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company was appraisals of its prop- the property are excessive, and not erty at St. Louis, Caruthersville, a just basis for rate making. and Springfield, respectively, as of "The values fixed by this commisDecember, 1913, February, 1914, sion at Caruthersville, St. Louis, and September, 1916, prepared by and Springfield, in the cases above the commission's engineers and ac- mentioned, aggregate $11,003,898, countants, together with statements while the company estimates the agshowing actual cost of additions gregate cost of reproduction new of subsequent to those dates.

these plants in this case at $18,971,Omitting a paragraph relative to 011. The ratio of the latter figure an unimportant reduction-$17,- is 172.4 per cent. This percentage, 513.52—from working capital ac- divided into $35,100,471, the comcount, that part of the commission's pany's estimate of the aggregate report which deals with property cost of the reproduction new of its values follows:

property in Missouri in this case, “The company offered in evidence equals $20,350,000, which might be exhibits showing the value of its said to be one measure of the value property in the entire state (outside of the property. the cities of Kansas City and Inde- “Again, the company's estimate pendence, whose rates are not in- of the aggregate cost of reproducvolved in this case), and also at tion new, less depreciation, of its forty-six of its local exchanges in properties at Caruthersville, St. the state. It shows by such exhib- Louis, and Springfield, in this case, its that the value of the property in is $16,913,673. The ratio of this the entire state (and when speaking figure to the aggregate value fixed of the property in the state in this by the commission at these exreport we mean exclusive of Kan- changes, plus additions reported by sas City and Independence) is as the company, is 153.7 per cent. follows: Reproduction cost new, This percentage, divided into $31,$35,100,471; reproduction cost new 355,278, the company's estimate of less depreciation, $31,355,278; and the aggregate cost of reproduction cost as per books $22,888,943. It new, less depreciation, of its propalso shows the company's estimate erty in Missouri in this case, equals of reproduction cost new, less depre- $20,400,000, which may be said to ciation, and the prorated book cost, be another measure of the value of at each of the forty-six local ex

the property. changes mentioned.

“The company also shows by ex“The engineers of this commis- hibits 19 and 212 that its return unsion have made a detailed inventory der the Postmaster General's rates and appraisal, and this commission on $22,888,942, the book value of its has formally valued the company's property in the state, is at the rate property at only three of its ex- of 11.65 per cent per annum for dechanges, viz.: at the city of Caruth- preciation and return on the investersville, reported in Re Southwest- ment, which would yield the comern Teleg. & Teleph. Co. 2 Mo. P. pany 6 per cent for depreciation and S. C. 492; at the city of St. Louis in 5.65 per cent for return on the book cases No. 234 and No. 235, as yet cost of the property. As stated, unreported; and at the city of however, we do not think that the Springfield, reported in Re Missouri book cost or the ‘prorated book cost & K. Teleph. Co. 6 Mo. P. S. C. 279; of the property, as claimed by the and, as a result, we have only the company, would be a fair basis for estimates and appraisals of the com- rate making. pany before us in relation to the val- "As we understand it, the 'proue of the property at the other ex- rated book cost' given in evidence by changes. We think it is clear, how- the company for the various exever, from the data at hand, that the changes is simply the percentage revalues placed by the company upon lation of reproduction cost new (262 U. 8. 276, 67 L. ed. 981, 43 Sup. Ct. Rep. 544.) which the original cost of all prop- ital for Missouri, Kansas, and Arerty bears to reproduction cost new kansas property as $46,061,162.76. of all property, and, in individual The total fixed capital of the Missouinstances, the actual cost might vary ri property shown on the company's greatly, either up or down, from exhibit 19 is $21,837,759, which is what an appraisal would show. lf 47.4 per cent of $46,061,162.76, and the company, to eliminate competi- 47.4 per cent of the reserve for tion, paid a price in excess of the depreciation; $7,963,082.37 equals value, or, because of discouraged lo- $3,774,501, or the portion assignable cal operation, were enabled to pur- to the Missouri property. chase a plant far below its actual “Adjusting in accordance with value, the 'prorated book cost' basis the above, we have: Total plant and would not reflect anything like the equipment, including working caporiginal cost.

ital, as per company's exhibit No. We also think that the figure of

19, $22,888,943. Deduct property $22,888,943, claimed by the com- not used or useful, $500,000; deduct pany to represent the book cost or excess working capital, $17,513.52; original of the property cost in the deduct depreciation reserve, $3,774,state, is subject to certain adjust- 501; [total to be deducted] $4,292,ments with reference to the amount 014.52; [net total] $18,596,928.48; of nonuseful property included, add for intangibles, 10 per cent, $1,working capital, and the amounts to 859,692.85; total adjusted original be deducted account extinguished cost, $20,456,621.33. value recouped from patrons by After carefully considering all charges to depreciation.

