The plaintiff in this case is a Michigan corporation duly organized in accordance with the statutes of this State. It is now and for many years past has been engaged in carrying on a telephone business. In its operations, and particularly with reference to the matter of intrastate rates, it is subject to regulation
The instant case concerns the validity of a rate order made by defendant in the exercise of its statutory powers. Under date of May 18, 1944, defendant gave notice to plaintiff and to other utilities similarly situated that under certain contingencies service rates and charges would become subject to adjustment as of January 1, 1944. On October 3d following, plaintiff was notified that an investigation would be held for the purpose of determining whether its profits were too high and also whether it was charging unnecessary and avoidable expenses against the public. Hearings were had and from the testimony before it defendant concluded that for the year 1944 plaintiff had made excessive depreciation charges, that payments made by it to the American Telephone & Telegraph Company for services
Defendant's order above referred to was designated as an "interim order" and the commission stated therein that there should be further proceedings to determine the matter of possible adjustments for 1945 and subsequent years. Such hearings were held, and under date of December 13, 1945, the commission made the order that is in question in the instant case. In terms it required the plaintiff to reduce its intrastate gross revenues for each of the calendar years 1944 and 1945 in the sum of $3,500,000, and to refund such amounts to its subscribers. Schedules of intrastate rates and charges that should be effective from and after January 1, 1946, were also prescribed. On the 3d of January following, a supplemental order was made setting forth the method for distribution of the alleged overcharge for the years 1944 and 1945.
In accordance with the provisions of the statute, above cited, plaintiff appealed to the circuit court of Ingham county, alleging that the order of December 13, 1945, was unlawful, unreasonable, and confiscatory in that it constituted a taking of the
Pursuant to the order of the trial judge a transcript of the proceedings in circuit court was transmitted to the commission. On February 14, 1947, the latter made its order affirming the order of December 13, 1945, except in certain particulars. Modifications affecting rates for service in the Detroit zone were made and, in view of the decision of this Court in the case above cited, the provisions with reference to 1944 and 1945 were eliminated. Thus the order in question was in terms rendered prospective only.
In April, 1947, plaintiff sought to reopen the case for the purpose of taking further testimony. On July 7th following, a further or supplemental motion was made alleging increased expenditures in the operation of plaintiff's business and urging the necessity of considering such alleged developments. Because of the death of the circuit judge before whom the matter was pending, action on the motions was delayed. A formal order denying plaintiff's request was made November 3, 1948, the trial judge concluding that under the statute he was without jurisdiction to grant the relief sought. Thereupon plaintiff instituted a mandamus proceeding in this Court to compel the trial judge to set aside his order. The petition was denied. Michigan Bell Telephone Co. v. Ingham Circuit Judge, 325 Mich. 228 (81 PUR NS 599).
In the meantime, under date of August 27, 1947, plaintiff made application to the commission for permission
The stock of the plaintiff corporation, other than qualifying shares owned by directors, is held by the American Telephone & Telegraph Company, herein referred to for the sake of convenience as the American. The latter company has a number of corporate affiliates, of which plaintiff is one, to which it renders services designed to promote and facilitate their operations. The aggregate cost of the assistance so furnished is allocated on bases that plaintiff claims to be fair, logical, and proportionate to the benefits received by each affiliate. At the time of the proceeding here in question there was in effect a so-called license contract by virtue of which plaintiff paid to the American for services performed 1 1/2% on its gross annual revenues. That plaintiff is greatly benefited by the supervisory counsel and assistance rendered to it by the American is not questioned. It appears that in connection with its operations the latter company maintains a sizable fund for the purpose of enabling it to loan money to its affiliates, if such action is deemed proper.
