City v. Pub. Ser. Com.

I concur in the opinion of the Court regarding the value of the physical property, going value, working capital and automatic grouping of exchanges. I also agree with the Court that the Interstate Commerce Commission has not excluded the jurisdiction of the state commission over the rate of depreciation charges. However, I do not feel that I can go to the extent of affirming the commission on the rate fixed here to cover depreciation and the accrual thereby of the depreciation reserve. The commission was divided on this finding.

When an inventory of the property of a public utility is made for any purpose, the various parts of the plant in use will be found not to be in the same condition as they were when new. This change begins to take place from the moment of installation, and is due, when for the worse, to what has been called "depreciation." How this changing condition of the property should be taken care of in public utility business has proved to be a very perplexing question. The loss or lessening in value is due to a great many causes, a few of which are use, wear and tear, storms and obsolescence. Not many years ago the idea that any provision should be made for depreciation of the part of the cost of utility service was deemed unsound in some quarters. That an allowance must be made to establish a depreciation fund is now generally admitted by courts and commissions. There are different methods of arriving at depreciation, such as the inspection method, sinking fund method, straight line method, theoretical method, and the like. The decisions only lay down the rule that allowance for depreciation is proper to utilities, but this only as a general proposition and the amount of such allowance depends usually upon the character of the utility. Experience has shown that utilities are generally built in such temporary fashion as will require approximately the per centum allowed in this case for replacements and to provide against casualties. But this cannot be true of the Chesapeake Potomac Telephone Company, which builds in a more permanent fashion and where experience has shown that its needs do not require the amount of other utilities of less permanent character. Judge LITZ pays a deserved tribute in his opinion to this utility's unique financial and managerial resources. Our Public Service Commission, in C. H. Mead Coal Co. v. Appalachian Power Co., P. U. R. 1923 E, 221, declared: "If a plant is highly maintained, the amount set aside each year in its reserve fund need not be so large as the amount would be if the plant was not so efficiently maintained." In Re New York Telephone Company, P. U. R. 1925 C, 767, the New Jersey Public Utility Commissioners held that no better guide as to reasonable amount of depreciation rate can be found than the experience of the utility company. Let us apply this rule to the instant case.

Going back seven years, we see from the Jirgal exhibit No. 1, that including large amounts for dismantling duplicate property, only in one year (1918) did the accrued depreciation exceed the sum of $550,000.00 allowed by the commission in the instant case. In no year after eliminating dismantlements has the net depreciation charges come within $85,000.00 of the sum allowed by the commission. In other words, according to the evidence, the largest amount charged to depreciation since 1917, was $465,000.00, whereas the commission now allows $550,000.00. The company has collected from the rate payers during these seven years $1,306,043.00 more than the company actually needed for its depreciation requirements on property in use in the public service. This reserve at the end of 1923 was $1,891,314.02.

An examination of the evidence before the commission discloses what a large part of the utility's operating expenses consist of depreciation charges and what it means to the rate payer to contribute to the accrual of this depreciation reserve. Why the allowance of the large depreciation reserve asked for by the utility? The burden is upon it to show the facts demanding it. Pacific Gas Company v. City of SanFrancisco, 265 U.S. 403. Justice Reynolds in that case said: "The problem was to ascertain the probable result of the specified rate if applied under well known passed conditions; not to forecast the probable outcome on a proposed rate under future conditions." The record of the utility as to actual depreciation for the past seven years is potential evidence when invoked by the telephone users on this question. ReLebanon Telephone Company (Ind.), P. U. R. 1925 B, 225. These facts are met only by calculations based upon theories and presumptions. Actual experience outweighs mere conjecture.