the evidence as to values before us “In the St. Louis case, supra, the in this case, we are of the opinion original cost of the nonuseful prop- that the value of the company's erty deducted and disallowed by the property in the state, exclusive of commission amounted to $454,689.- Kansas City and Independence, de16. It appears from the company's voted to exchange service, will not exhibit 256 that the ‘prorated book exceed the sum of $20,400,000, and cost of the St. Louis exchange is we will tentatively adopt this sum just about half of that given for the as the value of the property for the state. However, it is clear that the purposes of this case. As stated, proportion of the nonused and non- supra, this commission has formally useful property in St. Louis bears a valued only a part of this property, much larger percentage relation to and we should not be understood as useful property than would obtain authoritatively fixing the value of throughout the state. It would ap- the property at this time.pear that estimating the company's The three earlier valuations to property not used and useful for which the commission referred are: the entire estate at $500,000 would St. Louis, December, 1913, $8,500,be a fair approximation. This sum, 000; Caruthersville, February, 1914, at least, should be deducted... $25,000; Springfield, September,

"The depreciation reserve appli- 1916, $815,000; total, $9,340,000. cable to the Missouri property is not Between those dates and June 30, shown by the company. However, 1919, additions were made to these on the company's exhibit 15, the bal- properties which cost, respectively, ance sheet as of June 30, 1919, of $1,623,765, $5,992, and $34,141. the Southwestern Bell Telephone Adding these to the original valuaCompany (Missouri Corporation) tions gives $11,003,898, the base operating in Missouri, Kansas, and sum used by the commission for the Arkansas, the reserve for accrued estimates now under consideration. depreciation and reserve for amorti- Obviously, the commission underzation of intangibles is given as took to value the property without $7,963,082.37. The same exhibit according any weight to the greatly shows the original cost of fixed cap- enhanced costs of material, labor, supplies, etc., over those prevailing ligent forecast of probable future in 1913, 1914, and 1916. As matter values, made upon a view of all the of common knowledge, these in- relevant circumstances, is essential. creases were large. Competent wit- If the highly important element of nesses estimated them as 45 to 50 present costs is wholly disregarded, per centum.

such a forecast becomes impossible. In Willcox v. Consolidated Gas Estimates for to-morrow cannot igCo. 212 U. S. 19, 41, 52, 53 L. ed. nore prices of to-day. 382, 395, 399, 48 L.R.A.(N.S.) 1134, Witnesses for the company assert29 Sup. Ct. Rep. 192, 15 Ann. Cas. ed—and there was no substantial 1034, this court said:

evidence to the contrary—that, ex"There must be a fair return upon cluding cost of establishing the busithe reasonable value of the property ness, the property was worth at at the time it is being used for the least 25 per cent more than the compublic.

And we concur with mission's estimates, and we think the court below in holding that the the proof shows that, for the purvalue of the property is to be deter- poses of the present case, the valuamined as of the time when the in- tion should be at least $25,000,000. quiry is made regarding the rates. After disallowing an actual exIf the property which legally enters penditure of $174,048.60 for rentals into the consideration of the ques- and services by the American Teletion of rates has increased in value phone & Telegraph Company, and since it was acquired, the company some other items not presently imis entitled to the benefit of such in- portant, the commission estimated crease.”

the annual net profits on operations In Minnesota Rate Cases (Simp- available for depreciation and reson v. Shepard) 230 U. S. 352, 454, turn as $2,828,617.60,-approxi57 L. ed. 1511, 1563, 48 L.R.A. mately 113 per cent of $25,000,000. (N.S.) 1151, 33 Sup. Ct. Rep. 729, That 6 per cent should be allowed Ann. Cas. 1916A, 18, this was said: for depreciation appears to be ac

“The making of a just return for cepted by the commission. Deductthe use of the property involves the ing this would leave a possible 5} recognition of its fair value if it be

per cent return up- Telephones more than its cost. The property is on the minimum what is adequate held in private ownership, and it is value of the propthat erty, and not the original erty, which is wholly inadequate, cost of it, of which the owner may considering the character of the innot be deprived without due process vestment and interest rates then of law."

