From Casetext: Smarter Legal Research

Bell Tel. Co. v. P.U.C.

Supreme Court of Ohio
Jul 22, 1936
3 N.E.2d 475 (Ohio 1936)

Opinion

Nos. 24694, 24695, 25023 and 25065

Decided July 22, 1936.

Public Utilities Commission — State-wide valuation of telephone company for determining rates — Price trends and judicial notice of economic conditions — Investment in construction work in progress — Cost and reproduction cost — Operating expenses — License contract service — Depreciation — Current maintenance, repairs, replacements and improvements — Rate of return — General normal economic conditions and during depression.

ERROR to the Public Utilities Commission.

Plaintiff in error, The Ohio Bell Telephone Company, has filed in this court petitions in error in causes numbered 24694, 24695, 25023 and 25065, wherein the company seeks to reverse the findings and orders of the Public Utilities Commission of Ohio entered on January 16, March 1, July 5, July 9 and September 6, 1934. For the purposes of convenience in the consideration of these causes by this court all of them have been consolidated into this cause.

Throughout this statement and opinion the plaintiff in error, The Ohio Bell Telephone Company, will be referred to as "the company," and the defendant in error, The Public Utilities Commission of Ohio, will be referred to as "the commission."

The commission's order of January 16, 1934, corrected by its order of March 1, 1934, fixed a final valuation of the intrastate property of the company at $93,707,488 as of June 30, 1925, the "date certain." The value for each succeeding year to and including 1933 was also fixed by the commission. The order also required the company to refund to its patrons in the state of Ohio the sum of $13,289,172, which amount the commission found to be the excess earnings of the company's entire intrastate operations for the years 1925 to 1932, inclusive, and further directed the company to file a schedule of reduced rates effective as of June 30, 1925, and thereafter until changed by order of the commission.

Thereafter the commission made two reductions in the amount of the refunds as originally ordered. The first reduction of $1,121,494 was made in the order of July 5, 1934, for the reason that a part of the excess earnings found by the commission to have been collected by the company were referable to rates not collected under bond, and under the laws of Ohio could probably not be ordered refunded. The second reduction in the sum of $355,414 was made in the commission's order of September 6, 1934, to correct an error. The amount of the refunds was finally fixed by the commission in its order of September 6, 1934, at $11,832,264, with interest.

In its order of July 9, 1934, the commission required the company to show cause why its future rates should not be reduced.

The proceedings presented for review arise out of the action of the commission in what has come to be known as the state-wide case of The Ohio Bell Telephone Company, being properly so designated because it involved an inquiry into the value of the property and rates of that company for both exchange and toll service throughout the state of Ohio.

Prior to the year 1914, Bell System service in Ohio was limited to the portions of the state served by the Cleveland Telephone Company, the Central Union Telephone Company, the Central District Printing Telegraph Company and the Cincinnati Suburban Bell Telephone Company (the latter still operating as a separate company). At the same time and operating independently in the same territory in many localities were other telephone companies.

In July, 1914, a number of companies of the kind last referred to were consolidated under the name of The Ohio State Telephone Company. In December, 1920, the Cleveland Telephone Company (its name having been changed to The Ohio Bell Telephone Company) purchased the Ohio property of Central Union Telephone Company. In September, 1921, The Ohio Bell Telephone Company and The Ohio State Telephone Company were consolidated as The Ohio Bell Telephone Company and that company thereafter purchased additional telephone properties. Even after these extensive consolidations there remained more than four hundred and fifty other independent telephone companies operating in the state.

As soon as The Ohio Bell Telephone Company (consolidated) was ready to unify the service in communities having a dual service, it filed with the commission an application to determine the rates chargeable for such unified service. In the case of some of the exchanges the municipalities concerned contested the proposed rates and a hearing was instituted. Subsequently, following the 1923 amendment of Section 614-20 of the General Code of Ohio (110 Ohio Laws, 366), the company filed new rate schedules for many of its exchanges; some of which were protested by the municipalities concerned and were collected under bond, after the end of the statutory period of suspension. This was true also with respect to the company's new schedule of toll rates for its toll service throughout the entire state.

As a result many extensive hearings were had by the commission, and in the two years prior to October, 1924, several thousand pages of testimony were taken and an even greater number of pages of exhibits offered in evidence.

On October 14, 1924, the commission, having found that many issues were common to all of the then pending Bell cases, both toll and exchange, ordered that they be consolidated and that the examination into the rates proceed as a single state-wide case involving all the rates and services, exchange and toll, of The Ohio Bell Telephone Company, including those then under investigation, and that the evidence theretofore introduced, in the several separate cases, be considered and made a part of the record in the consolidated cases.

This order concluded as follows:

"Ordered, that, on or before December 1, 1924, said The Ohio Bell Telephone Company furnish to this commission and file in this cause, as a part of the evidence therein, a complete inventory of all of its property located in the state of Ohio and used and useful and to be used and useful, in the furnishing of telephone service therein, both toll and exchange, classified according to the classification adopted and prescribed by this commission and the Interstate Commerce Commission for telephone companies, and that, upon the filing of such inventory, this consolidated case proceed to a hearing for the determination of the fair value of said property and of the just and reasonable rates for the service thereby to be furnished by said company to its patrons throughout the state of Ohio."

By this order, forty-three separate cases then pending, the majority of which were for increased rates, were consolidated into the state-wide case.

Since the order of consolidation the company has made additional filings of exchange rates. Some were protested and are now collected under bond.

The company filed and offered in evidence an inventory and appraisal of its entire property.

In February, 1927, the case was submitted to the commission for the fixing of a tentative value, but before this valuation was announced the then attorney general requested that the case be reopened and further valuation testimony taken.

Following that date much time was consumed in taking testimony on behalf of the state, with rebuttal evidence on behalf of the company, and in April of 1930 the case was again submitted to the commission for its finding on tentative value. This tentative valuation finding was issued on January 10, 1931, and in such finding the commission found the present value of the total property of the company as of June 30, 1925, to be $104,282,735.

On February 7 and February 9, 1931, protests to this finding were filed on behalf of the company and the state, respectively. Hearings on the protests were held on March 3 and 4, 1931. At that time counsel for the company was preparing exhibits to show Western Electric profits, cost of license contract services rendered by the American Telephone Telegraph Company, and separation of plant, revenues, and expenses, as between interstate and intrastate usage in accordance with the interpretation which counsel placed upon the decision of the Supreme Court of the United States in the case of Smith et al., Commerce Comm., v. Illinois Bell Telephone Co., 282 U.S. 133, 75 L.Ed., 255, 51 S. Ct., 65.

On April 15, 1931, hearings were resumed for the presentation of this testimony proffered by the company.

On June 17 and 18, 1931, during the cross-examination of Charles A. Heiss, comptroller of American Telephone Telegraph Company, and R.H. Gregory, comptroller of Western Electric, certain requests were made for detailed information underlying their exhibits and testimony. In July of that year the company furnished certain data in accordance with its version of these requests.

A hearing was had on September 28, 1931, on the requests, and a few days later a revised list, dated October 1, was submitted.

On December 5, 1931, the company filed a brief, styled "memorandum responsive to state's official request for information." A reply to the company memorandum was filed with the commission on December 28, 1931. The matter again came on for hearing on January 27, 1932.

On April 22, 1932, the commission issued its order in regard to the requests, approving some, denying others, and directing the attorney general and the company to expedite the proceedings.

The company continued to furnish data in compliance with this last order, the last being received on June 22, 1932. Practically all of the data requested related to American Telephone Telegraph Company and Western Electric Company.

During the entire year 1932 the Illinois case was going forward, volumes of testimony and exhibits being introduced at hearings before Judge Wilkerson, as a result of the decision of the Supreme Court of the United States remanding that case to the statutory court for further findings. This evidence so introduced in the Illinois case related to the same general issues that were being presented to the Ohio commission.

Hearings were concluded and that record closed early in the fall of 1932, and all of the issues thoroughly briefed by counsel on each side. Five days were allotted early in December for oral argument before the full statutory court of three judges, at which time that case was submitted for decision.

Subsequently it was found that the material furnished by the company in professed compliance with the request made in June was inadequate and not responsive.

A great deal of time would have been necessary to formally introduce the same or similar testimony into the record of this case, so when hearings were resumed in this ease on December 19, 1932, before the commission, a stipulation was worked out between counsel to file therein the testimony and exhibits in the Illinois case in so far as it related to the four issues, namely, Western Electric profits, American Telephone Telegraph license contract service costs, separation of interstate and intrastate plant, revenues and expenses, and rate of return. As a result of this stipulation many days of hearing were saved. The stipulation provided, in substance, that the new record made in the Illinois case be incorporated in this record covering the testimony of certain specified witnesses and exhibits introduced through them and it also provided that all such evidence was introduced subject to the same objections made in the Illinois case. Certain additional exhibits relating to the Ohio company were introduced by stipulation, such exhibits having been prepared in the same manner as their correspondingly numbered exhibits in the Illinois case. The stipulation further provided for the introduction into this record of the requests made on behalf of the state, heretofore referred to, and the material furnished by the company in response thereto.

On December 29, 1932, the record in this case was closed on the introduction of certain testimony and exhibits of company witnesses and E.W. Wood on behalf of the state. Subsequently, under date of January 16, 1934, the commission made and entered its final order in this case, fixing the value of the property of The Ohio Bell Telephone Company as of June 30, 1925, the date certain in this case, and for each of the years subsequent thereto, through the year 1932. Thereafter the commission's orders of March 1, July 5, July 9 and September 6, 1934, heretofore described, followed.

The orders of the commission provide for refunds in forty-four Ohio municipalities to more than 500,000 telephone subscribers.

The petition in error of The Ohio Bell Telephone Company is in the words and figures following:

"A

"The Ohio Bell Telephone Company, plaintiff in error, is and has been continuously since the 20th day of September, 1921, a corporation duly organized under the laws of Ohio.

"Continuously since said date plaintiff in error has owned and operated a telephone system now consisting of one hundred and sixty-two local exchanges serving various cities and towns in said state with more than 530,000 connected subscribers stations, and of toll lines, by means of which system plaintiff in error has been during all of said period and is now engaged in the business of transmitting to, from, through and in said state telephonic messages, and has been and now is a public utility within the meaning of the General Code of Ohio.

"The defendant in error, The Public Utilities Commission of Ohio, hereinafter referred to as the 'Commission,' is now and has been continuously since 1913 an administrative body created by the laws of the State of Ohio.

"B

"This proceeding in error is brought to obtain a reversal, upon the grounds hereinafter stated, of the findings and order of the Commission made and entered on September 6, 1934, as well as the findings and orders of the Commission of January 16, March 1, July 5 and 9, 1934, (heretofore complained of in Causes Nos. 24694, 24695 and 25023 upon the dockets of this Court) in so far as said findings and orders form the basis for or are incorporated into said findings and order of September 6, 1934.

"The order of September 6, 1934, is the latest of a series of orders entered by the Commission in Cause No. 3307, which cause, inaugurated October 14, 1924, upon the Commission's own motion, is an investigation and inquiry to determine the fair value of the property of The Ohio Bell Telephone Company and to fix just and reasonable rates, rules and regulations for its service.

