Court Opinion

ID: 7950808
Source: CourtListenerOpinion
Date Created: 2022-09-08 23:26:23.911171+00
Date Added: 2024-06-11T16:34:07.974630
License: Public Domain

Bird, J.
(diss'entmg). The Michigan State Telephone Company submitted a schedule of rates to the Michigan railroad commission with a prayer that they be made applicable to the Detroit exchange. In response to this a hearing was had and the commission determined the rates which should be applicable in that zone. The city of Detroit feeling aggrieved by such determination and claiming the rates so fixed were unreasonable and unlawful, it filed this bill in the Ingham circuit court to have the same set aside. As a result of the court hearing the order made by the commission was materially modified and much of it set aside. One of the first questions discussed is the power and duties of the chancery court in such a proceeding.
These proceedings are authorized by Act No. 206 of the Public Acts of 1913 (2 Comp. Laws 1915, § 6689 et seq.). Section 14 is the important section in this inquiry:
“Sec. 14. Any telephone company or other party in interest, being dissatisfied with any final order of the commission made in any proceeding under this act, may within thirty days from the issuance of such order and notice thereof, commence an action in the circuit court, in chancery, against the commission as defendant to vacate and set aside any such order on the ground that the certificate granted or withheld is not in accordance with the rights of the parties, that the rate or rates, charges, joint rate or rates fixed are un*435lawful or unreasonable, or that any such regulation, practice or service fixed in such order is-unreasonable; in which suit the commission shall be served with a subpoena and a copy of the complaint. The commission shall file its answer and on leave of court any interested party may file an answer to said complaint. Upon the filing of the answer of the commission said cause shall be at issue and stand ready for hearing upon ten days’ notice by either party. All suits brought under this section shall have precedence over any civil cause of a different nature pending in such court, and the circuit court shall always be deemed open for the hearing thereof, and the same shall proceed, be tried and determined as other chancery suits. Any party to such suit may introduce original evidence in addition to the transcript of evidence offered to said commission, and the circuit courts, in chancery, are hereby given jurisdiction of such suits and empowered to affirpa, vacate or set aside the order of the commission in whole or in part, and to make such other order or decree as the courts shall decide to be in accordance with the facts and the law.”
To the Michigan railroad commission the legislature has by this act delegated the authority to prescribe lawful and reasonable telephone rates. To chancery courts, when appealed to, it has imposed the duty to see that this is done. The commission, upon petition in a given case, takes the testimony offered and arrives at what it conceives to be a lawfül and reasonable rate. This rate becomes the authorized rate and is made prima facie a lawful and reasonable rate. If no one is aggrieved, this is the end of the matter. If, however, any interested party is aggrieved he may have recourse to the chancery court. The chancery court hears the same evidence which was heard by the commission, and more, if offered, and determines whether the rate so fixed is a lawful and reasonable one. If the court is impressed that the rate is a lawful and reasonable one the relief prayed for is denied. If the chancellor is convinced from the testimony *436either that the rate fixed by the commission is unlawful or unreasonable the rate is set aside. The matter then goes back to the commission for further consideration. This is as far as the court can go because it cannot make the rate, that being a legislative question. In other words, the commission hears the testimony for the purpose of making a reasonable and lawful rate. The court hears the testimony, not for the purpose of making the rate, but for the purpose of determining 'whether the rate so made is a lawful and reasonable one.
But it is argued that if the court finds there was any evidence before the commission which justifies its order, or that the order is within the field of reasonableness, the duty of the court is at an end and it cannot be disturbed. This necessarily assumes that thp court is bound by the findings of fact arrived at by the commission. If this be the true interpretation the judgment of the chancellor as to whether the rate is a reasonable one would be of very little force in many cases. The legislature could not have meant this because if it had it would have provided for a finding of facts by the commission which would be final and binding, as it did in the workmen’s compensation act. Under the workmen’s compensation act the finding of the commission on questio'ns of fact in the absence of fraud are binding on the courts, and it is safe to assume that had the legislature intended the same procedure in this act it would have taken the trouble to say so. The weakness of this argument is further shown by the provisions of the statute that: “The same shall proceed and be tried and determined as other chancery suits.”
If, as is argued, the chancellor is bound by the findings of the commission, it is extremely difficult to see how it can be tried as other chancery suits are tried. It is only necessary for one to imagine the chancellor *437attempting to try the issues in a workmen’s compensation case as other suits are' tried, when he is bound by the findings of the commission, to conclude that the legislature never intended any such incongruous proceeding. It is conceivable that an order made by the commission might be found by the court to be barely justified by the proofs and yet, upon the whole record, the rate might be an unreasonable one. If the legislature did not mean that the chancellor should conduct a hearing and reach an independent judgment as to the reasonableness of the rate it is pretty difficult to discover why it issued a mandate to him to try the issues as other chancery suits are tried. The legislature intended' something by this language and we should try and give it some effect. The evident object of this legislation was to secure to both, company and patron, a lawful and reasonable rate. In order to bring this about an arbiter in the form of a commission was created to stand between the company and its patrons. This arbiter was enjoined to so fashion the rates that they would be lawful and reasonable, and the legislature, to further protect the rights of both, placed a check over this arbiter by providing that the chancery court might determine in any given case whether the arbiter had done the thing that it was enjoined by the statute to do, namely: To fix a lawful and reasonable rate. This is not rate making. For a chancery court to hear testimony bearing on the reasonableness of the proposed rate for the purpose of determining whether it is a reasonable rate is consistent, not only with the inherent power of the court, but it is in accord with and in obedience to the mandate of the legislature as evidenced by this act.
