Illinois Bell Telephone Co. v. Gilbert

• Decision Date: 29 April 1933
• Docket Number: No. 3746.,3746.
• Citation: 3 F. Supp. 595
• Parties: ILLINOIS BELL TELEPHONE CO. v. GILBERT et al. (CITY OF CHICAGO, Intervener).
• Court: U.S. District Court — Northern District of Illinois

3 F. Supp. 595

ILLINOIS BELL TELEPHONE CO. v. GILBERT et al. (CITY OF CHICAGO, Intervener).

No. 3746.

District Court, N. D. Illinois, E. D.

April 29, 1933.

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Chas. S. Cutting, of Chicago, Ill., Philip Barton Warren, of Springfield, Ill., Wm. D. Bangs and Horace Kent Tenney, both of Chicago, Ill., and William H. Thompson, of Indianapolis, Ind., for plaintiff.

Benj. F. Goldstein, Edmund D. Adcock, G. I. Haight, Francis X. Busch, and Samuel A. Ettelson, all of Chicago, Ill., Simon Hear and Oscar E. Carlstrom, of Chicago, Ill., for defendants.

Before EVANS and SPARKS, Circuit Judges, and WILKERSON, District Judge.

PER CURIAM.

The final decree of this court entered on January 31, 1930, enjoined 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. Illinois Bell Tel. Co. v. Moynihan, 38 F.(2d) 77. The order of the Commission was made on August 16, 1923, effective October 1, 1923. The decree of January 31, 1930, was set aside by the Supreme Court and the cause remanded to this court. Smith v. Illinois Bell Tel. Co., 282 U. S. 133, 51 S. Ct. 65, 75 L. Ed. 255. The Supreme Court said that "there should be appropriate findings as to the results of the intrastate business in Chicago and the effect of the rates in question for each of the years since the date of the Commission's order."

As to the separation of the intrastate and interstate property, revenues and expenses of the company, the Supreme Court (page 149 of 282 U. S., 51 S. Ct. 65, 69) said: "In view of the questions presented in this case, the validity of the order of the state commission can be suitably tested only by an appropriate determination of the value of the property employed in the intrastate business and of the compensation receivable for the intrastate service under the rates prescribed * * *. As to the value of that property, and as to the revenue and expenses incident to that business, separately considered, there should be specific findings * * *."

And again on the same subject: "In the method used by the Illinois Company in separating its interstate and intrastate business, for the purpose of the computations which were submitted to the court, what is called exchange property, that is, the property used at the subscriber's station and from that station to the toll switchboard, or to the toll trunk lines, was attributed entirely to the intrastate service. This method was adopted as a matter of convenience, in view of the practical difficulty of dividing the property between the interstate and intrastate services. The appellants insist that this method is erroneous, and they point to the indisputable fact that the subscriber's station, and the other facilities of the Illinois Company which are used in connecting with the long distance toll board, are employed in the interstate transmission and reception of messages. While the difficulty in making an exact apportionment of the property is apparent, and extreme nicety is not required, only reasonable measures being essential * * * it is quite another matter to ignore altogether the actual uses to which the property is put. It is obvious that, unless an apportionment is made, the intrastate service to which the exchange property is allocated will bear an undue burden — to what extent is a matter of controversy. We think that this subject requires further consideration, to the end that by some practical method the different uses of the property may be recognized and the return properly attributable to the intrastate service may be ascertained accordingly."

We have endeavored to comply with this mandate in making the separation of intrastate and interstate property, revenue, and expenses. The difficulties in so doing are, of course, apparent. Such separation has been made on the basis of actual use. Certain portions of the property were used exclusively for exchange or local intrastate business, certain portions exclusively for intrastate toll purposes, and certain portions exclusively for interstate toll purposes. Such portions of property require no apportionment, and have been directly segregated in accordance with their respective uses. The remainder of the property not so directly segregated, including the subscribers' station apparatus and equipment, of the subscribers' lines, and the local central office equipment, has been apportioned to plaintiff's exchange (intrastate), intrastate toll and interstate toll business, respectively, in accordance with its actual proportionate use for each of such classes of business. Obviously this apportionment cannot be exact. In our opinion, however, it is reasonably accurate.