"The order of September 6, 1934, requires plaintiff in error to refund what the Commission found to be excess charges for its exchange services rendered during the years 1925 to 1932 inclusive, in the sum of $11,423,137, and for its toll service for the years 1925 and 1926, the sum of $409,127, or a total of $11,832,264. The order fixes the amounts to be repaid to the subscribers in each of 44 exchange areas listed in Schedule A of said order and in the toll system and requires such repayment to be made within 90 days.

"C

"A brief history of the proceedings before and the findings and orders entered by the Commission, in so far as essential to the questions presented by this petition in error, is as follows:

"1. Prior to October 14, 1924, plaintiff in error or its predecessor had filed with the Commission pursuant to the provisions of the Robinson and Pence laws, respectively (108 Ohio Laws 1094 and 110 Ohio Laws 366), a number of separate schedules of increased rates for certain classes of its service in separate exchanges, and a schedule of increased rates for parts of its toll service. In some instances protests had been filed against such schedules as provided in said Robinson and Pence laws, and each such protest had been made the subject of a separate case on the docket of the Commission. In each such separate case the Commission had suspended the effective date of the schedule and had entered upon a hearing concerning the fair value of plaintiff in error's property in such exchange and the propriety of such rates, and thereafter said rates had become effective pursuant to a separate bond filed with and approved by the Commission in each such case, conditioned for the repayment by plaintiff in error of the portion of such increased rates finally determined by the Commission to be excessive. In each such case plaintiff in error was proceeding to show separately the fair value of its property and its net income and that the rates so made effective under bond were not excessive.

"2. On October 14, 1924, before any such case had been concluded, the Commission on its own motion instituted a company-wide investigation of the value of plaintiff in error's entire property and the reasonableness of its rates, and consolidated with said company-wide investigation (No. 3307) all of the then pending separate cases.

"3. Thereafter plaintiff in error filed separate schedules of increased rates for certain classes of its service in other exchanges, some of which schedules were in like manner suspended by the Commission, became effective under separate bond and were consolidated with said company-wide investigation. There are pending and undisposed of forty-five of such separate exchange cases and one such toll case, in which cases plaintiff in error has on file with the Commission bonds aggregating more than $14,000,000.

"4. Instead of determining said exchange and toll cases separately, the Commission in its said several orders herein referred to, has ordered plaintiff in error to make refunds based upon the Commission's findings of value of plaintiff in error's intrastate property as a single unit and of its aggregate net income therefrom, without having found or determined the fair value of plaintiff in error's property or the amount of its net income in respect of any separate exchange or its toll system, and without having found for any year or years that any portion of any rate was excessive.

"5. The Commission's first order, entered on January 10, 1931, tentatively fixed the fair value of plaintiff in error's total property, including the interstate portion thereof, as of June 30, 1925, at $104,282,735.

"6. On January 16, 1934, the Commission made its findings of final value for plaintiff in error's intrastate property as of June 30, 1925, by deducting from its tentative finding the sum of $2,714,788 on account of the interstate property, and by further reducing such tentative finding in the following amounts, without any change in the pertinent evidence:

"(a) By deducting the sum of $316,090 from the allowance for right of way;

"(b) By eliminating the sum of $3,490,905 on account of going concern value;

"(c) By reducing the allowance for working capital, including materials and supplies, by the sum of $535,970; and

"(d) By deducting the sum of $3,296,181 from the amount of undistributed construction expenditures.

"The Commission's finding of final value of the intrastate portion of plaintiff in error's property as of June 30, 1925, was thus $93,707,488 or $7,639,146 lower than its finding of tentative value.

"The Commission also found the value of plaintiff in error's property for each succeeding year to 1933 by the application of price trends hereafter referred to.

"In the same order the Commission found that plaintiff in error had collected excess charges for its intrastate telephone service for the years 1925 to 1932, inclusive, in the aggregate sum of $13,289,172 and ordered plaintiff in error to refund to its subscribers said entire sum, with interest, and to file with the Commission a schedule of reduced rates for its telephone service effective retroactively as of June 30, 1925, and thereafter until changed by the order of the Commission.

"7. The Commission has consistently found that for the year 1933 plaintiff in error had earned no excess income, and therefore no refund has been ordered for that year.

"8. Pursuant to said orders of January 16 and March 1, 1934, plaintiff in error, on April 17, 1934, submitted to the Commission, under a written protest, certain 'Rate and Revenue Data and Estimates' hereafter referred to.

"9. On July 5, 1934, the Commission made another order wherein it found that plaintiff in error had collected under bond in protesting exchanges and for its intrastate toll services, excess charges for the years 1925 to 1932, inclusive, in the aggregate amounts of $11,423,137 in such exchanges and $744,541 for such toll services, or a total of $12,167,678, being $1,121,494 less than the amount ordered refunded in its former orders.

"Said order required plaintiff in error to show cause upon August 1, 1934, why said refunds should not be ordered.

"10. On July 9, 1934, the Commission ordered plaintiff in error to show cause by August 1, 1934, why a further order should not enter adopting and substituting for plaintiff in error's existing schedules of rates, 'said first or said second revision of existing schedules' of plaintiff in error (referring to the hypothetical rate calculations contained in the 'Rate and Revenue Data and Estimates' furnished by plaintiff in error under protest as aforesaid).

"11. On September 6, 1934, the Commission entered the order herein complained of, wherein it found that plaintiff in error had collected under bond in protesting exchanges and from its intrastate toll services, excess charges for the years 1925 to 1932, inclusive, in the aggregate amounts of $11,423,137 in such exchanges and $409,127 from such toll services, or a total of $11,832,264, being $1,456,908 less than the amount ordered refunded in said orders of January 16 and March 1, 1934, and $335,414 less than the amount ordered refunded in the order of July 5, 1934; and ordered plaintiff in error to make repayment to its subscribers; all as set forth in said order and in Schedule A thereof. In its finding of September 6, 1934, the Commission stated that all prior findings and orders, pertaining to excess charges, conflicting with said finding of September 6, 1934, should be modified to conform to it.

"D

"Plaintiff in error, within the time required by law, appropriately challenged each of the findings, orders and rulings of the Commission and made certain written requests upon it, as follows:

"1. On February 7, 1931, protest to finding of tentative value of January 10, 1931, was filed by plaintiff in error. It was overruled by the Commission in its order of January 16, 1934.

"2. On February 6, 1934, plaintiff in error filed its application and petition for a rehearing with respect to the order of January 16, 1934. It was overruled by the Commission in its order of March 1, 1934.

"3. On February 17, 1934, plaintiff in error filed with the Commission its application and request:

"(a) That the Commission modify said findings and order of January 16, 1934, by finding that the rates charged by plaintiff in error are just and lawful rates and by establishing such rates as the rates thereafter to be charged by plaintiff in error for its services until changed or modified in accordance with law; (b) that the Commission permit plaintiff in error in accordance with the request theretofore made by it and thereby renewed, to introduce evidence of the fair value of its property and its net income in each of the said separate causes, and (c) that the Commission afford plaintiff in error an opportunity to examine, analyze, explain and rebut the price trend information considered by the Commission in arriving at said findings and order, which information was at no time exhibited to plaintiff in error or introduced in any open hearing or made a part of the record in said cause and to which information plaintiff in error has never had access.

This request was overruled by the Commission in its order of March 1, 1934.

"4. On March 9, 1934, plaintiff in error filed its protest, application and petition for a rehearing with respect to the order of March 1, 1934, and on the same day the Commission overruled the same.

"5. On April 17, 1934, pursuant to said orders of January 16 and March 1, 1934, plaintiff in error duly submitted to the Commission under written protest certain 'Rate and Revenue Data and Estimates' heretofore referred to.

"6. On July 31, 1934, plaintiff in error filed:

"An application and request, directed to the order of July 5, 1934, (a) for permission to inspect and rebut the undisclosed price trend information hereinabove in paragraph 3(c) referred to; (b) for a disclosure of the Commission's methods of apportionment and allocation employed in arriving at the refunds found therein; and (c) for the opportunity to introduce separate evidence in the separate bond cases as hereinbefore set forth;

"An application and request directed to the order of July 9, 1934, that the Commission fix plaintiff in errors' present rates as the rates for its future service or, if the Commission intended to reduce its present rates, to permit plaintiff in error to show that the reduced rates proposed by the Commission would reduce the plaintiff in error's net income for the year 1934 by $1,800,000 and permit it to earn less than 3 1/2 per cent upon the fair value of its intrastate property for 1934;

"Verified return to the rule to show cause contained in the order of July 5, 1934;

"Verified return to the rule to show cause contained in the order of July 9, 1934;

"Protest of plaintiff in error against orders of July 5 and 9, 1934, and application and petition for rehearing with respect to said orders.

"7. On August 1, 1934, the Commission overruled plaintiff in error's said application to establish its present rates as its rates for the future and on September 6, 1934, overruled all of the other applications, protests, petitions and returns referred to in paragraph 6.

"8. On August 29, 1934, plaintiff in error filed its protest against the Commission's ruling of August 1, 1934, and its further application and petition for a rehearing.

"9. On September 25, 1934, plaintiff in error filed with the Commission its application and request with respect to the Commission's order of September 6, 1934;

"a. To permit plaintiff in error, in accordance with the requests theretofore made by it, to introduce separate evidence in respect of each of the separate bond cases;

"b. To permit plaintiff in error to examine and rebut the price trend information hereinabove in paragraphs (3) and (6) referred to; and

"c. To make a disclosure with respect to the instructions of the Commission to its accountant, Wood, and his use of such instructions in making the apportionment of excess earnings.

"This application was denied by the Commission on September 27, 1934.

"10. On October 1, 1934, plaintiff in error filed with the Commission its protest against said order of September 6, 1934, and its application and petition for a rehearing of this cause which was denied on October 19, 1934.

"11. On October 1, 1934, plaintiff in error also filed with the Commission its application for a stay of the order of September 6, 1934, which application the Commission denied on October 19, 1934.

"Each and all of the exhibits, 'A' to 'U,' above referred to are hereby incorporated herein and made a part hereof.

"E

"In said proceedings, acts, findings and orders, the Commission erred, as follows:

"1. In basing its said findings of value and orders upon alleged material and labor cost prices and trends obtained from various sources without plaintiff in error's knowledge, and not offered or introduced in evidence in any open hearing or made a part of the record in this case and to which plaintiff in error never had access and as to which it had no opportunity to cross examine, explain or rebut, as follows:

"(a) Cost prices for several years furnished by unidentified manufacturers of telephone equipment;

"(b) The trend of land values allegedly ascertained from an examination of tax valuations in certain of the large cities of Ohio, the names of which cities were undisclosed;

"(c) Building cost trends taken from the Engineering News Record;

"(d) Labor cost trends from the same publication;

"(e) Other labor and material cost trends obtained from various undisclosed sources.

"The Commission having fixed the fair value of plaintiff in error's property as of June 30, 1925, thereupon erroneously used the price trends obtained from the sources above referred to in fixing the fair value of plaintiff in error's intrastate property, for each of the years 1926 to 1933, both inclusive.