Based on their business transactions and on the close relationship existing between the 2 corporations it is the claim of the plaintiff that it should not be treated as a separate corporate entity, but, rather, as a department of the American. The defendant
The bill of complaint filed by plaintiff in the circuit court averred that the commission was in error in thus dealing with the problem of rates. In support of its claim in this respect plaintiff relies on certain language found in the opinion of this Court in People, ex rel. Attorney General, v. Michigan Bell Telephone Co., 246 Mich. 198. That was a proceeding in the nature of quo warranto instituted by the attorney general for the purpose of determining the right of the Michigan Bell Telephone Company to have considered in the determination of rates the amount of payments made by it to the American under contract. The opinion referred to the fact that the status of the agreement between the corporations, designated as the 4% license contract, was the question at issue in the case. The relationship between the parties was discussed at some length and statements made that must be construed in the light of the issue before the Court. The conclusion was reached that in view of all the facts involved the Michigan company was not entitled to credit, in computing rates, for the amounts paid by it, as fixed by the agreement, to the American. It is significant to note that the proceeding was against the Michigan Bell Telephone Company and that the final order was entered accordingly. The Court referred to the prior decisions of City of
"A basic and necessary concession involved in the very structure of that litigation was that the Michigan company was conducting and carrying on a telephone business in the State. The purpose of the litigation was to fix its rates in its business in the State."
Plaintiff's claim that the Court held the Michigan company to be a mere instrumentality of the American for all purposes is not tenable. An analysis of the entire opinion, read in the light of the question before the Court, is conclusive in this regard. Unlike the case at bar, and also unlike the prior decisions referred to by the Court, the matter under consideration was not the determination of proper rates, but, rather, the status of a contract under which the Michigan company was claiming the right to take credit as a proper operating charge for payments, arbitrarily fixed, made under a contract between it and the American.
What is said with reference to the quo warranto case is equally applicable with regard to Michigan Bell Telephone Co. v. Michigan Public Utilities Commission, 297 Mich. 92 (39 PUR NS 111), on which plaintiff also relies. In that case, as in the case at bar, plaintiff instituted suit to set aside an order made by the defendant commission. Its position in the litigation was that of a distinct legal entity. It is on that basis that the State has heretofore dealt with the Michigan Bell Telephone Company. The plaintiff carries on its business here pursuant to the authority granted by the statute under which it is incorporated and subject to the right of regulation
The record indicates that the American occupies the same position with reference to its other affiliates as it does to the plaintiff. Such being the situation, the following language from the opinion of the United States supreme court in Smith v. Illinois Bell Telephone Co., 282 U.S. 133, 143, 144 (51 S.Ct. 65, 75 L ed 255), is squarely in point:
"The court found that 99% of the stock of the complainant, the Illinois company, is owned by the American Telephone & Telegraph Company which also owns substantially the same proportion of the stock of the Western Electric Company; that the Illinois and American companies unite in rendering long distance service under an arrangement for a division of tolls; that at the time to which the inquiry related, in October, 1923, there was in effect an agreement by which the Illinois company paid to the American company 4 1/2% of its gross revenues for rent of instruments and as compensation for engineering, executive, financial and other services; that a large part of the materials entering into the construction of the plant and equipment of the Illinois company were purchased from the Western Electric Company and much of its operating expense consisted of payments made under a contract with that company for apparatus and supplies. The court further found that the American company owned a controlling interest in 15 telephone companies which, in connection with other companies controlled by those subsidiaries and some companies
"Upon these facts the city attacked the standing of the Illinois company as the real plaintiff in the case. The court overruled this contention, holding that the ownership of stock by the American company, and its power to control the Illinois company, did not destroy the distinct corporate identity of the Illinois company. The court pointed out that the order of the commission was directed against the Illinois company, and that it was treated as a corporation for the purpose of compelling it to establish the prescribed rates for service furnished by the operation of the property to which it had legal title. No ground appears for assailing this ruling. The fact that the relation of the Illinois company to the American company may demand close scrutiny, in dealing with certain questions which bear upon the validity of the rate order, cannot obscure the essential basis of that order, that is, that the commission was imposing its requirement upon a corporate organization engaged in an intrastate public service and, as such, amenable to a valid exercise of the commission's authority."
During the period in question here plaintiff was entitled to earn a reasonable return on the fair value of its property devoted to the service for which the rates were prescribed. In determining the rate base plaintiff's book values were accepted as correct.
