Court Opinion

ID: 9660682
Source: CourtListenerOpinion
Date Created: 2023-08-23 22:18:26.28569+00
Date Added: 2024-06-11T18:14:21.286262
License: Public Domain

SICKEL, J.
(dissenting). The question in this case is whether the previously existing intrastate rates, as increased by the commission on December 27, 1946, have become confiscatory. Matters to be considered are first, the value of the company’s investment, second, its income and third, its operating expenses.
Depreciation is regarded as a legitimate item of expense. It 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. * * * In determining reasonable rates for supplying public service, it is proper to include in the operating expenses, that is, in the cost of producing the service, an allowance for consumption of capital in order to maintain the integrity of the investment in the service rendered.” Lindheimer v. Illinois Bell Tel. Co., 292 U.S. 151, 54 S.Ct. 658, 664, 78 L.Ed. 1182.
The “straight line” method for determining investment was used by the company in this case. “By this method the annual depreciation charge is obtained by dividing the estimated service value by the number of years of estimated service life. The method is designed to. spread evenly over the service life of the property the loss which is realized when the property is ultimately retired from service. According to the principle of this accounting practice, the loss is computed upon the actual cost of the property as entered upon the books, less the expected salvage, and the amount charged each year is one year’s pro rata share of the total amount.” Lindheimer v. Illinois Bell Tel. Co., supra.
The amount of the depreciation is charged annually to expense. In common practice the corresponding entry is a credit to the capital or investment account, but that practice has not been followed by the company in this case. Instead it has credited the amount of depreciation to an account *395designated as “Depreciation Reserve”. “As the allowances for depreciation, credited to the depreciation reserve account, are charged to operating expenses, the depreciation reserve invested in the property thus represents at a given time, the amount of the investment which has been made out of the proceeds of telephone rates for the ostensible purpose of replacing capital consumed. If the predictions of service life were entirely accurate and retirements were made when and as these predictions were precisely fulfilled, the depreciation reserve would represent the consumption of capital, on a cost basis, according to the method which spreads that loss over the respective service periods. But if the amounts charged to operating expenses and credited to the account for depreciation reserve are excessive, to that extent subscribers for the telephone service are required to provide, in effect, capital contributions, not to make good losses incurred by the utility in the service rendered and thus to keep its investment unimpaired, but to secure additional plant and equipment upon which the utility expects a return.” Lindheimer v. Illinois Bell Tel. Co., supra.
W. R. Johnson, the company’s statistician, estified that “depreciation expense is the provision to meet the loss of investment when depreciable plant is retired from service. All the properties used in rendering telephone service will ultimatly be retired, either because it is worn out, has become inadequate, or because it must be replaced for other reasons, such as replacing aerial plant with underground plant. This is a cost of rendering telephone service * *
The company’s witness Jensen testified that since 1933 they calculated the accruals for depreciation and recorded the charges to the reserve for South Dakota. They made the apportionment to South Dakota of the depreciation reserve as of December 31, 1933, of $1,234,845 (Exhibit A-7) added the net increase in the reserve from December 31, 1933, to December 31, 1947, of $2,925,933, also depreciation of Dakota Central Company applicable to South Dakota at time of merger on June 30, 1942 of $2,084,064 and depreciation reserve of general area office applicable to South Dakota on December 31, 1947, of $129,182. The total of this is $6,374,024 shown line 11, Exhibit A-7. Of this sum the intrastate share is $5,135,092.
*396Swancutt, the company’s appraisal engineer, testified: “The depreciation reserve makes provision for the expected ultimate loss of capital resulting' from future retirements due to inadequacy and obsolescence which have not yet occurred.” He deducted $7,415,971 from the current cost new. “That represents an accrual for all kinds of depreciation including obsolescence, inadequacy, wear and tear that would have been made, assuming this property to have been built at current cost levels and the accrual rates for depreciation and purposes to have been as they were.” He further testified that if there is any obsolescence or inadequacy in the present property, that would be taken into account by deduction of the entire amount of the depreciation reserve requirements.
The question is whether the method pursued by the company as outlined in the above testimony is the proper method of calculating the “allowance for the consumption of capital in order to maintain the integrity of the investment in the service rendered.” Lindheimer v. Illinois Bell Tel., supra.
Prom the testimony of the witnesses, as above related, it appears that charges are made to expense and credits are made to the depreciation reserve, out of the proceeds of telephone rates, not only to represent the consumption of capital in the service rendered, on a cost basis, but also to replace worn out, obsolete and inadequate property with new and modern equipment sufficient to meet the needs of the company’s expanding business, at “current cost new”. The account has been used to provide for capital additions substantially in excess of accrued depreciation. The company has used the depreciation reserve account as “a means by which the public is compelled to loan the Company a substantial amount of money without interest, which the Company is privileged to invest in its plant, and on which the public will be required to pay the Company a fair return as well as additional depreciation annuities to compensate the Company on its retirement, and so ad infinitum.” State v. Tri-State Telephone & Telegraph Co., 204 Minn. 516, 284 N.W. 294, 313.
The only legitimate purpose of the reserve is to equal*397ize expenditure so as to take from the revenue earned in each year its fair share of the burden. To the extent that the annual charges include amounts that will not be required for that purpose, the account misrepresents the cost of the service, and is excessive. There is no way to ascertain the amount of such excess from the record in this case. These charges amount to the exaction of “capital contributions, not to make good the losses incurred by the utility in the service rendered and thus to keep its investment unimpaired but to secure additional plant and equipment upon which the utility expects a return.” Lindheimer v. Illinois Bell Tel. Co., supra.
By the company’s own calculation the depreciation reserve applicable to intrastate business in South Dakota, amounting to $5,341,579, is still at least fifty per cent greater than the existing plant depreciation at this time, in spite of the fact that the value of the company’s plant has almost doubled in the past ten years.
The company contends that it must maintain a large reserve to cover casualties, such as sleet storms. These casualties are properly chargeable to expense, payable out of the working capital fund. The experience of the company on these matters is shown by Exhibit A-77 stating the amount of casualty repairs in the State of South Dakota as follows: 1939, $534.00; 1940, $25,637.00; 1941, $36,089.00; 1942, $124,415.00; 1943, $32,091.00; 1944, $76,143.00; 1945, $3,940.00; 1946, $20,401.00; 1947, $9,695.00. There is nothing in the evidence to indicate that the working capital is likely to be inadequate to meet such expenses.
The present rates were established by competent authority in 1946 and were adequate at that time. The burden of proving them confiscatory is on the company. This burden does not shift to the commission simply because the books and records of the company are available to the commission and its examiners. In my opinion the company has failed to sustain its burden of proof in this case and that the decision of the Public Utilities Commission denying an increase in rates should be affirmed on the record as made. ■