Indiana Bell Telephone Co. v. Public Service Commission of Indiana

• Decision Date: 19 May 1924
• Docket Number: 528,721.
• Citation: 300 F. 190
• Parties: INDIANA BELL TELEPHONE CO. v. PUBLIC SERVICE COMMISSION OF INDIANA et al.
• Court: U.S. District Court — District of Indiana

300 F. 190

INDIANA BELL TELEPHONE CO. v. PUBLIC SERVICE COMMISSION OF INDIANA et al.

Nos. 528, 721.

United States District Court, D. Indiana.

May 19, 1924

[Copyrighted Material Omitted]

Miller Dailey & Thompson and Pickens, Moores, Davidson & Pickens all of Indianapolis, Ind., for plaintiff.

Ralston, Gates, Lairy, Van Nuys & Barnard, U.S. Lesh, Edward M. White, and Shirley, Whitcomb & Dowden, all of Indianapolis, Ind., for defendants.

PAGE Circuit Judge.

This action is to enjoin, as confiscatory, the rate order made August 11, 1923, by the Public Service Commission of Indiana. Starting about 1883, one telephone system, covering Ohio, Indiana, and Illinois, was built up and operated until the Central Union Telephone Company, the then owner, on December 31, 1912, separated the properties in the several states, and the Central Union Telephone Company of Indiana received the Indiana property at a book valuation of $9,444,677.81. The Indiana company was under a receivership from 1914 until early in 1919. In 1918 an increase in the rates was asked, but before action was taken the United States government took over the lines and granted an increase in rates. After government control ceased, an increase in rates was asked, and on February 9, 1920, a small increase, much less than was asked, was given.

Plaintiff, in March, 1920, purchased the Central Union Telephone Company's Indiana properties, and on May 28, 1920, asked for an increase, which was refused because the commission took the position that the service was not in all respects satisfactory. Thereupon, before the hearing was completed, the petition was dismissed by plaintiff. Various applications were made for increase in rates during 1921 and 1922, and some relief in some instances was given. In June, 1922, the company filed a petition for general increase in rates, and on August 21st all increase as to the Indianapolis rates was denied.

Plaintiff on August 28, 1922, filed suit No. 528, charging confiscation of its property. On September 28, 1922, the commission gave notice that it would undertake a state-wide investigation of the reasonableness of plaintiff's telephone rates. Upon the hearing before three judges of the prayer for preliminary injunction in No. 528, it was stipulated, in open court, that if no injunction was granted the commission would amortize the difference between any rates fixed and those then existing. The stipulation was approved, and no injunction was granted. On November 27, 1922, an investigation was commenced by the commission.

No order having been issued, plaintiff, on August 8, 1923, filed suit No. 721, averring that the rates in force in Indiana, other than those for Indianapolis, were confiscatory, and that the commission's delay in granting a new rate was unreasonable and arbitrary, and praying an injunction. Three days later the order now sought to be enjoined was entered, approving plaintiff's toll rates and granting an increase in some rates, leaving some untouched, and reducing others.

After amending bill in No. 721 and filing a second supplemental bill in No. 528, the cases were consolidated, and an interlocutory injunction was prayed and allowed pending final hearing.

Four contentions are made: (1) That the commission's property valuation is too low. (2) That the allowance of less than 4 1/2 per cent., with which to pay plaintiff's obligation under the license contract with the American Telephone & Telegraph Company, is illegal. (3) That a 6 per cent. rate of return is too low. (4) That the 4 per cent. depreciation rate is too low.

Plaintiff found the minimum fair current cost value of its physical property to be $42,147,361.56. The commission's expert, Bemis, fixed the rate-making base at about $28,000,000. The public accountant, Herdrich, from an examination of book costs, found $31,370,500.08. The commission's engineering staff arrived at two sets of figures, $24,081,777 and $27,574,518, respectively, which the witness said, however, he did not claim represented the then present value of the property. The commission fixed the rate base value at $31,955,860,53.

