Court Opinion

ID: 4010029
Source: CourtListenerOpinion
Date Created: 2016-07-06 11:11:09.215299+00
Date Added: 2024-06-11T14:19:15.620322
License: Public Domain

After consideration of all the factors involved, the commission found the fair value of the used and useful exchange and equipment property to be not more than $35,000,000 as a going concern.
On December 31, 1934, as per the books of the company, the value of the exchange plant and equipment was $57,333,678.  There was on the same day in its depreciation-reserve account $23,470,410.  Of the depreciation reserve $16,321,099 was allocable to exchange plant and equipment.
It is to be noted that the difference between the rate base as fixed by the trial court and the rate base as fixed by the commission amounts to $16,000,000 (approximately the amount in the depreciation reserve account applicable to exchange plant), which difference is made up in the manner indicated in the table.  The trial court found that there should be deducted from the cost of reproduction new on account of accrued depreciation $5,251,039, or 9.79% while the commission deducted on account of accrued depreciation $12,859,279, or 28.47%.  The trial court followed the company's method of determining accrued depreciation.  For the purpose of ascertaining the present physical value of the plant the company sent into the field a large corps of engineers and helpers who inspected the plant and arrived at the conclusion that there was an accrued depreciation of 9.79%. The commission on the other hand followed the theory of a member of its staff, Mr. Colbert.  He contended that an inspection of the physical plant did not disclose the true amount of accrued depreciation.  The federal communications commission defined depreciation as follows:
"`Depreciation,' as applied to depreciable telephone plant, means the loss in service value not restored by current maintenance, incurred in connection with the consumption or prospective retirement of telephone plant in the course of service from causes which are known to be in current operation, against which the company is not protected by insurance, and the effect of which can be forecast with a reasonable approach to accuracy.  Among the causes to be given consideration *Page 334 
are wear and tear, decay, action of the elements, inadequacy, obsolescence, changes in the art, changes in demand and requirements of public authorities."
In Lindheimer v. Illinois Bell Tel. Co. (1934) 292 U.S. 151,167, 54 Sup. Ct. 658, 78 L. Ed. 1182, the supreme court of the United States said:
"Broadly speaking, depreciation is the loss, not restored by current maintenance, which is due to all the factors causing the ultimate retirement of the property.  These factors embrace wear and tear, decay, inadequacy, and obsolescence. Annual depreciation is the loss which takes place in a year."
Pursuant to an order issued in 1913 by the interstate commerce commission, which then had under its supervision telephone companies, depreciation has been taken by what is known as the straight-fine method.  At the end of the year 1913 the company had a depreciation reserve of $3,810,803.59.  In each year since that time there have been credits to the account, credit being the amount over and above the amount charged during each year on account of plant retirement and extraordinary repairs.  It was conceded that the present condition of the plant was practically 90% of reproduction cost new so that the observed depreciation amounted to 10%, to be accurate, 9.79%.
The witness Colbert testified:
"In my judgment an engineer by an inspection of property could not determine the true amount of depreciation by examining and finding the amount of physical wear and tear on the property.  Such a method leaves out largely those elements of depreciation such as obsolescence and inadequacy. It does not give due weight to the functional causes of depreciation. It does not give weight to the extent to which the service capacity of the property has been used up.  In my figure as to depreciation I have given weight to all those factors."
The commission did not charge against cost of reproduction new the full amount of the depreciation-reserve account, *Page 335 
but did charge against it 28.47% of cost of reproduction new of used and useful exchange plant and equipment as found by it.
The company contends that differences between itself, the court, and the commission with respect to the elements of the rate base are largely differences of law and not differences of fact based upon the choice between the testimony of assisting experts.
Before proceeding further with this discussion it will be helpful to state the meaning which we attach to some words and phrases.  By reserve depreciation we understand the amount which has been charged to ratepayers on account of depreciation which has not been used in retirements and extraordinary repairs.  By accrued depreciation we understand the lessened service value of the plant due to its consumption in furnishing the service for which ratepayers are charged. Observed depreciation is that depreciation which can be determined by a physical inspection of the plant.  The company contends that observed depreciation, actual depreciation, and accrued depreciation are one and the same thing.  The commission made no physical inspection of the plant for depreciation purposes but based its findings upon the testimony of its witness, Mr. Colbert, who was also a member of its staff. His evidence is severely criticized by the company which alleges that he never had experience with such inspections or with depreciation of telephone property; that he had no accounting experience as to telephone utilities except such as he had gained in the employment of the commission, and that he did not even suggest that he had made a physical inspection with regard to depreciation.  The testimony of Mr. Colbert shows much careful study of the company records as to retirements, replacements, service life of items, etc. It is fair and candid.  If his premises be accepted, it is convincing.
The company contends that by the weight of authority the only method of determining depreciation as a valuation deduction *Page 336 
is to examine the property and determine the extent of the physical deterioration, taking into account, any other present deterioration in value, such as obsolescence and inadequacy. The trial court adopted this view and cited in support thereof the following cases:  McCardle v. Indianapolis WaterCo. (1926) 272 U.S. 400, 47 Sup. Ct. 144, 71 L. Ed. 316;Southern Bell Tel.  Tel. Co. v. Railroad Comm. (D.C. 1925) 5 F.2d 77; West v. Chesapeake  P. Tel. Co.
(1935) 295 U.S. 662, 55 Sup. Ct. 894, 79 L. Ed. 1640;Western Buse Tel. Co. v. Northwestern Bell Tel. Co. (1933)188 Minn. 524, 248 N.W. 220.  In addition, the company cites Pacific Tel.  Tel. Co. v. Whitcomb (D.C. 1926),12 F.2d 279, 283, in which the court said:
"In other words, it was held that accrued depreciation is to be ascertained by an inspection of the property — by going and looking at it and making estimates based upon the facts which such examination discloses."  (Citing cases.)
In a book entitled "Depreciation, a Review of Legal and Accounting Problems," prepared by the staff of the commission and published by it in 1933, on page 100, the following appears:
"In concluding this subject, however, we do not wish to minimize the legal precedence in favor of the broader view that in determining accrued depreciation, estimates by experts after examination of the property are entitled to more weight than mere mathematical calculations based on doubtful probabilities. In addition to the San Francisco and Indianapolis cases quoted above the following lower court decisions support similar views."  (Citing cases.)
In this case the commission appears to have applied its theories as to depreciation instead of the "broader view" which has legal precedence.  By legal precedence we understand the commission to mean the weight of authority.