Many cases are cited in the briefs interpreting the Federal statutes and the statutes of other States creating public utility commissions. These discussions áre of general interest in considering the question, but *438are not very, helpful in construing the specific language of our own act, because of the variance in the statutory provisions. It might be mentioned, however, in passing, that the Missouri public utility statute is very similar to our own, and the interpretation put upon the power of the court in that State is not unlike the interpretation herein set forth. Chicago, etc., R. Co. v. Public Service Commission, 266 Mo. 333 (181 S. W. 61) ; Lusk v. Atkinson, 268 Mo. 109 (186 S. W. 703) ; State, ex rel. Wabash R. Co. v. Public Service Commission, 271 Mo. 155 (196 S. W. 369).
Our conclusion is, as we have heretofore held, that “the duty of the court in the premises is not essentially different from that of the commission.” Detroit, etc., R. Co. v. Railroad Commission, 171 Mich. 335. In the matter of procedure both travel the same road but when the hearing is at an end the commission makes the rate and the court determines whether it is reasonable. This view is also in accord with the holding of the chancellor who heard the case. My views on the remaining questions, with one exception, are so nearly in accord with those expressed by the chancellor that I think his opinion on them should be adopted as the opinion of this court. The exception referred to will be considered at the close of the opinion. The opinion of the chancellor follows:
“The Rate Base. The city asks the court to set the order of the commission aside because the rate base has been established on a finding of the present value of the property used and useful in giving the service under the reproduction new, less depreciation, plus going value method, claiming that such method is unfair to the public and insists that the rate base must be determined either from the actual investment deduced from the‘books of the company, or upon the investment it has made in this property, the sacrifice it has undergone in the management of the property and the reasonable and proper investment which it has made in order to discharge its functions in serving the pub-*439lie with, telephonic service, to the date of fixing rates, or at least these matters must be given consideration in estimating the value under the reproduction cost new. The court in considering the value as fixed by the commission will first take up the appraisal of the tangible property and later the intangible.
“Plaintiff claims that the value placed on the tangible property of the company is too high, and not enough allowance made for accrued depreciation; that it is based on the theory of reproduction cost new— less depreciation — without adequate consideration of actual or original cost and, therefore, real investment, and the commission fell into the error’ of splitting the difference in some instances between the estimates of the two experts, who based their calculations upon different methods. No matter how much I am impressed with the idea that fair present value cannot be determined under the reproduction cost new — less depreciation method, without considering original cost or actual investment, I cannot in view of the holding in the case of City and County of Denver v. Denver Union Water Co., 246 U. S. 178 (38 Sup. Ct. Rep. 278), decided March 4, 1918, condemn that method and set the order of the commission aside for such reason. In that case the court reaffirmed its approval of the reproduction cost new — less depreciation method of appraisal for rate purposes, saying:
“ ‘There can be no question of tbe company’s right to adequate compensation for tbe use of its property employed, and necessarily employed, in tbe public service; nor can it be doubted that tbe property must be valued -as property in use. * * * What we have said establishes the propriety of estimating complainant’s property on the basis of present market values as to land and reproduction cost, less depreciation, as to structures.'
“Such approval there of that method, bars disapproval here, even though, were this an original matter before me I would not adopt such method. Upon a consideration of the evidence relative to the value of the physical property, while I am of the opinion that the finding of. the commission is most liberal to the company, I am not prepared to change it by merely substituting my judgment for that of the commissioner. At the best and under approved systems of *440appraisal, the matter of fair present value of tangible property can hardly be determined with certainty, but must rest to some degree upon estimate. The value of the tangible property is largely a matter of opinion, and the court would have to go beyond mere difference of opinion from that of the commission to set their finding aside and overcome the statutory rule of prima facie correctness. The commission had a right to depart from the estimates of the experts.
“In Public Service Gas Co. v. Public Utility Com’rs, 87 N. J. Law, 585, it was held that.'the commission was
“ ‘Entitled upon the evidence before them, to conclude that the valuation stated by one set of experts was too nigh and that stated by the other set was too low, and to ascertain upon all the testimony what, in their best judgment, was the true valuation.’
“I agree with this opinion so far as the tangible property is concerned.
“A low estimate of accrued depreciation at the time of the appraisal, shows either a high statesof preservation and efficiency of the property, or portends a change in the near future, both of which operate to the advantage of the company. The nearer the company can get its property appraised at reproduction value, the higher the rate base; the future depreciation will not lower the rate base but call upon the public to pay rates to maintain the depreciation fund. The age and life of equipment should certainly be considered upon the question of depreciation, and while the company urged the commission not to use the age and life method, I am unable to say that it was not given consideration by the commission. If it turns out that the rate base is too high, considering the rates allowed and the return to the investors, and practical experience so demonstrates, then the matter is easily remedied and undoubtedly will receive prompt attention at the hands of the commission by lowering the rates. Under the reproduction cost new- — less depreciation method, the present fair value of the property used and useful in serving the public is sought, and this gives no consideration to the actual cost of the property acquired when the competing companies were purchased. Under any other system of appraisal such cost would receive consideration, but as I said before, I am not *441permitted to set the finding aside on the ground that' I do not approve of the method used. I do not understand that the Supreme Court of the United States has decided against other methods, .but only that it has approved the reproduction cost new — less depreciation method in the case before it.
“ ‘Going Value/ or Cost of Establishing the Business.- The company claimed before the commission that it should be allowed $1,115,950 as the cost of establishing the business, and the commission, allowed $835,215 for this in the rate base. This was based evidently on the estimate of Mr. Hagenah, in his appraisal for the company and comprehends his understanding of the value
“ ‘wbicb a well established utility has in the fact that it is a going concern with an established business and established income, and efficient organization, its operating records complete; all as distinguished from the physical property alone which might be merely a skeleton ready for service, but not having the human means of operation and producing that service.’
