Lindheimer v. Illinois Bell Telephone Co Illinois Bell Telephone Co v. Lindheimer

Citation78 L.Ed. 1182,292 U.S. 151,54 S.Ct. 658
Decision Date30 April 1934
Docket Number548,Nos. 440,s. 440
CourtUnited States Supreme Court

Appeals from the District Court of the United States for the Northern District of Illinois.

[Syllabus from pages 151-153 intentionally omitted] Messrs. George I. Haight, Benjamin F. Goldstein, and William H. Sexton, all of Chicago, Ill., for Lindheimer and others.

Messrs. William H. Thompson, Charles M. Bracelen, of New York City, Kenneth F. Burgess, of Chicago, Ill., and Edward L. Blackman, of New York City, for Illinois Bell Telephone Co.

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

This case comes here for the second time. It presents the question of the validity under the Fourteenth Amendment of rates prescribed by the Illinois Commerce Commission for telephone service in the city of Chicago. The commission's order, made on August 16, 1923, to be effective October 1, 1923, reduced rates applicable to a large part of the intrastate service of the appellee, Illinois Bell Telephone Company.1 In this suit, brought by that company in September, 1923, an interlocutory injunction was granted upon the condition that, if the injunction were dissolved, the company should refund the amounts charged in excess of the challenged rates. We affirmed that order. Smith v. Illinois Bell Tel. Co., 269 U.S. 531, 46 S.Ct. 22, 70 L.Ed. 397. The final hearing was not had until April, 1929, a delay found to be attributable to the city of Chicago. On that hearing, the District Court, composed of three judges, entered a final decree making the injunction permanent. 38 F.(2d) 77. We reversed that decree and remanded the case for further proceedings. Smith v. Illinois Bell Telephone Company, 282 U.S. 133, 51 S.Ct. 65, 75 L.Ed. 255. Further evidence was then taken, and the District Court made new findings and entered a final decree which permanently restrained the enforcement of the commission's order and released the company from obligation to refund the moneys which had been collected pending the suit. Illinois Bell Tel. Co. v. Gilbert, 3 F.Supp. 595. The state authorities and the city bring this direct appeal. Jud. Code § 266 (28 USCA § 380). The company brings a cross-appeal to review the findings below, insisting that its property has been undervalued and that substantial amounts of its operating expenses have been disallowed.

No. 440. The Appeal of the State Officers and the City of Chicago.—On the former appeal, it appeared that no distinction had been made by the commission or by the District Court between the intrastate and the interstate property and business of the company. We found that separation was essential to the appropriate recognition of the competent governmental authority in each field of regulation. Accordingly, we directed that, as to the value of the property employed in the intrastate business in Chicago and as to the amounts of revenue and expenses incident to that business, separately considered, there should be specific findings. And as a rate order which is confiscatory when made may cease to be confiscatory, and one which is valid when made may become confiscatory at a later period, we held that there should be appropriate findings for each of the years since the date of the commission's order. Smith v. Illinois Bell Tel. Co., 282 U.S. 149, 162, 51 S.Ct. 65, 75 L.Ed. 255. On the further hearing, that difficult task was so well performed that no question is now raised as to the allocation of property to the intrastate and interstate services, respectively, in the Chicago area, the allocation being made on the basis of use.2 Nor is there dispute with respect to the separation of expenses. Appellants object to the separation of revenues, insisting that certain revenues were improperly assigned to the interstate, instead of the intrastate, business.3

