Southern Bell Telephone & TeleGraph Co. v. Railroad Commission of South Carolina

ERNEST F. COCHRAN, District Judge. An order of the Railroad Commission of South Carolina dated March 24, 1921, prescribed certain telephone rates, effective from and after April 1, 1921. This order materially increased the existing rates. The General Assembly of South Carolina, by an act approved April 3, 1922, provided that no greater rates should be charged than were of legal force' and effect and on file with the Railroad Commission on January 1, 1921. The effect of the act was to abrogate the order of the Commission of March 24, 1922, and restore the previous rates and deprive the plaintiff of the increase provided by that order. The plaintiff brought its action to enjoin the enforcement of the act of the General Assembly approved April 3, 1922, on the ground that it was unconstitutional in that the rates restored by that act were unreasonably low and confiscatory and deprived the plaintiff of its property without due process of law. The defendants denied that the rates were unreasonably low and confiscatory. The ease was referred to a special master to' take the testimony and report the same. The order of reference also provided as follows: “That the special master shall report to the court his conclusions and recommendations as to (A) what is the value of the complainant’s property in this state, and (B) what is the gross income of the complainant, and (C) what should under,all circumstances be its net income, and for that purpose, in making up the statement to show the same, said special master is authorized, in order to ascertain the same, to pass upon the proper application and entries under the law and the testimony of all receipts and disbursements; subject to the supervision and conclusions of the court.” *90 The special master has filed his report. The defendants have filed their exceptions to this report, 16 in number. The plaintiff has filed no exceptions. The ease was heard by the court on December 17, 1924. At the hearing the case was argued orally, and both sides have filed printed briefs, and the case is now before this court for final decision on the merits. At the threshold we are met with opposing views as to the manner in which this court should consider and determine the case. The plaintiff contends that the findings of the master are prima facie correct, the presumptions in their favor, and they should not be overruled unless manifestly wrong, and, while conceding that before the master the plaintiff carried the burden of proof, contends that now upon the exceptions to the report the burden is, upon the defendants to show from the evidence that the findings of fact are erroneous in the respects charged in the exceptions. The defendants contend that the exceptions practically cover the whole case, that a Review of the evidence shows that the plaintiff has not met the burden upon it of showing that the rates are unreasonable and confiscatory, and that the parties are entitled (quoting from defendants’ brief) “to the benefit of the independent judgment of the court as to both law and facts.” There is much to be said in favor of the plaintiff’s contention, and indeed the eases sustain that point of view as a general rule. Crawford v. Neal, 144 U. S. 585, 596, 12 S. Ct. 759, 36 L. Ed. 552; Camden v. Stuart, 144 U. S. 104,12 S. Ct. 585, 36 L. Ed. 363; Davis v. Schwartz, 155 U. S. 631, 636, 15 S. Ct. 237, 39 L. Ed. 289; Girard, etc., v. Cooper, 162 U. S. 529, 538, 16 S. Ct. 879, 40 L. Ed. 1062. But in this ease the exceptions cover practically the whole ease on the merits, so far as the facts are concerned. The ease is an extremely important one, both to the plaintiff and the people of the state. It involves the question of whether or not an act of the lawmaking body of the state is to be declared in contravention of the Constitution, always a matter of great delicacy. Courts are especially reluctant to declare acts of the Legislature unconstitutional when the alleged uneonstitutionality rests upon facts. Such acts will not be declared unconstitutional unless the question is free from doubt, and where dependent upon a certain state of facts the proof of the facts should be clear and convincing. The use of the telephone as a means of communication has become an important part of the life of the people, probably equaling, if not surpassing, in importance the telegraph and the postal service. In every aspect the matter is one of grave concern. Therefore, without committing the court to a similar course in such cases arising hereafter upon exceptions to the master’s report, in this ease I have adopted the view of the defendants on this point and have studied and considered the case independently and apart from any presumptions in favor of the master’s report. In order therefore to properly exercise my independent judgment and arrive at my own conclusions upon the facts of the ease, I have read the pleadings and the testimony, and I have examined and considered the various exhibits in evidence, for a proper understanding and consideration of the testimony. I have also read (more than once) and studied carefully the able briefs filed by the attorneys on both sides. I have read all of the pertinent decisions cited in the briefs. I have given special consideration to those parts of the testimony indicated in the briefs. Upon a full consideration of the whple matter, and laying aside for the present any presumption in favor of the correctness of the master’s report upon the facts, I have reached the same conclusions that he reached. The facts as found by the master are amply sustained by the evidence. The rates of January 1, 1921, prescribed by the act of the Legislature are unreasonable and confiscatory and amount to a taking of plaintiff’s property without due process of law, and the act is therefore unconstitutional, null, and void, in so far as the plaintiff is concerned. The