While expressing the opinion that it had the right to exclude from consideration as a part of the rate base items of property belonging to the American, the commission actually included for the year 1946 the sum of $1,697,000, made up of the following items:
"(1) The American Telephone & Telegraph Company's average investment in furniture and office equipment used in rendering license contract services;
"(2) The American Telephone & Telegraph Company's average investment in Bell Telephone Laboratories;
"(3) The American Telephone & Telegraph Company's average investment in 195 Broadway Corporation applicable to space occupied by the general departments. (The home office of the American
"(4) The American Telephone & Telegraph Company's average net working capital for the general departments; and
"(5) The American Telephone & Telegraph Company's average investment in apparatus, equipment and supplies to meet emergency needs of licensees and the American company's long lines department."
In including such amount the commission indicated, in its report made February 14, 1947, that it did so because of a desire to make certain that the return to the plaintiff should be well above the point of confiscation, and that such action was without prejudice to the right to reject the items in any future proceeding. In determining the rate base we find that the commission made no error of which plaintiff is entitled to complain.
In ascertaining the operating expenses properly chargeable to plaintiff's intrastate business the commission gave extended consideration to the so-called license contract, above mentioned. During the year 1944, to which the inquiry was specifically directed, the Michigan company paid to the American 1 1/2% of its gross earnings. It was estimated that for ensuing years the total amount of such payments would increase. Based on the testimony before it the commission concluded that there was no direct relation between the operating revenues of the plaintiff and the expense incurred by American in rendering the services in question. As we understand appellant's position here, it is not claimed that it is entitled to credit, as an operating expense, for the entire amount paid, but, rather, that the method followed by the American in apportioning to its affiliates, on bases deemed appropriate, the expense incurred in the performance of services
"We follow the policy of accounting for the total cost, and then apportioning or allocating that total cost among the companies, by using certain factors which we believe properly measure the benefits, relative amount of benefits which the companies participating derive out of the services that are performed.
"Now, fundamentally, the problem of allocating or apportioning these costs of the American company among all of the licensee companies is no different from the problem of apportioning overheads of a company which has several departments, or a company which operates in several areas. They are problems which accountants have to meet every day.
"Now, the problem, as I see it, does not become any more complicated because the service is performed by 1 company for other companies than if it were a single company, and there was a separate department performing those centralized services. In fact, the methods which we follow in making these allocations are equivalent to having just a single company with 1 department performing the services. * * *
"Now, those costs are determined by the respective departments and they notify the comptroller's office how much should be deducted from their total cost for services which are rendered to the nonlicensee companies. Then we deduct that amount from the total, and that gives us the amount that is applicable to the licensee companies. The rule followed in making the allocations is for the departments to break down their cost, and then to suggest factors which should be used as appropriate for
"We have been allocating costs by companies for quite a number of years. The records will include an allocation for each one of the years, although we usually do not summarize it by companies until it may be necessary in a rate case. However, beginning with the year 1944, we changed that practice, and we are now currently advising each one of the licensee companies of the total cost, and their allocation in a form similar to the one I am using now as an exhibit. The aggregate of the allocations just equals the total cost of the American company. There would be no advantage to the American company in allocating to any 1 company more than its share because if we allocated more than 1 company's share, some other company would have less allocated to it, and vice versa. If less is allocated to 1 company, some other company may have to pay more.
"These companies all pay on the basis of 1 1/2% of the license contract, except for the long lines department. The long lines department pays on the basis of cost."