“Mr. Hagenah, in making his estimate, used the method known as the cost of training and developing the physical organization with reference to the plant, traffic, commercial and accounting departments, making a study of each for the eighteen months immediately preceding his estimate, to find the number and class of employees, character of service required from them, wages paid, expense of training them, etc.
“The commission allowed 8 per cent, of the value of the tangible property for the cost of establishing the business, the theory being ‘that purely as a matter of value, the live going exchange is worth at least as much more than the dormant one as it would cost to put the dormant exchange into the active condition/ This, of course, estimates the cost of establishing the business, not on actual cost to the investors or consideration of whether such cost has been met in the past out of rates collected, but upon a consideration of a theoretical establishing of the business at the time of the appraisal. In the opinion upon this subject the commission call attention to the case of the Michigan Northern Power Company, in which an order was made by the Michigan commission in 1913, allowing seven per cent, upon *442the estimated cost of the physical property, to cover the cost of establishing the business. This allowance was made, as I understand the case, upon the ground that it would cost that percentage to establish the business, the concern being new and without business. At bar we have an established business, either paid for out of rate collected, or built up out of sacrifice of the right of return by the owners; either horn of which is a question of fact and not of theory.
“The commission also calls attention to the fact that in the Passiac Gas Case [87 N. J. Law, 705], the New jersey utility commissioners held ‘that going concern value will be largely represented by the cost of developing the business,’ and made an allowance for that value, amounting to 30 per cent, of the structural value, less working capital. But in that case the 30 per cent, included costs of obtaining franchises, charters, preliminary investigations, preliminary engineering, deficits in operation, and lack of profits in the earlier years and unearned depreciation. See City of Long Branch v. Tintern Manor Water Co. (N. J.), P. U. R. 1918A, 196.
“A reading of the cases discloses that, the terms going value, going concern value, and cost of establishing business, have not always been considered synonymous and in reading the cases it is well'to have this in mind. One author claims that ‘going value’ means, as a matter of common consent among its originators, the present value of a prospective income. Marks on Practical Rate Making and Appraisement, p. 188.
“Going concern value or cost of establishing the business is ‘that part of the development expense of the business of a public utility, which has exceeded a fair return upon the investment, and has not been recouped or more than recouped by profits in later years.’
“The terms, going value, going concern value, and cost of establishing business have grown to have the same meaning in rate making cases and will be so treated in this opinion. These terms are of recent origin and under them it is intended to give to a public utility plant such a value as will prevent an injustice being done the investors in fixing rates, and at the same time protect the public against having the rate base represent a fictitious value. This value should *443not be measured by 'rule of thumb’, neither is it a purely theoretical or speculative thing to be arbitrarily fixed as a percentage of reproduction new value of the physical property. Its ascertainment may to some extent call for an exercise of sound discretion, but the basis for it and the exercise of such discretion rests upon evidence of facts relative to the operation and financial history of this company beyond that of a few months just before appraisal, and until found independent of the physical property it bears no mere percentage relation thereto. It is true that it has no existence aside from the property used and useful in the business, and, therefore, it is difficult to treat it as a thing to be estimated by itself; but this difficulty does not come up for the first after consideration of the tangible property, but is present from the beginning of an appraisal of a going concern.
“In appraising the physical property in use by defendant company it would be impossible to give it junk or scrap value or mere material or less than vitalized value and have it amount to the sum found. Consciously or unconsciously the going value is to some extent reflected in an appraisal of the physical property, otherwise we would have to imagine a situation under which there would be nothing in service upon which to fix intangible service value. May going concern value of an established business be computed as a percentage of the value of the tangible property, or must it be based upon evidence of actual sacrifice of the investors for the good of the service and now reflected in or of benefit to the business, in hand and of value to rate payers? It is true that rate fixing cases can be found, in which an addition for going concern value has been made to an estimate of reproduction cost new — less depreciation, but the fallacy in doing so is well pointed out as follows:
‘ ‘In other words, Laving reduced the rate base below the investment and below the estimated reproduction cost on the historical or some other basis, the court or commission then filled the gap which had thus been created by replacing all or most of what had been taken out, the amount thus being replaced being called “going concern value.” Such procedure is, in our opinion, entirely unsatisfactory. It seems to result from a subconscious realization that without such addition the rate base *444would not be just and reasonable to the public utility, and that such, base must be made right by restoring under some other name, what had been taken away.
“ ‘Where, however, the base used is the investment or the estimated cost to reproduce new, adjusted if necessary, it is generally unfair and unjust to the consumer to add thereto any so-called “going concern value” except at times in connection with an item which is sometimes called “going concern value” but which is really unpaid development expense.’ City and County of San Francisco v. Pacific Gas & Electric Co., P. U. R. 1918A, 506.
“In the case at bar, the cost of establishing the business was not based upon unrequited sacrifices of the investors, nor a consideration of the invested capital, return thereon, expenditures, operating cost, maintenance, financial history of the company, etc., but upon an assumption that, because the business is now in operation it would cost $835,215 under existing expense conditions to bring it to' its present efficiency point of service.
“Counsel for the company stated in their brief before the commission:
“ ‘These allowances do not cover differences between revenues and expenses during the early years of business. They cover an estimated period of one year only.’
“The testimony shows that the estimate was made on the basis of operating expenses for the year and a half before the appraisal. This is mentioned, not to call attention to the mistake of counsel as to the time, but to emphasize the position taken by the company with reference to going concern value.
“Under the method adopted, it is not the cost of establishing the business in hand at a sacrifice to the investors that we have at all, but an estimate of what it would cost to make it a going business if it were not a going business. But it is a going business and to estimate an expense upon an hypothesis that does not exist is to reach a value upon theory alone.
