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United States Supreme Court


No. 567

Decided: April 12, 1926

A public utility company, which by excessive depreciation charges in the past has created a reserve depreciation account greater than required to adequately maintain its property, cannot be compelled to apply a part of the property or money represented by such reserve to overcome deficits in present or future earnings, and to sustain rates which otherwise could nt be sustained.

The just compensation, safeguarded to a utility by Const. U. S. Amend. 14, is a reasonable return on the value of the property used at the time it is used for public service.

Constitutional protection against confiscation does not depend on source of money used to purchase property, it being enough that it is used to render service.

Mr. Thomas Brown, of Perth Amboy, N. J., for appellants.[ Board of Public Utility Com'rs v. New York Telephone Co. 271 U.S. 23 (1926) ]

[271 U.S. 23, 25]   Messrs. C. M. Bracelen, of New York City, Thomas G. Haight, of Jersey City, N. J., and Charles T. Russell and Frankland Briggs, both of New York City, for appellee. [271 U.S. 23, 26]  

Mr. Justice BUTLER delivered the opinion of the Court.

The is an appeal from a decree of the District Court-three judges sitting; section 266, Judicial Code (Comp. St. 1243)-which granted a temporary injunction restraining the enforcement of certain telephone rates.

The company owns and opinions a telephone system in New Jersey, New York, and Connecticut. In the territory served in New Jersey there are a number of local areas. Service between telephones in the same area is exchange service, and that between telephones in different areas is toll service. The latter includes both intrastate and interstate business. The system is used to give exchange and toll service to all subscribers. For about 10 years prior to the commencement of this suit the rates in New Jersey remained at substantially the same level. March 6, 1924, the company filed with the Board of Public Utility Commissioners, to take effect April 1, 1924, a schedule providing for an increase of rates for exchange service in New Jersey. The board suspended the proposed rates pending an investigation as to their reasonableness. December 31, 1924, the increase was disallowed, and the company was required to continue to serve at the existing rates. The board found that the value of the company's property in New Jersey, as of June 30, 1924, was $76,370,000; that a rate of return of 7.53 per cent., producing from $5,750,000 to $6, 000,000, would be a fair return for that year; that the amount charged by the company in 1924 for depreciation, $3,452,000 was excessive, and that $ 2,678,000 was sufficient. And the board found that net earnings in 1924 would be $4,449,000. less than the fair return by at least $1,300,000. [271 U.S. 23, 27]   The company's accounts are kept according to the uniform system of accounts for telephone companies prescribed by the Inter-state Commerce Commission. Charges are made to cover the depreciation in the elements of the plant which for one cause or another will go out of use. These charges are made month by month against depreciation in the operating expense accounts and corresponding credits are entered in the depreciation reserve account. When a unit or element of the property is retired, there is no charge to operating expense, but its original cost, less salvage, is charged to the reserve account. December 31, 1923, the company's books showed a credit balance in depreciation reserve accounts of $16,902,530. This was not set aside or kept in a separate fund, but was invested in the company's telephone plant. The board prescribed a rule for the determination of depreciation expenses to be charged by the company in 1925 and subsequent years. It declared that the credit balance was more than required for the maintenance of the property, and directed that $4, 750,000 of that amount be used by the company to make up deficits in any year when earnings are less than a reasonable return as found by the board. And it said:

    'But, having made such charges in the past, future charges, beginning January 1, 1925, may be deducted from the normal charge, until such time as at least $4,750,000 of the excess is absorbed as hereinafter provided.'

The effect of the order is to require that, if total operating expenses deducted from revenues leaves less than a reasonable return in 1925 or a subsequent year, there shall be deducted from the expense of depreciation in that year, and added to the net earnings, a sum sufficient to make up the deficiency; then, by appropriate book entries, the resulting shortage in depreciation expense is to be made good out of the balance in the reserve account built up in prior years.

On the application for a temporary injunction, the company attacked the findings of the board as to rate [271 U.S. 23, 28]   of return, property value, and expense of depreciation, and it contended that the charges on account of depreciation in earlier years were not excessive, and that in any event the company could not be compelled to make up deficits in future net earnings out of the depreciation reserves accumulated in the past.