"The alleged facts so considered did not come from any official source which the Commission had the right to notice judicially. They were not published by any public authority, governmental or state. They were not introduced in evidence, and plaintiff in error had no opportunity to examine or cross examine as to such claimed proof or to explain or rebut the same, or to show that such claimed price trends could not fairly be considered in determining the fair value of plaintiff in error's property. By reason of these facts the Commission denied plaintiff in error a fair hearing and in determining this case admittedly considered and gave controlling weight to evidence not introduced in any hearing.

"On February 17, July 31 and September 25, 1934, plaintiff in error filed the written requests heretofore referred to, each of which in specific terms asked the Commission to disclose the evidence on which it had arrived at the price trends above referred to and had fixed the value of plaintiff in error's intrastate property. These requests were all denied. The Commission mistakenly stated in its order of September 6, 1934, that plaintiff in error had been accorded ample opportunity to examine and consider all necessary and pertinent evidence. The record, however, is undisputed that plaintiff was never granted access to or an opportunity to examine any of the price trend information above referred to upon which the value of plaintiff in error's property for the years 1926 to 1933 was fixed.

"The findings of value and the orders of the Commission fixing the amount of the refunds, aggregating $11,832,264, which were necessarily based upon such claimed proof deprive plaintiff in error of its property without due process of law and deny to plaintiff in error the equal protection of the laws in violation of the Fourteenth Amendment to the Constitution of the United States; and said findings and orders are therefore void in their entirety.

"2. Plaintiff in error was deprived of its property without due process of law and denied the equal protection of the laws in violation of the Fourteenth Amendment to the Constitution of the United States by the order of the Commission of September 6, 1934, ordering plaintiff in error to refund to its exchange and toll subscribers the amounts set forth therein, because:

"The Commission refused to receive evidence showing separately for each year the fair value of plaintiff in error's property and net income and fair rate of return with respect to each separate exchange and plaintiff in error's toll system where rates had become effective pursuant to bonds as provided in the Robinson and Pence laws notwithstanding repeated written requests of plaintiff in error to introduce such evidence and repeated requests that a date be fixed for hearing the same.

"Said refunds therefore were ordered erroneously, arbitrarily and without any evidence upon which they can be sustained.

"3. Plaintiff in error's rates throughout the period in controversy in said cause were of two kinds:

"Those filed with the Commission and, following the statutory protest, made effective pursuant to bond approved by the Commission, as provided in the Robinson and Pence laws;

"Those filed with the Commission and, in the absence of such protest, made effective without bond or other condition.

"In fixing the amount of the refunds attributable to the bond cases, the Commission made certain apportionments and an allocation as follows:

"1st. An apportionment of the alleged excessive earnings of plaintiff in error for the years 1925 to 1932, inclusive, in the sum of $13,289,172 between protesting exchanges, that is to say, exchanges wherein any rate had been collected under bond in any of the aforementioned years, and non-protesting exchanges, that is to say, exchanges wherein no rate had been so collected;

"2nd. An allocation of $409,127 to plaintiff in error's toll system and of $11,423,137 to its protesting exchanges; and

"3rd. An apportionment of the sum of $11,423,137, the amount required to be refunded in its protesting exchanges, among said several exchanges.

"The Commission erred in making said apportionments and allocation, and in ordering plaintiff in error to make refunds as ordered, in the following respects:

"(a) It had no authority to require plaintiff in error to make refunds with respect to rates collected under bond without determining the fair value of plaintiff in error's property and its net income for each of its protesting exchanges separately and for its toll system. This the Commission refused to do. Instead, it arbitrarily used and applied accounting methods having no relation to property values and net earnings.

"(b) The Commission's method employed in making said apportionments and allocation was erroneous, arbitrary, inapplicable and not based upon any evidence in the case.

"(c) In arriving at the portion of excess earnings to be refunded both in exchanges and in the toll system, the Commission considered exchange service revenues only and ignored toll revenues. Its error in this respect was two-fold: first, plaintiff in error during the period involved received large revenues from its intrastate toll system and these revenues were disregarded in making the apportionment; second, the use of revenues as a basis is wholly improper because revenues are in no sense evidence of net earnings.

"(d) In making the apportionment between the protesting and the non-protesting exchanges the Commission included as bonded revenues in each year the total revenues in any exchange in which any rate had been collected pursuant to bond, although substantial portions of such revenues were not collected under bond, thereby erroneously increasing by more than $4,000,000 the refunds required to be made by plaintiff in error.

"(e) Plaintiff in error was required to make refunds in excess of $400,000 in respect of its intrastate toll system for the years 1925 and 1926 although the Commission made no determination of the fair value of the intrastate toll property or its net income or that any toll rate was excessive.

"(f) The Commission did not find that any of plaintiff in error's exchange or toll rates collected under bond was unreasonable or excessive for any year. Without such finding the Commission could not under the applicable Ohio statutes lawfully order any refund.

"(g) The Commission used an arbitrary method in ordering said refunds, viz: for each of the years in controversy a refund for each exchange, based in each instance upon the same percentage of the amount of the increases in rates collected under bond, which basis was wholly without support in the evidence.

"(h) In making its apportionment of excessive earnings between protesting and non-protesting exchanges the Commission used the basis of total exchange service revenues. This method was necessarily based upon the assumption that there was included in each dollar of such total exchange service revenues an equal amount of excess net earnings. In its subsequent apportionment and allocation, the Commission abandoned this method and the necessary assumption upon which it was based and ordered refunds to the extent of $4,640,364 more than would have resulted from a consistent application of the first method.

"The action of the Commission with respect to such refunds and the apportionments and allocations upon which they were based deprived plaintiff in error of its property without due process of law and denied it the equal protection of the laws in violation of the Fourteenth Amendment to the Constitution of the United States.

"4. The findings and orders of the Commission deprive plaintiff in error of its property without due process of law and deny to it the equal protection of the laws in violation of the Fourteenth Amendment to the Constitution of the United States, in that therein the Commission found:

"(a) That the fair value of plaintiff in error's intrastate property used and useful in the service of the public was the following amounts as of the following dates respectively:

June 30, 1925, $93,707,488 December 31, 1926, 101,767,774 December 31, 1927, 111,036,522 December 31, 1928, 122,417,735 December 31, 1929, 134,765,576 December 31, 1930, 145,683,047 December 31, 1931, 145,271,663 December 31, 1932, 133,625,655 November 30, 1933, 126,250,206

"(b) That the net income of plaintiff in error from its intrastate business available for return upon said property was the following amounts for the following years:

1925 $8,382,171 1926 9,165,227 1927 9,759,167 1928 10,494,542 1929 10,896,937 1930 10,951,087 1931 11,102,418 1932 8,257,746 1933 6,959,232

"(c) That the reasonable rates of return which plaintiff in error was entitled to earn upon said intrastate property were the following percentages for the following years:

1925 to 1929, inclusive, 7 per cent per annum 1930 to 1931, inclusive, 6 1/2 per cent per annum 1932 and 1933, 5 1/2 per cent per annum

"(d) In its finding and order of September 6, 1934, the Commission found that plaintiff in error had collected excess charges under bond in protesting exchanges and in its intrastate toll system in the following amounts:
Exchange Toll

1925 $1,137,195.00 $232,282.00 1926 1,637,314.00 176,845.00 1927 1,823,857.00 ........... 1928 1,772,238.00 ........... 1929 1,344,624.00 ........... 1930 1,357,589.00 ........... 1931 1,519,405.00 ........... 1932 830,915.00 ........... -------------- ------------ $11,423,137.00 $409,127.00

"Upon such findings so made, the Commission on said date ordered plaintiff in error to refund said alleged excessive earnings in said respective amounts of $11,423,137 and $409,127, or an aggregate amount of $11,832,264, together with interest thereon at the rate of six per cent (6%) per annum from the date of payment until the date of refund.

"The findings and orders of the Commission are erroneous, arbitrary, unreasonable, invalid and confiscatory of plaintiff in error's property in that the fair value of plaintiff in error's said intrastate property in each of the years 1925 to 1933 inclusive was largely in excess of the amounts so found by the Commission therefor; plaintiff in error's net income was in each of said years substantially below the amounts found by the Commission as such; the rates of return actually earned by plaintiff in error were substantially lower than those which the Commission found plaintiff in error had earned in each of said years, and the return to which plaintiff in error was reasonably entitled was substantially in excess of that found by the Commission to be fair for said years, respectively, and plaintiff in error had no excessive or unreasonable net income in any of said years, all as more particularly shown in Specifications of Error Nos. 5, 6, 7 and 8, infra.

"5. The Commission should have found that the minimum fair value of plaintiff in error's intrastate property was at least $30,000,000 in excess of the values found by the Commission, set forth in (a) of Specification of Error No. 4, for each of the dates therein set forth.

"6. The Commission, instead of finding plaintiff in error's net income to be as set out in (b) of Specification of Error No. 4, should have found that plaintiff in error's net income from its intrastate business available for a return, was in no year excessive and was not more than the following amounts in each of the following years:

"1925, $6,014,180; 1926, $6,726,922; 1927, $7,260,885; 1928, $8,266,094; 1929, $8,200,940; 1930, $8,068,933; 1931, $8,115,568; 1932, $7,086,738; 1933, $6,160,952.

"7. The Commission erred in finding that plaintiff in error's net income from its intrastate business equalled an annual earning at the following rates upon the value of its intrastate property used and useful in furnishing its service in the State of Ohio for each of the following years, viz:

"1925, 8.95 per cent; 1926, 9.01 per cent; 1927, 8.79 per cent; 1928, 8.57 per cent; 1929, 8.09 per cent; 1930, 7.52 per cent; 1931, 7.64 per cent; 1932, 6.18 per cent; 1933, 5.51 per cent.

"The rates of return so found by the Commission are higher than the rates of return actually earned by plaintiff in error upon such property, in that, as shown by the evidence, the Commission found the fair value of plaintiff in error's intrastate property in each of such years to be too low as shown in Specification of Error No. 5 hereof, and found plaintiff in error's net income for each of such years to be substantially higher than it actually was, as shown in Specifications of Error Nos. 4(b) and 6 hereof.

"The Commission should have found, in accordance with the evidence in this case, that the rates of return actually earned by plaintiff in error upon such property during each of said years were substantially less than the rates of return found by the Commission to be reasonable for said years, respectively, as hereinafter in Specification of Error No. 8 set forth.

"8. The Commission erred in finding that plaintiff in error was entitled to earn upon the fair value of its intrastate property only the following annual rates of return for the following years:

1925 to 1929, inclusive, 7 per cent per annum; 1930 to 1931, inclusive, 6 1/2 per cent per annum; 1932 and 1933, 5 1/2 per cent per annum.

"The Commission should have found upon the evidence that the rates of return at which plaintiff in error was entitled to earn upon the fair value of its said property in each of said years were substantially in excess of said rates of return hereinabove last set forth, respectively. In this respect the said orders of the Commission deprive plaintiff in error of its property without due process of law and deny to it the equal protection of the laws in violation of the Fourteenth Amendment to the Constitution of the United States.

