, 1919. That order undertook to reduce rates for exchange service and to abolish the installation and moving charges theretofore demanded by plaintiff in error. It is challenged as confiscatory and in conflict with the Fourteenth Amendment.

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

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

[43 S.Ct. 545] August 4, 1919, the Commission directed plaintiff in error to show why exchange service rates and charges for installation and moving as fixed by the Postmaster General should be continued. After a hearing, it made an elaborate report and directed that the service rates should be reduced and the charges discontinued.

The company produced voluminous evidence, including its books, to establish the value of its property dedicated to public use. The books showed that the actual cost of "total plant, supplies, equipment, and working capital" amounted to $22,888,943. Its engineers estimated the reproduction cost new as of June 30, 1919, thus: physical telephone property, $28,454,488; working capital, $1,051,564; establishing business, $5,594,816; total $35,100,868. They also estimated existing values

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(after allowing depreciation) upon the same date: physical telephone property, $24,709,295; working capital, $1,051,564; establishing business, $5,594,816; total, $31,355,675.

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

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

The company offered in evidence exhibits showing the value of its property in the entire state (outside the cities of Kansas City and Independence, whose rates are not involved in this case), and also at 46 of its local exchanges in the state. It shows by such exhibits that the value of the property in the entire state (and when speaking of the property in the state in this report, we mean exclusive of Kansas City and Independence) is as follows: reproduction cost new, $35,100,471; reproduction cost new, less depreciation, $31,355,278, and cost as per books, $22,888,943. It also shows the company's estimate of reproduction cost new, less depreciation, and the prorated book cost at each of the 46 local exchanges mentioned.

The engineers of this Commission have made a detailed inventory and appraisal, and this Commission has formally valued the company's property at only three of its exchanges, viz.: at the City of Caruthersville, reported in In Re Southwestern Tel. & Tel. Company, 2 Mo.P.S.C. 492; at the City of St. Louis in cases No. 234 and No. 235, as yet unreported, and at the City of Springfield reported

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in In Re Missouri and Kansas Telephone Company, 6 Mo.P.S.C. 279 -- and, as a result, we have only the estimates and appraisals of the company before us in relation to the value of the property at the other exchanges. We think it is clear, however, from the data at hand, that the values placed by the company upon the property are excessive, and not a just basis for ratemaking.

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

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

The company also shows by Exhibits 19 and 212 that its return under the Postmaster General's rates on $22,888,942, the book value of its property in the state, is at the rate of 11.65 percent per annum for depreciation and return on the investment, which would yield the company 6 percent for depreciation and 5.65 percent for return on the book cost of the property. As stated, however, we do not think that the book cost or the

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"prorated book cost" of the property as claimed by the company would be a fair basis for ratemaking.

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

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

In the St. Louis case, supra, the original cost of the nonuseful property deducted and disallowed by the Commission amounted to $454,689.16. It appears from the company's Exhibit 256 that the "prorated book cost" of the St. Louis exchange is just about half of that given for the state. However, it is clear that the proportion of nonused and nonuseful property in St. Louis bears a much larger percentage relation to useful property than would obtain throughout the state. It would appear that estimating the company's property not used and [43 S.Ct. 546] useful for the entire state at $500,000 would be a fair approximation. This sum, at least, should be deducted. . . .

The depreciation reserve applicable to the Missouri property is not shown by the company. However, on

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the Company's Exhibit 15, the balance sheet as of June 30, 1919, of the Southwestern Bell Telephone Company (Missouri corporation)...

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