Mich. Pub. Utilities Comm'n v. Mich. State Tel. Co.

• Decision Date: 30 October 1924
• Docket Number: No. 266.,266.
• Citation: 200 N.W. 749,228 Mich. 658
• Parties: MICHIGAN PUBLIC UTILITIES COMMISSION v. MICHIGAN STATE TELEPHONE CO.
• Court: Michigan Supreme Court

228 Mich. 658

200 N.W. 749

MICHIGAN PUBLIC UTILITIES COMMISSION

v.MICHIGAN STATE TELEPHONE CO.

No. 266.

Supreme Court of Michigan.

Oct. 30, 1924.

Application by the Michigan Public Utilities Commission for an order requiring the Michigan State Telephone Company to show cause why it should not comply with the order of the Commission. Writ denied.

Argued before CLARK, C. J., and McDONALD, BIRD, SHARPE, MOORE, STEERE, FELLOWS, and WIEST, JJ.

Wiest, J., dissenting, and Bird, J., dissenting in part. Merlin Wiley and Andrew B. Dougherty, Attys. Gen., Clare Retan, Deputy Atty. Gen., and Ernest C. Smith, of Lansing (Clarence E. Wilcox and David H. Crowley, both of Detroit, of counsel), for plaintiff.

Thomas G. Long and Stevenson, Carpenter, Butzel & Backus, all of Detroit (James O. Murfin, of Detroit, of counsel), for defendant.

Richard I. Lawson, Corp. Counsel, and David H. Crowley, Special Counsel, both of Detroit, for City of Detroit.

John H. Farley, City Atty., of Flint, and Ganson Taggart, City Atty., of Grand Rapids (Marvin J. Schaberg, of Kalamazoo, M. Grove Hatch, of Jackson, John W. Patchin, of Traverse City, Arthur J. Butler, of Grand Rapids, Roscoe O. Bonisteel, of Ann Arbor, Goodloe H. Rogers, of Pontiac, John A. Wagner, of Battle Creek, Elijah B. Howarth, Jr., of Royal Oak, J. L. McCormick, of Bay City, Thomas J. Riley, of Escanaba, A. P. Cady, of Benton Harbor, B. H. Halstead, of Petoskey, and Leland S. Bisbee, of Jackson, of counsel), for certain cities affected by telephone rates.

CLARK, C. J.

Plaintiff, Michigan Public Utilities Commission, made in July, 1922, an order to establish rates of defendant, Michigan State Telephone Company. An amendment making the order more specifically applicable to Detroit was made later. Defendant refused to obey the order. It filed a bill in the United States District Court at Detroit. An interlocutory injunction issued. To compel obedience plaintiff instituted mandamus in the circuit court for Ingham county. Counsel agreed that plaintiff might apply to this court for an order requiring defendant to show cause why it should not comply with the commission's order, and that, if an order issued, proceedings in other courts would be stayed, the cause speedily brought to hearing here, and the whole matter submitted for decision. Plaintiff applied. The order issued September 5, 1922. Defendant answered:

‘That the orders are wholly null and void and of no force and merit whatsoever, in that the rates prescribed therein are less than just and reasonable rates, and also are confiscatory of defendant's property used and useful in the furnishing to the public of the telephone service * * * and said orders therefore seek to deprive the defendant of its property without due process of law, and deny defendant the equal protection of the laws in violation of its rights under the Fourteenth Amendment to the Constitution of the United States.’

Reference was made to Hon. Guy M. Chester as special commissioner. After numerous sittings of the commissioner, filing of many briefs, argument, and the report of the commissioner, counsel finally brought the cause to hearing in our June, 1924, term. We have a record of over 3,000 pages, a 70-page opinion of the commission, an 80-page report of the special commissioner, and many briefs filed in behalf of the parties, the city of Detroit, and 13 other cities of the state.

That this opinion may be kept within bounds, only those facts which are important and essential to the questions considered will be stated, and they will be stated generally. See Lincoln Gas Co. v. Lincoln, 250 U. S. 256, 39 S. Ct. 454,65 L. Ed. 968.

1. Jurisdiction of This Court.-Mr. Justice BIRD, to whom this case was assigned, has declined to consider the merits, stating that plaintiff must be turned out of court on this question. With his conclusion we do not agree. Counsel raise no question of jurisdiction. They concede it. It was invoked by plaintiff, whose petition for the writ of mandamus concludes:

‘This petitioner prays further that this court immediately issue an order staying all proceedings under the said orders heretofore made by this petitioner and all actions for the enforcement of penalties for a violation of the same pending, and until the final determination of this proceeding in this in the manner provided by section 266 of the Judicial Code of the United States [U. S. Comp. St. § 1243].’

