Smith v. Illinois Bell Telephone

Decision Date01 December 1930
Docket NumberNo. 90,90
Citation75 L.Ed. 255,282 U.S. 133,51 S.Ct. 65
PartiesSMITH et al. v. ILLINOIS BELL TELEPHONE Co
CourtU.S. Supreme Court

[Syllabus from pages 133-135 intentionally omitted] Messrs. George I. Haight, Benjamin F. Goldstein, Oscar E. Carlstrom, and Samuel A. Ettelson, all of Chicago, Ill., for appellants.

Mr. William D. Bangs, of Chicago, Ill., for appellee.

Mr. Chief Justice HUGHES delivered the opinion of the Court.

This is an appeal from a final decree of the District Court, composed of three judges as required by section 266 of the Judicial Code (28 USCA § 380), enjoining the enforcement of an order of the Illinois Commerce Commission which prescribed rates for telephone service in the city of Chicago, upon the ground that the order was confiscatory and hence was in violation of the due process clause of the Fourteenth Amendment. 38 F.(2d) 77. The order of the Commission was made on August 16, 1923, to be effective October 1, 1923. It reduced rates for four classes of coin box service and thus applied to a large part of the intrastate service of the complainant, the Illinois Bell Telephone Company.

An interlocutory injunction, restraining the enforcement of the rates, was granted on December 21, 1923, and the order was affirmed by this Court on October 19, 1925. 269 U. S. 531, 46 S. Ct. 22, 70 L. Ed. 397. This interlocutory order was made upon the condition that, if the injunction were dissolved, the complainant should refund to its subscribers the amounts paid by them in excess of the sums chargeable under the Commission's order. The suit was not brought to a final hearing until April, 1929, and the court found that at the time of its decision (January 31, 1930) the amount thus reserved for refunds exceeded $11,000,000. The court said that the delay in bringing the case to trial was attributable to the city of Chicago and that the complainant had been ready at all times to proceed. But the decree enjoining the rates speaks from its date, and the question is necessarily presented, not only whether the order of the Commission was confiscatory when made, but also as to its validity during the period that has intervened, and as to the respective rights of the complainant and its subscribers in relation to the fund thus accumulated. Groes-

[Argument of Counsel from pages 136-143 intentionally omitted]

Page 143

beck v. Duluth, South Shore & Atlantic Railway Co., 250 U. S. 607, 609, 40 S. Ct. 38, 63 L. Ed. 1167.

The court found that 99 per cent. of the stock of the complainant, the Illinois Company, is owned by the American Telephone & Telegraph Company, which also owns substantially the same proportion of the stock of the Western Electric Company; that the Illinois and American companies unite in rendering long distance service under an arrangement for a division of tolls; that at the time to which the inquiry related, in October, 1923, there was in effect an agreement by which the Illinois Company paid to the American Company 4 1/2 per cent. of its gross revenues for rent of instruments and as compensation for engineering, executive, financial and other services; that a large part of the materials entering into the construction of the plant and equipment of the Illinois Company were purchased from the Western Electric Company and much of its operating expense consisted of payments made under a contract with that company for apparatus and supplies. The courtfur ther found that the American Company owned a controlling interest in fifteen telephone companies which, in connection with other companies controlled by those subsidiaries and some companies in which its interest was not controlling, were operated as a system with the avowed purpose of rendering a nation-wide and unified telephone service; that the American Company had stated that 'the associated companies are specialists in local service problems, with local operating forces, identified and familiar with the needs of the communities they serve'; that 'the parent company undertakes the solution of the problems that are common to all,' and in this way there was provided a central authority equipped to perform adequately general functions, leaving to the local companies responsibility for local affairs.

