American Telephone Telegraph Co v. United States

• Decision Date: 07 December 1936
• Docket Number: No. 74,74
• Parties: AMERICAN TELEPHONE & TELEGRAPH CO. et al. v. UNITED STATES et al
• Court: U.S. Supreme Court

299 U.S. 232

57 S.Ct. 170

81 L.Ed. 142

AMERICAN TELEPHONE & TELEGRAPH CO. et al.

v UNITED STATES et al.

No. 74.

Argued Nov. 16, 17, 1936.

Decided Dec. 7, 1936.

Appeal from the District Court of the United States for the Southern District of New York.

[Syllabus from pages 232-234 intentionally omitted] Messrs. Wm. D. Mitchell, Allen T. Klots, C. M. Bracelen, and Alan J. McBean, all of New York City, for appellants.

Mr. John Dickinson, Asst. Atty. Gen., and

Messrs. John E. Benton and Hampson Gary, both of Washington, D.C., for appellees.

Mr. Justice CARDOZO delivered the opinion of the Court.

This suit was brought in the United States District Court for the Southern District of New York to set aside an order of the Federal Communications Commission prescribing a uniform system of accounts for telephone companies subject to the Communications Act of 1934. Act of June 19, 1934, c. 652, 48 Stat. 1064, 47 U.S.C. § 151 et seq. (47 U.S.C.A. § 151 et seq.). The plaintiffs are forty-four telephone companies, thirty-seven of them members of the Bell system, and seven of them members of another group. The defendants are the United States and the Federal Communications Commission, with whom the National Association of Railroad and Utilities Commissioners was afterwards joined, intervening as the representative of the regulatory commissions of forty-six states in support of the contested order.

The Communications Act of 1934 provides (section 220 (47 U.S.C.A. § 220)) that 'the Commission may, in its discretion, prescribe the forms of any and all accounts, records, and memoranda' to be kept by carriers subject to the act, 'including the accounts, records, and memoranda of the movement of traffic, as well as of the receipts and expenditures of moneys.' This is a power that had previously been lodged with the Interstate Commerce Commission (Interstate Commerce Act, § 20(5), 49 U.S.C.A. § 20(5), which framed a set of rules for telephone companies to take effect January 1, 1913, and a revised set of rules effective January 1, 1933. After the transfer of jurisdiction over telephone companies from the Interstate Commerce Commission to the Federal Communications Commission in 1934, the new Commission prepared a 'draft of a Uniform System of Accounts,' which was considered at a conference with representatives of the companies and of the state commissions. The outcome of the conference was the order of June 19, 1935, to take effect January 1, 1936, which is the subject of this suit.

The plaintiffs having moved for an interlocutory injunction, the cause was heard, in accordance with the requirement of the statute (47 U.S.C. § 402(a) (47 U.S.C.A. § 402(a)); 28 U.S.C. § 47 (28 U.S.C.A. § 47)), by a District Court of three judges, the affidavits in support of the motion and against it being also submitted for and against the final decree. Five provisions of the order were attacked as arbitrary. The District Court sustained two objections of minor importance, which are not in controversy now, and overruled the others. One of these was directed to the 'original cost' rule; the second to a provision as to 'just and reasonable' charges; the third to a classification dividing plants in present use from those held for use thereafter. The court dismissed the bill as to the objections overruled, stating in an opinion the reasons for its action. 14 F.Supp. 121. The case is here upon appeal. 48 Stat. 1064, 1093, § 402(a), 47 U.S.C. § 402(a), 47 U.S.C.A. § 402(a); 38 Stat. 219, 220, 28 U.S.C. §§ 47, 47a, 28 U.S.C.A. §§ 47, 47a.

This court is not at liberty to substitute its own discretion for that of administrative officers who have kept within the bounds of their administrative powers. To show that these have been exceeded in the field of action here involved, it is not enough that the prescribed system of accounts shall appear to be unwise or burdensome or inferior to another. Error or unwisdom is not equivalent to abuse. What has been ordered must appear to be 'so entirely at odds with fundamental principles of cor- rect accounting' (Kansas City Southern Ry. Co. v. United States, 231 U.S. 423, 444, 34 S.Ct. 125, 131, 58 L.Ed. 296, 52 L.R.A.(N.S.) 1) as to be the expression of a whim rather than an exercise of judgment. Norfolk & Western Ry. Co. v. United States, 287 U.S. 134, 141, 53 S.Ct. 52, 54, 77 L.Ed. 218; Kansas City Southern Ry. Co. v. United States, supra, 231 U.S. 423, at page 456, 34 S.Ct. 125, 58 L.Ed. 296, 52 L.R.A.(N.S.) 1. Then, too, in gauging rationality, regard must steadily be had to the ends that a uniform system of accounts is intended to promote. 'The object of requiring such accounts to be kept in a uniform way, and to be open to the inspection of the Commission, is not to enable it to regulate the affairs of the corporations not within its jurisdiction, but to be informed concerning the business methods of the corporations subject to the act, that it may properly regulate such matters as are really within its jurisdiction.' Interstate Commerce Commission v. Goodrich Transit Co., 224 U.S. 194, 211, 32 S.Ct. 436, 439, 56 L.Ed. 729; cf. Kansas City Southern Ry. Co. v. United States, supra, 231 U.S. 423, at page 445, 34 S.Ct. 125, 58 L.Ed. 296, 52 L.R.A.(N.S.) 1. With these principles in mind, we proceed to consider separately the regulations and instructions now challenged as unlawful.