evidence is clear and convincing, and I have no reasonable doubt about it. Having reached this conclusion, I might well stop here, and refrain from any discussion of the facts or the law, inasmuch as the able report of the skilled and experienced master discusses the questions involved clearly, comprehensively, and succinctly. But in view of the nature of the ease and the very earnest and full presentation of the matter by defendants’ attorney, I will as briefly as possible discuss the more important features of the case. The general principles covering such cases are fairly well settled — the main difficulty lies in their application. The courts have no power to make rates. The Legislature, in order to guard the public from exorbitant rates on the part of public utilities, has the power either by legislative act, or acting through other agencies,- such as the Railroad Commission of this state, to *91 fix reasonable rates; but tbe Legislature cannot fix rates so unreasonably low as to amount to confiscation. If the rates are confiscatory, there is a taking of property without due process of law within the meaning of the Constitution, and an act of the Legislature fixing rates of such a character is therefore in violation of the Constitution and null and void. However, the rates fixed by the Legislature are presumptively reasonable, and the burden is upon the plaintiff in this ease to show that they are so unreasonably low as to be confiscatory, and the evidence relied on should be clear and convincing. In Smyth v. Ames, the Supreme Court said: “We hold, however, that the basis of all calculations as to the reasonableness of rates to be charged by a corporation maintaining a highway under legislative sanction must be the fair value of the property being used by it for the convenience of the public. And in order to ascertain that value, the original cost of construction, the amount expended in permanent improvements, the amount and market value of its bonds and stock, the present as compared with the original cost of construction, the probable earning capacity of the property under particular rates prescribed by statute, and the sum required to meet operating expenses, are all matters for consideration, and are to be given such weight as may be just and right in each case. We do not say that there may not be other matters to be regarded in estimating the value of the property. What the company is entitled to ask is a fair return upon the value of that which it employs for the public convenience. On the other hand, what the public is entitled to demand is that-no more be exacted from it for the use of a public highway than the services rendered by it are reasonably worth.” Smyth v. Ames, 169 U. S. 546, 547, 18 S. Ct. 434, 42 L. Ed. 819. See also Minnesota Rate Cases, 230 U. S. 434, 435, 33 S. Ct. 729, 57 L. Ed. 1511, 48 L. R A. (N. S.)1151, Ann. Cas. 1916C, 18; Bluefield, etc., v. Public Service Commission, 262 U. S. 679, 690, 691, 43 S. Ct. 675, 67 L. Ed. 1176. The value of the property employed in intrastate business must be ascertained and considered entirely apart from the property employed in interstate business. Such property, however, as is used jointly, must be apportioned between intrastate and interstate according to the use that is actually made of it for such intended service. Smyth v. Ames, supra; Minnesota Rate Cases, supra. “What the company is entitled to demand, in order that it may have just compensation, is a fair return upon the reasonable value of the property at the time it is being used for the public.” Minnesota Rate Cases, supra, 434 (33 S. Ct. 754); San Diego, etc., v. National City, etc., 174 U. S. 757, 19 S. Ct. 804, 43 L. Ed. 1154; San Diego, etc., v. Jasper, 189 U. S. 439, 23 S. Ct. 571, 47 L. Ed. 892; Willcox v. Consolidated Gas Co., 212 U. S. 19, 29 S. Ct. 192, 53 L. Ed. 382, 48 L. R. A. (N. S.) 1134, 15 Ann. Cas. 1034; Bluefield, etc., v. Public Service Commission, supra, 690 (43 S. Ct. 675). “The making of a just return for the use of the property involves the recognition of its fair value if it be more than its cost. The property is held in private ownership and it is that property, and not the original cost of it, of which the owner may not be deprived without due process of law.” Minnesota Rate Cases, supra, 454 (33 S. Ct. 762); Bluefield, etc., v. Public Service Commission, supra, 691 (43 S. Ct. 675). “If the property,, which legally enters into the consideration of the question of rates, has increased in value since it was acquired, the company is entitled to the benefit of such increase.” Bluefield, etc., v. Public Service Commission, supra, 690 (43 S. Ct. 678); Willcox v. Consolidated Gas Co., supra, 19, 41, 52 (29 S. Ct. 192). “The ascertainment of that value is not controlled by artificial rules. It is not a matter of formulas, but there must be a reasonable judgment having its basis in a proper consideration of all relevant facts.” Bluefield, etc., v. Public Service Commission, supra, 690 (43 S. Ct. 678); Minnesota Rate Cases, supra, 434 (33 S. Ct. 729). The evidence in behalf of the plaintiff fully meets the requirements of the foregoing decisions. The defendants offered testimony in rebuttal of the testimony of the plaintiff, and they rely to a great extent on the testimony of their expert witness. Eor the most part, however, the testimony of their expert consisted of criticisms of the methods adopted by the plaintiff’s experts in arriving at the present value of the property, and these criticisms and objections will be the subject of brief discussion later. There was some conflict in the testimony upon the facts, but the weight of the evidence is in favor of the plaintiff. The main objection presented by the defendants to the ease as made out by the evidence of the plaintiff may be broadly stated as based on the alleged insufficiency of the evidence in certain particulars. The criti *92 cisms or objections to the sufficiency of