Source: https://caselaw.findlaw.com/us-supreme-court/271/23.html
Timestamp: 2019-04-23 09:11:21+00:00

Document:
BOARD OF PUBLIC UTILITY COM'RS v. NEW YORK TELEPHONE CO.
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.
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 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.
Mr. Justice STONE took no part in the consideration of this case.
[ Footnote 1 ] Results under Present Rates-Estimated for the Year 1924.
[ 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.
[ 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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