Not only do the patrons contend that the fact there is a depreciation reserve at the present time of approximately Two Million Dollars, be taken into consideration by the commission in fixing the annual rate allowed for depreciation, but that reserve should be interest bearing. It is contended that the consumer by his contribution to the depreciation through the rate paid for services is, in effect, contributing to the construction of the plant the same as the stockholder or bondholder — at least that this is true to the extent that depreciation is provided in excess of the company's immediate requirements. Counsel for the utility in their brief take the view that the depreciation accruals are operating expenses-not in part, but in whole; that the purpose of the payments made by the customers to provide a reserve are not only for the purpose of protecting the company against retirement losses, when realized, but that such payments are also intended to protect, the company against an actual depreciation or shrinkage of value of its property, during its period of use and prior to its retirements; and that actual depreciation of the value of the property follows a "straight line". They insist the company has, in the past, followed the "straight line" method for accruals for depreciation because this represents the simplest and fairest and most accurate way of equitably distributing throughout the life of the property this item of expense. Under this method amounts are set aside annually which, without the interest accruals thereto or unaided by the earnings of the unexpended balances in such fund, will replace the depreciable property at the end of its useful life. The courts, however, do not seem to hold that public utility property really depreciates in such degree. Consolidated Gas Co. v. Newton, 267 F. 265. The past experience of the utility, as we have seen, likewise shows the latter to be true. However, the utility here contends that the depreciation percentages shall be ascertained by considering the estimated not useful but service life of each unit of property and the salvage value connected therewith. This being so, it follows that the reserve that would be accumulated even on a "straight line" basis, as here would be in excess of the accrued depreciation. The Wisconsin Railroad Commission in Re Wisconsin Telephone Co., P. U. R. 1925 D, 671, in discussing this question, said: "To the extent that the accumulated reserve is in excess of true depreciation, its only purpose is to serve as an advance provision against losses realized when retirements occur. Between the date of the payment of such excess by customers and the actual retirement, such excess serves the purpose of the company as available capital. * * * To the extent that the reserve may be used in excess of actual depreciation, it can only represent advance provision of capital to meet a loss to occur later, and fairness to those that have made that advance provision requires that they be given the benefit of the use of such capital." Following this reasoning the commission there held that: "The computation of depreciation on the so-called 'straight line' method which gives no consideration to the interest which the reserve fund would earn, is unfair to the customer if return is to be allowed on the undepreciated value of the property." Spurr, in his comprehensive work on public service regulation, says, "The decision in this case is undoubtedly sound." 2 Spurr, 334. Thus we see, from the standpoint most favorable to the utility, the patrons' claim for an interest-bearing reserve is supported. Under the sinking fund method, only such amounts are set aside annually as, with the interest accruals thereto, will replace the depreciable property at the end of its useful life. 2 Spurr, Public Service Regulation, 342, says: "The sinking fund method, since it relies upon the accumulation of interest to make up the amount required to replace depreciable property, demands a much smaller annual depreciation fund than the straight line method, especially when the property is of a comparatively long life." The protestants here advocate a modified form of this method — that the charges be loaned to the utility for use in its business and that the fund so loaned receive credit for interest at four per centum. Our commission has recognized that a prudent investment theory should be applied to the depreciation charges and accruals. In C. H. MeadCoal Company v. Appalachian Power Company, supra, the commission, in its opinion, declared: "This fund should be kept under a separate account and the annual contribution to the fund should be invested by the utility so that it would earn a reasonable income each year and the income should be charged to the account so that the account would be accumulative to meet the necessary replacement charges." The utility in the instant case in its computation for depreciation has used the "straight line" method which gives no consideration to the interest which a reserve fund would earn. The accrued reserve was accumulated by means of this method (at least since the consolidation). Its application would permit the utility to earn a return on the depreciation funds provided by the customers during the life of the property and which are not needed for the purpose for which they are provided until the property is retired. The return could be earned by the utility by either placing the fund at interest in some safe investment or by investing it in extensions to its property. This is, in effect, the plan urged by the protestants. It follows that such action would reduce the depreciation charge against the telephone users — likewise the rates. In determining the proper allowance for depreciation it must be borne in mind that regulation has come into being for the purpose of establishing an equitable relation