Between the highest and the lowest valuation there is a difference of 45 per cent., or $19,000,000. The commission's value is $10,000,000 less than plaintiff's, and $8,000,000 higher than the lowest figure of the commission's engineers, and that low figure, in turn, is only $400,000 higher than the gross additions to plant from 1912 to 1922, as found by Bemis. Assuming that these conclusions were honestly arrived at, it seems quite evident that there is in such figures small security against confiscatory rates, little protection to the public against unfair charges for public service, and but meager ground for hope that the values of utility securities can be stabilized, or that confidence in the governmental function of rate making can be established, until some more certain method is found for arriving at rate base values.

Increase in Value as an Element in Rate Making.

In here giving the results of my study of the record on the question of a fair rate base, I have attempted to follow the methods and include the elements of value that seem to be recognized by the authorities. Nevertheless, I believe that the inclusion for rate-making purposes of any increase in value of property occurring after it has been incorporated in the utility is fundamentally unsound, for many reasons.

First. Property must be used in the establishment, maintenance, and operation of every public utility, yet the thing sold to the public is service, and if property in the utility can in any sense be said to be given or devoted to public use, then it necessarily follows that it is given for the limited purpose of performing that service, and while incorporated in the utility can have no value beyond what it contributes to the rendition of that service.

Second. By the mere act of devoting property to the uses of a utility, in rendering a public service, the property loses its exchange value while it remains in the utility, and no market increase in value could possibly add one whit to the value of the service rendered. The public is not obligated to pay more than the reasonable value of the service.

Third. The public pays for all depreciation. If appreciation, through the increase of market values, is to be added in making the rate base, then the public pays, not only for appreciation, but for depreciation. In Ames v. Union Pac. Ry. Co. (C.C.) 64 F. 165, the method of arriving at the value of property for rate-making purposes is likened to that of arriving at the value in condemnation proceedings. Property in a public utility is not taken for a public use, a s it is in condemnation. It is voluntarily devoted to the limited purpose of rendering a specified public service. Even in condemnation, if one's interest in property is limited, he can be compensated only for the value of that limited interest. 20 Corpus Juris, 740.

The Property Rate Base Value.

The Indiana Public Service Commission came into existence on May 1, 1913, a few months after the separation of the properties. When the property was sold to the plaintiff, the book value was about $16,000,000. It was appraised in its then depreciated condition, as required by the rules of the Interstate Commerce Commission, at $20,400,000, but the property was sold and was put upon the books at a valuation of $18,000,000. That sum, plus net cash additions after October 31, 1919, was found by the commission to be the then fair and reasonable value of the property by the commission's order of March 30, 1920. While the order reserved the right not to be bound by that finding, there is no evidence to contradict either the appraisal or the correctness of that finding.

The total capitalization on December 5, 1923, was $32,447,725, based presumably on sound values, found by the commission after investigation as provided by the statute. It is nearly $8,000,000 higher than the figures made by Carter, the chief of the commission's engineering staff, and nearly $5,000,000 higher than the value found by the commission's witness Bemis. To arrive at the fair value of property for a rate base, the courts have said:

'There must be a reasonable judgment, having its basis in a proper consideration of all relevant facts. ' Minnesota Rate Cases, 230 U.S. 434, 33 Sup.Ct. 729, 57 L.Ed. 1511, 48 L.R.A. (N.S.) 1151, Ann. Cas. 1916A, 18.

In valuing a utility that has been built up through a long course of years, embracing some 70 exchanges, where repairs, renewals, depreciation, and withdrawals are going on constantly, there are necessarily many relevant facts that must be studied. After a careful consideration of the testimony given by Herdrich, Carter, and Bemis, witnesses for the commission, dealing with the question of the rate base value, I am confronted with the fact that neither Herdrich nor Bemis ever saw the plant, and that, although Carter had some familiarity with the property, he did not appraise, but merely inventoried it, and arrived at his figures by price curves, that did not involve the property condition. Apparently Carter was not acting upon his independent judgment, but merely produced figures by following a method directed by some one else. This conclusion is inevitable from the following question and answer:

'Q. I suppose you wanted to find * * * the value * * * of the property at the time the rate is to be made? A. I am not attempting in any of my figures to find the value. I am making my appraisals, using a certain series of figures.'

Carter's curves show no actual prices, but only the trend of prices from the years 1911 to 1922. His utility curve was made by combining 30 points for metal and metal products, 11...