“It is a truism that:
“ ‘In rate making cases tbe corporation whose rates are under consideration is always a going concern.’ Pioneer Telephone & Telegraph Co. v. State (Okla.), 167 Pac. 995.
*445“Estimating what it would cost the company to establish the business in 1915, in the face of the fact that the business was established years ago and the company comes before the commission to ask for a raise in rates for services now of greater cost to it because of present conditions, is to shut one’s eyes to existing circumstances and indulge in theoretical summarizing. The method adopted leaves out all consideration of the actual history of the company, its rates as formerly fixed by itself, its management whether efficient or otherwise, its operating expenses whether proper or not, its expenditures for equipment or extensions whether now in the tangible appraisal or not, its revenue and what has been done with it, and its return to the investors, and instead of finding what sacrifice, if any, the investors have made to produce the utility service before the commission, cost of establishing the business is based upon a fluctuating premise, which has nothing to do with the expense to the company in fact, and is well illustrated in the following question put to Mr. Hagenah and his answer:
“ ‘Q. Of course, if we did this thing over again nest year, and your wages had increased 40 per cent., it would give a still higher cost of organizing the business?
“ ‘A. It would tend to increase the amount, yes.’ (R. pp. 1499-1500.)
“Mr. Hagenah made no effort to find the actual cost of establishing the business from the records. He was asked:
“ 'Do you mean to tell this commission, Mr. Hagenah, that this company has not the items which make up the cost of establishing that business from 1904 down to the present time?’
“His answer was:
“ ‘I don’t know what has transpired since 1904. I am dealing with the property as it is today.’ (R. p. 1501.)
“It seems then that the question of going concern value in this case turns upon whether we adopt the rule of cost in fact to the investors, or a rule under which a theoretical establishing of an established business is set up on a reproduction cost new basis, and take the year and a half immediately preceding the ap*446praisal with its estimated costs of doing so, as the criterion, regardless of revenue. This latter is not the rule to be adopted in rate fixing cases, for it gives intangible value regardless of the facts. If full justice has been done the investors in fixing the value of the tangible property used and useful in the service now being given, and this it appears has been most liberally done, then going concern value has been considered and not junk value, and there is no occasion to do more, except to ascertain the sacrifices made by the investors, if any, and now of benefit toi the service of rate payers, outside of the tangible property. The tangible property is used in the business, and as assembled has been appraised; its condition of life and percentage of efficiency in performing actual service has been given, and in no sense has it been estimated apart from its value to the going business.
“This subject is well covered in the late case of Re Kewanee Home Telephone Co. (Ill.), P. U. R. 1918B, 172.
“ ‘The theory of going value as a factor of consideration in rate investigations base on physical valuations is the subject of much criticism and general comment and argument at the present time. While it is generally recognized that going value as a factor of consideration in rate cases can only be interpreted to be unearned early losses, ■ nevertheless many reputable engineers strongly favor the comparative method of computing going value, and contend that going value as a term means literally the difference in value between an operating and non-operating plant; meaning, of course, the increment of value that can be credited to the development of the business. * * *
“ ‘While a utility may be entitled to a return upon a valuation which takes into account that it is a live organization actually supplying customers, and so of more value to its owner than it would be if idle or just completed and ready to solicit business but not actually in full operation, it appears that to the full cost to produce new, less depreciation, no condition should be made for value inherent to the physical property, because the company is actually in successful operation. It would seem that, by crediting the company with the full cost to reproduce new, •less depreciation value, based on the petitioner’s report, the property is already appraised as that of a going concern. The facts are that whether the commission shall or shall not consider going value as an additional property item in the valuation for *447rate making purposes, depends entirely upon the interpretation of the term “going value.” If we mean hy going value the exchange value of the entire property of the utility, then, obviously, going value should not be considered in a rate case. On the other hand, if we classify the early losses in revenue incurred by a utility as going value, then it is proper and just that a consideration of going value be made when the question 'of rates involves the question of property values.’
“In the case at bar, why spend time estimating what it would cost to animate the ‘bones’ of a purely hypothetical plant imagined to be ready to start business but without customers or perfected living organism, when we have the living plant actually doing business? If the object is to ascertain the value as.a created thing, then comes the question of whether it has been paid for by the rate payers in the past, or, does it represent unrequited sacrifices made in behalf of the business. by the investors? Under the theoretical method of computing going concern value the public is cut off from showing that the returns in the past have paid all the costs of establishing the business, and it is not fair to the rate payers to capitalize such a thing into the rate base by mere hypothesizing. Under the actual cost standard going concern value is based upon the sacrifices made by the owners in establishing the business to a paying and efficient state and not recouped out of later returns. If the early losses have been treated in the accounts as operating loss and not as invested capital, and, if subsequent years have wiped out the early losses, it may be difficult to justify the inclusion of any cost of developing the business among the intangible elements of value. And this possible result may not be avoided by a mere assumption of this increment of value. If part of the cost of establishing the business is present as a result of early sacrifices of right of return on investment and represented in added equipment, then it has. been appraised as tangible property. When a telephone company seeks to have the cost of establishing its business capitalized into its rate base, it must establish such cost by evidence showing not only the nature of the same but the unrequited expense thereof and not leave it to be inferred. If the expense is made known, rules of law *448and equity can be applied. Is it equitable to add $835,215 to the physical property of a plant as old in business as this one, as representing the cost of establishing the business, without evidence of nature and extent of such expense? It is not enough to show there has been operating expenses; the amount thereof must be shown, if possible, the nature thereof, so this court can say whether they were proper, fix the amount by safe standard, and know whether any part of the same has gone into the property now appraised as tangible and also be able to say that the same has never been requited. The business in hand must control upon this subject, the facts, as far as possible, must be shown, the costs must appear, if within reach, the full operating expenses, including extent and the nature and need, the cost, rates, revenue, capital, investment and return thereon must be shown as far as possible before we are permitted to theorize or base an estimate on conjecture reduced to arbitrary percentage. Conceding the difficulty of doing this, does not dispense with the need. The case at bar shows the need of going into the history of this company. In the first instance, the business now being conducted by the company was not established by it but another company, and the sale on foreclosure to this company did not transfer to this company, so as to have it go into the rate base, the cost to the former company of establishing its business. The same can be said of the purchase of competing companies by this compány.