the case as made out by the evidence are contained in the exception to the master’s report- and are stated more in detail but grouped logically and comprehensively in the brief filed by their attorney. Before discussing these grounds of objections, there is one question presented by the defendants’ exceptions that should be first disposed -of. The defendants eharge that the master found both law and facts; whereas, under the order of reference he should have reported only his conclusions of fact. I do not consider the report of the master as intended to present conclusions of the law of the case generally, as in cases where issues both of law and faet are referred. The master was required to find “the value of the complainant’s property in this state.” The courts have laid down certain rules as to how that value should be ascertained. The master cited sóme of the various decisions and stated certain' conclusions of law merely to show clearly how he arrived at his conclusions of faet. There was no error in this. ín addition to this, however, the defendants have not ppinted out any error in the statements of law in the master’s report, nor has the court been able to find any. The're is no force in this objection. One of defendants’ main objections is that the plaintiff’s property upon which, under the Constitution, it is entitled to a fair return, is capital honestly and prudently invested, and not the value of the property at .the time of the inquiry. It needs but slight consideration of the subject to come to the conclusion that any rule which may be adopted to ascertain the value of the property of public utilities or the fate base for the purpose of fixing reasonable rates encounters grave difficulties in its application. There is much to be said for the adoption of capital honestly and prudently invested as the basis. The reasons for the adoption of this basis and the difficulties attending the application of the present value rule are strongly set forth in the dissenting opinion of Mr. Justice. Brandéis (e’oneurred in by Mr. Justice Holmes) in State of Missouri ex rel. Southwestern Telegraph Co. v. Public Service Com. of Missouri, 262 U. S. 276, 289, 43 S. Ct. 544, 67 L. Ed. 981, 31 A. L. R. 807; but the majority of the court were of the contrary opinion. In none of the line of eases beginning with Smyth v. Ames, decided in 1898, and ending with Ohio Utilities Co. v. Public Utilities Commission of Ohio, 45 S. Ct. 259, 69 L. Ed. -, decided March 2, 1925, did the Supreme Court adopt the rule of capital honestly and prudently invested as a rate basis, but, on the contrary, held to the rule of value at the time of the inquiry as the correct basis. Smyth v. Ames, supra; San Diego, etc., v. National City, 174 U. S. 757, 19 S. Ct. 80, 43 L. Ed. 1154; San Diego etc., v. Jasper, supra, 443 (23 S. Ct. 571); Willeox, etc., v. Consolidated Gas Co., supra; Minnesota Rate Cases, supra; Des Moines Gas Co. v. Des Moines, 238 U. S. 153, 35 S. Ct. 811, 59 L. Ed. 1244; Denver v. Denver Union Water Co., 246 U. S. 178, 38 S. Ct. 278, 62 L. Ed. 649; Houston v. Southwestern Telephone Co., 259 U. S. 318, 42 S. Ct. 486, 66 L. Ed. 961; Southwestern Bell Tel. Co. v. Public Service Commission, 262 U. S. 276, 43 S. Ct. 544, 67 L. Ed. 981, 31 A. L. R. 807; Georgia Railway v. Railroad Commission, 262 U. S. 625, 43 S. Ct. 680, 67 L. Ed. 1144; Bluefield, etc., v. Public Service Commission, supra; Pacific Gas v. San Francisco, 265 U. S. 403, 44 S. Ct. 537, 68 L. Ed. 1075; Ohio Utilities Co. v. Public Utilities Commission of Ohio (No. 210, March 2, 1925) 45 S. Ct. 259, 69 L. Ed. -. See, also, Northern Pac., etc., v. Dept. Pub. Wks., etc., 45 S. Ct. 196, 69 L. Ed. -. Therefore defendants’ contention that a fair return should be allowed only on capital honestly and prudently invested must be overruled. Another of defendants’ objections is that there is no satisfactory evidence of the actual original cost of plaintiff’s property. In the defendants’ brief this cost 'is spoken of as “actual cost” and also as “true historical cost.” I am not certain whether the defendants used the terms “actual cost” and “true historical cost” as synonymous or not. So far as the actual original cost of the property is concerned, the evidence is ample and shows fully just what that cost was, and the master’s finding of original or actual, cost is fully supported. But in the dissenting opinion of Mr. Justice Brandéis in Southwestern Tel. Co. v. Public Service Commission, supra, in note 6, subd. (d), it is stated that the original cost is the amount actually paid to establish the utility and should be ascertained by inspection of books and vouchers and other direct evidence, and that in determining the actual cost there is no attempt to determine whether the expenditure was wise or foolish, or whether it was useful or wasteful; but that historical cost, on the other hand, is the amount which normally should have been paid for the property, and is.in effect what is termed prudent investment. If the defend *93 ants by their objection mean that there is no satisfactory proof of the “historical cost” in the sense just mentioned, then the question simply reverts to the question of whether the rate should be on the basis of prudent investment, and that question I have already disposed of. Inasmuch as there was ample evidence to show the original actual cost of the property to the plaintiff, this objection must be overruled. One attack that the defendants make upon the case of the plaintiff is upon the ground that the conclusions as to the total reproduction cost new of the physical property of the plaintiff is based upon exaggerated, inflated, and untrue cost units at a time when prices were not normal. In other words, the defendants contend that the showing made as to the cost of reproducing the property new is insufficient, because, as they allege, the foundation is what is termed “unit cost” and this unit cost is alleged to be based