Upon the other hand, the commission contends that Lindheimerv. Illinois Bell Tel. Co., supra, warrants the consideration by the commission of depreciation factors which are not *Page 337 
disclosed by a physical examination of the property.  TheLindheimer Case, supra, was decided April 10, 1934, after the book on Depreciation was written.  It will be necessary at this point to give some consideration to the nature of a depreciation charge based on the straight-line method.  According to this method property of the various classes is supposed to have a service life of a given number of years.  At the end of that time it must be replaced and it may or may not have a salvage value.  If it has a salvage value the per cent of that value based upon the original cost is deduced from 100%.  The remainder is divided by the service life in years.  In that manner the annual depreciation rate is found. As an example, central office equipment has an average service life of fifteen years.  It has a net salvage value of 15%. Dividing the 85% by fifteen years gives an annual depreciation charge of 5.7%.  Manifestly, property does not diminish in value in accordance with a regular schedule.  As one of the witnesses for the company testified, obsolescence does not accrue, it happens, but theoretically at the end of its service life the property will be retired and the company is entitled to charge a rate high enough to enable it to replace the property. If the annual charge for depreciation exceeds the amount of retirements, the difference must necessarily be found in the depreciation-reserve account.  Theoretically, it is held by the company until such time as the retirement is necessary when it is used for replacement.  The amount disclosed by the depreciation-reserve account is not kept in money, but is reinvested in the plant, and of course appears in the appraisal of the plant, and upon this the company, according to the authorities, is entitled to earn a return.  The commission contends that if the company earns a return upon moneys derived from the ratepayers then it is getting in addition to a fair return upon its property an addition to its capital; in other words, the ratepayers are required to furnish capital for the company.  The company, however, contends *Page 338 
that while this may appear to be so, it is not so in fact because when it is required to replace the property the excess will be used up, and so far as the ratepayers are concerned the account will be square.  This would undoubtedly be true if the computations and estimates were accurate, but as a matter of fact they never are.  Some new invention may require the retirement of a large amount of property, such as the substitution of the dial for the manual system.  Public demands may increase due to relocation of highways, furnishing of conduit in place of aerial transmission lines, and in many other ways.  Maintenance may be so thorough as to prevent obsolescence.
There is one consideration that to our minds gives weight to the contention of the commission.  It was without dispute that the present plant is 90% efficient, that is, it is equivalent to 90% of a new plant.  If there should be deducted from the depreciation-reserve account, allocable to exchange plant, 10% of the book cost of the exchange plant and equipment, there would remain in the depreciation reserve account $13,785,231 allocable to exchange plant.  The company argues that this amount is held against future replacements. The experience of the company seems to demonstrate that at all times its plant is approximately 90% efficient.  In other words, its maintenance charges and charges for retirements, etc., are sufficient to maintain the plant in a 90% condition and to accumulate a depreciation reserve in addition.  The company has added to its depreciation-reserve account a substantial sum every year since 1913.  It has in the interim practically rebuilt its plant, or at least a large portion of it, and the over-all age of the plant is now something like eight years, although the original company was organized fifty years ago.
It is also apparent that some depreciation factors are not observable from physical inspection.  The classical illustration of this is the electric light bulb.  No one can tell by looking *Page 339 
at an electric light bulb how much of its service life has been spent.  The length of time for which it will continue to be serviceable can be determined only by knowing its service life at the beginning and how much of it has been already spent.  The witness Colbert based his conclusions as to the amount of reproduction cost new which should be charged off on depreciation upon a thorough study of the experience of the company as disclosed by its books, and although it was agreed that the plant was 90% efficient, Colbert found the accrued depreciation to be 28.47%.
In the Lindheimer Case, supra, a similar condition was disclosed.  In that case, as in this, the present condition of the plant was found to be 90% of a plant free from defects or impairment of any kind.  The evidence disclosed in that case that the aggregate amounts charged to operating expense on account of current maintenance and depreciation were from thirty to forty per cent of the total amount of operating expense.  In disposing of that matter the supreme court of the United States said (p. 174):
"In the light of the evidence as to the expenditures for current maintenance and the proved condition of the property — in the face of the disparity between the actual extent of depreciation, as ascertained according to the comprehensive standards used by the company's witnesses, and the amount of the depreciation reserve — it cannot be said that the company has established that the reserve merely represents the consumption of capital in the service rendered. Rather it appears that the depreciation reserve to a large extent represents provision for capital additions, over and above the amount required to cover capital consumption. This excess in the balance of the reserve account has been built up by excessive annual allowances for depreciation charged to operating expenses."
It is apparent that charges for maintenance and for depreciation are interrelated.  If by virtue of maintenance charges the plant is kept at a high state of efficiency the depreciation *Page 340 
charge should be less.  If, on the other hand, the amounts charged to maintenance do not maintain the plant in a high state of efficiency more charges must be made on account of retirements, and the depreciation charge should be higher. In this case we are confronted by the fact that the commission order not only required the rates charged to patrons to be reduced but cut down the depreciation rate from 4.53% claimed by the company to 3.41% composite.  On the basis of the authorities already cited, it is considered that the commission was in error in applying to the cost of reproduction new a depreciation charge of 28.47%.  No one, denies that the plant is now approximately 90% efficient.
The so-called hidden or unobservable depreciation which is the basis of the witness Colbert's conclusions does not in fact appear in the history of this company as disclosed by the records in this case and in the Lindheimer Case, supra.  While the theory that it exists is plausible, there is no evidence that it has any bearing upon the life of the plant taken as a whole. A telephone plant such as the one under consideration never approaches the condition of the one-horse shay.  Whether in view of the fact that the company's plant has consistently been maintained at approximately 90% of full efficiency although having an average age of eight years, and at the same time the large depreciation fund heretofore indicated has been accumulated, indicates that the charges for annual depreciation are too high is quite another matter and one that will receive attention in the depreciation case determined herewith, post, p. 371, 287 N.W. 167.
The trial court was required to decide whether the amount of accrued depreciation should be determined by observation or upon a theoretical basis in accordance with the evidence given by the witness Colbert.  It is considered that the trial court in accordance with the great weight of authority correctly found that observed depreciation should be charged against the cost of reproduction new to ascertain the present *Page 341 
fair value of the plant.  For analysis of the cases cited and other cases, see 36 Columbia Law Review, 250, 255-262. No testimony was offered to dispute that offered by the company as to the depreciation of the plant on the basis of observation.
Whether the depreciation charge was properly reduced will be considered in connection with the so-called depreciation rate case.  We adopt the decisions of the supreme court of the United States because while confiscation is not the issue here, the result here is subject to review by the supreme court of the United States if it be alleged that it is confiscatory. In the Lindheimer Case, supra, the court was not dealing with accrued depreciation but the depreciation-reserve account.  It found the amount in that account so large that it would not say the rate established was confiscatory.
                              EXCESS PLANT.
The company being entitled to earn only upon so much of its property as is used and useful in rendering the service for which charge is made, the question arises to what extent, if at all, is the company's plant overbuilt.  The commission's engineer Hill found that 8% of the company's plant was not used and useful, or as he styled it, it had 8% excess plant — $4,241,508.  The company's engineer on the other hand found the value of excess plant to be $117,972.  The commission's engineer Hill's compilations were based upon the years 1932 and 1933, which marked the bottom of the so-called depression, and the time when the use of the plant by the public was at its lowest.  Apparently on the basis of partial inspection of the plant, Mr. Hill arrived at the conclusion that 8% of the plant was not used and useful because at the time of his inspection it was not actually in service or would not be in service within a reasonable time.  There is no contention made that the company had overextended its plant on the basis of its prior experience.  What the company *Page 342 
had failed to do was to foresee the length and depth of the depression.  The difference between the position of the company and that of the commission is to some extent a difference based upon a proposition of law.  The company's position as stated by the commission is as follows:
"It is our position that the plant we have is to be valued. That is, not to have deductions because of claimed nonusefulness. If the plant was reasonably and properly necessary when put in, and that is what reasonably and properly necessary when put in means, which I could have elaborated. That is what we have tried to compress into the words `prudent investment.'  The phrase of what is reasonably and properly provided at the time is intended to be opposed to the concept of what is extravagantly and wastefully provided, if anything.  It is our idea that the only plant that should be taken out of our reproduction-cost valuation because of the used and useful theory is that plant, if any, which was extravagantly and wastefully and recklessly provided. In other words, imprudently provided.  And if there is any such plant and also such plant if there is some which was provided and in the ordinary course of changes becomes not only temporarily nonused but completely and permanently nonused, on which in the normal course of events there will be a removal when it is economical to remove.  There is always such plant and that we have deducted in our valuation."