prevailing. See also Denver v. Denver Union The important item of expense Water Co. 246 U. S. 178, 191, 62 L. disallowed by the commissioned. 649, 661, P.U.R.1918C, 640, 38 $174,048.60—is 55 per cent of the Sup. Ct. Rep. 278; Newton v. Con- 45 per cent of gross revenues paid solidated Gas Co. 258 U. S. 165, 66 by plaintiff in error to the American L. ed. 538, 42 Sup. Ct. Rep. 264 Telephone & Telegraph Company as (March 6, 1922); and Galveston rents for receivers, transmitters, Electric Co. v. Galveston, 258 U. S. induction coils, etc., and for licenses 388, 66 L. ed. 678, 42 Sup. Ct. Rep. and services under the customary 351 (April 10, 1922).

form of contract between the latter It is impossible to ascertain what company and its subsidiaries. Four will amount to a fair return upon and one half per cent is the ordinary properties devoted to public service charge paid voluntarily by local

without giving con- companies of the general system. Public utilities- sideration to the There is nothing to indicate bad tion of reproduc- cost of labor, sup- faith. So far as appears, plaintiff tion cost at current prices.

plies, etc., at the in error's board of directors has ex

time the investiga- ercised a proper discretior about tion is made. An honest and intel- this matter requiring business judg

rate for service. disallow items of expense.

( 262 U. S. 276, 67 L. ed. 981, 43 Sup. Ct. Rep. 544.) ment. It must never be forgotten court, adhering to the so-called rule that while the state may regulate, of Smyth v. Ames, and further dewith a view to enforcing reasonable fining it, declares that what is rates and charges, it is not the own- termed "value" must be ascertained er of the property of public utility by giving weight, among other companies, and is not clothed with things, to estimates of what it would the general power of management cost to reproduce the property at the incident to ownership. The appli- time of the rate hearing. cable general rule is well expressed The so-called rule of Smyth v. in State Public Utilities Commission Ames is, in my opinion, legally and ex rel. Springfield v. Springfield Gas economically unsound. The thing & E. Co. 291 Ill. 209, 234, P.U.R. devoted by the investor to the public 1920C, 640, 125 N. E. 891:

use is not specific property, tangible “The commission is not the finan- and intangible, but capital emcial manager of the corporation, and barked in the enterprise. Upon the it is not empowered to substitute its capital so invested the Federal Conjudgment for that of the directors stitution guarantees to the utility of the corporation; nor can it ignore the opportunity to earn a fair re

items charged by turn. Thus, it sets the limit to the -rates-power to

the utility as oper- power of the state to regulate rates.

ating expenses un- The Constitution does not guarantee less there is an abuse of discretion to the utility the opportunity to earn in that regard by the corporate offi- a return on the value of all items of cers.”

property used by the utility, or of See Interstate Commerce Com- any of them. The several items of mission v. Chicago G. W. R. Co. 209 property constituting the utility, U. S. 108, 52 L. ed. 705, 28 Sup. Ct. taken singly, and freed from the Rep. 493; Chicago, M. & St. P. R. Co. public use, may conceivably have an v. Wisconsin, 238 U. S. 491, 59 L. ed. aggregate value greater than if the 1423, L.R.A.1916A, 1133, P.U.R. items are used in combination. The 1915D, 706, 35 Sup. Ct. Rep. 869; owner is at liberty, in the absence of People ex rel. Delaware & H. Co. v. controlling statutory provision, to Stevens, 197 N. Y. 1, 90 N. E. 60. withdraw his property from the Reversed.

public service; and, if he does so, Mr. Justice Brandeis, with whom

may obtain for it exchange value. Mr. Justice Holmes concurs:

Compare Brooks-Scanlon Co. V. I concur in the judgment of re

Railroad Commission, 251 U. S. 396, versal. But I do so on the ground

64 L. ed. 323, P.U.R.1920C, 579, 40 that the order of the state commis- Sup. Ct. Rep. 183; Erie R. Co. v. sion prevents the utility from earn

Public Utility Comrs. 254 U. S. 394, ing a fair return on the amount

411, 65 L. ed. 322, 334, P.U.R. prudently? invested in it. Thus, I

1921C, 143, 41 Sup. Ct. Rep. 169; differ fundamentally from my 2 Except that rates may, in no event, be brethren concerning the rule to be prohibitive, exorbitant, or unduly burdenapplied in determining whether a some to the public. Covington & L. Turnp. prescribed rate is confiscatory. The Road Co. v. Sanford, 164 U. S. 578, 596,