Expert witnesses testifying for the commission challenged the accuracy of the method followed by the American in making the allocations. The commission determined from the proofs that the apportionment to plaintiff did not reflect the cost to the American of the services for which it was entitled to charge plaintiff in the instant case. With reference to the year 1944, plaintiff claimed that it was entitled to credit as an operating expense in the amount of $960,000 of the total sum, somewhat in excess of $1,000,000, paid to the American. After discussing the various services rendered, the commission concluded that a maximum of $475,671 was
In support of its claim that the allocations made by the American should have been accepted, reliance is placed on the decision in Southwestern Bell Telephone Co. v. State Corporation Commission, 169 Kan. 457 (219 P.2d 361). Involved in said case was a statute requiring that in a rate proceeding before the State corporation commission the public utility concerned should establish the actual cost to its holding or affiliated companies of services, materials or supplies, furnished. The plaintiff in the case, an affiliate of the American Telephone & Telegraph Company, filed application for a rate increase showing, as a portion of its proofs in support thereof, the charges made against it for services rendered by the American. The showing so made was not contradicted or disputed. The corporation commission, however, deemed it insufficient and dismissed the application. On appeal the district court set aside the order, and the Supreme Court of the State affirmed the action of the trial court. In substance it was held that the uncontradicted testimony constituted a sufficient compliance with the statute. Of like import are Pacific Telephone & Telegraph Co. v. Flagg, 189 Or. 370 (220 P.2d 522), and In re Northwestern Bell Telephone Co., ___ SD ___ (43 N.W.2d 553) (cert. denied 340 U.S. 934 [71 S.Ct. 489, 95 L ed 675]), also cited by appellant. In each case the utility involved was an affiliate of the American Telephone & Telegraph Company, and the allowance of payments made to the latter corporation for services rendered under contract was at issue. As in the Kansas Case, supra, the testimony on behalf of the utility was not contradicted. It was held in each
In the case at bar the showing made on behalf of plaintiff with reference to the matter in question was, as above noted, challenged by expert witnesses on behalf of the commission. Such being the situation it devolved on the fact-finding body to determine which of the divergent views presented was correct. The trial court obviously reached the conclusion that the commission was not in error in accepting the testimony of its experts. In discussing a somewhat analogous situation, this Court said in City of Detroit v. Michigan Railroad Commission, supra, 433, 434:
"On matters involving the exercise of good common sense and judgment only, the determination of the commission must be held to be final unless such determination in its application results in the establishment by `clear and convincing' proof of a rate so low as to be confiscatory or so high as to be oppressive. What return a public utility shall be entitled to earn upon its invested capital, and what items shall be considered as properly going to make up the sum total of that invested capital, are questions of fact for the determination of the commission, and their conclusions thereon, upon which the rate is based, are unassailable unless, as a necessary result, it can be affirmatively asserted that the resultant rate is unreasonable and unlawful.
"Between the point where a rate may be said to be so low as to be confiscatory and the point where it must be said to be so high as to be oppressive upon the public, there is a `twilight zone' within which the judgment of the commission may operate without judicial interference. Assume that the commission, in determining the amount of the capital invested, allows as an element of the sum an amount which the court, if charged with the initial duty of determination, might find to be excessive or inadequate; or, assume that the commission, in the exercise
The supreme court of the United States in Groesbeck v. Duluth, South Shore & Atlantic Railway Company, 250 U.S. 607 (40 S.Ct. 38, 63 L ed 1167), in reviewing issues appealed to it from the trial court, declined to disturb the decree from which the appeal was taken, on the ground that it could not be said that there was error in following the method adopted for the division of expenses between freight and passenger service. In the case at bar the order of the trial court should not be set aside unless it appears that the conclusions of the commission in prescribing the schedule of rates involved were based on insufficient proofs, or that the result was as to plaintiff unreasonable, confiscatory and unlawful. It becomes necessary in consequence to consider the more material items with reference to which the witnesses for the plaintiff and for the commission differed in their testimony.
Development and research work for the Bell telephone system, comprising the American and its affiliates, is performed by the Bell Telephone Laboratories, Inc., a nonprofit corporation the stock of which is owned in equal proportions by the American and by the Western Electric Company, an affiliate. The cost of work done is charged either to the Western Electric or to the American. The method followed in the division of costs is determined by the latter corporation. The Western Electric Company is the manufacturing member of the system. It makes and sells to the other affiliates the greater part of the equipment used in connection with their operations. The record indicates that a
The commission found that in 1944 the American assumed aggregate costs of $8,036,566 for development and research work. Counsel for plaintiff claim in their brief that for said year $4,118,533 was charged to Western Electric. A total of $279,675 was allocated to the plaintiff by the American. The commission reduced this to $45,258, concluding that the latter amount fairly represented the actual cost to the American of services rendered directly to the plaintiff. Such result was reached by eliminating items of expense that the commission thought were properly chargeable to the Western Electric as a legitimate part of the latter's manufacturing operations. The claim was advanced by witnesses for the commission that the method followed by the American resulted in relieving the Western Electric of a very material portion of the expense that it would be required to assume were it operating as an independent concern rather than as an affiliate of the telephone system. In this connection the assistant chief engineer of the commission, Verne H. Hufford, testifying before the court, said:
"The representatives of the American company have stated that their company pays the cost of development and research work which is mostly of a
"In either case the operating companies of the Bell system and the long lines department indirectly pay for substantially all of the development and research work performed by the Bell Laboratories.