The commission was of the opinion that this was not good law, and cites St. Joseph Stock Yards Co. v. United States
(D.C. 1935), 11 F. Supp. 322, 329, quoting as follows:
"The matter of including or excluding land or property held for business expansion in the rate base is the matter of who — the ratepayers or the company — shall carry property which is not being used to produce the service paid for by the rate.  Obviously, it may be proper and good business judgment may sometimes dictate provision for future expansion of the business.  It is equally clear that, so far as the present ratepayers are concerned, there must be a limit to the extent to which they can be compelled to pay for providing possible future facilities for future business.  While a broad power and discretion must be left undisturbed in company management, *Page 343 
yet, even as to expenditures directly entering into the present service for which the now customer pays, this discretion is not beyond control. . . . Clearly, courts should somewhat critically examine values which do not enter into furnishing the service paid for, and there should be no presumption in favor of including them in the rate base.  The burden is upon the company to show that such inclusion is proper. That showing must be that the properties held for future expansion are in themselves adaptable to such expansion and that there is probable need of them for that purpose in the not too distant future."
In the final order the commission points out some discrepancies in the claims of the company, and that the amount of not used and useful property found by the company's engineers was under any theory incorrect.  Conceding that, there still remains the question upon what basis excess plant should be ascertained.  In this connection it should be remembered that a public utility is required to furnish service when and as demanded by the public.  It may not as a private enterprise may do upon the basis of probably future advantages, choose a time for the enlargement of its plant. Being compelled to provide service when and as demanded it must have some latitude with respect to plant enlargement. We think some misconception is likely to arise by considering the rights of past ratepayers, present ratepayers, and future ratepayers.  The ratepayers are the public, and it is the public which demands the service.  The public does not change.  It is a constant factor and one which the company must at all times take into consideration.  The individual ratepayer determines for himself the value of the service rendered to him. If he thinks it is not worth what is charged he does not use it.  The question — whether the service rendered by the company to the public is rendered at a greater charge than is just and reasonable — is a different question, and is controlled by wholly different considerations.  It is considered that even under the doctrine of the St. Joseph Stock Yards Co. Case, *Page 344 11 F. Supp. 322, 329, property should not be excluded from the appraisal merely because at the moment the appraisal is made it is not in actual service.  The injustice involved in such an appraisal is well illustrated by the experience of the company in this case.
In 1937 the commission caused one of its staff engineers, Mr. Nicholson, to take Hill's list of nonuseful property and determine what proportion of it was in use in 1937.  Adopting Hill's material so far as possible, Nicholson found that approximately 42 1/2% of the property Hill classed as nonuseful was already in use.  The trial court found that the witness Hill's conclusions are in part based upon the following illegal grounds and upon alleged facts which have no foundation in fact:
"(1) In many instances, instead of giving consideration to the property as it existed, Hill estimated excess property on the basis of a substituted plant of his design.
"(2) By classifying and including a great deal of cable and conduit as nonuseful when the cable and conduit so classified and included had been and still was in active use at that time.
"(3) By classifying and including as nonuseful, thousands of left in stations when such stations had been installed on actual demand of subscribers and had been used by them and had been disconnected because of the depression.  That thousands of such stations have since been reconnected and are now in use.
"(4) By arbitrarily allowing an insufficient amount of plant for spare capacity in switchboard and other central office equipment.
"(5) By improperly treating certain acquired land as excess.
"(6) By arbitrarily classifying and including certain portions of building as nonuseful when such portions had been necessarily used and were still being so used.
"(7) By improperly including and classifying property as nonuseful without knowing or giving consideration to the conditions or reasons existing for its acquisition or installation. *Page 345 
"(8) By improperly including and classifying as nonuseful, parts of certain buildings and certain drop wires, which had theretofore been taken off the books of the plaintiff and are not included in its inventory.
"(9) By improperly including and classifying the Wright street conduit as nonused and nonuseful."
While we cannot adopt the view of the trial court with respect to the testimony given by the witness Hill in its entirety, a reading of the record convinces us that it is so unfair and biased as to be unreliable.  Nor does the attitude of the commission with respect to this issue meet with our entire approval.  The commission said:
"The fact remains that our engineer Hill has made the only engineering investigation of property not used and useful which has been conducted in this case.  The company's shallow revelation that there is a trivial quantity of defunct property which is being or has been taken off the books, is not a scientific inquiry into the property actually used and useful under physical conditions now existing.  Hill, on the contrary, has embraced his initial studies in two volumes which include hundreds of pages of minute detail."
On the other hand, the company contends that the witness Hill —
"was, in the greater part of his testimony, ready to be and often was untruthful and shifty and constantly alert to say anything necessary to support any testimony or figures he had presented."
Neither side seems to have maintained entire objectivity with reference to the matter of excess plant.  The contest between the commission and the company resembles in some of its aspects a contest between adversary lawyers rather than a discussion in proceedings before a quasi-judicial tribunal.
Hill apparently went over the plant with meticulous care for the purpose of discovering every item of property not in use.  He gave no consideration to the conditions under which *Page 346 
it was installed, cut probable future use to the bone, and in many instances substituted his judgment for that of the management without ascertaining whether the management had acted improvidently.  He, in effect, revamped the property in the light of experience instead of considering the propriety of the additions as of the time they were made.  Nevertheless a consideration of the whole record convinces us that there is more excess plant than was found by the trial court or disclosed by the report of the company's engineer.
We are unable to say from the record just how much of this excess plant there is.  It appears that Hill's estimate was 40% wrong by actual inspection in 1937.  Considering the method adopted by him which practically disregarded everything except future probable use, which was reduced to a minimum, his whole estimate becomes unreliable, and does not sustain the conclusions he reached.  We cannot make a complete analysis of his testimony but refer to the following as illustrating his method:  It was his view that vertical sections of buildings, even though they housed cafeterias, boilers, and power plants in actual use, should be classed as excess plant on the theory that this equipment could be located in other buildings, thus making a part of the buildings not useful.  Where two cables were run side by side, each in use to the extent of 30% instead of 60% which Hill considered appropriate, he would class one of the cables as nonuseful on the theory that the customers attached thereto could be shifted to the other cable.  In this connection it should be noted that neither the commission nor its engineers took the position that the plant was overbuilt or improvidently or wastefully provided.  The commission was apparently of the view that it was not required to take into consideration conditions existing at the time the so-called excess plant was installed.
Not every chance remark made by a court in commenting upon the facts of a particular case should be construed into a *Page 347 
rule of law applicable to all other cases.  If utilities are to be accorded the right to manage their own properties some effect must be given to their judgment in the acquirement and installation of their equipment.
The commission interprets the law stated in the St. JosephStock Yards Co. Case, 11 F. Supp. 322, 329, to mean that all property should be excluded from the rate base which is not in actual use plus a reasonable tolerance for the future. The commission said:
"We believe that the test is:  Would we reproduce one thousand pieces of plant if we actually need only five hundred now, no matter how prudent it may have been at the time of original investment to invest in the one thousand? It seems to us that there can be but one answer, and that is that the five hundred, with a reasonable tolerance for a reasonable time in the future, represents the property used and useful.
"We do not deny that ample provision of spare plant is required in a telephone company to guarantee continuity and adequacy of telephone service, but there appears to be no justification for including in the rate-base value large quantities of property which have been superseded through improvements in the art and rearrangement of plant to conform to the growth of communities, and further quantities of plant which will come into use, if at all, in the far distant future. . . .