upon incorrect or excessive dr abnormal prices. The defendants in their brief set forth many specifications of error both as to the methods and as to the actual facts in the ascertainment of the cost units and the actual cost of reproducing the property new. It would unnecessarily expand this decree to discuss them all in detail, but the main grounds will be adverted to. One ground under this head is that the unit costs were based on the inflated prices of 1918, 1919, and 1920. I quote from defendants’ brief as follows: “We respectfully submit that to allow public utilities to base their valuation for rate-making purposes on the enhanced cost of construction as it stood in 1918,1919, and 1920, would be to require the public to guarantee or insure public utilities a fair income under abnormal conditions and based upon abnormal conditions.” The evidence does not sustain the defendants in this contention. The evidence shows that prices rose during the war and after-wards, especially during 1918,1919, and 1920. The peak was reached in 1920, and thereafter there was a decline, and in 1922 and 1923 the bottom was reached, and thereafter there was some increase. The evidence further shows that the unit costs and prices and reproduction new cost were based on the prices and values of April 1, 1922, the time the plaintiff undertook, its appraisal, and the appraisal was brought down to December 31, 1923, the latter date being the latest practicable date to close the appraisal so as to conform to the rule that the value of the property should be ascertained at the time of the inquiry, and at that time, according to the testimony, there had been no material changes in labor or material costs from those prevailing in 1922. The defendants say, however, that in making this appraisal of 1922 and 1923 the plaintiff’s experts used certain “estimates” or “studies” of work in previous years, and that therefore all unit costs must be incorrect because based in part at least upon the previous “estimates” or “studies.” But the evidence shows that while previous “estimates” or “studies” were considered in a certain sense, nevertheless they were all either finally eliminated, their use explained so as to show that their use would not produce an incorrect result, or they were used simply to obtain the “productive hours” or “man hours” in arriving at the cost of reproduction. While certain of the “estimates” or “studies” were used in considering the “productive hours” or “man hours” of labor, the evidence shows that the prices used were those of 1922 and 1923. The defendants further say, however, that the previous “estimates” or “studies” should not have been used, because at the time they were made labor was very inefficient, and therefore they would furnish no safe guide. But the evidence shows that in whatever use was made of such previous “estimates” or “studies,” due allowance was made for that fact and all abnormalities. It must be borne in mind that we are now dealing with the testimony of experts who have made a study of labor and labor conditions. There is nothing‘before the court to show that such witnesses are not honest or trustworthy, and there is no reason to suspect them of dealing unfairly with the court. They say in substance that while certain “estimates” or “studies” were considered, nevertheless they made due allowance for the conditions under which such “studies” or “estimates” were made. An expert on labor conditions may take into consideration a broad extent of territory and a long period of time. The greater his range, both in point of territory and time, the greater the value of his opinions, provided he makes due allowance for differences in conditions both as regards time and locality, when he makes his deductions and arrives at his conclusions as to labor efficiency and productivity at a particular time and in a particular locality. This the witnesses say they have done, and I find nothing in the evidence to warrant discrediting their testimony. Among other specifications of alleged exaggerated costs, the defendants lay much *94 stress on the cost of these manholes as testified to by the plaintiff’s witnesses when contrasted with the testimony of defendants’ witnesses. While there is some conflict in the testimony, there is no great difficulty in reconciling the testimony of the various witnesses on this point. It appears that sewer manholes are of a different type and construction from telephone manholes, and, indeed, that there are different types of telephone manholes. The plaintiff’s witnesses all testify as to telephone manholes and were familiar with their specifications. Defendants’ witnesses (with one exception) were testifying about sewer manholes, and were not familiar with the specifications for telephone manholes. Only one of defendants’ witnesses testified that he was familiar with the specifications of telephone manholes, but he was familiar only with those telephone manholes constructed in 1912, and said he did not know what the specifications were for those constructed since 1912. Moreover, his testimony related to the cost of manholes in one city only. He had had experience in constructing manholes for the telephone company in Columbia, but he only laid the brick. The company furnished everything. While his estimate of the cost of constructing manholes in the city of Columbia was lower than the estimates of plaintiff’s witnesses as to the cost of manholes there and elsewhere, nevertheless I do not think his testimony sufficiently clear to overthrow the testimony of the witnesses for the plaintiff, who were men of large experience and testified positively., 1 think the weight of the testimony on the cost of reproducing the manholes is with the plaintiff, and I so find. The defendants also contend that there is no sufficient showing by plaintiff’s experts of the manner in which' certain operating expenses, which were incurred for the benefit of the whole