First: The Original Cost Provisions.

Four new balance sheet accounts, each of them a sub-title of the general title of 'Investments,' must be kept under the new system. The first (100.1) is described as Telephone Plant in Service; the second (100.2), Telephone Plant under Construction; the third (100.3), Property held for Future Telephone Use; and the fourth (100.4), Telephone Plant Acquisition Adjustment. Account 100.1 'shall include the original cost (defined by Instruction 3 (S. 1)) of the company's property used in telephone service at the date of the balance sheet.' Account 100.2 'shall include the original cost (as so defined) of construction of telephone plant not completed ready for service' at such date. Account 100.3 'shall include the original cost (so defined) of property owned and held for imminent use in telephone service under a definite plan for such use.' The term 'original cost' as appearing in these rules receives (under Instruction 3 (S. 1)) a special definition. "Original cost' or 'cost,' as applied to telephone plant, franchises, patent rights, and right-of-way, means the actual money cost of (or the current money value of any consideration other than money exchanged for) property at the time when it was first dedicated to the public use, whether by the accounting company or by a predecessor public utility.' If actual costs are unknown, estimates are to take their place. Instruction 21(B). From all this it follows that the sum of the three accounts which represent the original cost of property acquired by the accounting company from other telephone utilities, may be less or greater than the investment in such property by the accounting company itself. The difference is taken care of by account 100.4, Telephone Plant Acquisition Adjustment.^* The same rule provides in a subdivision designated (C) that 'the amounts recorded in this account (i.e. 100.4) with respect to each property acquisition shall be disposed of, written off, or provision shall be made for the amortization thereof in such manner as this Commission may direct.'

Before explaining the appellants' objections to these provisions as to cost, we may pause to indicate the reasons that led to their adoption. To a great extent, the telephone business as conducted in the United States is that of a far flung system of parent, subsidiary and affiliated companies. The Bell system is represented in this case by thirty-seven companies, the American Telephone & Telegraph Company at their head. Seven other companies, intervening as a group, represent a second and smaller system. Purchases are frequently made by a member or members of a system from affiliates or subsidiaries, and with comparative infrequency from strangers. At times obscurity or confusion has been born of such relations. There is widespread belief that transfers between affiliates or subsidiaries complicate the task of rate-making for regulatory commissions and impede the search for truth. Buyer and seller in such circumstances may not be dealing at arm's length, and the price agreed upon between them may be a poor criterion of value. Dayton Power & Light Co. v. Public Utilities Comm. of Ohio, 292 U.S. 290, 295, 54 S.Ct. 647, 650, 78 L.Ed. 1267; Western Distributing Co. v. Public Service Comm. of Kansas, 285 U.S. 119, 52 S.Ct. 283, 76 L.Ed. 655; Smith v. Illinois Bell Telephone Co., 282 U.S. 133, 51 S.Ct. 65, 75 L.Ed. 255. Even if the property has been acquired by treaty with an independent utility or a member of a rival system, there is always a possibility that it is nuisance value only—and not market or intrinsic value for the uses of the business—that has dictated the price paid. Accordingly, the work of the Commission may be facilitated by spreading on the face of the accounts a statement of the cost as of the time when the property to be valued was first acquired by a utility or dedicated to the public use. The same considerations show why the regulations do not direct that the inquiry as to original cost shall be carried even farther back, so as to cover, for illustration, the cost to manufacturers who may have sold to the first utility. In the process of analysis, inquiry is halted at the point where it ceases to be fruitful.

With this explanatory background we can now go forward with understanding to a statement of the objections to the order and a determination of their weight.

(a) The companies object that by the 'original cost' provisions of the order they are prevented 'from recording their actual investment in their accounts' with the result that the accounts do not fairly...