Lindheimer v. Illinois Bell Telephone Co.
292 U.S. 151 (1934)

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U.S. Supreme Court

Lindheimer v. Illinois Bell Telephone Co., 292 U.S. 151 (1934)

Lindheimer v. Illinois Bell Telephone Co.

No. 440

Argued January 15, 16, 1934

Decided April 30, 1934*

292 U.S. 151

Syllabus

1. Findings of a District Court, purporting to show the value of the property of a telephone company in its intrastate business, its net income therefrom, and the fair rate of return for each of a long series of years during which the State sought to impose a decrease of rates cannot be accepted as a basis for deciding whether the decrease would result in confiscation when, tested by the same findings, the existing rates, clearly adequate and under which the company operated with outstanding success throughout the same period and before, were themselves grossly inadequate. P. 292 U. S. 160.

2. Elaborate calculations which are at war with realities revealed by the financial history of the business are of no avail in determining the adequacy of rates prescribed for a public utility corporation. P. 292 U. S. 164.

3. To sustain its attack on a decrease of its rates as contrary to due process, a public utility must establish clearly and definitely that the decrease will bring about confiscation. P. 292 U. S. 164.

4. Charges to operating expenses may be as important as valuations of its property in determining the adequacy of a public utility's rate. P. 292 U. S. 164.

5. In determining reasonable rates for supplying public service, it is proper to include in the operating expenses -- that is, in the cost of producing the service -- an allowance for consumption of capital in order to maintain the integrity of the investment in the service rendered. P. 292 U. S. 167.

6. Broadly speaking, the term depreciation, as applied to the property of a public utility company, means the loss, not restored by current maintenance, which is due to all the factors causing the ultimate retirement of the property, these factors include wear and tear, decay, inadequacy and obsolescence. Annual depreciation is the loss which takes place in a year. P. 292 U. S. 167.

Page 292 U. S. 152

7. While depreciation is defined as the expense occasioned by the using up of physical property employed as fixed capital, and current maintenance as the expense occasioned in keeping the physical property in the condition required for continued use during its service life, it is evident that the distinction is a difficult one to observe in practice with scientific precision, and that outlays charged to current expenses may involve many substitutions of new for old parts which tend to keep down the accrued depreciation. P. 292 U. S. 173.

8. Where the amounts which a telephone company annually charges to operating expenses for depreciation and invests in plant and equipment are excessive, the telephone subscribers are, to the extent of such excess, required to provide capital contributions, not to make good losses incurred by the company in the service rendered and thus keep its investment unimpaired, but to secure additional plant and equipment upon which the company expects a return. P. 292 U. S. 169.

9. Confiscation being the issue in this case, the telephone company has the burden of making a convincing showing that the amounts it has charged for depreciation to operating expenses have not been excessive, and that burden is not sustained by proof that its general accounting system has been correct, since, though the calculations are mathematical, the underlying predictions of life of plant and salvage are essentially matters of opinion, involving many perplexing problems and the examination of many variable elements, in which opportunities for excessive allowances for depreciation, even under a correct system of accounting, are always present; the predictions must be checked by, and meet the test of, experience. P. 292 U. S. 169.

10. Giving full weight to the proposition that a reserve for depreciation built up by a telephone company according to the "straight line" method does not represent in any given year the amount of actual depreciation at that time, especially in a rapidly growing plant, such considerations fail to explain the great excess of depreciation reserve over actual depreciation in each of the many years involved in this case. P. 292 U. S. 171.

11. The evidence showed the amounts by which the reduction of rate in question would have diminished the company's income in each of a long series of years; also, for each year, the amounts charged to operation for depreciation and for expenses of maintenance, and the amount of actual depreciation. The company had maintained its plant at a very high and constant level of

Page 292 U. S. 153

efficiency by strict standards, replacements in anticipation of inadequacy or obsolescence, and expenditures for maintenance, including substitutions of parts, and yet in each year the depreciation reserve was greatly in excess of he depreciation actually accrued. Held:

That the company has not established that the reserve merely represents consumption of capital in the service rendered; rather, it appears that the depreciation reserve to a large extent represents provision for capital additions, over and above the amount required to cover capital consumption, and the questionable amounts so annually charged to operating expenses for depreciation are large enough to destroy any basis for holding that it has been convincingly shown that the reduction in income through the rates in suit would produce confiscation. P. 292 U. S. 174.

12. Where a public utility has had abundant opportunity to prove that a rate is confiscatory, but adduces only elaborate estimates and computations which fail of their intended effect and do not justify the decree of the court below in its favor, it is not the function of this Court to construct independent calculations out of a voluminous record to invalidate the rate, but the decree should be reversed with directions to dissolve the interlocutory injunction, provide for refunding under the injunction bonds of amounts charged pendente lite in excess of the rate in question, and to dismiss the bill. P. 292 U. S. 175.

13. A party has no right to appeal from a decree in his favor to procure a review of the findings. P. 292 U. S. 176.

3 F.Supp. 595 reversed.

Appeal in No. 548 dismissed.

Appeal and cross-appeal from a decree permanently enjoining the Illinois Commerce Commission from enforcing a reduction of the rates of the Telephone Company for intrastate service in the City of Chicago. The decree below also released the company from obligation to refund moneys collected by it during the suit. For other phases of this protracted litigation, see 269 U.S. 531; 282 U. S. 282 U.S. 133; 283 U.S. 794; 283 U.S. 808.

Page 292 U. S. 154

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