The record shows that the rates in effect prior to the temporary injunction were not sufficient to produce revenue enough to pay necessary operating expenses and a just rate of return on the value of the property. There is printed in the margin1 a statement made by the board and included in its decision, giving a comparison of re- [271 U.S. 23, 29]   sults of operation in 1924 under these rates as found by the board and as estimated by the company. And, in opposition to the motion for the temporary injunction, the board submitted an affidavit containing a statement2 [271 U.S. 23, 30]   which set forth in detail the estimated results for 1925 based on the same rates. The affidavit shows net additions to the company's property in New Jersey in 1924, amounting to more than $13,000,000, and the board calculates the return on $88,417,448 as the reasonable value of the property. The calculation is made on three bases: (1) Depreciation taken at the company's figure, $4,128,000; (2) depreciation as found by the board, $3,314,716; and (3) depreciation allowed by the board's order, $683, 430. The effect of the order is to deduct $2,631,286 from operating expenses found by the board properly chargeable for depreciation in 1925. This deduction is made at the expense of the property of the company paid for out of depreciation reserves built up in prior years, and it has the same effect on net earnings as would the addition of the same amount of revenue received for service. On the basis of the company's estimate of depreciation expense, the return is 4.12 per cent.; on the board's estimate it is 4.93 per cent.; and by increasing net earnings $2,631,286, as directed by the order, it is made 7.53 per cent. It is conceded that, unless, as directed by the board, depreciation expense is reduced below what the board itsel found necessary and net earnings are correspondingly increased, the rates cannot be sustained against attack on the ground that they are unreasonably low and confiscatory. Appellants do not contend that the rate of return from the intrastate business is or will be higher than that resulting from the company's business as a whole in New Jersey; and the record supports the claim of the company that the intrastate business or that covered by the exchange rates complained of is not relatively more profitable than the other business of the company.

It may be assumed, as found by the board, that in prior years the company charged excessive amounts to depreciation expense and so created in the reserve account [271 U.S. 23, 31]   balances greater than required adequately to maintain the property. It remains to be considered whether the company may be compelled to apply any part of the property or money represented by such balances to overcome deficits in present or future earnings and to sustain rates which otherwise could not be sustained.

The just compensation safeguarded to the utility by the Fourteenth Amendment is a reasonable return on the value of the property used at the time that it is being used for the public service, and rates not sufficient to yield that return are confiscatory. Willcox v. Consolidated Gas Co., 29 S. Ct. 192, 212 U.S. 19, 41 , 48 S. L. R. A. (N. S .) 1134, 15 Ann. Cas. 1034; Bluefield Co. v. Public Service Commission, 43 S. Ct. 675, 262 U.S. 679 , 692. Constitutional protection against confiscation does not depend on the source of the money used to purchase the property. It is enough that it is used to render the service. San Joaquin Co. v. Stanislaus County, 34 S. Ct. 652, 233 U.S. 454 , 459; Gaslight Co. v. Cedar Rapids, 120 N. W. 966, 144 Iowa, 426, 434, 48 L. R. A. (N. S.) 1025, 138 Am. St. Rep. 299, affirmed 32 S. Ct. 389, 223 U.S. 655 ; Consolidated Gas Co. v. New York (C. C.) 157 F. 849, 858, affirmed 29 S. Ct. 192, 212 U.S. 19 , 48 L. R. A. (N. S.) 1134, 15 Ann.Cas. 1034; Ames v. Union Pacific Railway Co. (C. C.) 64 F. 165, 176. The customers are entitled to demand service and the company must comply. The company is entitled to just compensation and, to have the service, the customers must pay for it. The relation between the company and its customers is not that of partners, agent and principal, or trustee and beneficiary. Cf. Fall River Gas Works v. Gas & Electric Light Com'rs, 102 N. E. 475, 214 Mass. 529, 538. The revenue paid by the customers for service belongs to the company. The amount, if any, remaining after paying taxes and operating expenses including the expense of depreciation is the company's compensation for the use of its property. If there is no return, or if the amount is less than a reasonable return, the company must bear the loss. Past losses cannot be used to enhance the value of the property or to support a claim that rates for the future are confiscatory. Galveston Electric Co. v. Galveston, 42 S. Ct. 351, [271 U.S. 23, 32]   258 U.S. 388 , 395; Georgia Ry. v. R. R. Comm., 43 S. Ct. 680, 262 U.S. 625 , 632. And the law does not require the company to give up for the benefit of future subscribers any part of its accumulations from past operations. Profits of the past cannot be used to sustain confiscatory rates for the future. Newton v. Consolidated Gas Co., 42 S. Ct. 264, 258 U.S. 165 , 175; Galveston Electric Co. v. Galveston, supra, 396 (42 S. Ct. 351); Monroe Gaslight & Fuel Co. v. Michigan Public Utilities Commission (D. C.) 292 F. 139, 147; City of Minneapolis v. Rand (C. C. A.) 285 F. 818, 823; Georgia Ry. & Power Co. v. Railroad Commission (D. C.) 278 F. 242, 247, affirmed 43 S. Ct. 680, 262 U.S. 625 ; Chicago Rys. Co. v. Illinois Commerce Commission ( D. C.) 277 F. 970, 980; Garden City v. Telephone Co., 236 F. 693, 696, 150 C. C. A. 25.

