Pacific Telephone & Telegraph Co. v. Whitcomb

• Decision Date: 22 April 1926
• Docket Number: No. 166-E,167-E.,166-E
• Citation: 12 F.2d 279
• Court: U.S. District Court — Western District of Washington
• Parties: PACIFIC TELEPHONE & TELEGRAPH CO. v. WHITCOMB, Director of Public Works of Washington, et al. HOME TELEPHONE & TELEGRAPH CO. OF SPOKANE v. DENNEY, Director of Public Works of Washington, et al.

12 F.2d 279 (1926)

PACIFIC TELEPHONE & TELEGRAPH CO. v. WHITCOMB, Director of Public Works of Washington, et al.

HOME TELEPHONE & TELEGRAPH CO. OF SPOKANE v. DENNEY, Director of Public Works of Washington, et al.

Nos. 166-E, 167-E.

District Court, W. D. Washington, S. D.

April 22, 1926.

Otto B. Rupp, of Seattle, Wash., Post & Russell, of Spokane, Wash., and Pillsbury, Madison & Sutro, of San Francisco, Cal. (C. M. Bracelen, of New York City, of counsel), for plaintiffs.

John H. Dunbar, Atty. Gen., and H. C. Brodie, Asst. Atty. Gen., of State of Washington (Thomas J. L. Kennedy, of Seattle, Wash., E. K. Murray, of Tacoma, Wash., and Alex M. Winston, of Spokane, Wash., of counsel), for defendants.

Before RUDKIN, Circuit Judge, and NETERER and WEBSTER, District Judges.

WEBSTER, District Judge.

These cases, by agreement of counsel consolidated for the purpose of taking testimony before the special master, have been dealt with by him in a single report, and will therefore be considered together. No attempt will be made to detail the history of this complicated and protracted litigation as it has taken its course through state and federal courts. For the purpose of our present inquiries, it will perhaps suffice to say that on March 31, 1923, the Department of Public Works of the state of Washington (hereinafter called the department) made two orders affecting these plaintiffs, one purporting to determine for rate-making purposes the value of the property of the Home Telephone & Telegraph Company of Spokane (hereinafter called the Home Company), and the other a like order fixing the value of both the intrastate and interstate property of the Pacific Telephone & Telegraph Company (hereinafter called the Pacific Company). A few days later these suits were commenced by these two companies, alleging that the rate orders promulgated by the department were confiscatory of the property of the companies, respectively, and consequently in violation of the federal Constitution. The cases are now before the court pursuant to section 266 of the Judicial Code as amended (Comp. St. § 1243), upon exceptions to the report of the special master, to whom the cases were in due course referred.

The special master found the fair and reasonable value of the Pacific Company's intrastate property devoted to the public service, as of June 30, 1922, to be $31,425,403.75, including average working capital, to which there should be added $720,000, found to be the "going concern value" of that company's property, making a total value or rate basis on which that company was entitled to a fair and reasonable return of $32,145,403.75; and the equivalent figure for the Home Company was fixed at $4,548,021.76. The special master further found the fair and reasonable rate of return which the companies were entitled to earn as of June 30, 1922, to be 7½ per centum per annum. In addition he found that the net revenue of the Pacific Company as of June 30, 1922, was $928,081.97, and the corresponding figure for the Home Company was $126,081.97, on the basis of the rates then allowed, and that these revenues would produce a return of less than 3 per centum per annum for each company. From these findings he concluded as a matter of law that the effect of enforcing the orders of the department complained of would be to confiscate the property of the companies, respectively, and recommended that a permanent injunction be granted restraining the department from putting such orders into effect. The correctness of these findings and conclusions is now challenged by exceptions, which give rise to the following principal questions:

One. What is the fair and reasonable value of the properties of the two companies respectively which is held for and used in the public service — that is to say, what is the proper value of such properties as the lawful basis for a rate structure?

Two. In determining this, should working capital be allowed?

Three. Should "going concern value" be taken into account, and, if so, how should such amount be ascertained?

Four. What amount should properly be deducted for depreciation, and how is this amount to be arrived at?

Five. Are the licensee contracts involved valid and to be given their face effect?

And finally. What was a proper rate of return to be allowed each company upon the property devoted by it to the public use as of June 30, 1922?