plant in the several states in which plaintiff operates, were divided so as to arrive at the proper amount which should be apportioned to South Carolina. The testimony shows that the apportionment or division of the general operating or overhead charges referred to (that is, charges for service rendered more than one state) was based on, that is, in proportion to, the direct expenses in the respective states. The testimony also shows that this plan is universally adopted in making such an apportionment. The allocation is made monthly and the percentages vary from month to, month, but at the end of the year the final figures are obtained and a statement made out each year of the whole expenses apportioned to each state. While the final figures are combined, nevertheless they contain the proper apportionment of the general overhead apportioned to each state. It is true that the plaintiff’s witness stated that in the final statement made at the end of the year, he did not state the overhead and direct expense separately. But he also said: “We add the twelve months’ figures together each month by itself; we added those figures and got a year’s figures, which included the proper apportionment,” and he had previously testified that the proper figures were used in the figures he gave for the division or apportionment of such expenses to South Carolina. This method had been the method of the company for a number of years. I see no objection to it. Indeed, the defendants have not shown that this is an incorrect method, nor have they suggested any other that should be followed. The matter is one in which the court must rely to a great extent upon the testimony of experts. The experts have said that it is 'a correct method and was the method actually adopted. I see no reason,' therefore, for not adopting their conclusions in this respect. The defendants also criticize the result of the appraisal made by plaintiff of its property because of what is termed “unused investment,” and claim that the present value shown by the evidence should be rejected for that reason. From the evidence it appears that in establishing its plant in various towns and cities the plaintiff planned-for the future growth of such towns and cities and laid down therein equipment sufficient to provide for such growth. The defendants claim that the value of the additional equipment so provided for future use should not be included in the present value on which remuneration should be allowed, on the ground that it is idle capital. But such equipment is not idle capital in the proper sense of the term. A business concern, and especially a telephone company, must look to the future as well as the present. It is the part of wisdom to forecast the growth of communities they serve and be prepared to meet new conditions as they arise. It would be a very poor policy, and one that would entail tremendous expense in the long run, if a telephone company placed in a growing community conduits, lines, and other equipment barely sufficient for present demands, and then be forced after a few years, at enormous expense, to tear up the plant in order to place there the additional equipment necessary. Such a policy, instead of benefiting the public, would in the long run *95 entail heavier charges upon them and would deprive them, temporarily at least, of the additional facilities due to the delays necessary for the installation of the additional equipment required. Of course, proper business prudence also requires that additional equipment for future use, which must in á certain sense be unused for a period of time, should not be laid out, where such additional equipment can as readily be placed in the plant at the time it is needed. But the evidence in this ease shows that the provision for future use was not of that character, but a proper provision such as would effect a large saving in the long run. Neither should public utilities be allowed in this respect to project their plans too far into the future, and thereby entail too heavy an expense upon present patrons for the benefit of others in a dim and distant future. But considering the nature of the plaintiff’s business, I cannot find from the evidence that the time in the future for which plaintiff has planned and laid out its several properties is unreasonably distant, or that any of its expenditures in that behalf are unreasonable or beyond what a prudent business man would do under like circumstances. The defendants vigorously attacked the amount of depreciation to be deducted from the reproduction cost new in order to ascertain the present value as testified by the plaintiff’s experts and found by the master. This attack is made on three grounds, viz.: (1) Because depreciation was ascertained by physical examination of the property. (2) Because defendants claim there were many errors made in that examination. (3) Because the amount of “depreciation reserve” as shown by the books of the company is the true depreciation and should have been deducted. As to the first ground, the testimony shows that the plaintiff caused an actual physical examination of its property to be made for the purpose of determining the depreciation. There are various methods employed by experts to determine depreciation. The defendants’ expert apparently prefers what he terms “the straight line method.” As the court understands it, in this method the main factors are the age of the plant and its probable life. The age is ascertained from the history and inspection, and the probable life from studies and inspection by experienced men. It is assumed that the depreciation is uniform and constant, and defendants’ expert stated that it was used in those plants where the depreciation is uniform and constant. Having ascertained the age of the property and its probable life, a definite rule is obtained whereby to fix exactly the amount of depreciation at any particular time. Thus, as explained by the