No question is raised that the said section is applicable, nor that this is a proper suit in a proper state court, timely brought, requiring under the said section stay of proceedings in the federal court, pending final determination of the cause here. It is our duty to dispose of the case on the merits. See Railway Co. v. Utilities Commission, 225 Mich. 425, 196 N. W. 518;Prendergast v. N. Y. Telephone Co., 262 U. S. 43, 43 S. Ct. 466, 67 L. Ed. 853;Monroe Gaslight & Fuel Co. v. Mich. Public Utilities Commission (D. C.) 292 F. 139.

2. Principles.-Language used in a railroad case (Smyth v. Ames, 169 U. S. 466, 18 S. Ct. 418, 42 L. Ed. 819), is applicable here:

‘A state enactment, or regulations made under the authority of a state enactment, establishing rates for the transportation of persons or property by railroad that will not admit of the carrier earning such compensation as under all the circumstances is just to it and to the public, would deprive such carrier of its property without due process of law, and deny to it the equal protection of the laws, and would therefore be repugnant to the Fourteenth Amendment of the Constitution of the United States. While rates for the transportation of persons and property within the limits of a state are primarily for its determination, the question whether they are so unreasonably low as to deprive the carrier of its property without such compensation as the Constitution secures, and therefore without due process of law, cannot be so conclusively determined by the Legislature of the state or by regulations adopted under its authority, that the matter may not become the subject of judicial inquiry.’

What are the chief elements of just compensation to defendant? (a) Operating expense, including administration, labor, interest, taxes, certain items of repair, and maintenance and the like. (b) Depreciation, physical and functional, including wear and tear of property by use, the constant destruction of property by earth's relentless processes, and supersession and obsolescence of machines and structures by progress. (c) A fair return upon the present fair value of the property used and useful in public service.

These elements, when determined, measure the rate to be paid by the public for the service. Upon the issue of confiscation, a federal question, decisions of the Supreme Court of the United States are controlling.

3. Depreciation Charge.-As has been stated, before coming to the question of profit, the company is entitled to earn enough to meet the continuous depreciation of its plant and equipment, and this beyond ordinary current repairs and maintenance. To provide funds from earnings to offset this depreciation is a right and a duty of the directors of the company. Knoxville v. Water Co., 212 U. S. 1, 29 S. Ct. 148, 53 L. Ed. 371. But the property is made up of many parts of varying lengths of life and of varying rates of depreciation. And progress, new invention, new design, new thought, constantly menace present-day machines and structures. A machine functioning efficiently to-day may be obsolete and inefficient to-morrow. The rate of depreciation changes with the age of the plant. Telephone lines are in danger of disaster from sleet and storm.

It is the difficult task of the commission to spread the amount of the depreciation, less salvage, over the years, and make an annual allowance in earnings that will be fair to the public, and that will fairly compensate the company for the property consumed in service. The particulars of this difficulty are fully set forth in Saliers on Depreciation, p. 131, and in opinion of Mr. Justice Brandeis in Pacific Gas & Electric Co. v. City and County of San Francisco, 265 U. S. 403, 44 S. Ct. 537, 68 L. Ed. 1075.

Respecting theory, purpose, and method of accumulating a depreciation fund, there is a wide difference of opinion. See Hayes on Public Utilities, c. 9; Saliers on Depreciation, c. 7. Some hold that the fund belongs to the public. Others say that it is a trust fund, or quasi trust fund belonging to both the public and the utility, to be used for the replacement of invested property when the property is theoretically dead. But the fund is definitely the property of the utility. People v. Public Service Commission, 204 App. Div. 73, 198 N. Y. S. 193.

Some contend that the proper basis for valuation is prudent investment cost. See dissenting opinion of Mr. Justice Brandeis, S. W. Telephone Co. v. Public Service Commission, 262 U. S. 276, 43 S. Ct. 544, 67 L. Ed. 981, 31 A. L. R. 807; Goddard on Fair Value of Public Utilities, 22 Mich. Law Rev. 777. But it is settled that the rate base is present fair value as defined in Smyth v. Ames, supra, and in the Minnesota Rate Cases, 230 U. S. 352, 33 S. Ct. 729, 57 L. Ed. 1511, 48 L. R. A. (N. S.) 1151, Ann. Cas. 1916A, 18. Computing depreciation although perhaps convenient to accountants and bookkeepers), on investment cost, or book cost, as distinguished from present fair value, must be rejected. If the rate base is present fair value, then the depreciation base as to depreciable property is the same thing. There is no principle to sustain a holding that a utility may earn on the present fair value of its property devoted to public service, but that it must accept and the public must pay depreciation on book cost or investment cost, regardless of present fair value. We repeat, the purpose of permitting a depreciation charge is to compensate the utility for property consumed in service, and the duty of the commission,...