Customers pay for service, not for the property used to render it. Their payments are not contributions to depreciation or other operating expenses or to capital of the company. By paying bills for service they do not acquire any interest, legal or equitable, in the property used for their convenience or in the funds of the company. Property paid for out of moneys received for service belongs to the company just as does that purchased out of proceeds of its bonds and stock. It is conceded that the exchange rates complained of are not sufficient to yield a just return after paying taxes and operating expenses, including a proper allowance for current depreciation. The property or money of the company represented by the credit balance in the reserve for depreciation cannot be used to make up the deficiency.

Decree affirmed.

Mr. Justice STONE took no part in the consideration of this case.


[ Footnote 1 ] Results under Present Rates-Estimated for the Year 1924.

By Board, By Company Based on (Exhibit Exhibit C-34, P-14). Modified Revenues: Exchange revenues $11,936,000 $11,936,000 Toll revenues 10,465,000 10,465,000 Miscellaneous operating 257,000 257,000 ___ ___ Total telephone revenue $22,658,000 $22,658,000

Expenses: Traffic expenses $ 5,846,000 $ 5,846,000 Commercial expenses 2,309,000 2,309,000 General and miscellaneous expenses 548,000 548,000 Uncollectible operating revenues 150,000 150,000 Rent and other deductions * 283,000 283,000 Current maintenance 3,230,000 3,230,000 Depreciation 3,452,000 2,678,000 Taxes 2,170,000 2,200,000 License revenue, Dr 965,000 965,000 ___ ___ Total telephone expenses $18,953,000 $18,209,000

Total telephone earnings $ 3,705,000 $ 4,449,000


[ Footnote * ] Include a certain portion of depreciation for right of way from clearing accounts.

Omits concessions ($102,000) and interest during construction ($160, 727) aggregating $262,727 in Exhibit C-34.

[ Footnote 2 ] Estimated Rate of Return During Year 1925 under Present Rate Schedule.

Plaintiff's Board's Compliance Depreciation Depreciation with Order Rate. Rate. of Board. Telephone revenues: Exchange service $13,281,000 $13,281,000 $13,281,000 Toll service 11,113,000 11,113,000 11,113,000 Miscellaneous 316,269 316,269 316,269 ___ ___ ___ Total Telephone Revenues 24,710,269 $24,710,269 $24,710, 269

Telephone expenses: Current maintenance $ 3,453,400 $ 3,453,400 $ 3,453, 400 Depreciation and amortization 4,128,000 3,314,716 * 683,430 Traffic 6,404,465 6,404,465 6,404,465 Commercial 2,657,000 2,657,000 2,657,000 General and miscellaneous 589,166 589,166 589,166 Uncollectibles 140,000 140,000 140,000 Taxes 2,260,691 2,371,812 2,700,723 Rent expense and deductions 325,744 325,744 325,744 Miscellaneous deductions 56,813 56,813 56,813 License contract expense 1,041,695 1,041,695 1,041,695 ___ ___ ___ Total Telephone Expense 21,065,974 $20,354,811 $18,052,436 ___ ___ ___ Net Telephone Earnings 3,644,295 $ 4,355,438 $ 6,657,833 Average cost, $86,401,736. Per cent. return on average cost 4.22 5.04 7.71 Defendant's average fair and reasonable value, $88,417,488. Per cent. return on value 4.12 4.93 7.53


[ Footnote * ] Allowing a return of 6 per cent. on value of property depreciation and amortization expense will be $2,163,471.

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Citation: 271 U.S. 23

Docket No: No. 567

Decided: April 12, 1926

Court: United States Supreme Court

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