"Furthermore, we regard it as unreasonable to say that property becomes used and useful because of its capacity to handle a load unprecedented over a number of years.  Common sense demands that some subscribers shall suffer slight delay in service during an acute emergency rather than that all subscribers shall pay perpetually for an excess of property only occasionally in use under extreme conditions."
If the theory of the commission is sound then rates are to be constructed on the basis of a remanagement of the property in the light of experience and present conditions.  We do not so understand the law even where confiscation rather than reasonable rate is the issue.  The company is entitled to *Page 348 
have the matter of excess plant determined on the basis of the existing plant which is being valued.  The commission may not construct a hypothetical plant which would render an equivalent service or reconstruct in theory parts of the existing plant and on that basis hold that any provision in the existing plant over and above that found in the theoretical plant is excess plant, which seems to be substantially what was done in this case.  This gives no effect to the broad discretion vested in the management.  In making its determination in this case the commission substituted the discretion of the witness for that of the managers of the property without in any way impeaching the discretion of the managers.  It is much easier to point out past errors in management than it is to avoid future mistakes.  A reasonable rate is one based on reason as applied to the property of the utility.  While the company must bear the burden of an unreasonable extension of its plant, and the risk that portions of it prudently acquired may become obsolete or not useful, it should not be penalized for failure exactly to anticipate future demands for service in a period of depression.  After careful consideration we are of the view that the amount of excess plant does not at the most exceed 2%.
                        WESTERN ELECTRIC PRICES.
In the making of the appraisal the commission and the company applied Western Electric prices.  This appears to have been done for the reason that the proof showed that Western Electric prices were at all times lower than competitive prices in the industry.  The controversy is affected by the fact that the capital stock of the Wisconsin Telephone Company, except qualifying shares, is owned by the American Telegraph  Telephone Company.  The American Telegraph Telephone Company also owns the Western Electric Company.  It appears from the evidence that the Western *Page 349 
Electric Company is in fact the manufacturing department of the American Telegraph  Telephone Company.  The fact that the company bought its equipment and supplies from an affiliated company, both being subject to the control of the American Telegraph  Telephone Company, naturally suggests that the transactions between the two companies should be subjected to close scrutiny.  The attitude of the commission in this matter seems to be based upon a statement made in Smith v. Illinois Bell Tel. Co. (1930)282 U.S. 133, 152, 51 Sup. Ct. 65, 75 L. Ed. 255.  The situation in that case with respect to affiliated companies was the same as the situation in this case.  The supreme court of the United States said:
"On the record in this suit, the [trial] court concluded that the city had failed to support its contention that these prices were exorbitant.  The court said that it appeared that for the past fourteen years the average profit of the Western Electric Company on its total business had not been `in excess of seven per cent and never above ten per cent.' That fact has evidentiary value but the finding does not go far enough.  The Western Electric Company not only manufactured apparatus for the licensees of the  Bell system but engaged in other large operations and it cannot be merely assumed or conjectured that the net earnings on the entire business represent the net earnings from the sales to the Bell licensees generally or from those to the Illinois company. Nor is the argument of the appellants answered by a mere comparison of the prices charged by the Western Electric Company to the Illinois company with the higher prices charged by other manufacturers for comparable material, or by the Western Electric Company to independent telephone companies.  The point of the appellants' contention is that the Western Electric Company, through the organization and control of the American company [A. T.  T. Co.], occupied a special position with particular advantages in relation to the manufacture and sale of equipment to the licensees of the Bell system, including the Illinois company, that is, that it was virtually the manufacturing department for that system, and the question is as to the net earnings of the *Page 350 
Western Electric Company realized in that department and the extent to which, if at all, such profit figures in the estimates upon which the charge of confiscation is predicated. We think that there should be findings upon this point."
The commission evidently interpreted this statement as a rule of law whereas the supreme court of the United States was merely stating a basis upon which further consideration of the case should be had upon its remand to the lower court. The court laid down a procedure to be followed upon a reconsideration of the case.  If an investigation should show that the prices charged by the Western Electric Company to the Wisconsin Telephone Company or any other subsidiary of the American Telegraph  Telephone Company were exorbitant or unreasonable to the detriment of the public interest, certain legal consequences would follow.
The commission in this case, acting upon the statement quoted, proceeded to make a superficial analysis of the Western Electric Company's business.  It said:
"The only way to find out whether the price of a particular article is reasonable is to find out what the cost is to manufacture and sell that article."
We have the word of an eminent economist that this is not sound economics.  1 Bonbright, Valuation of Property, p. 155, says:
"For all modern economists, even those who remain loyal to the orthodox theories of price determination, agree that production costs are very unreliable measures of value. Marshall's statement that `cost of reproduction exerts little direct influence on value, save when purchasers can conveniently wait for the production of new supplies,' would be generally accepted in the profession."
The commission seems to be of the view that in determining whether or not a reasonable price was paid for the products of the Western Electric Company, it was still valuing company property.  As a matter of fact it was dealing with *Page 351 
property which was bought and sold upon the open market. Certainly, in a shifting market, cost of manufacture would be a dubious guide in the ascertainment of price.
In this case, as in other instances throughout the trial, the commission rested its decision upon generalizations based upon general economic considerations instead of upon the facts of the particular case.  It said:
"Here again is the effect of economic disaster [referring to condition of the Western Electric Company].  A vast industry, carrying enormous overheads and no business to sustain it, increases its prices.  But by that fiat it cannot stamp those increases as reasonable, nor should such increases, propelled by the flight of business from the Western company, arbitrarily inflate the `fair value' of operating company property through the country."
In concluding this part of its consideration, the commission said:
"The 1929 equipment and material prices as quoted in Western Electric Company price lists have been adopted by the commission engineers as the best available prices corresponding to large volume production by the Western Electric Company."
The difference, amounting to $3,700,000 as found by the court and by the commission, results from the fact that the commission's engineer applied 1929 Western Electric Company prices as to part and 1934 Western Electric prices as to other parts of the equipment.  Just how a plant could be reproduced in 1934 upon the basis of 1929 prices is difficult to see.  It was apparently based upon the testimony of the witness Hill, who was of the opinion that 1929 Western Electric equipment prices represented the fairest estimate of the 1932-1935 cost level.  Hill's explanation was as follows:
"I have taken the point of view that the Western Electric Company is the manufacturing department of the Bell system and as such is the manufacturing department of the Wisconsin Telephone Company; that excess or not used and *Page 352 
useful manufacturing facilities of the Western Electric Company, which would be the cause of high manufacturing costs, if there were but a small volume of production, are in the same class as excess plant and property of the Wisconsin Telephone Company; that the material prices which are suitable and proper for use in a reproduction-cost estimate of the Wisconsin Telephone Company are the material prices which would result from the operations of a well-constructed, well-organized factory of size and organization properly adapted to the current volume of output. 1929 was the last year in which the plant and organization of the Western Electric Company might have been reasonably well adjusted to its volume of output at that time.  Consequently, I have used the 1929 prices as the best measure available to me at the present time of the normal cost of manufacture in a well-organized, well-equipped plant of the proper size."
It is evident that Mr. Hill did not adopt the procedure suggested by the supreme court of the United States in Smithv. Illinois Bell Tel. Co., supra.  He adopted the 1929 prices because in his opinion it constituted in 1932 and 1933 the normal cost of manufacture in a well-organized, well-equipped plant of the proper size.  We assume that he included in "normal cost" a reasonable profit.