"Basic knowledge means fundamental work of an underlying character in physics and mathematics and the pure sciences; and the specific work would be an improvement in either the art of manufacturing or in the performance of the particular object being manufactured by Western Electric Company.
"For the year 1925, the first year of the Laboratories' activities — it was organized that year — 31.1% of the development and research work were charged to the American Telephone & Telegraph Company and included in the assigned costs of the license contract service.
"The relative amounts so charged have been gradually increased over the years, and as of 1944, 66.12% was charged to the American Telephone & Telegraph Co.
"By 5-year intervals, these percentages were as follows: in 1925, 31.1%; in 1930, 42.73%; in 1935, 57.05%; in 1940, 57.46%; and in 1944, 66.12%.
"The source of the information set forth in those figures are the reports of the Laboratories and of the American Telephone & Telegraph Company, and the data is graphically presented on a chart in the report that the committee filed."
Other witnesses for the commission also disagreed with the plan observed by the American with reference to the cost of the Laboratories' research and development work. Cyrus G. Hill, who qualified as an expert of extended experience, testified as follows:
"Most companies in spreading overhead charges of this kind consider it correct accounting practice to allocate costs to the activities of the company to which they are directly related. In other words, overhead charges in connection with plant construction are usually allocated to plant construction; overhead charges in connection with operating expense are usually allocated to operating expense.
"The Michigan company capitalizes its direct construction expense, and it also capitalizes a part of the overhead or general office or executive expense which it considers related to construction expenditures. There is an account entitled expense charge construction, in which the company records those general overhead expenses for the various departments which it considers related to the construction of, or allocable to the construction of new plant, and therefore a capital charge.
"The Michigan company compensates the American company for those expenses on the basis of a percentage of revenues, and that account, known as general services and licenses, is included entirely as an operating expense. No part of it is capitalized."
Plaintiff's witness Dr. Oliver E. Buckley, president of Bell Telephone Laboratories, summarized in his testimony the nature of the work of his company, suggesting the theory as to division of costs contended for by plaintiff. He said in part:
"Bell Telephone Laboratories is responsible for technical advance and improvement in the Bell system. Their function extends all the way from the most fundamental research that relates to electrical
"We actually make the detailed designs and drawings from which the apparatus and equipment are built. We go even farther, and follow the performance of new types of apparatus into the field. We prepare instructions for its installation, repair, and maintenance.
"We even follow the quality and performance of the apparatus long after it has gone into service in the field, and take advantage of the information that we get from studying its performance in the improvement of subsequent models of apparatus.
"It is a wider range of function than most research and development laboratories have. * * *
"Well, most of the new ideas on telephone development, the development of new materials of communication, and new kinds of apparatus that might be made, originate within the Laboratories, or come about through the contacts of the research workers in the laboratory with the field forces of the telephone company, and with the manufacturing people in the Western Electric Company, and all are very close together.
"As ideas come up from within the organization, and around the needs of the telephone companies, as they are understood in laboratories from their contacts with the operating end of the Bell system we develop or form a research and development plan, and work out programs of work which are recommended to the American Telephone & Telegraph Company, or to the Western Electric Company, depending on the character of the work, for approval; and it is on the basis of such approved plans of work that we proceed with our research and development."
As before noted the American has maintained a fund to be used for making loans to the so-called licensee companies. In the year 1944, it is claimed, $2,746,000 was so held for future use by the plaintiff. During the period in question in the instant case no loan was made to Michigan Bell Telephone Company from such fund. The record indicates that had the American advanced money for plaintiff's use the rate of interest charged would have been 3.92%. For the alleged service in maintaining the fund the plaintiff for the year 1944 was charged $140,326, that is, such amount was allocated to plaintiff as its proper proportion of the cost. The contract in force did not in terms require the making of loans, but it is not questioned that the fund existed to enable the American to advance money to its affiliates when and if deemed necessary by it. The commission disallowed the item on the ground that it did not represent the cost of a service actually rendered. We think the conclusion of the commission that the maintenance of the fund was a part of the operations of the American was correct. The record does not justify a finding that the proper performance
In the course of its operations the American was required to pay for the year 1944 a franchise tax in the State of New York in the sum of $621,758, a New York excise tax amounting to $157,504, and a Massachusetts franchise tax aggregating $4,394. In addition, it paid $150,993 as a social security tax, $33,782 Federal excise tax, and $25,971 as a sales, use and occupancy tax, to the city of New York. The right of the American to allocate to its licensee affiliates the total amount of such taxes as a part of the license contract services rendered is claimed by plaintiff. The commission, however, determined that only the last 3 items were proper charges and that the amount of plaintiff's portion was $7,094. The action, in this regard, is supported by the testimony of the commission's witness Hufford. The record indicates that the excluded taxes were levied on the privilege of exercising the corporate franchises of the American. Such being the case, we think they constituted a burden resting on the American because of its financial operations in other States, and that no portion thereof was a proper charge against the plaintiff.