“The intangible value of $835,215 placed in the rate base by the commission is set aside.
“Four-Party Line Rate. The four-party line service is unreasonable and discriminatory, and was so intended by its proposer, the telephone company; the scheme of the company being to drive the four-party line subscribers to take the two-party line service rather than to put up with the annoyance of reporting their letter at each call, having limited service for the flat rate and a measured service beyond two calls a day. It is true that the commission did not adopt the proposal of the company to give but fifty calls a month for the flat rate; but this does not change the purpose the company had in mind. The four-party line service was originally installed by the company as a cheap ser*449vice to attract subscribers and has proved so popular as to overload the lines of the company, and, while the old service contracts put a limit on calls per day, the company has, in fact, given unlimited service, but now in an effort to rid itself of a condition it claims is embarrassing to its business, the company wants and expects this new rate and its measured service and regulation to accomplish the end of forcing subscribers to give up that kind of service and take the two-party line service, or in default thereof pay more for four-party line service than for two-party line if the telephone is used to an extent it should be used to justify having one at all.
“There are about 47,000 subscribers to the four-party line, and an estimate made by the company shows that they use on an average for the entire group 1,074 calls per year, but quite a large percentage of them use upward of 1,700 calls per year, and some of them go as high as 7,000 calls per year per telephone on the line. The rate fixed by the commission for the four-party line service crosses the two-party line rate at the point of eighty-six calls per month. The manager of the company estimated that a limit of fifty calls per month at a flat rate with measured service beyond that would drive about 10,000 four-party line subscribers to change to the two-party line in order to save paying more for four-party line limited and poor service than for two-party line unlimited and better service, and in this he is too conservative. This limited flat rate' four-party line service will permit the housewife in the morning to reach the butcher and the baker but stops short of the 'candle-stick-maker/ until the palm of the company is met with four cents. The rate and its measured service for the four-party line telephone is unreasonable, and viewed from the standpoint of the two-party line rate and service, having in mind the telephone as something more than a parlor ornament, is in accord with a studied scheme on the part of the company to discriminate so unjustly against the use of the four-party line service as to compel subscribers to go to the two-party line service.
. “Under the confessed purpose of the company this so-called rate is not a rate intended to meet a service, *450but a club in the'hands of the company. The discrimination here is not upon any difference inhering in the cost of the service rendered, but upon the mere circumstance that the company desires to make a rate for one method of its service unpopular and so burdensome when compared with another rate and method, that rather than submit to exactions and annoyances, and even then probably pay higher than for unlimited service, the patrons will be forced away from it. When measured with the two-party line rate, the rate for four-party line service is not a rate at all in the sense of being a fair compensation for a service rendered, but is a mere policy of the company as a means of accomplishing an end.
“A rate adjusted so as to accomplish what the solicitations of the company have failed to bring about, that is, to drive at least 10,000 of the present subscribers away from it because it will cost them more to stay under it and have a reasonable amount of service than to pay a higher rate, is not a just or reasonable rate at all, but a mere instrument in the hands of the company to force subscribers away from it and to a higher rate. If this rate remains then the plan of the company will be carried out, and if its expectations are realized, then it will force 10,000 subscribers to reject it on its merits and will bring the company $120,000 a year additional revenue, because subscribers will at once see that it is unreasonable to pay the four-party line rate. If subscribers will be forced to so decide as a matter of practical fact, then this court would be guilty of less than common perception not to recognize the injustice of the rate.
“The discrimination above mentioned may not fall within the strict lines of statutory definition or the holdings of the courts relative to preferential rates, because this situation may never have arisen before, but it does fall within the meaning of unjust and unreasonable rates. Having in mind the right of the four-party line subscribers to a reasonable rate for the service they get, is the rate as fixed appropriate to that end, or does this rate when compared with the two-party line rate, appear arbitrary or capricious and well calculated to accomplish something besides fixing compensation for a service to the user. If $86 a year *451is a reasonable rate for a two-party line service with unlimited right of use, then $24 per year for an admittedly poorer service and limited to two calls a day with an exaction of four cents per call beyond that is unjust and unreasonable. But it may be said that the subscriber does not have to take the four-party line service. That is true, but 47,000 have it now and have a right to a reasonable rate and such a rate should be fixed. The rate as now fixed is but a feeder to the two-party line business of the company.
“The rate fixed for four-party line service is unreasonable and unjust and is set aside.
“American Telephone & Telegraph Company Contract. The bill alleges that the commission based their opinion and order in part upon an independent investigation relative to the question of the contract between defendant company and the American Telephone & Telegraph Company, without giving plaintiff notice of an opportunity to be present and take part therein.
“The answer of the commission admits:
“ ‘That for the purpose of becoming familiar with certain features of the hearing, an examination was made, by the commission, of the laboratory of the American Telephone & Telegraph Company, by and through which certain services were alleged to have been performed by the American Telephone & Telegraph Company for the Michigan State Telephone Company in part consideration of certain payments made by the Michigan State Telephone Company to the American Telephone & Telegraph Company; that likewise an examination was made of the plant and facilities of the Western Electric Company to enable the commission to more fully understand the testimony given upon the hearing with relation to said subjects; that the order issued by the Michigan railroad commission embodies the result of these considerations.’