It was not contemplated by the supreme court of the United States in Smith v. Illinois Bell Tel. Co., supra, that fair price should be ascertained on the basis of a theoretical plant adapted as to volume to the particular needs of a particular year.  This being true, the testimony of Mr. Hill furnished no basis whatever for resorting to 1929 prices. His testimony furnished no basis for the conclusion that Western Electric products were sold to the company at exorbitant rates.  The only remaining basis upon which the prices could be established was the state of the open market, and it is conceded that the Western Electric prices during all the years in question were lower than those of its competitors in this market.
It is considered that the trial court's finding that $3,700,000 should be added to Hill's appraisal of reproduction cost new *Page 353 
as adjusted by the commission because of the use of 1929 instead of 1934 Western Electric prices is correct.
                      INTEREST DURING CONSTRUCTION.
It is the contention of the company that approximately $1,500,000 should be added to the appraisal by the commission on account of interest during construction.  There is no disagreement with respect to the addition of interest.  The controversy relates to the amount to be added.  The company contends that approximately $3,500,000 should be added while the witness Hill estimates the amount of $2,000,000, while the witness Cook estimates the amount of $2,500,000 based on the Crowell appraisal, which amounts to about $2,000,000 based on the commission's valuation. The commission allowed approximately $2,000,000.
In considering this matter the trial court said:
"On this issue the plaintiff produced the testimony of its chief engineer Crowell, who met this problem by cutting off interest on fifty per cent of the exchange when fifty per cent of the telephones of that exchange were prepared to be given service, at which time an exchange would be opened for business for the first time.  Thereafter he cut off interest in proportion to the value of groups of telephones as such groups of telephones were given service.  This cut off of interest was done from time to time on groups of telephones instead of on each telephone as each telephone was cut in, in order to avoid interminable calculations.  The number in such groups of telephones depending on the attending conditions. By the use of such formula he arrived at 9.42 months time as the construction period, and at approximately $3,500,000 as interest allowance.  The plaintiff also produced Maynard A. Cook of the firm of Sloan  Cook, consulting engineers of Chicago, Illinois.  He used a different formula than did Crowell and arrived at a 6.6 months time as the construction period, and at approximately $2,000,000 as interest.  However, under the formula used by him he designated about $1,900,000 additional interest to going value.  Under his formula he stopped interest, as such, after the initial cut in, and the amounts which Crowell continued *Page 354 
to include as interest after the initial cut in of fifty per cent of the exchange, Cook designated as going value.  The result then being that Cook in fact allowed more for interest than did Crowell, but designated part of it as going value. Crowell designated it all as interest and made a separate and independent appraisal of going value elsewhere.
"Cyrus G. Hill the commission's engineer arrived at 6.84
months time as the construction period, and at approximately $2,000,000 as interest.  He used the same formula used by Cook and stated, as did Cook, that a part of what Crowell had included as interest belongs in an appraisal but should be included as going value.  However, Hill testified that the commission had not requested him to make an appraisal of going value, and that he had not included going value in his appraisal anywhere.
"In its final order the commission states: `We therefore find that the amount of interest determined by the commission's staff of approximately $2,000,000, which is about the same as calculated by the company employed engineer Cook, when related to the commission's valuation, is the absolute maximum amount which could be allowed as interest during construction.'
"This court is unable to find any basis in the record for the assumptions made in the foregoing quotation.  The premise being false and erroneous, any conclusions based thereon must be similarly considered."
The question seems to involve a matter of classification. Should certain estimates properly be included as interest during construction or as going value?  The witness Hill and the witness Cook classified $2,000,000 as interest and the remainder as going value while the witness Crowell attributed the whole amount to interest.  There seems to be no disagreement that on some basis a sum in excess of $2,000,000 should be added to the appraisal.  No consideration seems to have been given to this item by the commission in establishing going value.  In respect to going value the commission said:
"We have valued the property of the company after giving consideration to the fact that the company is a going concern *Page 355 
and to book investment and values which include costs of training the organization of the company and of developing routines, practices, and records to the extent that such items enter into the cost of telephone plant.  We believe this gives full consideration to the element of going value and that no separate additional allowance is warranted by the facts."
It is apparent that in determining going value the commission gave no consideration to the interest element.  On the basis of this determination it is considered that the trial court rightly added to the appraisal $1,061,036 for additional interest.
At this point we digress for the purpose of expressing some views with reference to valuation of public-utility properties.  While the commission said that it gave and there is no reason to suppose it did not give consideration to book investment, the whole emphasis throughout this valuation proceeding covering a period of nearly five years has been placed upon the cost of reproduction new.  When Smyth v.Ames, supra, was decided in 1898, public utilities were subject to little, if any, effective regulation.  In the financial structure of utility companies, especially railway companies, was to be found a large amount of so-called water.  There was no systematized accounting and it was practically impossible to discover from the records of a utility company the so-called book cost of the property.  There was therefore no other practical way to ascertain its value than to consider what it would cost to reproduce it new, and then depreciate that cost to the present condition of the plant being valued. Here we have a plant which has been under state supervision since 1911, and under federal supervision since 1913, has been required annually or oftener to report to regulating authorities every dollar of its earnings and expenditures and at all times it has been subject to strict supervision as well as regulation.  Just why a million and a half to two million dollars should be spent in appraising a hypothetical plant that would never be built, under assumed conditions that never *Page 356 
can exist, on the basis of price levels which are mere estimates, by a construction force which must be hypothetical, and then assume that that represents the fair value of the plant and give it controlling weight as against the book costs which are disclosed by records kept under strict governmental supervision, is difficult to see.  We expressed dissatisfaction with the emphasis placed upon reproduction new in valuing the property of public utilities in Waukesha Gas  E. Co. v.Railroad Comm. (1923) 181 Wis. 281, 194 N.W. 846. There is considerable evidence that it will ultimately cease to be a dominant factor in utility-valuation practice in cases where other more accurate and realistic bases are available.
In a dissenting opinion by Mr. Justice BRANDEIS, in which Mr. Justice HOLMES concurred, in Missouri ex rel. SouthwesternBell Tel. Co. v. Public Service Comm. (1923)262 U.S. 276, 299, 43 Sup. Ct. 544, 67 L. Ed. 981, it is said:
"Thus, for some time, replacement cost, on the basis of prices prevailing at the date of the valuation, was often adopted by state commissions as the standard for fixing the rate base.  But gradually it came to be realized that the definiteness of the engineer's calculations was delusive; that they rested upon shifting theories; and that their estimates varied so widely as to intensify, rather than to allay doubts.  When the price levels had risen largely, and estimates of replacement cost indicated values much greater than the actual cost of installation, many commissions refused to consider valuable what one declared to be assumptions based on things that never happened and estimates requiring the projection of the engineer's imagination into the future and methods of construction and installation that have never been and never will be adopted by sane men. . . .  And state utility commissions, while admitting the evidence in obedience to Smyth v.Ames, failed, in ever-increasing numbers, to pay heed to it in fixing the rate base."
See also concurring opinion by Mr. Justice BRANDEIS, in which Justices STONE and CARDOZO joined, St. Joseph Stock *Page 357 Yards Co. v. United States, 298 U.S. 38, 73,56 Sup. Ct. 720, 80 L. Ed. 1033.
See also concurring opinion, Mr. Justice FRANKFURTER,Driscoll v. Edison Light  Power Co. (1939) 307 U.S. 104,59 Sup. Ct. 715, 83 L. Ed. 1134.
