1. The just compensation safeguarded to a public 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. P.
271 U. S.
31.
2. Constitutional protection against confiscation does not
depend on the source of the money used to purchase property; it is
enough that the property is used to render the service.
Id.
3. The relation between a public utility and its customers is
not that of partners, or agent and principal, or trustee and
beneficiary. The amount of money remaining after paying taxes and
operating expenses, including the expense of depreciation, is the
company's compensation for the use of its property.
Id.
4. The law does not require the company to give up for the
benefit of future subscribers any part of its accumulations from
past operations. P.
271 U.S.
32.
5. Assets of a public utility represented by a credit balance in
the reserve for depreciation cannot be used to make up the
deficiency in current rates which are not sufficient to yield a
just return after paying taxes and operating expenses, including a
proper allowance for current depreciation.
Id.
Affirmed.
Appeal from a decree of the district court granting a temporary
injunction, in a suit by the Telephone Company to restrain the
Board of Public Utility Commissioners of New Jersey from enforcing
confiscatory rates.
Page 271 U. S. 26
MR. JUSTICE BUTLER delivered the opinion of the Court.
The is an appeal from a decree of the district court, three
judges sitting; ยง 266, Judicial Code, 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
percent, 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.
Page 271 U. S. 27
The company's accounts are kept according to the uniform system
of accounts for telephone companies prescribed by the Interstate
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
Page 271 U. S. 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 margin [
Footnote 1] a statement made by the board and
included in its decision, giving a comparison of results
Page 271 U. S. 29
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 statement [
Footnote
2]
Page 271 U. S. 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
percent; on the board's estimate, it is 4.93 percent, and by
increasing net earnings $2,631,286, as directed by the order, it is
made 7.53 percent. It is conceded that, unless, as directed by the
board, depreciation expense is reduced below what the board itself
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
Page 271 U. S. 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.,
212 U. S. 19;
Bluefield Co. v. Public Service Commission, 262 U.
S. 679,
262 U. S. 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, 233 U. S. 454,
233 U. S. 459;
Gaslight Co. v. Cedar Rapids, 144 Iowa, 426, 434,
aff'd, 223 U. S. 223 U.S.
655;
Consolidated Gas Co. v. New York, 157 F. 849, 858,
aff'd, 212 U. S. 212 U.S.
19;
Ames v. Union Pacific Railway Co., 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 Comm'rs, 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,
Page 271 U. S. 32
258 U. S. 388,
258 U. S. 395;
Georgia Ry. v. R. Co. Comm'n, 262 U.
S. 625,
262 U. S. 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., 258 U. S. 165,
258 U. S. 175;
Galveston Electric Co. v. Galveston, supra, 258 U. S. 396;
Monroe Gaslight & Fuel Co. v. Michigan Public Utilities
Commission, 292 F. 139, 147;
City of Minneapolis v.
Rand, 285 F. 818, 823;
Georgia Ry. & Power Co. v.
Railroad Commission, 278 F. 242, 247,
aff'd,
262 U. S. 262 U.S.
625;
Chicago Rys. Co. v. Illinois Commerce Commission, 277
F. 970, 980;
Garden City v. Telephone Co., 236 F. 693,
696.
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 [2]
$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. . . . . . . . . . [1] 283,000
283,000
Current maintenance. . . . . . . . . . . . . [1] 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
----------
[1] Include a certain portion of depreciation for right of way
from clearing accounts.
[2] 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 amorti-
zation . . . . . . . . . . . 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
% return on average cost 4.22 5.04 7.71
Defendant's average fair
and reasonable value,
$88,417,488
% return on value 4.12 4.93 7.53
---------
* Allowing a return of 6% on value of property, depreciation and
amortization expense will be $2,163,471.