State of Missouri Southwestern Bell Telephone Co v. Public Service Commission of Missouri

CourtUnited States Supreme Court
Citation67 L.Ed. 981,262 U.S. 276,43 S.Ct. 544,31 A. L. R. 807
Docket NumberNo. 158,158
Decision Date21 May 1923

Messrs. Frederick W. Lehmann and Thomas O. Stokes, both of St. Louis, Mo., for plaintiff in error.

[Argument of Counsel from pages 277-279 intentionally omitted] Messrs. L. H. Breuer, of Rolla, Mo., and James D. Lindsay, of Jefferson City, Mo., for defendants in error.

[Argument of Counsel from pages 279-281 intentionally omitted] Mr. Justice McREYNOLDS delivered the opinion of the Court.

The Supreme Court of Missouri (233 S. W. 425) affirmed a judgment of the Cole county circuit court which sustained an order of the Public Service Commission of Missouri, effective December 1, 1919. That order undertook to reduce rates for exchange service and to abolish the installation and moving charges theretofore demanded by plaintiff in error. It is challenged as confiscatory and in conflict with the Fourteenth Amendment.

During the period of federal control—August 1, 1918, to August 1, 1919—the Postmaster General advanced the rates for telephone service and prescribed a schedule of charges for installing and moving instruments. The Act of Congress approved July 11, 1919-41 Stat. 157—directed that the lines be returned to their owners at midnight July 31, 1919, and further——

'that the existing toll and exchange telephone rates as established or approved by the Postmaster General on or prior to June 6, 1919, shall continue in force for a period not to exceed four months after this act takes effect, unless sooner modified or changed by the public authorities—state, municipal, or otherwise—having control or jurisdiction of tolls, charges, and rates or by contract or by voluntary reduction.' Section 1.

August 4, 1919, the commission directed plaintiff in error to show why exchange service rates and charges for installation and moving as fixed by the Postmaster General should be continued. After a hearing, it made an elaborate report and directed that the service rates should be reduced and the charges discontinued.

The company produced voluminous evidence, including its books, to establish the value of its property dedicated to public use. The books showed that the actual cost of 'total plant, supplies, equipment, and working capital' amounted to $22,888,943. Its engineers estimated the reproduction cost new as of June 30, 1919, thus: Physical telephone property, $28,454,488; working capital, $1,051,564; establishing business, $5,594,816; total $35,100,868. They also estimated existing values (after allowing depreciation) upon the same date: Physical telephone property, $24,709,295; working capital, $1,051,564; establishing business, $5,594,816; total, $31,355,675.

The only evidence offered in opposition to values claimed by the company were appraisals of its property at St. Louis, Caruthersville, and Springfield, respectively, as of December, 1913, February, 1914, and September, 1916, prepared by the commission's engineers and accountants, together with statements showing actual costs of additions subsequent to those dates.

Omitting a paragraph relative to an unimportant reduction $17,513.52—from working capital account, that part of the commission's report which deals with property values follows:

The company offered in evidence exhibits showing the value of its property in the entire state (outside the cities of Kansas City and Independence, whose rates are not involved in this case), and also at 46 of its local exchanges in the state. It shows by such exhibits that the value of the property in the entire state (and when speaking of the property in the state in this report we mean exclusive of Kansas City and Independence) is as follows: Reproduction cost new, $35,100,471; reproduction cost new, less depreciation, $31,355,278; and cost as per books, $22,888,943. It also shows the company's estimate of reproduction cost new, less depreciation, and the prorated book cost, at each of the 46 local exchanges mentioned.

The engineers of this commission have made a detailed inventory and appraisal, and this commission has formally valued the company's property at only three of its exchanges, viz.: At the city of Caruthersville, reported in Re Southwestern Tel. & Tel. Company, 2 Mo. P. S. C. 492; at the city of St. Louis in cases No. 234 and No. 235, as yet unreported; and at the city of Springfield reported in Re Missouri and Kansas Telephone Company, 6 Mo. P. S. C. 279—and as a result we have only the estimates and appraisals of the company before us in relation to the value of the property at the other exchanges. We think it is clear, however, from the data at hand, that the values placed by the company upon the property are excessive, and not a just basis for rate-making.