Other items with reference to which plaintiff questions the commission's action do not require specific discussion. None is of such size as to be of controlling importance. It is obvious that plaintiff's claims with reference to many of the items involved under the license contract, including those above considered, rest, in part at least, on the theory that plaintiff and the American should be treated together for the purposes of this case. For the reasons hereinbefore stated, we cannot agree with such claim. The commission dealt with plaintiff as a corporate entity conducting a utility business within
It is the claim of the appellant that, during the period here in question, it was entitled to a net revenue from its intrastate business in Michigan of not less than 6.81% annually on the rate base. Such claim rests largely on the testimony of plaintiff's chief accountant, Mr. Ferry B. Allen, whose conclusions in this regard were indicated in a computation (exhibit 196) set forth in the record. Said exhibit purported to be a summary of the capital and required earnings of the Bell system, with a statement of "required earnings" by the plaintiff. In effect the American and its affiliates were treated as an operating unit, the theory apparently being that each such affiliate might properly be charged with an obligation to pay its proportionate share of the aggregate amount that the witness claimed the American company was entitled to receive. The commission and the circuit court declined to accept the premise.
In the opinion rendered by the commission as the basis for the order of December 13, 1945, the plaintiff's net revenues for 1944, 1945 and 1946, under said order, were estimated, and the respective amounts indicated deemed adequate. In its report of February 14, 1947, the commission concluded that the approximate actual return for the year 1946 was, as shown by the monthly reports made by the plaintiff during such year, not less than 5.51% on the rate base as increased by the addition of certain items of property, above mentioned, belonging to the American. The result indicated was obtained by using a rate base fixed at $167,179,000, with an adjusted net income of $9,204,000. We find in the record a computation (exhibit 257) made by the general accounting department of the plaintiff under
Having asserted that the return permitted by the prescribed rates was, during the period involved in the instant suit, confiscatory, the burden of proof rested on the plaintiff to establish such fact by clear and satisfactory evidence. In Federal Power Commission v. Natural Gas Pipeline Co., 315 U.S. 575 (62 S.Ct. 736, 86 L ed 1037), the court had under consideration rates prescribed by the plaintiff for the defendant utility under the provisions of the natural gas act of 1938 (52 Stat 821 [15 USC, § 717]). The order of the commission was sustained, the court saying in part (p 585):
"The ultimate question for our decision is whether the rate prescribed by the commission is too low. The statute declares, section 4 (a), that the rates of natural gas companies subject to the act `shall be just and reasonable, and any such rate or charge that is not just and reasonable is hereby declared to be unlawful.' Section 5 (a) directs the commission to `determine the just and reasonable rate' to be observed, and requires the commission to `fix the same by order.' It also provides that `the commission may order a decrease where existing rates are unjust * * * unlawful, or are not the lowest reasonable rates.' On review of the commission's orders by a circuit court of appeals as authorized by section 19 (b), the commission's findings of fact `if supported by substantial evidence, shall be conclusive.'
"By long standing usage in the field of rate regulation, the `lowest reasonable rate' is one which is not
"The Constitution does not bind rate-making bodies to the service of any single formula or combination of formulas. Agencies to whom this legislative power has been delegated are free, within the ambit of their statutory authority, to make the pragmatic adjustments which may be called for by particular circumstances. Once a fair hearing has been given, proper findings made and other statutory requirements satisfied, the courts cannot intervene in the absence of a clear showing that the limits of due process have been overstepped. If the commission's order, as applied to the facts before it and viewed in its entirety, produces no arbitrary result, our inquiry is at an end."