In valuing the property, one of the elements to which consideration has been given is the reproduction cost new as of December 31 for each of the years 1923 to 1931. In the findings of January 31, 1930, we approved the method employed by plaintiff in determining the reproduction cost new of the property. We have adhered to that conclusion, and are now of opinion that the reproduction costs determined in accordance with the method pursued by plaintiff are substantially accurate. Such reproduction costs of plaintiff's property in service in the Chicago area, exclusive of working cash capital, materials, and supplies, construction work in progress, and going value, based upon the estimates of plaintiff's engineer, Sloan, are as follows: 1923, $148,581,042; 1924, $156,452,212; 1925, $172,257,055; 1926, $178,413,771; 1927, $191,820,622; 1928, $202,604,906; 1929, $219,327,112; 1930, $228,411,330; 1931, $226,912,713.

The evidence as to the book cost of plaintiff's Chicago area property, exclusive of working cash capital, materials and supplies, construction work in progress, and going value, as of December 31, for each of the years 1923 to 1931, is as follows: 1923, $100,040,051; 1924, $110,987,626; 1925, $126,493,467; 1926, $140,915,840; 1927, $155,508,437; 1928, $169,390,828; 1929, $182,657,561; 1930, $191,286,165; 1931, $195,422,113.

The evidence shows that the average amounts of working cash capital reasonably employed in the Chicago area were as follows: 1923, $3,000,000; 1924, $3,150,000; 1925, $3,325,000; 1926, $3,550,000; 1927, $3,825,000; 1928, $4,050,000; 1929, $4,500,000; 1930, $4,550,000; 1931, $4,250,000.

The average investment of plaintiff in its Chicago area in materials and supplies necessary in the conduct of its business as shown by the evidence are as follows: 1923, $233,022; 1924, $299,310; 1925, $358,227; 1926, $336,693; 1927, $326,599; 1928, $344,336; 1929, $276,091; 1930, $209,784; 1931, $224,433.

The amounts invested in property in the process of construction are shown by the evidence to be as follows: 1923, $812,543; 1924, $2,100,245; 1925, $1,390,296; 1926, $775,279; 1927, $5,437,059; 1928, $3,275,756; 1929, $1,974,688; 1930, $4,415,765; 1931, $441,956.

The valuation of plaintiff's property for 1931 and 1932 presents some difficulties which are not present in the other years. We are obliged to take notice of the general decline in property values which has accompanied the present period of business stagnation. For this reason we cannot take the reproduction estimates, based on the costs of labor and material stated in the record at their face. We have fixed values, therefore, for 1931 and 1932 which in our opinion give due consideration to the element of the present general decline in values.

In considering reproduction cost new as an element in arriving at value, it is necessary to deduct the actual existing depreciation in the property as compared with the new one in order to find the value of the physical elements commonly referred to as the structural value of the property.

A consideration of the evidence on this subject, including that of the witnesses who inspected the property, has led to the conclusion that the fair rate of depreciation is 16 per cent. for the years 1923 to 1928, inclusive, and 15 per cent. for the succeeding years.

In determining the element of going value, consideration has been given to the evidence relating to the construction and management of plaintiff's Chicago property. It is well planned, effectively engineered, and properly constructed. It has a capable staff of operating employees. It is well adapted to the needs of Chicago, and through years of operation has become fully efficient and serviceable to that community. Continuously from 1923 to the present time, it has had established routines, attached customers, and trained employees. The plaintiff has been efficiently and economically operated, and has had a high standard of maintenance. The company's credit has been excellent and, if given reasonable rates, it has good earning power. The number of its telephone stations increased from 690,000 at the end of 1923 to over 980,000 at the end of 1930. Plaintiff has engineered and planned its property so that, as additions are required to meet the future needs of the community, they may be made efficiently and economically.

From a consideration of the pertinent facts, we have reached the conclusion that 8 per cent. is a reasonable allowance for going value.

With reference to purchases by the Illinois Company from the Western Electric Company, the Supreme Court (page 153 of 282 U. S., 51 S. Ct. 65, 70) said: "The point of the appellants' contention is that the Western Electric Company, through the organization and control of the American Company, occupied a special position with particular advantages in relation to the manufacture and sale of equipment to the licensees of the Bell system, including the Illinois Company, that is, that it was virtually the manufacturing department for that system, and the question is as to the net earnings of the Western Electric Company realized in...