The values fixed by this commission at Caruthersville, St. Louis, and Springfield in the cases above entioned aggregate $11,003,898, while the company estimates the aggregate cost of reproduction new of these plants in this case at $18,971,011. The ratio of the latter figure is 172.4 per cent. This percentage, divided into $35,100,471, the company's estimate of the aggregate cost of the reproduction new of its property in Missouri in this case, equals $20,350,000, which might be said to be one measure of the value of the property.

Again, the company's estimate of the aggregate cost of reproduction new, less depreciation, of its properties at Caruthersville, St. Louis, and Springfield, in this case is $16,913,673. The ratio of this figure to the aggregate value fixed by the commission at these exchanges, plus additions reported by the company, is 153.7 per cent. This percentage divided into $31,355,278, the company's estimate of the aggregate cost of reproduction new, less depreciation, of its property in Missouri in this case, equals $20,400,000, which may be said to be another measure of the value of the property.

The company also shows by Exhibits 19 and 212 that its return under the Postmaster General's rates on $22,888,942, the book value of its property in the state, is at the rate of 11.65 per cent. per annum for depreciation and return on the investment, which would yield the company 6 per cent. for depreciation and 5.65 per cent. for return on the book cost of the property. As stated, however, we do not think that the book cost or the 'prorated book cost' of the property as claimed by the company would be a fair basis for rate making.

As we understand it, the 'prorated book cost' given in evidence by the company for the various exchanges is simply the percentage relation of reproduction cost new, which the original cost of all property bears to reproduction cost new of all property and in individual instances the actual cost might vary greatly, either up or down, from what an appraisal would show. If the company, to eliminate competition, paid a price in excess of the value or because of discouraged local operation were enabled to purchase a plant far below its actual value, the 'prorated book cost' basis would not reflect anything like the original cost.

We also think that the figure of $22,888,943, claimed by the company to represent the book cost or original of the property cost in the state, is subject to certain adjustments with reference to the amount of nonuseful property included, working capital, and the amounts to be deducted account extinguished value recouped from patrons by charges to depreciation.

In the St. Louis Case, supra, the original cost of the nonuseful property deducted and disallowed by the commission amounted to $454,689.16. It appears from the company's Exhibit 256 that the 'prorated book cost' of the St. Louis exchange is just about half of that given for the state. However, it is clear that the proportion of nonused and nonuseful property in St. Louis bears a much larger percentage relation to useful property than would obtain throughout the state. It would appear that estimating the company's property not used and useful for the entire state at $500,000 would be a fair approximation. This sum at least should be deducted. * * *

The depreciation reserve applicable to the Missouri property is not shown by the company. However, on the the Company's Exhibit 15, the balance sheet as of June 30, 1919, of the Southwestern Bell Telephone Company (Missouri corporation), operating in Missouri, Kansas, and Arkansas, the reserve for accrued depreciation and reserve for amortization of intangibles is given as $7,963,082.37. The same exhibit shows the original cost of fixed capital for Missouri, Kansas, and Arkansas property as $46,061,162.76. The total fixed capital of the Missouri property shown on the Company's Exhibit 19 is $21,837,759, which is 47.4 per cent. of $46,061,162.76 and 47.4 per cent. of the reserve for depreciation. $7,963,082.37 equals $3,774,501 or the portion assignable to the Missouri property.

Adjusting in accordance with the above, we have: Total plant and equipment, including working capital, as per Company's Exhibit No. 19, $22,888,943; deduct property not used or useful, $500,000.00; deduct excess working capital, $17,513.52; deduct depreciation reserve, $3,774,501.00; [total to be deducted] $4,292,014.52. [Net total] $18,596.928.48; add for intangibles, 10 per cent., $1,859,692.85; total adjusted original cost, $20,456,621.33.

After carefully considering all the evidence as to values before us in this case, we are of the opinion that the value of the company's property in the state, exclusive of Kansas City and Independence, devoted to exchange service, will not exceed the sum of $20,400,000, and we will tentatively adopt this sum as the value of the property for the purposes of this case. As stated, supra, this commission has formally valued only a part of this property, and we should not be understood as authoritatively fixing the value of the property at this time.

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