between the consumers and the utility. If the value of the property is to be determined by rules laid down by the courts, the provision for depreciation must take into consideration some measure of equity which is consistent with the value already established, and it would appear that the only way consideration could be given to this element is in the recognition that the depreciation reserve built up by the utility is reinvested in its property, and is, therefore, entitled to an interest earning, as claimed by the protestants. This is at least true to the extent that depreciation is provided in excess of the utility's immediate requirements. The Oregon Public Service Commission in Re Pacific Telephone Telegraph Co., P. U. R. 1924 D, 39, in discussing how the swollen depreciation reserve should be handled said that the order on the hearing for increase of rates should have contained a provision that would have prevented the company from including in the operating expenses any sum for depreciation until said excess should be eliminated. "If this were done", says the commission, "a further cut in rates could be made * * * thus further relieving the rate payers." We are not unmindful that counsel for the utility claim it is a mere bookkeeping entry. The depreciation reserve is something more than a mere book entry. The utility, under public regulation, asking for and receiving a return for the purpose of establishing a reserve fund, has received from the rate-payers a fund, the commission was bound to grant, and a correlative duty rests upon the utility to employ the fund for the purpose it was asked for and received, and for none other. It was impressed with the purpose of maintaining the rate base and amortizing the investment, and cannot be employed to increase the rate base. The utility may not even spend the fund for betterments.Railroad Commission v. Cumberland Teleph. Teleg. Co.,212 U.S. 414; 53 L.Ed. 577. In Home Telephone Co. v. Town ofCarthage, 235 Mo. 644, the court, in speaking of the inconsistency of the theory of an accumulation of an excessive fund where the plant was valued without any deduction for the amount on hand in such fund, said: "It is obvious that upon that theory a time would be reached when the depreciation fund would amount to almost the total value of the plant, and yet, in determining the reasonableness of the rates, the plant, which theoretically would be the victim of almost complete 'invisible rot', would be valued as new in determining the reasonable value of the property at the time it was used by the public, while no corresponding credit would be given for the depreciation fund on hand." This line of reasoning has force here. Here we have a reserve fund of approximately fourteen per centum of the entire capital invested by the utility in the public service. It is being added to year by year without any account being taken of the interest feature. It serves, in effect, as we have seen, to increase the rate base. This Court, in Huntington v. Public Service Commission,89 W. Va. 703, said: "A schedule of rates for public utility that effects inequitable results is and always has been the subject of judicial inquiry, whatever may be the source of the authority prescribing such rates." The subject of rate making should be approached by commissions and courts with a view of doing what is fair and just between the parties under all the circumstances of the particular case. Roanoke W. W. Co. v.Commission, 137 Va. 348. What is a reasonable return is a judicial problem. Waukesha Gas Elec. Co. v. RailroadCommission, 181 Wis. 281. Our statute (Code, Ch. 15-O, § 9) casts the burden on the utility of showing an increase is just and reasonable. Chairman Stathers, in his dissenting opinion, in the instant case, P. U. R. 1925 C, 587, took the utility's figures, and fixed an average sum for the last four years for depreciation (which I believe to be a fair sum), and upon the rate base fixed by the commission, which he says is too high, shows the utility is earning six and nine-tenths per centum, including Federal income tax. The utility wanted eight per centum. The commission gave it seven per centum. Earnings of six per centum as to utilities have been upheld by the Supreme Court of the United States. Willcox v. Gas Company,212 U.S. 19; Cedar Rapids Gaslight Co. v. Cedar Rapids,223 U.S. 655; Des Moines Gas Co. v. Des Moines, 238 U.S. 153;Dayton-Gooscreek Ry. Co. v. U.S., 263 U.S. 456. In the light of the indubitable facts in the case here — the steadily increasing reserve — should the rates be increased to secure the negligible difference of one-tenth of one per centum? To me a just balancing of the equities as between the utility on the one hand and its patrons on the other does not require this. "If either is to be protected to the disadvantage of the other, the utility must bear the consequences." Huntington v. PublicService Commission, supra. Judge POFFENBARGER, speaking for this Court, in Baltimore Ohio R. R. Co. v. Public ServiceCommission, 81 W. Va. 457, says: "Where the facts are undisputed, and the reason and justice of the case is clear and plain, an order made in contravention thereof has no foundation in law, and is not beyond the power of judicial abrogation." Including the allowance of the commission for the item of intangibles, to which ruling I do not subscribe (See, ReLebanon Telephone Co., P. U. R. 1925 B, 114; Moritz v. EdisonElectric Co., P. U. R. 1917 A, 396-398; Wilcox v. ConsolidatedGas Co., supra), it would seem that the utility will receive a fair return. However, the elimination of this item from the rate base, leaving all other rulings of the commission without change, would give to the utility seven and eight hundredths per centum return. Holding these views, I would suspend the order increasing rates and remand the case to the Commission.