witness, if the property is five years old and its probable life is ten years, the depreciation is 50 per cent. It is obvious that this rule is highly theoretical and may in many cases lead to grossly erroneous results. This same witness also discusses the “curved line rule,” which assumes that depreciation comes on very slowly at first, so far as percentage is concerned, but rapidly towards the end.of the life of the property. This rule is more theoretical, if anything, than the “straight line method.” These rules may be of some value where physical examination is impossible. Of course, there is no method of determining depreciation with exact mathematical precision. In physical examination the depreciation rests upon estimates and opinions of witnesses. But the theoretical methods mentioned rest not only upon estimate and opinion, but upon the correctness of a theory which is of doubtful correctness in many cases, and which we know cannot be correct in all eases. My own view is that certainly in a ease of this kind the actual personal physical examination of the property by competent witnesses and their estimate and opinion of the actual depreciation is a better guide than any of the theoretical methods that have been suggested. The decisions practically sustain this conclusion. Pacific Gas & Electric Co. v. San Francisco, 265 U. S. 403, 44 S. Ct. 537, 68 L. Ed. 1075; Landon v. Court of Industrial Relations of State of Kansas (D. C.) 269 F. 445; N. Y. Telephone Co. v. Prendergast (D. C.) 300 F. 825. I may say that in passing upon the conflicting views of the experts on this and other matters in this ease, I have borne in mind and applied the following pertinent observations of the Supreme Court in North Dakota v. Minnesota: “It is difficult for a court to decide issues, of fact upon which experts equal in number and standing differ flatly and when their conclusions rest on estimates upon the correctness of which the court, without technical knowledge, cannot undertake to pass. In such cases, the court looks about for outstanding facts from which the lay mind can safely draw inferences as to the probabilities. The court is also aided by its judgment of the care and accuracy with which the contrasted experts respectively have determined the data upon which they base their conclusions. The experts called by Minne *96 sota in this case seemed to us to use more specific and accurately ascertained data for their estimates than those for North Dakota, and this circumstance, as well as the more satisfactory reasons given, lead us to think that their conclusions are more to he depended on.” North Dakota v. Minnesota, 263 U. S. 365, 385, 386, 44 S. Ct. 138, 143 (68 L. Ed. 342). As to the second ground, viz., that there are so many errors in the depreciation as shown by the appraisal as to destroy its value, both plaintiff and defendants had what is termed “spot cheeks,” made to determine the correctness of the appraisal. In making these “spot checks,” the person making it simply selected (arbitrarily and without designation by or knowledge on the part of the plaintiff or its officers-or agents) certain limited portions of the property, made a physical examination of it, and estimated the value for .the purpose of a comparison with the estimate of value placed upon the same portions of the property by the appraisers. The “spot check” made by plaintiff’s witnesses tallied fairly well with the values fixed in the appraisal, and such differences as appeared were slight and no more than were to be expected in such cases. The “spot check” of the defendants discloses numerous apparent discrepancies in valué, but these discrepancies were all either satisfactorily explained by the plaintiff’s experts, or were of such a minor character as were naturally to be expected, and in no view could they be said to cast any real doubt upon the value of the appraisal. As to the third ground, viz., that the “depreciation reserve” as shown by the books should have been deducted from the reproduction cost new; to ascertain present value, instead of the depreciation ascertained by the physical examination, the defendants contend that the “depreciation reserve” as shown on the books of the plaintiff should have been apportioned among states where the plaintiff operates, and the amount apportioned to South Carolina would be the true depreciation to be deducted. I cannot accede to this view. The “depreciation reserve fund” is merely a sum supposed to be set apart to take care of depreciation with a margin over. It is not as a matter of fact actually set aside, but is really simply entered on the books and is in fact a mere matter of bookkeeping. It does not represent actual depreciation, but only what observation and experience suggest as likely to happen, with a margin over. The law, however, requires actual depreciation to be deducted. See N. Y. Telephone Co. v. Prendergast (D. C.) 300 F. 825. Prom the defendants’ brief, however, it would appear that defendants’ real ground is, not that the “depreciation reserve” should be used as the true depreciation, but that it should be used to impeach the accuracy of the depreciation ascertained by the physical examination. Assuming for the purposes of this ease that such contention is correct, nevertheless, upon a careful consideration of the whole matter, I am satisfied that the depreciation ascertained by the actual physical examination of the plant is correct and represents the true depreciation of the property. The defendants attack the contract of the plaintiff with the American Telephone & Telegraph Company, whereby 4% per cent, of the gross income of the plaintiff is paid as rental for certain apparatus, on the ground that it is a grossly unreasonable rental and should be either wholly or partly excluded from the operating expenses. They also attack the contract of the plaintiff with the Western Electric Company, for the purchase of supplies. The American