"9. The Commission erred in arriving at the fair value of plaintiff in error's intrastate property for each of the years 1925 to 1933, inclusive, by erroneously evaluating plant items manufactured by Western Electric Company and included in plaintiff in error's telephone plant in each of the following respects:

"(a) The Commission developed a trend for Western Electric prices from the prices of that company for telephone apparatus only and then applied such trend not only to plaintiff in error's telephone apparatus but to its lead covered cable and materials and supplies. This action resulted in undervaluing plaintiff in error's property.

"(b) The Commission having determined certain price trends for labor and material based upon the experience of manufacturers other than the Western Electric Company, applied such price trends to plaintiff in error's plant items of Western Electric manufacture, although it conclusively appeared from the evidence that Western Electric Company's prices were lower than the prices charged by other manufacturers for comparable materials and lower than the prices charged by Western Electric Company for the same materials to others, and that Western Electric Company's earnings in its Bell business were at all times reasonable.

"(c) The Commission refused to give effect to an increase of approximately ten per cent in the price of telephone apparatus made by Western Electric Company under the following circumstances:

"The evidence showed that commencing with December 31st, 1920, and continuing until July 1st, 1929, Western Electric Company made reductions in the prices charged by it to plaintiff in error and other Bell Associate Companies for telephone apparatus, so that on July 1st, 1929, the level of the prices for such telephone apparatus was only 58.3 per cent of what it had been on the 31st day of December, 1920. These reductions in prices by Western Electric Company were made at a time when other manufacturers were maintaining or increasing their prices. The reductions in 1929 were made in anticipation of a large increase in Western's business which was not realized, and consequently, in November, 1930, Western Electric Company restored the prices which had been in effect in 1928. With such increased prices Western Electric Company earned only 4.6 per cent and 4.2 per cent on its investment in its Bell business for the years 1930 and 1931, respectively, and the evidence showed that it would sustain a loss in such business of approximately $6,400,000 in 1932. The Commission's action in rejecting such price increase can not be justified on the basis that Western's earnings in its Bell business were at any time unreasonable or its prices excessive. Its action in rejecting such price increase was unlawful and unreasonable and resulted in a substantial undervaluation of plaintiff in error's intrastate property for each of the years 1930, 1931, 1932 and 1933.

"10. The Commission erred in arriving at the fair value of plaintiff in error's intrastate property for each of the years 1925 to 1933, inclusive, by failing to give proper consideration and weight to the actual costs of such property as such costs are correctly reflected in plaintiff in error's books and shown by the evidence.

"The actual cost of plaintiff in error's intrastate property (including cash working capital and materials and supplies as fixed by the Commission in said orders, but exclusive of construction work in progress) were the following sums as of the following dates respectively:

Date Book Costs

June 30, 1925, $98,798,259 December 31, 1926, 111,044,696 December 31, 1927, 126,725,311 December 31, 1928, $136,883,155 December 31, 1929, 150,330,971 December 31, 1930, 162,820,788 December 31, 1931, 164,932,754 December 31, 1932, 162,480,450 November 30, 1933, 161,809,034

"11. The Commission erred in finding in its order of September 6, 1934, that plaintiff in error in the period 1925 to 1932, inclusive, had imposed, charged and collected pursuant to bond from the subscribers and patrons of its intrastate services, exchange and toll, within the State of Ohio, the sum of $11,832,264 in excess of a fair return upon the fair value of its property and in ordering that plaintiff in error refund within ninety days therefrom the following amounts for the following years, to-wit:

Exchange Toll

1925 $1,137,195.00 $232.282.00 1926 1,637,314.00 176,845.00 1927 1,823,857.00 .......... 1928 1,772,238.00 .......... 1929 1,344,624.00 .......... 1930 1,357,589.00 .......... 1931 1,519,405.00 .......... 1932 830,915.00 .......... _____________ _____________

TOTAL $11,423,137.00 $409,127.00

"There was no evidence in the case which justified any finding by the Commission that any refund should be made in any exchange or in the toll system with respect to any of the years in question, and no basis upon which the Commission's order for such refund can be sustained. The order of the Commission in this respect deprives plaintiff in error of its property without due process of law and denies it the equal protection of the laws in violation of the Fourteenth Amendment to the Constitution of the United States.

"12. The Commission erred in its order of January 16, 1934, in reducing, without any change in the pertinent evidence, the unreasonably low value of plaintiff in error's intrastate property as of June 30, 1925, as tentatively fixed by it in its order of January 10, 1931, in the following respects and by the following amounts:

"(a) By deducting the sum of $316,090 from the allowance for right of way;

"(b) By eliminating the sum of $3,490,905 on account of going concern value;

"(c) By reducing the allowance for working capital including materials and supplies, by the sum of $535,970;

"(d) By excluding and deducting the sum of $3,296,181 from the amount of the undistributed construction expenditures.

"In each of the foregoing respects, the said findings and orders of the Commission deprive plaintiff in error of its property without due process of law and deny to it the equal protection of the laws in violation of the Fourteenth Amendment to the Constitution of the United States.

"13. The Commission erred in said findings and orders by failing to include any allowance for the going concern value of plaintiff in error's intrastate property in any year. In its tentative value order of January 10, 1931, the Commission found that the element of going value amounted to $3,592,040, which amount in itself was too low according to the undisputed evidence. It made the allowance therefor separately and did not include in its detailed valuation of the physical property any increment on account of the going value, representing the difference between an established plant and business in operation and earning money, and the bare bones of the physical plant. In its final findings of fair value, the Commission not only eliminated any allowance for going value, but reduced the fair value of plaintiff in error's intrastate property as tentatively fixed in its order of January 10, 1931, by making other substantial reductions. The result is that in the alleged fair values as found by the Commission in its orders of January 16, 1934, and March 1, 1934, no allowance whatever has been made for the going concern value in any of the years, either as a separate element or otherwise. The Commission's refusal to value the property as a going concern has deprived plaintiff in error of its property without due process of law, and denied to it the equal protection of the laws, in violation of the Fourteenth Amendment to the Constitution of the United States.

"14. The Commission erred in arriving at the fair value of plaintiff in error's intrastate property for each of the years 1925 to 1933, inclusive,

"(a) By excluding from such valuation the following amounts of money invested by plaintiff in error during such respective years in telephone property in process of construction, viz:

1925, $2,161,109; 1926, 4,168,837; 1927, $3,658,921; 1928, $2,059,240; 1929, $2,992,501; 1930, $4,750,748; 1931, $4,874,625; 1932, $810,383; 1933, $2,606,456.

"(b) By disallowing for each of the years 1925 to 1933, inclusive, any amount for engineering in respect to the following items of plant: right of way, buildings and also material values in switchboards installed by Western Electric Company, in other equipment of central offices, private branch exchanges, interior block wires, exchange aerial wire, and toll aerial wire.

"(c) By limiting the allowance for the item of omissions for each of the years 1925 to 1933, inclusive, to one per cent and by excluding the following items of plant from the amount upon which the allowance for omissions was computed: right of way, buildings and general equipment.

"(d) By allowing only one per cent for the item of taxes during construction instead of basing the same on the actual experience of plaintiff in error.

"(e) By allowing an inadequate amount for the item of plant supervision and tool expense.

"The Commission's exclusion of such amounts deprived plaintiff in error of its property without due process of law and denied to it the equal protection of the laws in violation of the Fourteenth Amendment to the Constitution of the United States.

"15. The Commission erred in finding that the actual existing depreciation in plaintiff in error's said intrastate property as of June 30, 1925, was $14,226,709. The reproduction cost new of plaintiff in error's intrastate property as found by the Commission for the same date in its order of January 16, 1934, was $107,934,197. Based upon such finding of reproduction cost new the Commission should not have found existing depreciation in the property in excess of $10,000,000. The Commission thus erroneously deducted on account of the existing depreciation in plaintiff in error's intrastate property more than $4,000,000 in excess of any sum justified by the evidence. In so doing the said findings and orders of the Commission deprive plaintiff in error of its property without due process of law and deny to it the equal protection of the laws in violation of the Fourteenth Amendment to the Constitution of the United States.

"For each of the succeeding years 1926 to 1933, inclusive, the Commission erred in arriving at the fair value of plaintiff in error's intrastate property by deducting amounts on account of existing depreciation in such property largely in excess of the actual existing depreciation therein.

"16. The Commission erroneously refused to include in plaintiff in error's necessary operating expenses the following sums of money for the years 1925 to 1933, respectively, representing part of the annual expense of depreciation of the intrastate portion of plaintiff in error's depreciable property:

1925 $1,635,563 1926 1,756,299 1927 1,757,275 1928 1,908,000 1929 2,520,223 1930 2,758,913 1931 2,744,479 1932 1,034,985 1933 465,648

"17. The Commission purported to allow in plaintiff in error's operating expenses for each of the years 1925 to 1933 an annual expense of depreciation at the rate of four per cent per annum of plaintiff in error's depreciable intrastate property, although its actual allowance therefor was less than four per cent. The Commission should have allowed, under the evidence in this case, not less than the following annual amounts for the expense of depreciation in respect of plaintiff in error's intrastate property:

"1925, $4,914,980; 1926, $5,371,921; 1927, $5,815,204; 1928, $6,457,602; 1929, $7,484,033; 1930, $8,247,474; 1931, $8,549,677; 1932 $6,892,986; 1933, $6,269,772.

"The Commission's action in these respects deprives plaintiff in error of its property without due process of law and denies to it the equal protection of the laws in violation of the Fourteenth Amendment to the Constitution of the United States.

"18. Plaintiff in error's annual expense of depreciation was based upon evidence of service life and salvage of the several classes of its depreciable property, which evidence was undisputed. The Commission erred in ignoring such evidence and in fixing arbitrarily what it states was a rate of four per cent per annum, although in fact less than that amount. In doing so, the Commission purported to adopt the retirement theory of depreciation accounting, but in fact based its allowances upon the experience of the company for a period antedating the period in controversy. The Commission's allowance for depreciation expense for the period 1925 to 1931 was $9,852,737 less than actual expense of retirements during that period. Plaintiff in error was entitled for the expense of depreciation to a sum substantially in excess of the expense of its retirements, and the action of the Commission in allowing less than such expense deprived plaintiff in error of its property without due process of law and denied to it the equal protection of the laws in violation of the Fourteenth Amendment to the Constitution of the United States.

"19. The Commission erroneously refused to permit the deduction from plaintiff in error's gross income of the following sums of money for the years 1925 to 1932, respectively, representing sums paid by plaintiff in error to the American Telephone and Telegraph Company on account of license contract services rendered by said company to plaintiff in error, viz:

"1925, $732,429; 1926, $682,004; 1927, $741,006; 1928, $320,448; 1929, $175,773; 1930, $100,906; 1931, $94,350; 1932, $23,302.

Said sums of money were paid by plaintiff in error to said American Telephone and Telegraph Company for services actually rendered by the latter to plaintiff in error, which services were required by plaintiff in error in the rendition of its intrastate service in the State of Ohio.