“Plaintiff claims that it was error for the commission to make such ex parte investigations and the order of the commission should be set aside. It, therefore, is to be determined what legal effect, if any, is to be given an order of the commission made under such circumstances. The statute provides that the testimony submitted to the commission shall be available for use in this court upon this hearing, and this, of *452course, cannot be done, if the commission makes a personal investigation not of record. While it is not inherently wrong for the commission to make a private investigation, and no claim is made here that in this instance it was made from other than worthy motive, yet, in a jurisdiction where right of court review, upon the evidence submitted to the commission, is open to an aggrieved party, such an investigation, if permissible at all in cases where the parties in interest are actually submitting their evidence in the presence of each other, should be no more than a preliminary to the bringing of what is disclosed upon the record and to the knowledge of- the parties and afford them an opportunity to test the correctness thereof or refute the same, and also make it available for court review. Upon this hearing the findings of the commission are not in the nature of evidence and cannot supply what the statute provides shall come here from the commission.
“In a suit to set aside an order of the commission, when it is made to appear that an investigation was made by the commission of a material matter, without notice to parties putting their evidence in publicly before the commission, and without an opportunity being afforded such parties to know the nature of what has so come to the commission and without chance to test or refute the same, and such ex parte investigation is made by the commission to enable them to more fully understand a subject in dispute between parties trying out an issue of fact before them and the investigation is made of matters under the control of one financially interested in the determination to be made by the commission, and the commission embodies in their order the result of such private investigation, and leave the same wholly off the record available for review by this court, then, to say the least, the statutory presumption in favor of the action of the commission in such matter is removed and the plaintiff is relieved from showing by clear and satisfactory evidence that the order in this particular is unlawful and unreasonable.
“While the commission may examine into the matters before them without technical nicety of procedure, yet the right of a party in interest to a hearing must be *453preserved." There is deprivation of this right when a party is prevented from knowing all the evidence submitted or considered by the commission upon a particular subject, and, therefore, has no opportunity to test the correctness thereof or explain or refute the same.
“ ‘Though a commission, is not limited by the strict rules as to the admissibility of evidence, which prevails in suits between private parties, yet, the more liberal the practice in admitting testimony, the more imperative the obligation to preserve the essential rules of evidence by which rights are asserted or defended. In such cases commissioners cannot act upon their own information as could jurors in primitive days. All parties must be fully apprised of the evidence submitted or to be considered and must be given an opportunity to cross-examine witnesses, to inspect documents and to offer evidence in explanation or rebuttal. Collier on Public Service Companies, § 192. Allowing the testimony to be heard by the commission, or one of its members, without opportunity to cross-examine the witnesses presenting it, amounts to practical denial of the vital parts of the hearing required by this statute.’ Farmers’ Elevator Co. v. Railway Co., 266 Ill. 567.
_ “Under the circumstances the order of the commission upon this matter might be set aside as contrary to law, but the importance of the question or right involved leads me to pass on the merits upon the record before the court. It appears that the Michigan State Telephone Company in 1904 entered into contract under which it obligated itself to pay the American Telephone & Telegraph Company 4% per cent, of its total gross earnings as a consideration for the use or rental of telephone instruments furnished by the American Telephone & Telegraph Company, and it is also claimed the latter company gives financing, engineering, accounting and legal services under the contract. This contract, in fact, was an election on the part of the Michigan State Telephone Company to accept, assume and adopt the provisions of former contracts between the American Telephone & Telegraph Company and the Michigan Telephone Company, so far as the same remained in force and operative. The Michigan Telephone Company was formerly in business in this State, but was defunct before the organization of defendant company.
*454“Upon this subject the contract provided:
“ ‘Each of said contracts has, from time to time since the respective dates thereof, 'been modified and supplemented, and a number of provisions thereof have become nugatory by change of circumstances or of policy, or have been otherwise waived or cancelled, and the meaning and scope of many of said provisions have been fixed by a practical construction thereof by dealing between said Bell Company and the Michigan Telephone Company in common with a large number of corporations with which said Bell Company has similar contracts and relations, reference being hereby had and made to all such modifications, supplements, waivers, cancellations, practical constructions and dealings, with the same' force and virtue as if the same or the substance and effect thereof were herein set forth at length and as if said contracts had been re-written so as to embody and conform to the same. sa * *
“ ‘The Michigan Company does hereby elect to accept, assume and adopt each of said contracts and all supplements thereto, so far and to the extent that the provisions thereof, respectively, now remain in force and operative, and as said provisions have been modified and otherwise varied, and with the meaning and scope placed and fixed upon said provisions by the practical constructions and dealings hereinbefore recited and referred to.
“ ‘The Bell Company agrees that the Michigan Company shall have and does hereby grant to the Michigan Company the right and privilege to elect to accept modifications, supplements, provisiohs, waivers, cancellations, concessions, benefits and advantages of or arising from said license contracts so accepted, assumed and adopted by the Michigan Company, like those which may at any time be extended, tendered or granted by said Bell Company to the other companies with which said Bell Company has or may have contractual or other relations, in whole or in part, of a like or similar nature to those evidenced by the contracts herein referred to.’
“The original contracts were license contracts, but in 1902 were changed under an acceptance of the following offer:
“‘The American Bell Company hereby offers, until further notice, to substitute for the rental upon telephone instruments (magneto telephones and battery transmitters) payable by you under its license contracts held by you and circulars in modification thereof, four and one-half per cent. (4%%) of the total *455gross earnings of your company. * * * Said percentage will cover all instruments in use by you under your authority in your territory, including instruments used on switchboards or for other operating purposes, and those for which no consideration is received by you, and also will cover those in stock, which last are not to exceed three per cent. (3%) of the total number charged to you.’