Upon these facts the city attacked the standing of the Illinois Company as the real plaintiff in the case. The

Page 144

court overruled this contention, holding that the ownership of stock by the American Company, and its power to control the Illinois Company, did not destroy the distinct corporate identity of the Illinois Company. The court pointed out that the order of the Commission was directed against the Illinois Company, and that it was treated as a corporation for the purpose of compelling it to establish the prescribed rates for service furnished by the operation of the property to which it had legal title. No ground appears for assailing this ruling. The fact that the relation of the Illinois Company to the American Company may demand close scrutiny, in dealing with certain questions which bear upon the validity of the rate order, cannot obscure the essential basis of that order, that is, that the Commission was imposing its requirement upon a corporate organization engaged in an intrastate public service and, as such, amenable to a valid exercise of the Commission's authority.

The Commission, in its final order of August, 16, 1923, made the following findings with respect to the value of the property of the Illinois Company: That the original cost as of December 31, 1922, of the property used and useful in the rendering of telephone service in the city of Chicago and exclusive of working capital, materials and supplies, work in progress and going value, but including overhead, was $90,687,816; that the reproduction cost new of that property, with the same exceptions, was $128,769,000; that the property as it then existed was 'in at least 90 per cent condition'; that the amount of construction work then in progress, which would eventually be included in capital account, was not more than $4,250,000; that the amount necessary to provide a sufficient cash working capital and to permit the carrying of sufficient materials and supplies was $3,000,000; that the going value of the Chicago property of the Illinois Company was $4,196,872; that the Chicago division of the Illinois

Page 145

Company had a depreciation reserve of $26,000,000, which had been contributed by the subscribers of the company and had been used by the company for extensions and additions to its property, and that these extensions and additions should not be considered in arriving at a base upon which to compute rates for telephone service; and that the fair rate-making base for the Chicago property of the Illinois Company, 'including physical property, overhead, working capital, going value and work in progress' as thus found, was $96,000,000, which was 'exclusive of the $26,000,000 of money taken for depreciation reserve and put into plant and equipment.' The Commission also found that on a readjustment of the account of operating expenses, and on making a fair allowance to take care of maintenance and retirement charges, the existing rates, if permitted to remain in effect for the ensuing year (1923), would afford a return of 9 per cent. upon the rate-base above stated; that this was an excessive rate and that the reduced rates prescribed by the Commission would enable the company to obtain a return of 7 1/2 per cent. upon that rate base.

The court found that the original cost of the property, taking the Commission's finding of cost as of December 31, 1922, with net additions to June 30, 1923, was $101,626,014; that the reproduction cost new, as of the latter date, was at least $145,000,000; that the finding that the property was in 90 per cent. condition was supported by the evidence, and that on this basis the reproduction cost new, less depreciation, was $130,500,000; that the amount allowed by the Commission, $4,196,067, was the minimum allowance that could be made for going value; that the valuation, or rate basis, of $96,000,000, found by the Commission as of December 31, 1922, or $106,000,000 if the net additions to June 30, 1923, were added, was clearly insufficient; and that the valuation should be not less than $125,000,000, estimating the depreciation at 10 per cent.

Page 146

The court held that the exclusion from the rate base of extensions and additions to the amount of $26,000,000, for which payment had been made from the company's depreciation reserve, was erroneous; that the customers had paid for service, not for the property used to render it; that in paying for service they had not acquired any interest in the property of the company; and that profits of the past could not be used to sustain confiscatory rates for the future, citing Board of Public Utility Commissioners v. New York Telephone Co., 271 U. S. 23, 31, 32, 46 S. Ct. 363, 70 L. Ed. 808.

The court further found that the readjustment made by the Commission of the company's account of operating expenses involved a reduction of $360,000 from the payment made to the American Company under the license contract, and a reduction of $1,800,000 from the annual allowance for depreciation; that the amount available for return in 1923 on the value of the property under the rates in force was $6,280,000; that if to this amount were added the above deductions on the license contract and for depreciation, there would have been available for such return the sum of $8,440,000; that the reduction for the entire year under the rates established by the Commission would have been $1,700,000, thus leaving a return of $6,740,000, or less than 5 1/2 per cent., which was held to be confiscatory under conditions existing in 1923.

At the threshold of the discussion, we are met with the fact that, in these findings, the Commission and the court made no distinction between the intrastate and the...

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