U.S. Supreme Court SMITH v. ILLINOIS BELL TELEPHONE CO., 282 U.S. 133 (1930)

[Page 282 U.S. 133, 147]

ice, 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, revenues and 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. In support of this view, the court said that according to the computations of the company, one-half of one per cent. of calls originated by subscribers resulted in interstate toll calls; that 3.62 per cent. of the company's property in Chicago was used in furnishing interstate toll service, and 2.54 per cent. of its property was used in furnishing intrastate toll service; that both on the reproduction cost new, as claimed by the company, and on the original cost, the percentag of return was greater for the total Chicago business than for the total intrastate business; and that the return for the latter was greater than for the intrastate exchange business. 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.

The appellants challenge this conclusion. [Footnote 1] They insist that the American Company used in its long distance service, without properly reimbursing the Illinois Company, the Chicago local exchange plant, and other facili-

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the American Company at the city limits. 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. [Footnote 2] The appellants insist that this method is erroneous, and they point 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. [Footnote 3] While the difficulty in making an exact apportionment of the property is apparent, and extreme nicety is not required, only reasonable measures being essential (Rowland v. Boyle, 244 U.S. 106, 108, 37 S. C.t 577; Groesbeck v. Duluth, South Shore & Atlantic Railway, 250 U.S. 607, 614, 40 S. Ct. 38 ), it is quite another

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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. [Footnote 4] 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.

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this suit), had provided that an allowance of.$1.13 was reasonable solely for the use of each telephone instrument, that the services of the American Company were of great value to the Illinois Company, that the annual payment under the license contract then averaged $2.10 per station for the city of Chicago, and that this payment was not excessive. [Footnote 5] The Illinois Commerce Commission, in the order now under attack, continued this allowance of

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$2.10 per station as sufficient to cover the rental and the services in question. [Footnote 6]

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no warrant for any further reduction. Without approving the reduction, the court accepted the ruling of the Commission for the purpose of determining the issue of confiscation.

It further appears that in the early part of the year 1926, the payment under the license contract was reduced from 4 1/2 per cent. of the gross earnings to 4 per cent. This reduction was made effective as of January 1, 1926, and the reduced rate was applied in the years 1926 and 1927.7 At the end of the year 1927, the conditions of the license contract were again changed by providing for the sale by the American Company to the Illinois Company of the telephone instruments (receivers, transmitters, and induction coils), and the American Company was relieved from its obligation with respect to their replacement and repair. It is said that the price paid was substantially the current price less 20 per cent. At the same time the payment under the license contract by the Illinois Company to the American Company was reduced from 4 per cent. to 2 per cent. of the gross earnings. [Footnote 8] On January 1, 1929, the

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years.' But no findings were made as to the value of the property and the revenues and expenses in these years. A rate order which is confiscatory when made may cease to be confiscatory, or one which is valid when made may become confiscatory at a later period. Des Moines Gas Co. v. Des Moines, 238 U.S. 153, 172, 173 S., 35 S. Ct. 811; Lincoln Gas Co. v. Lincoln, 250 U.S. 256, 268, 269 S., 39 S. Ct. 454; Brush Electric Co. v. Galveston, 262 U.S. 443, 446, 43 S. Ct. 606; Bluefield Co. v. Public Service Commission, supra. In view of this fact, and as the disposition of the amount withheld by the company under the conditions of the interlocutory injunction will depend on the final decree, there should be appropriate findings as to the results of the intrastate business in Chicago and the effect of the rates in question for each of the years since the date of the Commission's order.

In order that the necessary findings may be made, and such additional evidence as may be required for that purpose may be received, the decree is set aside, and the cause is remanded to the District Court, specially constituted as provided by the statute, for further proceedings in conformity with this opinion; the restraining order entered in this suit to be continued pending further action of the District Court.

It is so ordered. Footnotes

Footnote 1 In Board of Commissioners v. New York Telephone Co., , page 30, 46 S. Ct. 363, the appellants did not raise this question.

Footnote 2 On his ground, this method of separation has been approved by a number of state commissions. See Re Northwestern Bell Telephone Co., P. U. R. 1923B, 112, 170; Public Utilities Commission v. New England Telephone & Telegraph Co., P. U. R. 1926C, 207, 261; Re Hawkinsville Telephone Co., 138 Commission Leaflet (1923), 1112, 1115-1117. But compare Missouri & Kansas Telephone Co., P. U. R. 1918C, 55; Re Southern California Telephone Co., P. U. R. 1925C, 627; Re Chesapeake & Potomac Telephone Co. of Virginia, P. U. R. 1926E, 481, 626; Chesapeake & Potomac Telephone Co. of Virginia v. Commonwealth of Virginia, 147 Va. 43, 136 S. E. 575.

Footnote 3 The Interstate Commerce Commission has had under consideration the application of section 20(5) to the local exchange property which 'is open for use in interstate commerce and at any time may be so used.' Telephone and Railroad Depreciation Charges, 118 I. C. C. 295, 328-333; also Proposed Report (I. C. C.) of August 15, 1929.