"The Commission's refusal to allow plaintiff in error to make such deductions from its gross income or to treat such payments as an operating expense for each of such years deprives plaintiff in error of its property without due process of law and denies to it the equal protection of the laws in violation of the Fourteenth Amendment to the Constitution of the United States.

"20. The Commission erred in failing to make adjustments in plaintiff in error's expenses by way of increases in its Federal Income Tax because of the disallowances shown in paragraphs 16 and 19, supra.

"21. The reproduction cost new and the fair value of plaintiff in error's property as of June 30, 1925, as tentatively found and determined by the Commission in said findings and order of January 10, 1931, are less than the actual, true and correct reproduction cost new and fair value thereof and are therefore unjust, unreasonable and too low with respect to said property as a whole and specifically as to each and all of plaintiff in error's classes of property.

"The Commission erred in overruling plaintiff in error's protest against said tentative value order.

"22. The Commission erred in said findings and orders of January 16 and March 1, 1934, in requiring, for the purpose of reducing plaintiff in error's future rates, that plaintiff in error file, effective retroactively as of June 30, 1925, and thereafter until changed by order of the Commission, such schedules of reduced rates for plaintiff in error's intrastate service as would produce net income not in excess of the amount found by the Commission to be fair and reasonable as of that date. This requirement of said last mentioned orders plaintiff in error complied with on April 17, 1934, by submitting to the Commission, under protest, 'Rate and Revenue Data and Estimates.'

"Said orders deprive plaintiff in error of its property without due process of law and deny to plaintiff in error the equal protection of the laws in violation of the Fourteenth Amendment to the Constitution of the United States, in that:

"(a) The action of the Commission was an attempt to accomplish indirectly that which it could not directly do, viz.: to deprive plaintiff in error of the opportunity to earn a fair return upon the fair value of its property by reducing plaintiff in error's present rates, although they are now producing, as the Commission found in said orders, no more than a fair return on the present value of said property as found by the Commission.

"(b) In said findings and orders of January 16, and March 1, 1934, the Commission found that for the year 1933 plaintiff in error was entitled to earn a return of 5 1/2 per cent upon the fair value of its intrastate property as fixed by the Commission for that year and that plaintiff in error's net income from said property for that year at its present rates did not exceed such a return. Any reduction in plaintiff in error's present rates would necessarily reduce its net income below the amount found by the Commission to be fair, and would be unjust and unreasonable.

"(c) Said hypothetical rates, if now made effective retroactively, will, throughout the period of their effectiveness, deprive plaintiff in error of its property without due process of law and deny it the equal protection of the laws, in violation of the Fourteenth Amendment to the Constitution of the United States.

"(d) Under the applicable Ohio statutes the Commission had no authority to require plaintiff in error to file schedules of rates effective retroactively.

"(e) The action of the Commission in this respect was erroneous and in direct violation of the laws of the State of Ohio, as under such laws the Commission has no authority to fix rates except for the future.

"(f) Such order attempts unlawfully to reduce plaintiff in error's rates for its present and future service, by ordering plaintiff in error to make effective, for such service, rates not in issue in any of the separate bond cases and in respect of which no hearing or proof has been had.

"In addition, the hypothetical rates contained in the 'Rate and Revenue Data and Estimates' which plaintiff in error was compelled to and did furnish to the Commission on April 17, 1934, could not lawfully be made the basis of any order fixing rates for the future for plaintiff in error for each of the following reasons:

"(a) Such hypothetical rates were based on a reduction of $1,822,647 for the year 1925, which reduction was applicable to plaintiff in error's entire intrastate earnings, without distinction as between rates collected pursuant to bond and those not so collected, whereas in the order of September 6, 1934, refunds are ordered only with respect to exchanges and the toll system where rates were collected pursuant to bond and in an amount approximately $450,000 less than the amount of the refunds fixed for the year 1925 by the orders of January 16 and March 1, 1934.

"(b) The hypothetical rates contained in said 'Rate and Revenue Data and Estimates,' if they had been in effect during the years 1926 to 1932, inclusive, would not have produced the reductions in revenue which the Commission found to be proper for said years respectively, either in its said orders of January 16 and March 1, 1934, its order of July 5, 1934, or its order of September 6, 1934.

"(c) Many of the decreases shown in the hypothetical rates in said 'Rate and Revenue Data and Estimates' are with respect to exchanges in which rates were not made effective pursuant to bond. Inasmuch as the Commission in its order of July 5, 1934, and September 6, 1934, required refunds to be made only with respect to rates made effective pursuant to bond, said hypothetical rates could have no application to the orders of the Commission as now modified.

"(d) The Commission had no right to fix rates for plaintiff in error's intrastate telephone service for the present and future by considering only the fair value of the property, the revenues, expenses and net income of plaintiff in error for the year 1925. In determining rates for the present and future the Commission was required to consider the fair value of plaintiff in error's property, its revenues, expenses and net income for the most recent period available. Although the Commission, in determining the refunds to be ordered, found even on the low value of plaintiff in error's intrastate property as fixed by the Commission for the year 1933, and upon the Commission's own findings in respect of revenues, expenses and net income for that year, that plaintiff in error was earning only a barely compensatory return for that year and therefore upon such finding made no order of refund against plaintiff in error for the year 1933, nevertheless, the Commission has refused to consider and give effect to the same evidence, in respect of plaintiff in errors' present and future rates.

"23. The Commission erred in its findings and orders in failing to continue the existing rates of plaintiff in error in effect for the present and future and in overruling the written requests of plaintiff in error so to do filed in this cause on February 17, July 31 and August 29, 1934.

"Plaintiff in error showed the Commission that if permitted it would prove that if either of the revisions of rates proposed by the Commission should be made effective the result would be to reduce plaintiff in error's net income from its intrastate business in Ohio for the year 1934 by more than $1,800,000 and to permit it to earn less than 3 1/2% for the year 1934 on the present fair value of its property employed in its intrastate service in Ohio. The Commission found that for the year 1933, plaintiff in error had earned only a barely compensatory return.

"It was the duty of the Commission under the evidence in this cause and its own findings to determine that the existing rates of plaintiff in error were no more than just and lawful rates to be charged for the present and future until modified in accordance with law, but if the Commission proposed to make any reduction in the existing rates, plaintiff in error was entitled to a hearing and the right to introduce evidence as to the fair value of its property, its revenues, expenses, net income and fair rate of return for the year 1934, and thereby to prove that any such reduction would be unlawful and unreasonable.

"The action of the Commission in denying plaintiff in error's request and in requiring it to render future services in Ohio at admittedly confiscatory rates has deprived plaintiff in error of its property without due process of law and denied to it the equal protection of the laws in violation of the Fourteenth Amendment to the Constitution of the United States.

"24. The Commission erred in overruling, denying and in failing to comply with plaintiff in error's several applications and requests filed on February 17, July 31, August 29, and September 25, 1934, asking: (1) that the Commission modify said findings and order of January 16, 1934, by finding, deciding and ordering the rates then and now charged by plaintiff in error for its services rendered in the State of Ohio to be no more than just and lawful rates and by fixing and establishing such rates as the rates hereafter to be charged and collected by plaintiff in error for its services until changed or modified in accordance with law; (2) that the Commission permit plaintiff in error in accordance with the requests theretofore made by it and thereby renewed to introduce evidence of the fair value of its property, its revenues and expenses and net income in each of said separate cases where plaintiff in error was and is collecting rates pursuant to bonds; and (3) that the Commission afford plaintiff in error an opportunity to examine, analyze, explain and rebut the price trend information considered by the Commission in arriving at said findings and order of January 16, 1934, and the Commission's method of applying the same, which information was at no time exhibited to plaintiff in error or introduced in any open hearing or made a part of the record in said cause, and to which information plaintiff in error had never had access and as to which method it has never been informed.

"The action of the Commission in so denying said applications and requests has deprived plaintiff in error of its property without due process of law and has denied to it the equal protection of the laws in violation of the Fourteenth Amendment to the Constitution of the United States.

"25. The Commission erred in requiring plaintiff in error to repay unstated portions of its intrastate toll rates collected under bond 'to the persons, subscribers and patrons paying the same, notwithstanding payments for said services were made by such persons and patrons to telephone companies other than The Ohio Bell Telephone Company because of the interchange of telephone service.' Plaintiff in error cannot lawfully be required under the terms of the applicable Ohio statutes and the conditions of the bonds executed by it to make any refunds except to persons who are its subscribers or patrons.

"26. Plaintiff in error has been denied a fair trial and hearing in respect of the fair value of its property; it has been denied a fair trial and hearing in respect of whether the rates put into effect under bond in its several exchanges and its toll system were excessive and unreasonable in each separate case in which such rates were made effective pursuant to bond and it has been denied any trial with respect to the just and reasonable rates for its present and future service. Such denials have resulted in depriving plaintiff in error of its property without due process of law and denying it the equal protection of the laws in violation of the Fourteenth Amendment to the Constitution of the United States.

"27. The Commission erred in its order of September 6, 1934, in requiring the repayment by plaintiff in error to its intrastate toll users of the sum of $232,282 for the year 1925 and the sum of $176,845 for the year 1926 without having made a determination of the fair value of plaintiff in error's property and its revenues, expenses and net income in such intrastate toll system. There was no evidence upon which the Commission could have based any finding that plaintiff in error had, in any year, made any excessive earnings in its toll system.

"Plaintiff in error demanded the right to prove the fair value of its property used in rendering its intrastate toll service and to show the net income from such property. The Commission refused to receive such evidence. Therefore, it could make no valid order requiring any refunds to be made by respondent on account of toll rates collected under bond and the Commission's orders in this respect deprive plaintiff in error of its property without due process of law and deny it the equal protection of the laws in violation of the Fourteenth Amendment to the Constitution of the United States.

"28. The Commission erred in its order of September 6, 1934, in the following respects and each thereof:

"(a) It denied the protest and application and petition of the plaintiff in error asking, for the reasons and upon the grounds set forth therein a rehearing with respect to the matters and things decided and determined by the finding and order made and entered herein upon July 5, 1934;

"(b) In finding, as set forth in said order of September 6, 1934, that it had accorded plaintiff in error ample opportunity to examine and consider all necessary and pertinent information requested in plaintiff in error's application and request directed to the Commission's order of July 5, 1934, and in overruling said application and request;

"(c) In overruling the verified return of plaintiff in error to the rule to show cause contained in the Commission's findings and order of July 5, 1934, and the prayer thereof;

"(d) In ordering that all protests and objections to the Commission's finding of July 5, 1934, filed and made by plaintiff in error, inconsistent with the order of September 6, 1934, be overruled.

"29. The Commission further erred in overruling on October 19, 1934, (a) the protest, application and petition of plaintiff in error for a rehearing filed on October 1, 1934, and (b) its said application for a stay, postponement and suspension of the enforcement of the orders of the Public Utilities Commission of Ohio in so far as they order and direct plaintiff in error to make the repayments and refunds ordered by the Commission.