Following a reference to the above-cited case, it was said in Federal Power Commission v. Hope Natural
"It is not theory but the impact of the rate order which counts. If the total effect of the rate order cannot be said to be unjust and unreasonable, judicial inquiry under the act is at an end. The fact that the method employed to reach that result may contain infirmities is not then important. Moreover, the commission's order does not become suspect by reason of the fact that it is challenged. It is the product of expert judgment which carries a presumption of validity. And he who would upset the rate order under the act carries the heavy burden of making a convincing showing that it is invalid because it is unjust and unreasonable in its consequences. Cf. Railroad Commission v. Cumberland Telephone & Telegraph Co., 212 U.S. 414 (29 S.Ct. 357, 53 L ed 577); Lindheimer v. Illinois Bell Tel. Co., 292 U.S. 151, 164, 169 (54 S.Ct. 658, 78 L ed 1191); Railroad Commission v. Pacific Gas & Electric Co., 302 U.S. 388, 401 (58 S.Ct. 334, 82 L ed 319)."
See, also, City of Detroit v. Michigan Railroad Commission, supra; 16 CJS, p 1456.
In considering the issue of confiscation in a case of this nature, it was said in Smith v. Illinois Bell Telephone Company, supra:
"In determining what is a confiscatory regulation of rates, it is necessary to consider the actual effect of the rates imposed in the light of the utility's situation, its requirements and opportunities. As was said in United Railways & Electric Co. v. West, 280 U.S. 234, 249, 250 (50 S.Ct. 123, 74 L ed 390), a rule as to rate of return can not be laid down which would apply uniformly to all sorts of utilities; `what may be a fair return for one may be inadequate for another, depending upon circumstances, locality and risk.' In the case the court restated the general rule in the language of the opinion in Bluefield Waterworks & Improvement Co. v. Public Service
Applying the principles recognized in the cases above cited and in other decisions of like import, may it be said that the plaintiff sustained the burden of proof resting on it and established that the order of the defendant commission in question here was unreasonable and unlawful on the ground that the rates prescribed thereby were confiscatory? On this phase of the controversy the theories and claims of plaintiff's witnesses, particularly Mr. Allen, were challenged by the commission's expert witness Dr. Ralph E. Badger. Dr. Badger, whose testimony indicated long experience and study in the field of economics, testified at some length with reference to interest rates on loans to business corporations. Such testimony was not disputed and was accepted by the commission as indicating ability on the plaintiff's part to obtain at relatively low cost such sums
The matter of capital costs is obviously of prime importance in determining the issue of confiscation raised by plaintiff. Dr. Badger's conclusions with reference thereto were set forth in an exhibit prepared by him, and summarized in his testimony as follows:
"Exhibit 224 shows the overall cost of capital to a company on the assumption that it is going to finance to the point where bond interest absorbs 30% of the total income available; the balance of 70% is allocated to stock payments, where the assumed cost of the capital raised by bonds is to the company 2.735%; and where the assumed cost of the capital acquired by stocks is 6.56%. On that basis, the overall estimated cost of capital would be 4.62%; and those assumptions would result in a capital structure of 50.69% in bonds, and 49.31% in stocks. I would consider such a capital structure to be a reasonable structure in the utility industry, or in the telephone industry.
"I am not suggesting this as an ideal structure or a structure that any company should or should not follow. I am simply saying that on the basis of the figures previously presented, it is entirely consistent with those figures.
"All Bell telephone companies combined show capital structure absorbing between 25 and 30% of the total income available through fixed charges. Furthermore, the utility industry, as a whole, is financed on a capital structure, as we have already seen which shows out of total capital bonds in the amount of approximately 46%; preferred stock in the amount of approximately 15%; which would raise the amount of fixed income-bearing securities from 41 to 61%, and common stock and surplus in the amount of some 39%. So that this capital structure is not inconsistent with capital structures that already exist extensively in the utility industry."