Footnote 4 In Houston v. Southwestern Bell Telephone Co., 259 U.S. 318, 322, 42 S. Ct. 486, 488, relating to the ordinance of the city of Houston prescribing telephone rates for the company which operated not only the Houston local exchange but also long distance toll lines connecting the local exchange with various towns and cities in Texas and several other States, the company in practic, a nd for the purpose of the suit, 'credited the local exchange with 25 per cent. of the long-distance toll revenues received from calls originating in Houston as compensation for the use made of the local plant in rendering long-distance service,' and upon the facts there shown the Court held that the allowance was reasonably sufficient.

Footnote 5 The Public Utilities Commission found as follows: 'The record in the instant case shows that the present market price for the same instrument is $4.50 and on this basis the Commission finds that an annual allowance is.$1.13 is reasonable and adequate solely for the rental of each telephone instrument. The record shows, however, that the license to use various patented devices, the patents covering which are the property of the American Telephone and Telegraph Company, together with engineering, financial and advisory services, are of great actual value to the Chicago Telephone Company such value being evidenced in part by the actual annual saving effected over and above the operating costs should such devices and services not be available. The present payment made by petitioner and under the present license contract to the American Telephone and Telegraph Company averages about $2.10 per station per annum for the City of Chicago and about $1.91 per station per annum for the suburban territory. At $2.10 per station per annum, therefore, the maximum effect upon any one rate for service cannot exceed $0.18 per station per month. Since payment is made to the American Telephone and Telegraph Company by the Chicago Telephone Company of whose stock the former owns approximately 98%, it is necessary that the underlying contract be given scrutiny notwithstanding the fact that the Chicago Telephone Company, as a legal entity, is a free agent. A careful consideration of the evidence in the instant case discloses the unquestioned value of the general services rendered petitioner by the American Telephone and Telegraph Company. ... The particular amounts involved have been approved as items of operating expense in different jurisdictions by nine Commissions within the last three years, however, and the Commission after carefully considering all the evidence is of the opinion and finds that the present annual payment under the license contract, limited to $2.10 per station per annum for the City of Chicago and to $1.91 per station per annum for the suburban territory, is not excessive and may be allowed as an item of operating expense.'

Footnote 6 The finding of the Commerce Commission, after referring to the ownership of stock by the American Company, was as follows: 'The Commission believes from all the circumstances surrounding the payments made by the Illinois Bell Telephone Company to the American Telephone and Telegraph Company and the services rendered by the latter tothe former, and the cost thereof, should be at some time fully investigated, to the end that charges for the services may be properly established. The present record does not contain sufficient information to warrant this Commission in departing from the findings of the previous Commission in respect to the payments that should be made by the Illinois Bell Telephone Company to the American Telephone and Telegraph Company. The previous Commission found that payment by the Chicago Telephone Company to the parent company of $2.10 per station was sufficient to cover the value of the services rendered. It is certainly more equitable to base the charges for services rendered on the number of stations rather than on the gross revenue because any change in revenues results in a change in payments to the parent company, and would be made without respect to the services rendered.'

Footnote 7 In the Annual Report of the American Company for 1926 it was stated: 'The American Telephone and Telegraph Company was able during the year to make a reduction in its charge to its Associated Companies under its contracts for service, including the furnishing of telephones. The charge was reduced from 4 1/2 per cent. to 4 per cent. of the gross revenue of those companies, effective from January 1, 1926. The purpose of these contracts is not to make money for the American Telephone and Telegraph Company, but to further the development of the telephone art and to enable the growth and expansion of telephone service on a nation-wide basis. While the cost of furnishing the services to any one company, from the nature of the services rendered, cannot be determined, the total cost of furnishing services for all of the companies under the contracts can be approximated. The revenue of $29,850,303 received under the cntr acts during 1926 only slightly more than offset the estimated cost of over $29, 250,000.'

Footnote 8 With respect to these changes the American Company stated in its report for 1927: 'As the business grows and the country grows, conditions change. In the early days of the telephone business it seemed essential that telephone instruments be owned and maintained by a central organization. This condition no longer obtains, and, therefore, as previously stated, the telephone instruments heretofore owned by the American Telephone and Telegraph Company were sold to the operating companies and a reduction was made in the charge for services furnished under service contracts with those companies. In 1926 this charge was reduced from 4 1/2 per cent. to 4 per cent. of their gross telephone revenues, and this present reduction to 2 per cent. will result in revenues to the American Telephone and Telegraph Company somewhat less than the estimated cost of performing its services under these contracts. This is, however, in accord with our efforts to assist our Associated Companies in keeping down the cost of telephone service in every way possible.'

Footnote 9 The Interstate Commerce Commission has observed: 'In devising methods for accumulating, recording, and utilizing the data essential to the ascertainment of service lives and depreciation rates, the railroad companies may well take note of the experience of the telephone companies. Much of this research and planning work has been done for the Bell System companies by a central organization of a few carefully selected engineers and accountants, and in this way it has been done better and more economically than if each of the numerous operating companies had been left to its own initiative. The independent telephone companies have also profited from this work.' Telephone and Railroad Depreciation Charges, Proposed Report of August 15, 1929.