"In each and all of the foregoing respects complained of, and in denying plaintiff in error's protests, applications and petitions for rehearing, the said proceedings, acts, findings and orders of the Commission and each and all thereof affect materially the substantial rights of plaintiff in error, are erroneous and prejudicial to it and are unlawful, unreasonable and are not supported by evidence, are against the weight of the evidence and contrary to the evidence and the law and in violation of the applicable Ohio Statutes and of Article 1 Section 1 of the Constitution of the State of Ohio, and, further, are confiscatory and will, if enforced, result in the confiscation of plaintiff in error's property and deprive it of its property without due process of law and deny to plaintiff in error the equal protection of the laws in violation of the Fourteenth Amendment to the Constitution of the United States.

"Each and all of the foregoing grounds and specifications of error were urged and relied upon by plaintiff in error in said protests, applications and petitions for a rehearing filed by it in cause No. 3307 on the docket of the Commission.

"WHEREFORE, plaintiff in error prays that said findings and orders of defendant in error, the Public Utilities Commission of Ohio, made and entered in said cause No. 3307 on September 6, as well as the orders of January 16, March 1, July 5 and July 9, 1934, in so far as said findings and orders form the basis for or are incorporated into the findings and order of September 6, 1934, and each of them, be reversed, vacated and set aside by this Court as unlawful and unreasonable and that plaintiff in error may be restored to all things lost by reason thereof."

The various findings and orders made by the commission and the procedural steps taken by the company are brought into the record through exhibits "A" to "U" inclusive. These exhibits are too voluminous to carry into this statement and we are content to set out a list of same, with designating letter.

"A" Tentative Finding of January 10, 1931.

"B" Order of January 10, 1931, fixing value.

"C" Protest of the Ohio Bell Telephone Company to value fixed in order of January 10, 1931.

"D" Findings of January 16, 1934.

"E" Order of January 16, 1934.

"F" Application for Rehearing of January 16, 1934, order.

"G" Application and Request of the Ohio Bell Telephone Company of February 17, 1934.

"H" Order of March 1, 1934.

"I" Application for Rehearing of March 1, 1934, order.

"J" Order of July 5, 1934.

"K" Order of July 9, 1934.

"L" Application and Request of the Ohio Bell Telephone Company of July 31, 1934, with respect to the order of July 5, 1934.

"M" Application and Request of the Ohio Bell Telephone Company with respect to the order of July 9, 1934.

"N" Verified Return to the order to show cause contained in the order of July 5, 1934.

"O" Verified Return to the order to show cause contained in the order of July 9, 1934.

"P" Protest and Application for Rehearing of July 5 and July 9, 1934, orders.

"Q" Protest and Application for Rehearing filed August 29, 1934.

"R" Order of September 6, 1934.

"S" Application and Request of the Ohio Bell Telephone Company of September 6, 1934.

"T" Protest and Application for Rehearing of September 25, 1934, with respect to the order of September 6, 1934.

"U" Application to the Commission for a stay.

The commission took judicial notice of the trend of prices during the years involved in this proceeding and for the purposes of its determination and finding referred to and considered a periodical publication known as The Engineering News Record, and the company avers used other sources of information to it unknown; also, considered prices of materials furnished by manufacturers of telephone equipment and land values as ascertained from tax valuations, all of which it is claimed was erroneous. That on February 17, July 31 and September 25, 1934, the company filed written requests with the commission asking it to disclose the evidence upon which it arrived at price trends, all of which was refused.

With the mechanics governing the proper distribution of the refunder herein, this court at this time has nothing to do.

This fact is in dispute.

The petition in error and the exhibits make up the entire record of the case. For the means used and the methods followed by the commission in determining the rate base and rate of income, reference must be had to the petition in error, exhibits and briefs of Counsel.

Mr. Karl E. Burr, Mr. W.H. Thompson, Mr. W.B. Stewart and Mr. Ashley M. Van Duser, for plaintiff in error.

Mr. John W. Bricker, attorney general, and Mr. Donald C. Power, for defendant in error.


VALUATION INCLUDING PRICE TRENDS.

As of the date certain of June 30, 1925, the commission fixed the tentative valuation of the company's property at $104,282,735. Subsequently this was reduced $10,575,247. Item by item the company complains about the commission's figures such as those relating to right of way, land, buildings, central office equipment, distributing system, undistributed construction costs, going concern value and construction work in progress. However, a laborious study of the superabundant record of approximately 70,000 pages discloses a sharp conflict of competent evidence on every point, and under such circumstances this court cannot properly hold that the findings of the commission are against the weight of the evidence. Illustrative of this fact is the matter of intangible, undistributed construction expenditures. One witness expressed the opinion that the allowance for this item should be approximately $19,088,000; another that it should be $18,525,000; another that it should be $16,000,000; and still another that it should be $12,000,000. The commission after hearing and seeing the witnesses allowed $12,650,143. Certainly this court is at least in no better position to appraise the value of this conflicting testimony.

It is contended that there was failure to consider certain vital elements in determining questions of valuation. For instance, the claim is made that the commission excluded from the property value money necessarily invested in construction work which was in progress, in an average annual amount of $3,000,000 for the nine-year period.

The commission held that no allowance could be included for this work in determining value for rate-making purposes, because the property was not complete and ready for service and therefore not used and useful property in the service of the public within the meaning of Sections 499-8, 499-9, 614-20 and 614-23, General Code. An allowance was made, however, for the item of interest during construction, which fully and adequately compensated the company for the use of its capital which was invested in unfinished construction work, and the amount of allowance so made entered into the rate base which was fixed by the commission. Furthermore, allowance was made for capital so invested as soon as the new construction came into use, and provision was also made for the capitalization of materials used in construction and inventories on hand before they were used in the process of construction.

It is also contended that no consideration was given to the cost of property and the cost of reproduction of property. It may be conceded that such costs are relevant facts to be considered in determining values. Los Angeles Gas Electric Corp. v. Ry. Comm. of California, 289 U.S. 287, 306, 77 L.Ed., 1180, 53 S.Ct., 637.

In support of its contention that cost of property was ignored, the company offered a table which purports to show cost of the company's intrastate property aside from construction work in progress, and similar facts. But there is nothing in the record to show that the evidence so offered was not considered, along with the other evidence in the case relating to cost, in determining the rate basis.

As to the claim that the commission did not consider cost of reproducing property, the record discloses that evidence was adduced relating thereto and there is entire absence of a showing anywhere in the record that the commission failed to give proper consideration to such evidence bearing upon the question of expense of reproducing essential property.

A careful consideration of all claims of the company relating to alleged omissions or failure to consider certain elements of value discloses that the contentions are not borne out by the record. In fact, it appears that the commission determined its rate base from all the evidence before it, including that relating to these alleged ignored items, and thus reached the conclusion it did relative to the basic valuation fixed for determining a fair and reasonable rate.

Likewise the company strenuously complains because, although neither side introduced evidence of price trends, the commission took judicial notice of such trends; but even a casual examination of the decisions of the United States Supreme Court unquestionably discloses definite and repeated sanction of this principle.

In the case of Central Kentucky Natural Gas Co. v. Railroad Commission of Kentucky, 290 U.S. 264, 78 L. Ed., 307, 54 S.Ct., 154, Mr. Justice Stone stated that one ground for reversal of the judgment of the lower court was its exclusion "from consideration the profound changes in values, costs of service, consumption of commodities and reasonable return on invested capital which we judicially know took place during the period of more than five years while the case was pending before the Commission and the Court." Then in the ninth paragraph of the headnotes of that case, as reported in 78 L.Ed., appears the statement that "judicial notice may be taken of changes in values, cost of service, consumption of commodities and reasonable return on invested capital which have taken place during the period while a case was pending before the Utilities Commission and the Court."

In the later case of Dayton Power Light Co. v. Public Utilities Commission of Ohio, 292 U.S. 290, 78 L.Ed., 1267, 54 S.Ct., 647, Mr. Justice Cardozo said that "in view of business conditions, of which we take judicial notice, * * * the rate allowed was adequate." Then in the twenty-fourth paragraph of the headnotes of that case in 78 L. Ed., it is stated that "the Supreme Court of the United States takes judicial notice of business conditions."

In the Dayton case, supra, Mr. Justice Cardozo cites the case of Atchison, Topeka Santa Fe Ry. Co. v. United States, 284 U.S. 248, 76 L.Ed., 273, 52 S. Ct., 146, in which Mr. Chief Justice Hughes said that "There can be no question as to the change in conditions upon which the new hearing was asked. Of that change we may take judicial notice." Then in the second paragraph of the headnotes of the case in 76 L.Ed., appears the statement that "the Court may take judicial notice of a general economic depression."

In view of these authorities it is readily apparent that the commission committed no error in this respect.

OPERATING EXPENSES.

In the matter of operating expenses, the commission apparently accepted and applied the testimony of the company in the consideration and determination of most of the items involved. That was true as to the very important item covering cost of current maintenance, including salaries, in which there was no reduction whatever from the claims of the company.

We shall refer particularly to the amount urged by the company for allowance for license contract services. These charges were seriously challenged by the commission. They have reference to certain services furnished the Ohio Bell Telephone Company by the American Telephone Telegraph Company and other associated companies, compensation for which was computed at a stated per cent of the gross revenues.

Such license contract provides that the licensee was to receive from the licensor in addition to all other services and benefits accruing to the licensee, the described services and privileges which have been briefly summarized as follows: (a) The right to use all telephonic devices covered by patents owned by the licensor and all new improved apparatus in the art of telephony resulting from experimental work under the direction of the licensor, and protection against all suits for infringement. (b) The continuous prosecution by the licensor of research work in the development of the art and the plans designed to promote economy and efficiency in equipment of the plant of the associated companies. (c) Advice in engineering, traffic, operating, commercial, accounting, patents, legal, administrative and other matters pertaining to the successful conduct of the telephone business. (d) Advice and assistance in any financing required to be done by the licensee in the extension of its plant or improvement to its system, and assistance in marketing licensee securities and other necessary financial support. (e) The right to extend to subscribers of the licensee the connections provided between its system and the system of other associated companies and their subscribers. (f) Active assistance in connection with such measures as will best protect the health of employees and in other ways conserve the high quality of service and maintenance by the licensor of various pension and insurance plans. (g) the right of the licensee to extend to its connecting companies the benefit of the advice and information that the licensee may receive from the licensor.

In order that the services may be promptly performed the licensor was to (a) Render available for use of the Bell Company all products of the licensor's research and all inventions, etc., relating to the art of telephony, which, after investigation, are pronounced by the technical experts of the licensor to be of practical use. (b) Maintain continuously an organization of specialists to relieve the licensee from the necessity of performing such work. (c) Maintain facilities for connection between the system of the licensee and the system of other associated companies.

The contract provides for full service between the exchange of the licensee and the toll lines of the licensor setting out provisions for payment of interline service.

The company classifies the costs for services claimed to have been rendered, but which were rejected in whole or in part by the commission, in the following departments: Development and research; information; personnel; public relations; treasurer's; comptroller's; secretary's; administration and general service; operations; depreciation of telephone instruments; contingent liability for patent infringement.