41 L. ed. 560, 566, 17 Sup. Ct. Rep. 198; 1 The term “prudent investment” is not Smyth v. Ames, 169 U. S. 466, 544, 42 L. used in a critical sense. There should not ed. 819, 848, 18 Sup. Ct. Rep. 418; San be excluded from the finding of the base, Diego Land & Town Co. v. National City, investments which, under ordinary cir- 174 U. S. 739, 757, 43 L. ed. 1154, 1161, cumstances, would be deemed reasonable. 19 Sup. Ct. Rep. 804; Minnesota Rate The term is applied for the purpose of Cases (Simpson v. Shepard) 230 U. S. excluding what might be found to be dis- 352, 454, 57 L. ed. 1511, 1563, 48 L.R.A. honest or obviously wasteful or imprudent (N.S.) 1151, 33 Sup. Ct. Rep. 729, Ann. expenditures. Every investment may be Cas. 1916A, 18; Mr. Justice Miller in Chiassumed to have been made in the exercise cago, M. & St. P. R. Co. v. Minnesota, 134 of reasonable judgment, unless the con- U. S. 418, 459, 33 L. ed. 970, 982, 3 Inters. trary is shown.

Com. Rep. 224, 10 Sup. Ct. Rep. 462, 702.

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Texas v. Eastern Texas R. Co. 258 tinguished from ascertaining facts. U. S. 204, 66 L. ed. 566, 42 Sup. Ct. And as to each factor, there is usualRep. 281. But so long as the specific ly room for difference in judgment. items of property are employed by But the first two factors do not orthe utility, their exchange value is dinarily present serious difficulties. not of legal significance.

The doubts and uncertainties inThe investor agrees, by embark- cident to prophecy, which affect ing capital in a utility, that its them, can, often, be resolved by a charges to the public shall be reason- test period; and meanwhile protecable. His company is the substitute tion may be afforded by giving a for the state in the performance of bond. Knoxville v. Knoxville Water the public service, thus becom- Co. 212 U. S. 1, 18, 19, 53 L. ed. 371, ing a public servant. The com- 381, 382, 29 Sup. Ct. Rep. 148; St. pensation which the Constitution Louis, I. M. & S. R. Co. v. McKnight, guarantees an opportunity to earn 244 U. S. 368, 61 L. ed. 1200, 37 is the reasonable cost of conducting Sup. Ct. Rep. 611. The doubts and the business. Cost includes not only uncertainties incident to the last two operating expenses, but also capital factors can be eliminated, or lesscharges. Capital charges cover the ened, only by redefining the rate allowance, by way of interest, for base, called value, and the measure the use of the capital, whatever the of fairness in return, now applied nature of the security issued there- under the rule of Smyth v. Ames. for; the allowance for risk incurred; The experience of the twenty-five and enough more to attract capital. years since that case was decided The reasonable rate to be prescribed has demonstrated that the rule there by a commission may allow an effi- enunciated is delusive. In the atciently managed utility much more. tempt to apply it insuperable obBut a rate is constitutionally com- stacles have been encountered. It pensatory if it allows to the utility has failed to afford adequate protecthe opportunity to earn the cost of tion either to capital or to the pubthe service as thus defined.

lic. It leaves open the door to grave To decide whether a proposed rate injustice. To give to capital emis confiscatory, the tribunal must de- barked in public utilities the protectermine both what sum would be tion guaranteed by the Constitution, earned under it, and whether that and to secure for the public reasonsum would be a fair return.

able rates, it is essential that the rate decision involves ordinarily the base be definite, stable, and readily making of four subsidiary ones: ascertainable; and that the percent

1. What the gross earnings from age to be earned on the rate base be operating the utility under the rate measured by the cost, or charge, of in controversy would be. (A pre- the capital employed in the enterdiction.)

prise. It is consistent with the 2. What the operating expenses

Federal Constitution for this court and charges, while so operating, now to lay down a rule which will would be. (A prediction.)

establish such a rate base and such 3. The rate base,—that is, what a measure of the rate of return the amount is on which a return deemed fair. In my opinion, it should be earned. (Under Smyth v. should do so. Ames, an opinion, largely.)

The rule of Smyth v. Ames sets 4. What rate of return should be the laborious and baffling task of deemed fair. (An opinion, large- finding the present value of the utilly.)

ity. It is impossible to find an exA decision that a rate is confisca. change value for a utility, since tory (or compensatory) is thus the utilities, unlike merchandise or land, resultant of four subsidiary deter- are not commonly bought and sold in minations. Each of the four in the market. Nor can the present volves forming a judgment, as dis- value of the utility be determined


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