“At the time the contract was made in 1904 the American Telephone & Telegraph Company was not a stockholder in the defendant company, but has since then become owner of about 97% of its common stock and something over 50% of its preferred. Just what relations existed in 1904, if any, outside of contract, between the companies relative to power of control by the American Telephone & Telegraph .Company does not appear.
“A raise in rates increases the sum to be paid on the contract. The city contends that the American Telephone & Telegraph Company should be paid a fair rental value for its equipment leased to defendant company or held in reserve for it, and no more, when it comes to the matter of rates to be paid by the public. During the year 1915, that being the year of appraisal, the defendant company paid to the American Telephone & Telegraph Company, from its gross revenue, the sum of $147,415.98. During that year there were approximately 95,000 telephone instruments in use in the Detroit exchange district. These instruments were bought by the American Telephone & Telegraph Company from the Western Electric Company, a manufacturing concern, the stock of which is owned by the American Telephone & Telegraph Company. The instruments cost the American Telephone & Telegraph Company $2.13 per set in 1915, including a 20 per cent, profit to the Western Electric Company.
“The city contends that, at the outside, considering the cost of the instruments, allowing 8% for depreciation, 8% return on such cost and taxes and repairs, a proper rental charge should not exceed 40 cents per annum for each instrument, and upon this basis the 95,000 instruments in use and the 3% in addition held in reserve under the agreement, making 97,850 set in all, at an annual rental value of 40 cents-per set would *456amount to $39,140, or $108,275.98 less than what was paid in 1915.
“But the company claims that the American Tele-, phone & Telegraph Company not only furnishes the instruments, but through its general staff and otherwise, renders engineering, accounting, legal and- financial services, and keeps abreast of all improvements in telephonic equipment and methods of operation, and such matters, are to the great advantage of the defendant company and in money value exceed all sums paid under the contract. To this the city makes answer that the contract does not' obligate the American Telephone & Telegraph Company to do any of these things and if they are done they are performed either as a gratuitous service for a subsidiary or as mere self-serving acts for its own pecuniary advantage and in behalf of its practical ownership of defendant company. The company claims that under the contract and by practical construction arising out of their dealings such matters have received the force of contract relations. Witnesses for the company have given testimony relative to the general nature of the services and their opinions upon the value thereof. Outside of the furnishing of telephone instruments, what does the contract obligate the American Telephone'& Telegraph Company to do? It is true that former contracts with a defunct company, so far as the same remained unchanged, were adopted, but what part of such former contracts remained in force and did any of such contracts provide for such services? We have the contracts and upon their face they provide no such thing.
“Considering the written contract between defendant company and the American Telephone & Telegraph Company, as given in part above, it is apparent that, in order to trace down its scope it must first be determined to what extent the adopted contracts not only remained in force but in what manner and to what extent they had been modified and supplemented, become in part pugatory by change of circumstances or of policy, how much waived or canceled, just what meaning and scope had been fixed by a practical construction through dealings with the defunct company or a large number of other companies known only to *457the American Telephone & Telegraph Company, because ‘all such modifications, supplements, waivers, cancellations, practical constructions and dealings’ were adopted ‘as if said contracts had been rewritten so as to embody and conform’ thereto. To ascertain the meaning and scope of this contract, beyond its plain and expressed purpose of securing telephone instruments, is beyond the reach of any one questioning the same, because the knowledge rests with the American Telephone & Telegraph Company alone. This contract may be considered satisfactory between two corporations, one now subsidiary to the other, and, therefore, with synchronized impulses, but to others it is so indefinite and uncertain without intrinsic evidence covering the dealings between the American Bell Telephone Company, the American Telephone & Telegraph Company, the defendant company, the defunct Michigan Telephone Company, and all the telephone companies in the United States with which the two first named companies have had dealings whether in accordance with contracts or in any other way after contracts, for over thirty years, as to what the American Telephone & Telegraph Company is obligated to give for the percentage of gross earnings so fixedly exacted, and is so drawn as to absolutely render impossible any effective investigation by the public, that it must not be put on the public to pay in their rates, beyond disclosed services falling within its clear provisions, and then only for value received. This court does not hold that the contract is void; the contract may be valid between its makers and satisfactory to them because, financially speaking, they are practically now of one mind, but the enveloping possibilities rendered thereunder and by loose construction thereof of participating in dividing revenue must stop short of reaching regulatory exactions from the public for utility service, except to the extent above mentioned.
“The company contends that this contract, being satisfactory to the parties to it and practically construed by them for 14 years, and benefits received, payments made and services rendered, no third party can question that which those mutually bound do not question. In this matter the public is not a third party to the rights of those asking that rates be fixed for the *458public to pay for utility service, but the party asked to pay every dollar and it requires something more than practical construction and mutual satisfaction on the part of the party collecting from the public and the other participating in the collection, to tie the public to carry out such an arrangement. That the public is not a third party with reference to contracts made by the defendant company and, therefore, without voice as to whether the rates shall meet their requirements or not, ought to be apparent upon the most casual consideration of the subject, and defendant ■company and the American Telephone & Telegraph Company fully recognize this and have practical application of it in this very proceeding, in the relief granted by the commission in setting aside the low rate, long time contracts made by the company at a time it wanted to meet competition. The expense of the defendant company, arising out of the 4% per cent, contract, and now put on the public in full to meet, brings the public squarely to the point where it may question not only the legality of the contract but as well be heard upon the subject of the amount that in equity and good conscience shall be taken under public authority for the benefit of the American Telephone & Telegraph Company under such contract. Money so exacted from the public for utility service must bear a true relation to benefits conferred by the receiver, and the public has an undoubted right to question the expenses the .defendant company asks be taken care of in the rates the public must pay, and a right to see the contract.