The commission was of the opinion that valuable service was rendered the Ohio Bell Telephone Company by the American Telephone Telegraph Company, which concededly is the parent corporation, and that a substantial portion of the payments claimed to have been made to defray the costs of the parent company in providing such service should be, and they were, accordingly, allowed. It found, however, that a portion of the payments so claimed resulted in no benefit to the Ohio Bell Telephone Company and should not be included as a part of its operating expenses. In view of the uncertain and indefinite character of the proof based in great measure upon estimate and opinion, if not conjecture, it cannot be said that the findings and conclusions of the commission were unfair or unreasonable, and certainly there is no basis for finding that they were unlawful.

The commission followed the admonition of the Supreme Court of the United States in the Illinois proceeding reported in Smith et al., Commerce Comm., v. Illinois Bell Telephone Co., 282 U.S. 133, 75 L.Ed., 255, 51 S.Ct., 65, and Lindheimer et al., Commerce Comm., v. Illinois Bell Telephone Co., 292 U.S. 151, 78 L. Ed., 1182, 54 S.Ct., 658, and endeavored to ascertain the cost to the American Telephone Telegraph Company of the service furnished by it to the Ohio Bell Telephone Company. It did not and was not bound to accept fully and unconditionally the statements of the company as to the amount claimed to have been paid to the parent company; nor was it concluded thereby as to the reasonableness or propriety of such service; nor bound to regard the amount paid as the true value of such service to the Ohio Bell Telephone Company. Just as in other respects, its findings and conclusions upon these items will not be disturbed unless shown to be manifestly against the weight of the evidence or in contravention of law.

For instance, the commission allowed the claim for engineering service in its entirety. On the other hand, it denied in its entirety the claim made for services rendered in its information department, it having found that the general advertising of the American company, national in scope, did not relate to the Ohio Bell Company as such, and that such general advertising should not be paid by the Ohio telephone users.

The commission found that the department of development and research did much for the benefit of the associated companies. It rejected some of the costs and expenses claimed because not related to Ohio Bell Telephone operations. These charges were for television, radio, submarine, cable and other similar items.

In the so-called personnel department, many items of cost were allowed as claimed, those disallowed having been found rather in the interest of the holding company than of the licensee and hence not proper charges against the rate payer of the operating company.

So also as to the public relations department, the commission found that no part of such cost should be considered in determining the rate to be paid by the Ohio telephone user for the same reason.

The partial disallowance of the charges made for the treasurer's and comptroller's departments, and the total disallowance of the charges of the secretary's department and the department of operations, were likewise based upon its finding that those services were solely for the benefit of the parent company. The so-called general service bureau is referred to as a co-ordinating department in which general administration costs were included. It seems to be a sort of catchall for items that might possibly have been omitted from some classification. The allocation was uncertain and unsatisfactory. The commission was probably about right when it allowed half of the amount claimed. The same may be said of its allowance for depreciation of telephone instruments.

It does not appear how there could be justification for a specific allowance for contingent liability for patent infringements, for it does not appear that there has been any actual cost to the American company in the way of loss or damage because of patent infringements of apparatus used by the Ohio Bell Telephone Company, and the mere possibility is too remote and speculative to warrant a charge against the telephone user. So the commission found, and their finding seems commendable.

We deem it unnecessary to discuss in detail each of these specific claims of expenditure for service rendered by the parent company. Suffice to say that from an examination thereof we are of the opinion that the conclusions reached by the commission were just and the allowances made fair and reasonable, and hence should not be disturbed.

The item, expense of depreciation, was recognized by the commission as a legitimate part of the operating costs. The elements of maintenance and of essential replacements were regarded as factors, and it was conceded that the telephone user must, as part of his rate, provide funds to meet the wear and tear upon the physical plant resulting from the year's operations, and such expense entered into the calculations of the commission, as disclosed by its detailed findings. Its findings and conclusions thereon were apparently reached after careful consideration of the volume of testimony introduced and record evidence placed before it, and we find no warrant for their disapproval.

DEPRECIATION.

The commission makes the unchallenged statement in its brief that "With the exception of the amounts claimed by the company for the expense of depreciation, license contract costs and Western Electric purchases chargeable to expense, the commission allowed without question all of the operating expenses contended for by the company."

There are two sections of the General Code of Ohio expressly dealing with the subject of "depreciation" in relation to public utilities.

Section 614-49, General Code, provides: "Every public utility shall carry a proper and adequate depreciation or deferred maintenance account, whenever the commission after investigation shall determine that a depreciation account can be reasonably required. The commission shall ascertain, determine and prescribe what are proper and adequate charges for depreciation of the several classes of property for each public utility. The charge for depreciation shall be such as will provide the amount required over and above the cost and expense of maintenance to keep the property of the public utility in a state of efficiency corresponding to the progress of the art or industry. The commission may prescribe such changes in such charges for depreciation from time to time as it may find necessary."

It is further provided, in Section 614-50, General Code, that "The moneys for depreciation charges thus provided for shall be set aside out of the earnings and carried as a depreciation fund. The moneys in such fund may be expended in new construction, extensions or additions to the property of the public utility, or invested, and if invested, the income from the investment shall also be carried in the depreciation fund. Such fund and the proceeds thereof, may be used for the purpose of renewing, restoring, replacing or substituting depreciated property in order to keep the plant in a state of efficiency. Such fund and the proceeds or income therefrom shall be used for no purpose other than as provided in this section, except upon the approval of the commission."

In the case of Lindheimer v. Illinois Bell Telephone Co., supra, Mr. Chief Justice Hughes succinctly defines "depreciation" as "the loss, not restored by current maintenance, which is due to all the factors causing the ultimate retirement of the property. These factors embrace wear and tear, decay, inadequacy, and obsolescence."

Upon the merger or consolidation of September 21, 1921, the company began business with property having a book value of $77,839,932 and a depreciable value of $69,070,160. Several additional properties of considerably smaller valuation were acquired afterwards. With perhaps one exception they were taken over at net cost, with no reserve for accrued depreciation or amortization.

The commission found that from the date of merger the company pursued the policy of keeping its property in good condition and in a high state of efficiency, expending for current maintenance and repairs from the time of merger to the date certain, viz., June 30, 1925, the sum of $16,385,139, and from the date certain to December 31, 1931, the further sum of $42,064,639, which the commission denoted as liberal.

While expending the sums mentioned for current maintenance and repairs, the company's net charges to reserve for depreciation from the date of merger to the date certain were $11,349,664, and from the date certain to December 31, 1931, amounted to $40,956,301.

As is pointed out in the Lindheimer case, supra, it is extremely difficult as a practical matter to draw a definite line between funds accredited to current maintenance and repairs and those allocated to depreciation. It stands to reason that when proportionately large amounts are expended in maintaining the plant of a public utility in a high state of efficiency and good condition, the amount necessary for depreciation expense should be correspondingly less. Pioneer Telephone Telegraph Co. v. State, 64 Okla. 304, 167 P. 995, L.R.A., 1918C, 138.

In view of our future remarks on the subject of depreciation as it pertains to this case, it would now seem appropriate to call attention to certain pronouncements of the Supreme Court of the United States in the Lindheimer case, supra. It was there said in substance that where a public utility complains that rates ordered by a regulatory body are confiscatory, the utility "has the burden of making a convincing showing that the amounts it has charged to operating expenses for depreciation have not been excessive," and that since charges to depreciation should be representative of the expense occasioned to the public utility by the using of physical property employed as fixed capital, excessive charges for such object have the wrongful and indefensible effect of requiring patrons to provide capital contributions, not to make good losses incurred by the utility in the service rendered and thus keep its investment unimpaired, but to secure additional plant and equipment upon which the utility expects a return.

Since in the instant case the amounts charged to depreciation were included in the rates imposed against the company's subscribers, the commission felt obligated to investigate the matter of depreciation from the date of merger through the year 1933, to arrive at a fair and just result.

There can be little argument that when the consolidation of 1921 occurred, and upon the acquisition of additional properties, the company should have provided from capital contributions or charged to surplus the amount necessary to replace worn out, obsolete and useless units.

From evidence presented the commission found that at the date of merger the company's property was actually in a per cent condition approximating 83 per cent, which required a depreciation reserve of $14,638,870, but that with depreciable fixed capital of $69,049,424, a depreciation reserve of only $6,219,829 was supplied, according the property an erroneous per cent condition of about 91 per cent.

While admittedly the company made extensive replacements and improvements between 1921 and 1925, with an annual increase in depreciation reserve, the per cent condition, according to the company's records, steadily declined, reaching a low of 87.51 per cent on the date certain.

Obviously, this presented an extraordinary situation and suggested to the commission that the charges to depreciation reserve during the initial years of the company's existence were in excess of the inadequate amount furnished for depreciation at the date of merger, and that in order to sustain a credit balance in the depreciation reserve to make good the original deficiency, the company included excessive amounts for depreciation in its charges to current operating expenses, which were reflected in the rates to subscribers.

In support of this conclusion, the commission engaged in an elaborate set of calculations covering the period from September 21, 1921, through 1933, included in its brief in tabulated form.

This table purports to show that from September 21, 1921, through the year 1924 the company retired its original depreciable plant to the extent of a net realized depreciation of $8,479,728, which indicated too much retirement in too short a time, in light of the erroneous 91 per cent condition accorded the depreciable property by virtue of the insufficient depreciation reserve set up in the beginning.

Upon computations extending through 1933 the commission found that the total charges against the reserve for depreciation were $59,339,088, of which $38,270,252 was covered by the additions to the reserve since September 21, 1921, $6,219,829 was covered by the reserve in existence as of September 21, 1921, and $14,849,007 was representative of the amount of realized depreciation in excess of the credits which had been made to the depreciation reserve on the assets replaced.

Under a maze of figures, the continuation of which would but lend to confusion, the commission contended that the company should have begun operations with additional reserve for depreciation of $14,849,007, or that this amount should have been charged to surplus.

On the basis of "per cent condition," the commission determined that the company's initial reserve for depreciation should have been $14,638,870, instead of $6,219,829. Such discrepancy resulted in the elimination of the difference, viz., $8,419,041, as charges against the depreciation reserve, representing as it did losses antedating the merger, and which the company had charged to operating costs thereafter, at the expense of its subscribers.

Thus, the commission was unable to escape the conclusion that the company had commenced business with a grossly inadequate depreciation reserve, and that this deficiency together with appreciable replacements and changes made necessary by consolidation, which should have been contributed by capital or taken from surplus were financed by abnormal depreciation charges and corresponding credits to the depreciation reserve during twelve and one-quarter years of the company's existence, and especially up to and including the year 1931.

Substantiating its findings that the company from its beginning had created an excessive reserve for depreciation to absorb the amount which should have been furnished at the start, the commission points out in its brief that from 1922 through 1931 the company's composite depreciation rate ranged from 5.68 per cent to 5.92 per cent, but that it was voluntarily reduced in 1932 to 4.50 per cent, and to 4.18 per cent in 1933, thus tending to show final absorption of the deficiency in the depreciation reserve during the year 1931.

After digesting the mass of evidence presented to it on the question of depreciation, the ultimate function of the commission was to fix a composite rate to be applied annually from the year 1925 to maintain a proper depreciation reserve.