Telephone & Telegraph Company owns all of the stock of the plaintiff and a large majority of the stock of the Western Electric Company. From the American Telephone & Telegraph Company the plaintiff leases its instruments and secures their maintenance and renewal. The contract provides for the rendering of various services by the American Telephone & Telegraph Company to the plaintiff. From the Western Electric Company, the plaintiff obtains a considerable portion of its equipment and supplies used in operating its local exchanges. The fact that the American •Telephone & Telegraph Company owns the stock of the plaintiff and controls the Western Electric Company by stock ownership is not important beyond requiring close scrutiny of their dealings to. prevent imposition upon the community served by the plaintiff. Houston v. Southwestern Telephone Co., supra, 323 (42 S. Ct. 486). The court has scrutinized both of these contracts very carefully, and I have been unable to find, either from the contracts themselves, or from the evidence, that there is anything unreasonable in the contracts or in the manner of their performance. The testimony is overwhelming to the effect that both of the contracts are of great benefit to the plaintiff. Under its contract with the plaintiff, the American Telephone- & Telegraph Company renders the plaintiff a large number of services which save it enormously in actual money and in other respects. As to the contract with the Western Electric Company, the proof is *97 overwhelming that the purchase of supplies through that company, when resorted to by the plaintiff, has been to the immense advantage of the plaintiff. Under that contract the plaintiff is not compelled to purchase from the Western Eleetric Company, but only does so when it is to its interest to do so. These contracts have been before the Supreme Court of the United States and other courts and have been uniformly upheld as reasonable, and I find nothing whatever in the facts of the case before me to differentiate it in this respect from the cases decided by the Supreme Court. Houston v. Southwestern Telephone Co., 259 U. S. 323, 42 S. Ct. 486, 66 L. Ed. 961; Southwestern Bell Telephone Co. v. Public Service Commission, supra; State v. Southwestern Telephone Co., 115 Kan. 236, 223 P. 771, 780, 781; City of Detroit v. Michigan, etc., 209 Mich. 395, 177 N. W. 306. One of the defendants’ grounds as. contained in the exceptions is that it was the duty and within the power of the plaintiff to offer evidence as to its capitalization or bond issue, and not having done so, the court should find against the plaintiff. As far as the court recalls, this point was not alluded to in the oral argument, and is barely mentioned in the printed brief. The plaintiff operates in five states, and its capitalization was as a whole, and its securities were not. issued with reference to any partietdar state. No evidence was offered by either party as to the capitalization or bond issue or the proper apportionment of the same to South Carolina. Inasmuch as there was no evidence on the point, the master did not consider these items in arriving at present value, nor can this court. It is true That these items were stated in Smyth v. Ames and other eases to be proper subjects for consideration. But I do not understand that they are necessary subjects of consideration in all eases. If either party desired to offer testimony of the capitalization or bond issue, it might be taken into consideration for whatever it is worth in considering the ease. It is a relevant fact as shown by the decisions, but it is not absolutely essential to a finding of present value. If the plaintiff thought that it would be of any value in determining the questions involved, it might have offered such evidence; but if the plaintiff took the view that it would not be of assistance and did not offer such evidence, then the defendants might have offered it. In most of the cases, as the court recalls them, the effort has been made on the part of utilities companies to have their stocks and bonds taken as a controlling factor or a factor entitled to great weight, although it is well known that stocks and bonds of such corporations are frequently based upon fictitious values or, as it is.commonly spoken of, “watered” stock. The courts have uniformly refused to consider stocks and bonds as controlling or that they have great weight, but have merely held that they are entitled to be considered. In San Diego Land Co. v. National City, supra, the Supreme Court used the following language: “The property may have cost more than it ought to have cost, and its outstanding bonds for money borrowed and which went into the plant may be in excess of the real value of the property. So that it cannot be said that the amount of such bonds should in every case control the question of rates, although it may be” (italics mine) “an element in the inquiry as to what is, all the circumstances considered, just both to the company and to the public.” In Georgia Railway v. Railroad Commission, the Supreme Court, after quoting from Smyth v. Ames and Willeox v. Consolidated Gas Co. and stating the matters for consideration in such cases (including “the amount and market value of its bonds and stocks”), used the following language; “The rule laid down in these cases was expressly recognized as controlling, both by the Commission and by the lower court. Evidence bearing on most of the facts” (italics mine) “there declared to be relevant facts was before them.” It is clear that in this last-mentioned case not all of the relevant matters stated in Smyth v. Ames were considered, and yet the Supreme Court in that case affirmed the ruling both of the Commission and of the lower court. I think it clear from the decisions that it is not absolutely essential that there be evidence before the court as to the capitalization or bond issue of the plaintiff for the court to be able to