Considering the fact that 99 per cent. of the stock of appellee is owned by the American Telephone & Telegraph Company which also owns substantially the same proportion of the stock of the Western Electric Company, we directed that there should be further examination of the purchases made by appellee from the Western Electric Company and of the payments made by appellee to the American Company. As it appeared that the Western Electric Company, through the organization and control of the American Company, was virtually the manufacturing department for the Bell system, we directed specific findings to be made as to the net earnings of the Western Electric Company in that department and as to the extent to which, if at all, such profit figured in the estimates upon which the charge of confiscation was predicated. We also held that there should be specific findings with regard to the cost to the American Company of the services which it rendered to appellee and the reasonable amount which should be allocated in that respect to the operating expenses of appellee's intrastate business. Id. pp. 153, 157 of 282 U.S., 51 S.Ct. 65, 75 L.Ed. 255. The District Court entered into an exhaustive examination of these questions and made detailed findings. The court found that the equipment and supplies furnished by the Western Electric Company had been sold to appellee at fair and reasonable prices, and that the earnings of the Western Electric Company on its investment allocated to the business done with appellee, and its profits on sales, had been fair and reasonable, with the exception of an advance in prices of 10.2 per cent. effective on November 1, 1930. That advance the court disapproved, and, in determining the reasonable outlays to be allowed to appellee after that date, the court made a reduction of 10 per cent. from the prices charged by the Western Electric Company.4 Appellee contests this reduction, and appellants object to the amounts allowed.

The District Court made specific findings as to the character of the services rendered by the American Company under its license contracts with appellee and the amounts of the cost of these services which should be allocated to the operating expenses of the latter's intrastate business. In the years 1923 to 1928, inclusive, when the court found that the payments under the license contracts charged on appellee's books exceeded the cost as thus determined and allocated, only the cost was held to be chargeable to operating expenses, but in the years 1929 to 1931, inclusive, when the license payments as so charged were less than the cost, only the amount of the license payments was allowed as an operating expense.5 Appellants raise many questions in opposition to these determinations of costs and allocations, while appellee contends that the costs as found were less than the true costs and that the full amounts paid under the license contracts should have been allowed.

The evidence with respect to the value of appellee's property employed in its intrastate business at Chicago is voluminous. The evidence shows the original or book cost of this property, the market value of land, and estimates of the cost of reproduction new of the other physical property constituting appellee's telephone plant. There was also evidence of the condition of the property, together with estimates of accrued depreciation. Appellants submitted no valuations since one made by the commission in 1923,6 but presented detailed criticisms of appellee's estimates. The District Court found that the method adopted by appellee's witness in ascertaining the cost of reproduction new was reliable and that appellee's estimates were substantially correct. The court encountered difficulties in making its valuations for the years 1931 and 1932. It took notice of the general fall in values which had accompanied the depression in business. And for that reason the court fixed values for 1931 and 1932 which in its opinion 'gave due consideration to the element of the present decline.' The court found that the fair rate of depreciation to be applied to reproduction cost new was 16 per cent. for the years 1923 to 1928, inclusive, and 15 per cent. for the succeeding years, and that the amount to be added to reproduction cost new on account of going value was 8 per cent. of that cost. The court also made findings as to the appellee's working cash capital, the amounts invested in materials and supplies and in property in course of construction, and as to these three items there is no controversy.

The court's findings, for each year, of the fair value of appellee's property, used and useful in its intrastate business in the Chicago area, including working cash capital, materials and supplies, construction work in progress, and going value, taking the average amount for the year, and the court's findings as to the original or average book cost of the same property, but without going value, are as follows:

                Fair Value Book cost
                 1923......... $124,200,000.       $ 95,074,135
                 1924.......... 136,500,000.        105,291,980
                 1925.......... 148,500,000.        117,730,536
                 1926.......... 151,500,000.        130,857,355
                 1927.......... 167,000,000.        146,173,197
                 1928.......... 173,000,000.        159,622,212
                 1929.......... 184,000,000.        168,988,816
                 1930.......... 187,120,000.        178,157,620
                 1931.......... 179,100,000.        181,925,963
                 1932.......... 166,500,000.        181,925,963

Appellants contend that the findings as to fair value are excessive. Appellee insists that they are too low. In particular, appellee says that the property was undervalued through excessive deductions for existing depreciation. Appellee maintains that the evidence shows a maximum depreciation of 9 per cent. for the years 1923 to 1928, and of 8 per cent. thereafter, instead of the 16 per cent. and 15 per cent. deducted by the court.

In computing the net revenue from the intrastate business in Chicago, the court made adjustments in...

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