It is to be remembered that the commission did not challenge the charges of the company for maintenance and repairs, which were generous, or any depreciation expense except the major item relating to telephone plant and equipment. Neither did it disturb the depreciation expense charged between September 21, 1921, and the year 1925, which was found to be excessive. The future was its concern in the light of what had transpired in the past.

Proceeding to fix the annual composite rate for depreciation expense, effective from 1925, the commission found that from the date of merger to the date certain the company annually charged as depreciation expense an average composite rate of 5.50 per cent, and that its net charges to reserve for depreciation during the same time were equal to an annual composite rate of 3.74 per cent.

Taking into consideration the substantial sums spent by the company in the years preceding and following the date certain for maintenance and repairs, and that the depreciable property of the company was in a good, improved and up-to-date condition as of June 30, 1925, the commission decided that a composite rate of 4 per cent was just and fair to provide for annual statutory depreciation, and that it should be applied from 1925 forward.

It appears in the case of Michigan Public Utilities Commission v. Michigan State Telephone Co., 228 Mich. 658, 200 N.W. 749, that the commission had fixed a rate of depreciation at four per cent of the total fair value of the company's depreciable property. The Supreme Court of Michigan in upholding such action said:

"Probably in a majority of the cases a higher rate has been sustained. But this is a question of fact depending largely upon the character, nature and age of the property in question, and illuminated somewhat by the experience of the company respecting the subject. And it must not be overlooked that, as the cases show, many minor replacements, and repairs and maintenance are made and charged to operating expense. In practice, this contributes considerably toward keeping the property intact. The commission in its opinion * * * reviews the question at length, and states fully the experience of the company respecting the rate of depreciation and the accumulation of the fund. The rate fixed is comparatively low, but, in the light of the facts of this case, we must decline to hold it confiscatory."

As authority for the proposition that the past experience of a public utility affords a tenable foundation upon which to establish the rate that should be allowed in the future for annual depreciation, the commission relied on the case of Smith v. Illinois Bell Telephone Co., supra.

The value of the company's depreciable property having been fixed at $84,330,894 as of the date certain, the amount allowed for depreciation expense for the year 1925 at 4 per cent was $3,373,236. The commission further prescribed that depreciation expense for subsequent years should be based on the determined value of the depreciable property at the date certain plus net additions thereto. Consequently, from the years 1925 to 1933, inclusive, the depreciation allowance to the company under the commission's order amounted to $45,266,614, being some $17,267,353 less than claimed by the company upon higher composite rates and higher valuation, which it contends are reasonable.

Naturally, the company registers vigorous protest to the methods pursued by the commission, arguing that it had no right to rest its calculations on the period preceding the date certain, disregarding the actual retirement losses of the company during the time for which refunds were ordered. The company earnestly maintains that its actual realized retirement losses from 1925 to 1933, inclusive, were $8,364,256, and that its true expense of depreciation during such time was some $16,000,000, which no one disputes, and that they have been entirely ignored through the erroneous course adopted by the commission; to which the commission replies that if the company had commenced business with a proper depreciation reserve of $14,638,870 instead of $6,219,829, and if certain properties acquired since September 21, 1921, had had reasonable depreciation reserves, the company would have had an ample reserve on December 31, 1933, of $14,652,468.

The conflict between the company and the commission is apparent. The former insists that computations should be confined to the period between 1925 and 1933, while the latter has seen fit to extend its inquiry to the beginning of the company's existence.

"Depreciation" is inherently a complex subject. It becomes more so when the particular enterprise under consideration is of great magnitude and millions of dollars are involved. In weighing and dissecting the evidence, a knowledge of law plays a minor part. One attempting a comprehensive grasp of the intricacies presented should be both a skilled engineer and a competent accountant, versed in the problems peculiar to the public utilities field.

We have made a conscientious examination of the voluminous evidence relating to "depreciation" and have analyzed it to the best of our ability with regard to the conflicting contentions of the adverse parties. There being substantial support for the findings and order of the commission on this feature of the case, they will be permitted to stand.

RATE OF RETURN.

The company complains that the rate of return allowed by the commission is inadequate and confiscatory. The rates of return allowed by the commission are as follows: 7 per cent for the years 1925 to 1929, inclusive; 6 1/2 per cent for each of the years 1930 and 1931; and 5 1/2 per cent for each of the years 1932 and 1933. These rates they find and declare were ample in the light of the economic conditions existing during the periods involved. A rather recent case dealing with this question is that of Illinois Bell Telephone Co. v. Gilbert, 3 F. Supp., 595, in which there is a discussion of the question quite timely and appropriate to the case before us. From that case we quote the following:

"A public utility enjoying the advantages of plaintiff is not entitled to the large earnings made by many undertakings during periods of great prosperity. On the other hand, its return in times of business adversity should not be reduced to the extent that the earnings of many private corporations have been impaired. The range of from 7 1/2 per cent to 5 1/2 per cent as found in this case gives weight, in our opinion, to all of the elements which under the ruling of the Supreme Court we are required to consider."

The court took judicial notice of the general decline in corporate earnings during the years 1931 and 1932 and said: "It is for this reason that we have fixed 6 1/2 per cent as the proper rate of return for 1931 and 5 1/2 per cent as the proper rate of return for 1932."

In Dayton P. L. Co. v. Public Utilities Commission, supra, the Supreme Court of the United States, on page 311, in approving as adequate a rate of return of 6 1/2 per cent, said: "In view of business conditions, of which we take judicial notice ( Atchison, Topeka Santa Fe Ry. Co. v. United States, 284 U.S. 248, 260), the rate allowed was adequate."

A rate of return deemed reasonable under generally prevailing normal economic conditions may be excessive in a period of economic depression, and a rate of return deemed reasonable in a period of depression may be wholly inadequate and confiscatory in a period of general prosperity. That a general economic depression prevailed during the years here considered requires no proof, and this court will, even as the Supreme Court of the United States did ( supra), take judicial notice of that fact. The fact that the prevailing economic depression is reflected in a reduction in the rate of the return allowed to a utility does not necessarily render the rate of return allowed confiscatory where the reduction made is reasonable in the light of prevailing conditions.

Another recent case in point, decided in February, 1925, is Chesapeake Potomac Telephone Co. v. Whitman, 3 F.2d 938, wherein the court approved a 6 per cent return on the value of the telephone company property, and held that since the telephone company was an integral part of a nation-wide system and was assisted in its financing by the corporation controlling it, the rate of return allowed was not confiscatory. The court, on page 954, said: "* * * If the present company stood alone, either in the sense that it had, unaided, to look after its own financing, or that it did not form what is in reality an integral part of a nationwide system we might well doubt whether a return of 6 per cent would be sufficient to enable it to raise the money necessary to its growth, and therefore, it may be, to its life; but such is not the case. It is owned and altogether controlled by the American Telephone Telegraph Company, hereinafter styled the National company. In partial return for a substantial annual sum paid by it to the National company, the latter has agreed to assist it in its financing. * * * All that we hold is that, if the company be allowed as much as 6 per cent, its property has not been confiscated. * * *"

In the instant case, the commission, in its opinion, finds that the company "enjoys a virtual monopoly in the territory in which it operates; its business constitutes one of the most substantial and profitable utility businesses in the state; its properties are favorably located in serving many of the large and thriving communities of Ohio; its management is of a high grade of efficiency; its financial position, because of its subsidiary character, is of a very high order, and it has been able by reason thereof to secure funds for its additions and betterments without going into the open market for money and there is no indication that it will be required to enter the public market for finances in the immediate future. It may be said the element of risk to the investor as applied to this company is negligible."

In Smith v. Illinois Bell Telephone Co., supra, the court, on pages 160, 161, said: "* * * In determining what is a confiscatory, regulation of rates, it is necessary to consider the actual effect of the rates imposed in the light of the utility's situation, its requirements and opportunities. As was said in United Railways v. West, 280 U.S. 234, 249, 250 [ 74 L.Ed. 390, 408, 50 S.Ct. 123], a rule as to the rate of return can not be laid down which would apply uniformly to all sorts of utilities; 'what may be a fair return for one may be inadequate for another, depending upon circumstances, locality and risk.' In that case the court restated the general rule in the language of the opinion in Bluefield [ Water Works Improvement Co.] v. Public Servicc Commission, 262 U.S. 679, 692, 693 [ 67 L.Ed. 1176, 1182, 1183, 43 S.Ct. 675], as follows: 'What annual rate will constitute just compensation depends upon many circumstances and must be determined by the exercise of a fair and enlightened judgment, having regard to all relevant facts. A public utility is entitled to such rates as will permit it to earn a return on the value of the property which it employs for the convenience of the public equal to that generally being made at the same time and in the same general part of the country on investments in other business undertakings which are attended by corresponding risks and uncertainties; but it has no constitutional right to profits such as are realized or anticipated in highly profitable enterprises or speculative ventures. The return should be reasonably sufficient to assure confidence in the financial soundness of the utility and should be adequate, under efficient and economical management, to maintain and support its credit and enable it to raise the money necessary for the proper discharge of its public duties.'

"It is evident that in the present case we are not dealing with an ordinary public utility company, but with one that is part of a large system organized for the purpose of maintaining the credit of the constituent companies and securing their efficient and economical management."

In the case of Wabash Valley Electric Co. v. Young, 287 U.S. 488, 77 L.Ed., 447, 53 S.Ct., 234, the court held that a rate of return of 7 per cent for a public utility company supplying electricity would not be deemed so inadequate as to amount to a taking of property without due process because after taking care of debts and dividends there might be nothing left for surplus, where it appeared that the company had a surplus equal to nearly 28 per cent of its total stock and funded debt liability, and the fact that it was a subsidiary of a company by which its stock and securities were owned, and which also owned and financed other similar companies, made it reasonable to conclude that it was in a more favorable financial situation than if it were a disconnected enterprise.

From a consideration of these authoritative decisions, it must be concluded that the rate of return allowed by the commission is fair and just and hence should not be disturbed.

Upon the entire record we are of opinion that the findings and conclusion of the Public Utilities Commission of the state are neither unlawful nor unreasonable. Its order is therefore in all respects affirmed.

Order affirmed.

WEYGANDT, C.J., STEPHENSON, WILLIAMS, MATTHIAS, DAY and ZIMMERMAN, JJ., concur.

JONES, J., not participating.


Summaries of

Bell Tel. Co. v. P.U.C.

Supreme Court of Ohio
Jul 22, 1936
3 N.E.2d 475 (Ohio 1936)
Case details for

Bell Tel. Co. v. P.U.C.

Case Details

Full title:THE OHIO BELL TELEPHONE CO. v. PUBLIC UTILITIES COMMISSION OF OHIO. (Four…

Court:Supreme Court of Ohio

Date published: Jul 22, 1936

Citations

3 N.E.2d 475 (Ohio 1936)
3 N.E.2d 475

Citing Cases

Ohio Bell Tel. Co. v. Comm'n

There can be no compromise on the footing of convenience or expediency, or because of a natural desire to be…

U.S. v. District Director of Immigr. Nat

I think that Orlando was entitled to know what documents constituted the record against him, to have access…