The subordinate and incidental problems to which these major considerations necessarily give rise will be noticed in their proper places and connections.

At the threshold we face the query, What were the physical properties of the companies, respectively, as of June 30, 1922. During 1913, 1914, and 1915, at a cost of approximately $125,000, the Pacific Company made a detailed and complete inventory of all its property in the state of Washington. As to central office equipment, buildings, and certain other important items of property, an actual field count and appraisal was made. In case of other classes of property as careful and accurate a survey was made as the nature of the millions of small items comprising it rendered practicable. This inventory and appraisal consisted of 54 volumes containing an average of 400 pages each. It was completed in the early part of 1915, and subsequently was brought down to December 31, 1921, by a system of accounting supplemented by various and numerous field checks. The work was in charge of an expert in such matters, who testified: "It is as close a determination of the precise facts as it is humanly possible to make it." There is little in the record challenging the correctness of this appraisal, and the special master was amply justified in finding that it is as accurate, thorough, and complete as it is practical to make it, and is all that should in reason be required. The cost of reproducing the property of the Home Company, with the exception of its going concern value, was stipulated by the parties, and therefore needs no discussion. Taking then the detailed inventory and the stipulation as the basis of the physical properties of the two companies, we pass naturally to the ascertainment of the proper rules to be followed, the proper elements and factors to be considered, in fixing the value of such property for rate-making purposes.

In Smyth v. Ames, 18 S. Ct. 418, 434, 169 U. S. 466, 546, 547 (42 L. Ed. 819) the Supreme Court said:

"We hold, however, that the basis of all calculations as to the reasonableness of rates to be charged by a corporation maintaining a highway under legislative sanction must be the fair value of the property being used by it for the convenience of the public. And in order to ascertain that value, the original cost of construction, the amount expended in permanent improvements, the amount and market value of its bonds and stock, the present as compared with the original cost of construction, the probable earning capacity of the property under particular rates prescribed by statute, and the sum required to meet operating expenses, are all matters for consideration, and are to be given such weight as may be just and right in each case. We do not say that there may not be other matters to be regarded in estimating the value of the property. What the company is entitled to ask is a fair return upon the value of that which it employs for the public convenience."

In Willcox v. Consolidated Gas Co., 29 S. Ct. 192, 200, 212 U. S. 19, 52 (53 L. Ed. 382, 15 Ann. Cas. 1034, 48 L. R. A. N. S. 1134) the Supreme Court said:

"If the property, which legally enters into the consideration of the question of rates, has increased in value since it was acquired, the company is entitled to the benefit of such increase. This is, at any rate, the general rule. We do not say there may not possibly be an exception to it," etc.

In the Minnesota Rate Cases, 33 S. Ct. 729, 762, 230 U. S. 352, 454 (57 L. Ed. 1511, 48 L. R. A. N. S. 1151, Ann. Cas. 1916A, 18) this principle is stated:

"The property is held in private ownership and it is that property, and not the original cost of it, of which the owner may not be deprived without due process of law."

In Missouri ex rel. Southwestern Bell Telephone Co. v. Public Service Commission, 43 S. Ct. 544, 262 U. S. 276, 67 L. Ed. 981, 31 A. L. R. 807, the Public Service Commission undertook to value the property there involved without according any weight to the greatly enhanced cost of material, labor, and supplies. In reviewing this action, at page 287 (43 S. Ct. 546) of the opinion, the court said:

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

In Bluefield Waterworks & Improvement Co. v. Public Service Commission, 43 S. Ct. 675, 677, 262 U. S. 679, 689 (67 L. Ed. 1176), this language is found:

"The record clearly shows that the commission in arriving at its final figure, did not accord proper, if any, weight to the greatly enhanced costs of construction in 1920 over those prevailing about 1915 and before the war, as established by uncontradicted evidence; and the company's detailed estimated cost of reproduction new, less depreciation, at 1920 prices, appears to have been wholly disregarded. This was erroneous."

Federal and state cases holding to the same view almost without number might be cited. It is true that in the case of Georgia Railway & Power Co. v. Railroad Commission, 43 S. Ct. 680, 262 U. S. 625, 67 L. Ed. 1144, the Supreme Court said:

"The refusal of the commission and of the lower court to hold that, for rate-making purposes,...