“This contract has been before several commissions in rate fixing cases and has been approved in some cases and rejected in others. A reading of the holdings upon the subject of this contract, consideration of the contract and the evidence and the equities of the case leads to the conclusion that the public should be required to pay in rates only so much thereunder as is represented in a fair valuation of use of the instruments and that amount should be fixed at 40 cents per set per annum. If the dominant company wants to exact more than this from its subservient company, it is, of course, at liberty to do so, but its remedy must steer clear of collecting it from the rate payers.
“The holding of the commission that this 4% per *459cent, per annum is a fixed charge and may be collected from rate payers for the American Telephone & Telegraph Company under the contract with the defendant company is set aside and the sum to be collected of the rate payers should be fixed at 40 cents per year per set of instruments furnished by the American Telephone & Telegraph Company, including the 3 per cent, in reserve.
“Depreciation Reserve. There is merit in the objection made by the city to the allowance of 5.6% upon the depreciable fixed capital. This percentage should be materially reduced and a limit placed on the amount of the fund beyond which its accumulation shall not proceed. My views on this subject are expressed by the supreme court of Oklahoma in an opinion filed in September, 1917.
“ 'Another ground for complaint is based upon the claim that the corporation commission refused to allow the company a sufficient reserve for depreciation. The commission held that, inasmuch as the evidence showed that the physical plant was kept up to a high degree of efficiency by replacements paid for out of current revenue, and that any deterioration covered by obsolescence would not affect the result in case at bar, there was no depreciation, and, therefore, an allowance for a reserve fund to take care of depreciation was not necessary, and should not be allowed. The contention of the company on this point is that, notwithstanding every part of a properly constructed and well equipped telephone system may be maintained in good condition from year to year out of the maintenance fund, yet the time inevitably comes with every building and unit of equipment when it can no longer be kept serviceable by repairs or current maintenance, and when it must be replaced substantially in its entirety. * * *
“ ‘A great many authorities and opinions of experts are cited by counsel for the company, which they say conclusively show the economic necessity for the principle contended for, among which are the following:
[The court gives a list of many cases.]
“ ‘The expert opinion relied upon consists of an article by Mr. William B. Jackson,' entitled, Depreciation and Reserve Funds of Electrical Properties, published in the Electrical Review of March 7th, 1910, p. 934, the report of William J. Hagenah in his investigation of the Chicago Telephone Company, 1910, and in *460the second volume of Telephony, p. 102. After examining such of these authorities asi are available to us, ?md others on the same subject, not cited, we find ourselves unable to agree with counsel in their assumption that the doctrine of depreciation, as contended for by them, meets with universal approval of the courts and economists. From our investigation of the problem of depreciation we are convinced that precedent on this question is varying, and that there is also great contrariety of opinion among the heads of public service corporations themselves, some companies believing that their best interests lie in adopting the largest possible depreciation charge and in the consequent accumulation of a permanent fund in the future, whilst others contend that the application of the doctrine amounts to a virtual confiscation of their property-. Without attempting to set out herein our analysis of these discordant views, it is sufficient to say that we have reached the conclusion that in plants of considerable size that have attained their gait, to which class the plant herein is conceded to belong, there is both theoretically and actually a normal condition in which the replacements come along with comparative evenness, and where there can be no possible use for so-called depreciation fund of any considerable amount.
, “ ‘In the case at bar, as we have seen, the commission made no deduction from the value of the plant on account of depreciation, but allowed returns upon its value as a' going concern, kept up to a high degree of efficiency by replacements paid for out of current revenue. There is no principle of public regulation more firmly established than the right of the company to charge in its rate an amount which will enable it to make these replacements, and as investors put their money into public utilities for the sake of the returns they will be able to obtain, if the allowance for replacements is sufficient to keep up a high degree of efficiency and prevent a lowering of the ability of the plant to earn returns, we are unable to perceive the necessity for building up a fund to be used for the purpose of counteracting a purely theoretical depreciation.' Pioneer Telephone & Telegraph Co. v. State (Okla.), 167 Pac. 995.
“Rate of Return. The commission allowed 8% as the rate of return. The city claims this is too high. It has been said:
“ ‘The rate of interest on money and ordinary rates of incomp on capital invested have fallen enormously in the last few years. Every one knows this, and the court that does not know it is certainly not fit to review the acts of a commission that should *461know it.’ Steenerson v. Railway Co., 69 Minn. 353 (72 N. W. 713).
“An examination of the cases show that rates of return, as a rule, are allowed at from 5 to 8 per cent, depending upon circumstances in particular cases. Having in mind the actual investment in this plant, the value of the property as fixed by the_ commission upon reproduction cost new, less depreciation basis, the stability of the business involved, considering the field and monopoly therein under present public policy, the certainty of return under fair regulation, the rates for the use of money permitted _ under private agreement by law in this State, and giving due weight to court adjudications and holdings of commissions upon the subject, it appears that the rate fixed is too high. Money, as a rule, if safely invested, has a pretty well understood and' expected rate of return, and _if this rate is exceeded in the case of a corporation its stock goes to such a premium as will bring an investment in it to a reasonable rate of return. Eight per cent, return under the facts and circumstances disclosed in this case appears to me to be excessive and. this court finds that 7 per cent, will be fair compensation and amply protect the rights of those whose moneys are invested in the company as well as the public interest.
“It follows from what has been said that the order of the commission cannot stand, and it is vacated and set aside in the particulars mentioned herein, and the matter will be remanded to the commission to take further action in accordance with the findings of this court.”
The commission fixed the rate of return to which the telephone company was entitled at 8 per cent. The court set this aside and fixed the rate at 7 per cent. The court undoubtedly had the right to set aside the rate fixed by the commission because unreasonable, but I am of the opinion that it had no right to fix the rate, for the reason that that question is a legislative one.
With this modification the decree of the trial court should be affirmed.