In West v. Chesapeake  P. Tel. Co. (1935) 295 U.S. 662,689, 55 Sup. Ct. 894, 79 L. Ed. 1640, Mr. Justice STONE dissenting (Justices BRANDEIS and CARDOZO concurring), said:
"In assuming the task of determining judicially the present fair replacement value of the vast properties of public utilities, courts have been projected into the most speculative undertaking imposed upon them in the entire history of English jurisprudence.  Precluded from consideration of the unregulated earning capacity of the utility, they must find the present theoretical value of a complex property, built up by gradual accretions through tong periods of years.  Such a property has no market value, because there is no market in which it is bought and sold.  Market value would not be acceptable, in any event, because it would plainly be determined by estimates of future regulated earnings.  Estimates of its value, including the items of `overheads' and `going concern value,' cannot be tested by any actual sale or by the actual present cost of constructing and assembling the property under competitive conditions.  Public-utility properties are not thus created full fledged at a single stroke.  If it were to be presently rebuilt in its entirety, in all probability it would not be constructed in its present form.  When we arrive at a theoretical value based upon such uncertain and fugitive data we gain at best only an illusory certainty.  No court can evolve from its inner consciousness the answer to the question whether the illusion of certainty will invariably be better supported by a study of the actual cost of the property adjusted to price trends, or by a study of the estimates of engineers based upon data which never have existed and never will."
In West v. Chesapeake  P. Tel. Co., supra, the commission had arrived at a valuation by the application of price-trend *Page 358 
data to historical cost.  The court held that such a method of valuation was inapt and improper and that an order fixing rates on that basis was repugnant to due process of law.  The court said (p. 271):
"To an extent value must be a matter of sound judgment, involving fact data.  To substitute for such factors as historical cost and cost of reproduction, a `translator' of dollar value obtained by the use of price-trend indices, serves only to confuse the problem and to increase its difficulty, and may well lead to results anything but accurate and fair.  This is not to suggest that price trends are to be disregarded; quite the contrary is true.  And evidence of such trends is to be considered with all other relevant factors."
This would seem to imply that no valuation made without an appraisal and ascertainment of cost of reproduction could stand.  The court in the West Case, supra, criticized the data used by the commission in its valuation rather severely.  We have found no comparable criticism of the reproduction or replacement bases of valuation although it seems to be equally vulnerable in that regard.  While we adhere to the rule laid down by the supreme court of the United States it is difficult to see why a valuation arrived at by guess on the basis of estimates should form the legal basis for depriving a litigant of its property, or be the justification for excessive charges to the public.  In this connection see 37 Mich. Law Review, 1209, The Rate Base, by Paul G. Kauper, where the authorities are cited and the problem carefully analyzed.
                            TOLL SEGREGATION.
Prior to the issuance of the final order in this case the commission had considered that the local telephone charge should cover the cost of service to the toll switchboard, and the charge for toll service should cover the service from toll switchboard to toll switchboard.  The exchange plant therefore was considered to be that part of the plant employed in local service and in the extension of service to the toll switchboard. *Page 359 
In its order in this case the commission excluded from the rate base the value of the so-called terminal toll plant which had theretofore been considered a part of the exchange plant, and allocated 7.4% of the plant value to toll, but made no provision for a change in toll rates so that the company, although the value of the toll plant is excluded from the rate base, is now required to provide for the expense of operating and maintaining a toll plant out of exchange revenue.  In this connection it should be pointed out that in three cases where the commission had this matter directly before it, the last one being In the Matter of the Applicationof Wisconsin Telephone Company for authority to increase its rates at its Marinette exchange, 34 W.R.C.R. 223, decided January 3, 1931, the commission itself held that the former method of accounting was correct.  We quote rather extensively because it discloses the nature of the controversy:
"However, the present method of accounting has been examined and approved by the commission in the past and we can see no occasion for a change.  Under the present method the fixed rental of the local subscriber is just what it would be if his local exchange were isolated and he has the advantage of knowing that, if occasion should arise, he can call distant points, at no additional cost except as he uses the toll service.  If, as the city advocates, a proportion of the toll revenue were credited to the local exchange this would have to be done for all exchanges in the state and, since the toll system does not show excessive earnings, there would then be two alternatives.  One would be to assess against each local exchange a corresponding proportion of the investment and expenses of the toll system which would nullify the benefit of the additional revenue.  The other would be to increase the toll rates and if this were equitably done it would increase the toll revenue from a given exchange by the same amount as was credited to it.  Neither alternative would reduce the total burden to be borne by the subscribers of the exchange in question but at the most only shift a larger proportion onto the subscribers actually using toll service.  Since, as pointed out above, these subscribers are already carrying the costs of the toll system in addition to paying their share of the local *Page 360 
exchange costs, while the subscribers not using the toll system have, at no cost, the advantage of the right of being connected to it, such a shift would be uncalled for."
Upon the strength of the ruling of the commission, the company has made contracts for the use of its toll lines upon that basis with some two hundred nineteen other companies. No doubt it is within the power of the commission to make such classifications and allocations as it finds proper and necessary, but the result of the final order with respect to terminal toll property is so manifestly unfair and unjust that we are of the view that it could only have resulted from a mistake of law.  The commission said:
"We dispose of the question of terminal toll, as a matter of law, under the Smith Case, as we understand it." (Smithv. Illinois Bell Tel. Co. (1930) 282 U.S. 133, 150,51 Sup. Ct. 65, 75 L. Ed. 255.)
It stated its position as follows:
"Exchange subscribers cannot be required to bear in exchange rates the burden of carrying the facilities from the subscriber's station to the toll board.  This is toll service. The supreme court expressly said that the exchange subscriber could not be thus imposed upon with such a burden on interstate toll calls.  The logic is the same, whether interstate or intrastate toll is involved.  The access to the toll board is toll on an intrastate call as much as on an interstate call.  If it is not exchange service on an interstate call (and the supreme court certainly said so), then it is not exchange service on an intrastate call."
The trial court could find no warrant in Smith v. IllinoisBell Tel. Co., supra, for the conclusions reached by the commission. Neither do we.  In the first place, the commission has power to regulate intrastate toll rates.  That is expressly so provided in sec. 221 (b) of the Federal Communications Act of 1934, 47 USCA, § 221 (b). *Page 361 
In Smith v. Illinois Bell Tel. Co., supra, the court said (p. 146):
"At the threshold of the discussion, we are met with the fact that, in these findings, the commission and the court made no distinction between the intrastate and the interstate property and business of the company.  It appears that the property of the company in Chicago is used to render (1) what is called exchange service, all of which is intrastate, (2) intrastate toll service over its own lines and under arrangements with companies other than the American company, and (3) interstate toll service, which includes all the toll service rendered under arrangements with the American company.  The company introduced evidence separating the intrastate and interstate business and also the intrastate exchange business.  While the court regarded these computations as correct, and approved the method in which they had been made, still the court made no specific findings based on a separation of the intrastate and interstate property, revenuesand expenses, but determined the issue on the basis of the total Chicago property of the company.
"The court stated that this was done because that basis was less favorable to the company than that of its total intrastate property or of its intrastate exchange property. . . .  Considering that the difference would not affect the result, the court deemed it to be more convenient to pass upon the order of the commission without recasting the figures in order to make allowance for interstate or intrastate toll property and earnings. . . .
