Court Opinion

ID: 9772689
Source: CourtListenerOpinion
Date Created: 2023-08-29 17:26:35.174147+00
Date Added: 2024-06-11T07:31:46.986295
License: Public Domain

On Motions for Rehearing.
POPE, Justice.
Contrary to what we said in the original opinion, the plant value for depreciation purposes was correctly fixed by the trial court at $730,997.01. The record shows that the plant value was arrived at by computing the average between (1) the reproduction cost new before adjustment for present age and condition as urged by General Telephone, and (2) the gross book cost as urged by the City. Subtracted from each of those items in advance were land and certain equipment, which the parties agree should not be treated as depreciable items. General Telephone is entitled to recover that figure through depreciation, amortized over the life of the plant. Iowa-Illinois Gas & Electric Co. v. City of Fort Dodge, 248 Iowa 1201, 85 N.W.2d 28.
Hence, certain essential facts are settled. 1959 is the fair test year for the determination of net operating revenue and the operating expenses. General Telephone is entitled to a fair return on a rate base of $675,245.33. The plant value upon which General Telephone is entitled to compute its annual depreciation expense is fixed at $730,997.01. The trial court fixed not only the rate base, but also the plant value by giving equal weight to the appraisal methods urged by General Telephone and the non-appraisal methods urged by City. The issue is now narrowed to the determination of the depreciation rate, which in turn will control the amount of the depreciation expense. If the court fixed that rate too high, the expense for 1959 is too high, and the net income for 1959 is correspondingly too low.
The trial court erred because it fixed the annual depreciation rate by a method which is inconsistent with that used in fixing the rate base and the plant value. We do not hold that the straight-line accounting method of depreciation is a wrong method, *271nor do we hold that the appraisal method is the only right one. Both in proper context are correct methods. The court merged both methods in fixing the rate base and the plant value, and we approve that method. We do not hold that the trial court necessarily had to give equal weight to the methods urged by General Telephone and City. The court, perhaps could, and in a proper case should, give greater weight to the one or the other. In this case, however, we find that the court used both methods to arrive at a fair figure for two of the essential elements in the rate formula, but in fixing the annual depreciation rate it wholly abandoned the appraisal method. The inequity of this method is mentioned in our former opinion, but it can be further illustrated.
Exhibit 4 contains the evidence urged by General Telephone as the appraised value of the plant as of December 31, 1959. It shows the percent condition of the plant as of that date. This information was used by the trial court and is an essential part of the figure reached in both the rate base and the plant value. General Telephone’s proof of the annual depreciation rate is contained in its Exhibit 14. These were the rates used by the trial court. Depreciation was computed, not by giving weight both to appraisal and straight-line methods. Straight-line was used exclusively. This discloses that General Telephone used different methods for depreciating its property in connection with two significant elements in the result. When we place, side by side, the plant’s appraised depreciation, as found in Exhibit 4, and the straight-line depreciation, as found in Exhibit 14, we see the differences in the rates of depreciation produced by the methods.6 Buildings, under the appraisal method, on December 31, 1959, are ninety-seven per cent as good as new. For all time up to that date, they depreciated only three per cent. By shifting to the straight-line method, however, the buildings depreciate 2.25 per cent every year. Station connections, by appraisal, for all time up to December 31, 1959, depreciated only ten per cent, but by using the straight-line method, they depreciated fourteen per cent during 1959. Under the straight-line method, they depreciated more during 1959 than they had depreciated under the appraisal method for all time in the past. The other items are equally instructive.
The inconsistency is revealed by other proof offered by General Telephone. Its Exhibit 8 shows the appraised value of the plant as of March 31, 1959. This proof shows that the plant was 91.1 per cent as good as new. It had depreciated for all time in the past only 8.9 per cent. General Telephone further proved the appraised value of the plant as of December 31, 1959, nine months later. By that time, the plant had a total accrued depreciation of 9.02 per cent. During the nine-month period in 1959, therefore, the plant had depreciated only .12 per cent, a little more than one-tenth of one per cent. By shifting to the straight-line depreciation method, General Telephone proved that the plant depreciated 5.4 per cent during the twelve months of 1959. This was the figure taken by the trial court.
*272The court in fixing the annual depreciation wholly excluded any consideration of the method it had significantly considered in reaching the rate base and the plant value. The rate base and plant values were boosted by use of the appraisal method. The depreciation expense was also boosted by wholly excluding the low depreciation evidenced by the appraisal method. The net income for 1959 was correspondingly depressed. General Telephone failed to prove the appraisal depreciation for the twelve-, month period of 1959, and, in our opinion, the use of the appraisal method in two parts of the rate formula and its total exclusion in fixing the annual depreciation rate violated the admonition in Houston Natural Gas -Corporation, supra, that “The item of depreciation of a given piece of property appearing in current expenses for rate purposes should be closely correlated with the ‘fair value’ appraisal of the same piece of property from year to year, and the whole should be consistent.”
General Telephone argues that there was no point which attacks the depreciation rate. Both by point and argument, the matter is raised.7 Gleason v. Davis, 155 Tex. 467, 289 S.W.2d 228; Fambrough v. Wagley, 140 Tex. 577, 169 S.W.2d 478.
Both motions for rehearing are overruled and costs are taxed equally against the parties.

.
Exhibit 4 Exhibit 14
Appraisal Method Per cent condition as of Dec. 31, 1959 Straight-line Method for 1959
Buildings 97% 2.25%
Central Office Equipment 97 4.00
Station Apparatus 90 6.00
Station Connections 90 13.70
Pole Lines 82 5.00
Aerial Cable 90 4.00
Underground Cable 96 3.00
Aerial Wire 87 5.00
Underground Conduit 98 2.00

. City’s Point of Error
“4. The Trial Court erred in holding that 4.68% return on the Telephone Company’s investment was confiscatory (presuming the Trial Court found ‘expense-loading’ income derived from depreciation collected from Weslaco subscribers, over and above original cost, was not profit).” Argument
“The controversy is over whether or not the company must count as ‘profit’ the windfall it acquires through ‘expense loading,’ which makes the difference between their admitted 4.68% return, and the 7.-88% return they are making if the windfall from depreciation alone is put back in profit, where the City contends that it belongs. * * »
“Depreciation and maintenance should he honestly handled: Depreciation allowed as an expense must be correlated and consistent with depreciation deducted from the plants’ ‘fair value,’ else it is unfair to either the utility or subscribers. * ⅜ ⅜
“If the Telephone Company’s sworn statement that it has collected a depreciation reserve from Weslaco subscribers of $122,819.42 (or 18.4%) as of March 31, 1959, or $128,626.08 (or 18.2%) as of December 31, 1959, is correct, then their statements on Plaintiff’s Exhibit 8, that they have in the same period suffered actual depreciation of only 8.9% as of March 31, 1959, and only 9.02% as of December 31, 1959, is either patently false, or a large percentage of the actual depreciation has been recovered through maintenance. ⅜ * *
“But let us not ignore the mandate of honesty and fairness implicit in the dicta: ‘and the whole should be consistent.’ Such requirement of ‘consistency’ condemns as dishonest, and unfair, two sehed- - ules such as here involved, one claiming a high rate of depreciation and the other claiming that -the' full depreciation so claimed by the first did not in fact oceur. So if ‘fair value’ is used in determining expense, so must ‘observed depreciation’ be used in determining the extent thereof, and the Plaintiff must not be allowed to collect it again under the guise of ‘maintenance’.”