Plaintiff is admittedly entitled to such a return as will permit it to render proper service to the public within the scope of its operations, to meet its financial obligations, and to inspire confidence on the part of investment capital. Exhibits were introduced before the circuit court indicating the return on invested capital received during stated periods by various types of industrial concerns, including corporations engaged in manufacturing businesses. It was shown that the return from such enterprises fluctuated from time to time to a far greater extent than have the earnings of the plaintiff. The stable character of plaintiff's business, its consistently steady growth over past years, its prospects for the future, and the general position that it occupies in the financial and business world, are matters affecting the determination of the question before us. Our attention is not challenged to anything in the record indicating any material competition within the State.
Plaintiff is not entitled to a rate of return on its intrastate business comparable to the profit that an investor in more speculative enterprises might receive. Smith v. Illinois Bell Telephone Co., supra. The record does not establish that during the period in question, from January 1, 1946, until the order of December 13, 1945, was superseded by the subsequent order of the commission, capital investments in businesses comparable to that of plaintiff from the standpoint of prospects and stability earned a return materially higher than is here involved. Neither is such result indicated by general economic conditions of which we may take notice. The relatively low interest rates paid on conservative loans, to which Dr. Badger testified, is, to a large extent, a matter of common knowledge.
In dealing with the issue of confiscation in any case the court must necessarily look to all facts and circumstances involved. A rate of return that is unreasonably low under conditions obtaining in a particular locality or section obviously might not be so regarded elsewhere if the factual situation involved is different. In Willcox v. Consolidated Gas Co., 212 U.S. 19 (29 S.Ct. 192, 53 L ed 382, 48 LRA NS 1134, 15 Ann Cas 1034), it was held that 6% upon the value of the property of the utility actually used in the public service was sufficient to avoid a claim of confiscation for the reason, among others, that a return of such amount was commensurate at the time with the return on investments of a like degree of safety. In Alexandria Water Co. v. City Council of Alexandria, 163 Va. 512 (177 SE 454), the court declined to hold confiscatory rates yielding a net return of 4.98%, some emphasis being placed on the economic conditions then existing. In State v. Tri-State Telephone & Telegraph Co.,
The conclusion, above indicated, to the effect that each case of this character must be determined with reference to the particular facts and circumstances involved, is fully supported by authority. In the case at bar it may not be said that the commission was in error in accepting the testimony of its witnesses concerning the matters above considered. Nor may it be said with the requisite degree of certainty that the rate schedules fixed by the order of December 13, 1945, were confiscatory throughout the period involved in the instant case, that is, from January 1, 1946, to the effective date of the superseding order of the commission. Such period was not so extended as to require that separate consideration be given to the different years, or fractions of years, therein. Plaintiff had the right at any time during such period to make application to the commission for an examination of the question and a determination with reference to its rates. As hereinbefore noted, it, on August 27, 1947, exercised the privilege granted to it by the statute. This phase of the situation was referred to by this Court in Michigan Bell Telephone Co. v. Ingham Circuit Judge, supra. The statements there made need not be repeated. It was held that the trial court was correct in his conclusion that under the statute he did not have the requisite authority to reopen the matter for further proofs after the return of the defendant's report on
Plaintiff's contention that this Court should take judicial notice of the 1948 order of the commission granting rate increases on intrastate service is not tenable. Such action might well involve an inquiry into the basis for the order. The mere granting of the increase does not in and of itself characterize the order involved in the case at bar as unlawful and unreasonable, nor does it necessarily corroborate the testimony of plaintiff's witnesses in this proceeding. As has been pointed out in numerous decisions, a rate may be made by a legislative body, or by a legislative agency, materially higher than is required to meet the constitutional test, and still be regarded as reasonable. City of Detroit v. Michigan Railroad Commission, supra; Federal Power Commission v. Natural Gas Pipeline Company, supra; Alabama Public Service Commission v. Southern Bell Telephone & Telegraph Co., 253 Ala 1 (42 So.2d 655). The question in the instant case, as above emphasized, concerns the alleged confiscatory character of the rates involved. On such issue we conclude that plaintiff failed to sustain the burden of proof resting on it.
The order of the circuit court is affirmed, with costs to defendant, and the cause is remanded for further proceedings.
NORTH, C.J., and DETHMERS, BUTZEL, BUSHNELL, SHARPE, BOYLES, and REID, JJ., concurred.