"In the method used by the Illinois company in separating its interstate and intrastate business, for the purpose of the computations which were submitted to the court, what is called exchange property, that is, the property used at the subscriber's station and from that station to the toll switchboard, or to the toll trunk lines, was attributed entirely to the intrastate service.  This method was adopted as a matter of convenience, in view of the practical difficulty of dividing the property between the interstate and intrastate services.  The appellants [commission] insist that this method is erroneous, and they point to the undisputable fact that the subscriber's station, and the other facilities of the Illinois company which *Page 362 
are used in connecting with the long-distance toll board, are employed in the interstate transmission and reception of messages. While the difficulty in making an exact apportionment of the property is apparent, and extreme nicety is not required, only reasonable measures being essential [citing cases] it is quite another matter to ignore altogether the actual uses to which the property is put.  It is obvious that, unless an apportionment is made, the intrastate service to which the exchange property is allocated will bear an undue burden — to what extent is a matter of controversy.  We think that this subject requires further consideration, to the end that by some practical method the different uses of the property may be recognized and the return properly attributable to the intrastate service may be ascertained accordingly."
What the supreme court of the United States was doing was to require interstate business to be separated from intrastate business.  It said nothing whatever about the allocation of revenues as between exchange and intrastate toll service. The commission in its final order says:
"The supreme court of the United States in the SmithCase refers to the `indisputable fact that the subscriber's station, and the other facilities of the Illinois company which are used in connecting with the long-distance toll board, are employed in the interstate transmission and reception of messages.' This can mean only one thing, namely, that the segment between a subscriber's station and the toll board on a call from Madison to Chicago is interstate commerce.  By the identical token, that identical segment is a part of any
toll, albeit intrastate toll."
We think this is a misinterpretation of what the supreme court of the United States said.  The supreme court did not say that the exchange subscriber might not be charged as a part of the exchange rate for the transmission of a message from his station to the toll board.  What the supreme court said was that the intrastate business could not be made to bear a part of the expense fairly attributable to interstate business.  The equipment between the subscriber's station and the switchboard is used for both interstate and intrastate *Page 363 
business.  From the order it is clear that the commission proceeded upon what it supposed to be a rule of law established by the supreme court of the United States.  The supreme court of the United States did not concern itself with the basis upon which intrastate rates should be determined, provided they were compensatory.  It stated the reason for the segregation as follows (p. 148):
"The separation of the 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 competentgovernmental authority in each field of regulation.  In disregarding the distinction between the interstate and intrastate business of the company, the court found it necessary to pass upon the fairness of the division of interstate tolls between the American and Illinois companies.  The court held that the division was reasonable and the appellants contest this ruling. But the interstate tolls are the rates applicable to interstate commerce, and neither these interstate rates nor the division of the revenue arising from interstate rates was a matter for the determination either of the Illinois commission or of the court in dealing with the order of that commission."
The law relating to the segregation of intrastate from interstate tolls does not control the action of the commission in making intrastate allocations of exchange and toll property.
The commission also intimates that although it has segregated the toll property and so denied the company the right to earn upon it and has allocated the expense and has made no provision for revenue, that the remedy of the company is by petition to have its toll rates increased; that the commission is considering only exchange rates.  The company complains and says with reason that if that was the case it was not made aware of it until the issuance of the final order.  It is to be remembered that this proceeding was initiated by the commission upon its own motion.  It ordered:
"That an investigation and inquiry be, and the same is hereby instituted on the commission's own motion into the *Page 364 
rates, charges, tolls, rules, service, practices, and activities of the Wisconsin Telephone Company."
The company says that until the final order was issued it had no means of knowing definitely when or how the toll service would be dealt with.  We are not advised when or how the proceeding became a local-exchange-rate proceeding. Certainly toll rates were within the scope of the commission's order which initiated the proceeding.  In its order for investigation the commission referred to a similar proceeding in the state of New York.  The commission in its order said:
"We believe that the state-wide plan is the sounder theory of telephone rate-making and it is the plan which we propose to follow in this investigation. . . .
"Perhaps the most notable instance of a state-wide telephone investigation was that instituted by the New York public service commission in 1921," and the commission quoted, among other things, the following:
"The amount of revenue necessary can then be obtained by rates (in the state-wide case) which are uniform, under like circumstances and conditions, instead of through hundreds of separate rates and classifications for the same character of service, with the consequent discrimination and undue preference.  Both toll and exchange rates can be so fixed and toll service costs and returns determined on a proper and sound basis."
The basis of the New York proceeding is set out in the 1931 order of the commission at length and clearly contemplates the investigation of all the property owned by the Wisconsin Telephone Company within the state of Wisconsin and all of the rates, tolls, and charges of the company.
If the commission in segregating toll property from exchange property had made a corresponding allocation of revenues, the final result would not have been materially affected, but when it failed to make any allocation of revenues or other provision for the expense of maintaining and operating what is now classified as toll property, it threw that expense back upon exchange revenues and cut the rate base by the *Page 365 
amount of property allocated to toll.  It did this upon authority of Smith v. Illinois Bell Tel. Co., supra, erroneously. The amount of the terminal toll segregation should be included in the rate base in accordance with its former decisions. We do not undertake to criticize the commission's classification.  When, however, it changes its classification it should be consistent.  It would seem to a nonexpert that the exchange subscriber is subject to a reasonable "ready to serve" charge.  Although he may never use it, the intrastate as well as the interstate toll property is maintained for his use.
                               CONCLUSION.
Our consideration of the questions relating to rate base results in the following:
Hill's appraisal of reproduction cost new as
  adjusted by the commission .................... $53,018,854
Add:
  Difference due to use of 1929
    instead of 1934 prices ......  $3,700,000
  Interest not included by the
    commission or added to going
    value ....................     1,061,036        4,761,036
                                -----------------------------
                                                  $57,779,890
Less:
  2% excess plant ............... $1,155,597
  Accrued depreciation 9.79% ....  5,656,651
  Interstate allocation .........    288,899        7,101,147
                                -----------------------------
                                                  $50,678,743
Plus:
  Working capital ..................................  750,000
  Intangibles including going value ............... 2,103,000
                                                  -----------
  Rate base (round numbers $53,500,000) ......... $53,531,743

The commission found total exchange, adjusted net operating income for the year 1934 to be $1,656,358.  On the rate base found by the trial court and modified by this court it *Page 366 
produces a return of 3.1%.  On the rate base found by the commission it produces a return of 5%.  It is clear that there is no ground for saying that the existing rates were unreasonable.  Subsequent experience confirms this conclusion.
Income of the company as per company brief is as follows:
    1936 ................................ $2,687,319
    1937 ................................  2,248,661
    1938 ................................  2,374,959

Income of the company as adjusted by the commission:
    1936 ................................ ----------
    1937 ................................ $3,071,762
    1938 ................................  2,786,660

In none of these years would the returns exceed 6% upon the base found by the court as modified.
The commission found upon the matter of fair return that 5 1/2% under all the circumstances and conditions existing at the time the order was made was reasonable.
