Smith v. Illinois Bell Telephone Co., 282 U.S. 133 (1930)

Smith v. Illinois Bell Telephone Company

No. 90

Argued October 20, 21, 1930
Decided December 1, 1930
282 U.S. 133

APPEAL FROM THE DISTRICT COURT OF THE UNITED STATES

FOR THE NORTHERN DISTRICT OF ILLINOIS

Syllabus

1. In a suit by a public utility to enjoin, as confiscatory, an order of a state commission lowering its rates, an interlocutory injunction was granted upon the condition that, if the injunction were dissolved, the plaintiff should refund to its subscribers the amounts paid by them in excess of those chargeable under the commission’s order. A large excess had accumulated when, a number of years later, a final injunction was granted. On appeal, held that, as the decree speaks from its date, the question is necessarily presented not only whether the rate order was confiscatory when made, but also as to its validity during the period that has intervened and as to the respective rights of the company and its subscribers in the funds accumulated. P. 142.

2. An Illinois telephone corporation owning an exchange system in Chicago and toll lines from there to other places in the state did an exchange business local to Chicago, an intrastate toll business, and an interstate toll business. The interstate service was performed by means of its Chicago property and connecting lines owned and operated by another corporation (here, called the American Company), and, as compensation for its part in that service, including the use of its Chicago property, the Illinois Company received a division of the interstate tolls, agreed upon with the other company. The American Company owned a controlling interest in the stock of the Illinois Company and of like companies in other states, all of which, in connection with still other companies, were operated as a system, in which the American Company was the central authority performing general functions, while the associated companies served their respective communities and dealt with their own local affairs. The Illinois Company paid the American Company percentages of its gross revenues, partly for rent of instruments and partly as compensation for valuable engineering, financial, and other services, and purchased, in large part, its equipment and supplies from the Western Electric Company, a manufacturing subsidiary of the American Company, which sold its products to members of the system and to others also. In a suit by the Illinois Company, the district court enjoined, as confiscatory, the enforcement of an order of an Illinois commission reducing that company’s rates for local exchange service in Chicago.

Held:

(1) That the Illinois corporation, notwithstanding the control of its stock by, and its intimate relations with, the American Company, was the proper plaintiff. P. 143.

(2) The method adopted by the district court of testing the adequacy of the reduced rates on the basis of the total Chicago property of the plaintiff, without specifically separating intrastate from interstate property, revenues, and expenses, was erroneous, although that court deemed the division of the interstate tolls to be fair, and found, with the aid of computations showing percentages of interstate calls originated by Chicago subscribers and percentages of property used in intrastate and interstate toll service, respectively, that the percentage of return for the total Chicago business was greater than that for the total intrastate business or than that for the intrastate exchange business. P. 146.

(3) The separation of intrastate and interstate property, revenues, and expenses of the company is important not simply as a theoretical allocation to two branches of the business; it is essential to the appropriate recognition of the competent governmental authority in each field of regulation. P. 148.

(4) The fairness of the interstate rates, or of the divisions thereof, was not for the state commission or the court to decide. Id.

(5) The validity of the commission’s order in this case can be suitably tested only by an appropriate determination of the value of the property employed in the intrastate business and of the compensation receivable for the intrastate service under the rates prescribed, and there should be specific findings as to the value of that property and as to the revenue and expenses of that business, separately considered. P. 149.

(6) This involves a reasonable apportionment of the telephone exchange property used in both classes of service. P. 150.

(7) Although the Illinois Company has the advantage of being a component of a large system to which the benefits of its operations accrue, and obtains through this relation the cooperation of the manufacturing, research, engineering and financing departments of the American Company, the Illinois Company is to be treated as a segregated enterprise. P. 151.

(8) The plaintiff company having purchased most of its equipment from the Western Electric Company, manufacturing subsidiary of the American Company, and its being contended by the commission that the prices paid were excessive and should not be credited in full to the plaintiff in testing the adequacy of the rates in question, it was erroneous to determine the fairness of the prices by reference to the percentages of net profits realized by the Western Electric Company from all its business, including transactions with outsiders as well as with the plaintiff and other members of the system, or by reference to higher prices charged for like articles by other manufacturers or by the Western Electric Company to independent telephone companies; but there should be findings as to the net earnings made by that company in furnishing equipment to the plaintiff and the other companies in the system, and as to the extent to which, if at all, such profit figured in the estimates upon which the charge of confiscation was predicated. P. 152.

(9) With regard to the services rendered to the plaintiff by the American Company, for which the former paid percentages of its gross income, the court below should make specific findings as to their cost to the American Company and the reasonable amount that should be allocated in this respect to the operating expenses of the intrastate business of the plaintiff in the years covered by the decree. Pp. 153-157.

(10) The property of a public utility represented by the credit balance in a reserve for depreciation cannot be used to support the imposition of a confiscatory rate; but due recognition of this property does not require that an amount of annual addition to the reserve, which is shown by experience to have been excessive, shall be allowed for the future. P. 158.

(11) The power of the state to prescribe intrastate rates, and the jurisdiction and duty of the district court, in considering their validity, to determine the amount properly allowable for depreciation in connection with the intrastate business, are not taken away by the action of Congress in granting jurisdiction to the Interstate Commerce Commission over the depreciation rates of telephone companies doing interstate business, (Interstate Commerce Act, § 20(5)) where that Commission has taken no action which could be deemed validly to affect depreciation charges in connection with intrastate business so as to affect intrastate rates. P. 159.

(12) Accordingly, the court below should make appropriate finding with respect to the amount to be allowed in this case as an annual charge for depreciation in connection with the intrastate business. Id.

(13) In determining whether a regulation of rate is confiscatory, it is necessary to consider the actual effect of the rate in the light of the utility’s situation, its requirements, and opportunities. P. 160.

(14) The court below should find in this case the rate of return which was realized from the intrastate business and the rate of return which it is fair to conclude would have been realized from that business under the prescribed rates. P. 161.

(15) A rate order which was confiscatory when made may cease to be confiscatory, and one which was valid when made may become confiscatory at a later period. P. 162.

(16) As the disposition of the amount withheld by the plaintiff under the condition of the interlocutory injunction will depend upon the final decree, there should be finding as to the results of the intrastate business in Chicago, and the effect of the rates in question, for each of the years since the date of the commission’s order. Id.

38 F.2d 77 reversed.

Appeal from a decree of the district court of three judges, which enjoined the enforcement of an order of the Illinois Commerce Commission reducing local rates of the Telephone Company. See also 269 U.S. 531.