We shall not undertake to review the order of the commission in that respect.  In this connection we call attention to Driscoll v. Edison Light  Power Co. (1939) 307 U.S. 104,59 Sup. Ct. 715, 83 L. Ed. 1134.  In considering the matter of rate of return in a case involving a public-utility corporation furnishing electric energy, the court said (p. 119):
"The rate of return was fixed by the commission at 6 per cent.  Witnesses for the utility brought out facts deemed applicable in the determination of a proper rate of return on the fair value of the property.  Their evidence took cognizance of the yield of bonds, preferred and common stocks of selected comparable utilities, the stagnant market for new issues, prevailing cost of money, the implications of the possible substitution of some governmentally operated or financed utilities for those privately owned and the dangers of a fixed schedule of rates in the face of possible inflation. From these factors they deduced that a proper rate of return would be from 7.8 per cent to 8 per cent.  An accounting *Page 367 
expert of the commission countered with tables showing yields of bonds of utilities; the yield to maturity of Pennsylvania public-utility securities, approved by the commission between July 1, 1933, and May 7, 1937, long term and actually sold for cash to nonaffiliated interests; yield of Pennsylvania electric utilities; financial and operating statistics of Pennsylvania electric utilities; money rates, and other material information.  He concluded 5.5 per cent was a reasonable rate of return.
"It must be recognized that each utility presents an individual problem.  The answer does not lie alone in average yields of seemingly comparable securities or even in deductions drawn from recent sales of issues authorized by this same commission.  Yields of preferred and common stocks are to be considered, as well as those of the funded debt. When bonds and preferred stocks of well-seasoned companies can be floated at low rates, the allowance of an over-all rate return of a modest percentage will bring handsome yields to the common stock.  Certainly the yields of the equity issues must be larger than that for the underlying securities.  In this instance, the utility operates in a stable community, accustomed to the use of electricity and close to the capital markets, with funds readily available for secure investment.  Long operation and adequate records make forecasts of net operating revenues fairly certain.  Under such circumstances a 6 per cent return after all allowable charges cannot be confiscatory."
The capital market in Pennsylvania certainly must be as favorable if not more favorable than the capital market in Wisconsin.  While lower rates of fair return have been found in other cases, such cases are not a dependable guide because in many of them the court is considering the issue of confiscation which may involve other factors so that it cannot be said as a matter of law that it is necessary that the property produce some specified rate of return.
In Wisconsin Gas  Electric Co. v. Tax Comm. (1936)221 Wis. 487, 266 N.W. 186, 268 N.W. 121, this court had under consideration the valuation by the Wisconsin tax commission of the property of the utility for tax purposes.  In *Page 368 
that case we were required to consider what rate of return should be adopted for the purpose of capitalizing earnings. While that method cannot be used in valuing property of a utility for rate-making purposes, the rate of return must be considered in each case.  This court approved the application of a rate of return of 6%.  The court said (p. 498):
"Plaintiff's claim that the proper rates of capitalization are seven, seven and one-half, and eight per cent, while the defendants in testing the validity of the commission's assessment have insisted upon the propriety of rates of five, five and one-half, and six per cent.  We assume that the rate at which the earnings of a company are capitalized must bear a relation to the rate of return currently being derived from capital invested in other taxable property."
We shall not consider the so-called adjustments made in the expenses of the utility in order to establish net income. However, our failure to deal with these matters must not be construed as approval of the methods employed.  In a general way, here as in consideration of the factors relating to the rate base, minimum figures are employed.  No consideration is given to the fairness or justness of expenses actually incurred and made by the management; the expense account is cut down on the basis of a remanagement of the business. Where the management has not been extravagant, improvident, or wasteful it is considered that the commission may not ignore actual expenses because in the light of experience and present conditions it is possible to say that some part of the expense might have been avoided.  From what has been said it follows that the judgment of the trial court in each case must be affirmed.
By the Court. — Judgment in each case is affirmed.
The following opinion was filed September 15, 1939:
The defendant has filed motions for rehearing and in connection therewith *Page 369 
a motion to modify the mandate in each case.  In its brief, in support of its motions, the defendant calls our attention to an obvious error in the opinion.  In the opinion it is said:
"The commission found total exchange, adjusted net operating income for the year 1934 to be $1,656,358.  On the rate base found by the trial court and modified by this court it produces a return of 3.1%.  On the rate base found by the commission it produces a return of 5%.  It is clear that there is no ground for saying that the existing rates were unreasonable.  Subsequent experience confirms this conclusion."
The adjusted net operating income for the year 1934 was in fact $2,951,834 as determined by the commission.  An error having been made in taking off the basic figure, the conclusions based thereon are also in error.  However, on the rate base found by the trial court and modified by this court, the net operating income for the year 1934 produces a return of only 5.5%, so that after the correction is made it still remains clear that there is no ground for saying that the existing rates are unreasonable.  We are cited to no authority and we find none holding that a return of 6% is an unreasonable return.  On the other hand, a return of less than 6% has in some cases been held to be not unreasonably low.  The statement made in the opinion is modified to conform to the corrections made here.
The second contention of the defendant is that the judgment of the circuit court in each case should be modified so that there shall be retained in the hands of the circuit court and subject to its disposition the funds required to be deposited by the plaintiff as a condition to staying the 1934 order and the final order.
The defendant relies upon the case of United States v.Morgan (1939), 307 U.S. 183, 59 Sup. Ct. 795,83 L. Ed. 1211.  There are two reasons why the motion to modify the mandate in this respect must be denied.  First, we find no provision in the statutes which authorizes the public service *Page 370 
commission in a proceeding conducted in 1940 to fix a rate for the year 1934.  If the judgment were to be modified as defendant claims it should be, that would be the practical result.
There is a second and more convincing reason.  The order in the Morgan Case was not a tentative or temporary order, — it was a final order fixing rates for the future.  As a condition of staying the order the district court required the stockyards operators to deposit the difference between the collected rate and the rate fixed by the order so that the patrons of the stockyards might be reimbursed if the secretary's order should ultimately be sustained.  Upon an appeal to the supreme court of the United States, the judgment of the district court confirming the order of the secretary of agriculture was finally reversed on procedural grounds.Morgan v. United States (1938), 304 U.S. 1,58 Sup. Ct. 773, 999, 82 L. Ed. 1129.  The merits received no consideration.
The 1934 order was denominated a temporary order and fixed the rate "for the period of one year unless the commission shall in the meantime alter or amend this order."  The commission never attempted to amend or alter the order.  As a consequence, 1934 revenues which were by the terms of the order required to be reduced 10% from the schedule in force on the date of the order became final for the prescribed period.  The final order fixed the rate for the future and not for a limited period as did the 1934 order.  The 1934 order was vacated and set aside upon procedural grounds but the final order was set aside upon the merits.
In the Morgan Case, the issues presented were not tried upon the merits, and as indicated in the opinion of the court in United States v. Morgan (1939), 307 U.S. 183,59 Sup. Ct. 795, 83 L. Ed. 1211, have not yet been tried.  When the order of the secretary of agriculture finally fixes a rate it will be a rate taking effect from the date of his order, June 14, 1933, because that was the issue which the secretary *Page 371 
of agriculture attempted to determine and the one which will be passed upon by the supreme court of the United States when the case is finally decided.
In this case there has been a full and complete trial upon the merits.  The printed case now before us consists of fourteen volumes, a total of 7,320 pages, and large sections of the record were not printed.  In connection with the action to review the final order the whole evidence has been reviewed and it conclusively appears therefrom that the existing rate in accordance with which the plaintiff company collected charges from subscribers for the year 1934 was not unreasonable or unlawful.  The situation in this case is entirely different from the situation presented in the Morgan Case.  While the record at the time the 1934 order was issued was not complete and full, a complete record was made before the issuance of the final order.  As we pointed out in the original opinion, this is a single proceeding, not four separate and distinct proceedings.
We have given the brief of defendant full and careful consideration and we discover no reason for modifying the determination already made in this case.
In each case the motion for rehearing and the motion to modify the mandate are denied without costs.