arrive at a conclusion of what is the present value of the property and whether the rates thereon are confiscatory. There was some suggestion in the oral argument to the effect that the master had based his conclusions as to the present value of the property upon reproduction cost new less depreciation alone or deemed that element controlling. The plaintiff in its brief deals with this question under the first exception, but I hardly think this exception covers that point, nor have I found any exception which appears to cover it. The defendants’ brief makes no mention of the point at all, and I would be warranted therefore in deeming it abandoned; but in order *98 that there may be no misunderstanding as to the position of the court upon this matter, I will consider it briefly. Reproduction or replacement cost less depreciation is not a controlling factor in the ascertainment of present value. Ga. Ry. v. R. R. Com., supra, 630 (43 S. Ct. 680). It is one of the factors or relevant facts to be considered and given due weight in the ascertainment of present value. But this court does not base its conclusions upon this factor alone, nor deem it controlling, nor did the master, as a careful reading of his report will show. "While the master in his report used this expression, “It would seem that the present value as determined by replacement less depreciation is probably the nearest and fairest system that can well be adopted to arrive at the present value of a public utility plant,” yet in formulating his report, and after hearing all the evidence, he gave due consideration to every factor in evidence before him for the valuation of plaintiff’s property in accordance with the decisions in Smyth v. Ames, supra, and the line of eases following that case, and in summing up, after a full discussion of the testimony, he used the following language: “After a full consideration, therefore, of the original cost, the present cost of construction, the probable earning capacity of the property, the sum required to meet operating expenses, and other relevant matters needful to be regarded in formulating a sound judgment, I have reached the conclusion that, under the circumstances, the value of the property of the complainant, Southern Bell Tel-ephoné & Telegraph Company, in the state of South Carolina, is shown by the testimony adduced by it and heretofore discussed.” The master reached his conclusions, and I have reached mine, in finding the present value, upon due consideration of the original cost of construction, the amount expended in permanent (improvements, the present as compared with the original cost of construction, the probable earning capacity under the rates prescribed by the statute, the sum required to meet operating expenses, and other relevant matters in aid of a reasonable judgment. Upon due consideration of all the testimony and evidence in the cause, it is perfectly clear that the rates restored and prescribed by the act of the General Assembly are unreasonable and confiscatory, and, indeed, the present value of the property as ascertained by the master and found by this court might be largely reduced and still those fates, based upon such reduced value, would not provide anything like a proper remuneration under the Constitution. This may be easily shown by assuming various valuations much less than those found by this court and the master, and calculating the per cent, of profits the plaintiff would realize from the return such rates would produce; but it is unnecessary to set forth such calculations in detail, nor is it to be inferred from this suggestion that the court deems in any way that the valuation as found by the master and by the court should be in any respect reduced, but the suggestion is merely made for the purpose of showing how clear it is that the prescribed rates, in any possible view that could be taken of the value of the property, are unreasonable and confiscatory. The defendants have argued and presented many objections and specifications in detail relating to the alleged insufficiency of the evidence to establish the plaintiff’s claim; but they are all either fully met by what has been said, or they have been fully dealt with in the master’s report, or are of such a minor nature as not to call for any further discussion. The only remaining question is the question of costs. The plaintiff necessarily must have been at an enormous expense in making the appraisal and bringing forward the evidence to make out its case. Ordinarily, in such case to impose the costs or any part thereof upon the plaintiff would be inequitable in view of the plain case that it has made. On the other hand, the defendants as public officers could hardly do less than endeavor to meet the issues and sustain the act of the General Assembly if possible. While the ease made out by the plaintiff is plain, nevertheless at the outset the defendants could hardly have foreseen that it would be so plain as it is. It is of great benefit to the plaintiff to have the question settled, and it is likewise of benefit to the defendants and the public generally to have it settled. The issues are now determined, and the final decree will be entered so that the case may be presented to the Supreme Court for final decision. In these circumstances, I have deemed it hut fair that the costs should be taxed and divided equally between the plaintiff and the defendants. This, it seems to me, would be equitable in this particular ease, It is therefore ordered, adjudged, and decreed : (1) That the report of the special master and his conclusions and findings be and the same are hereby adopted, approved, ratified, and confirmed. (2) That the rates restored and prescribed by the act of the General Assembly of *99 South Carolina, approved April 3, 1922, are unreasonable and confiscatory and do not afford the plaintiff fair remuneration upon its property, and the said act is therefore, so far as the plaintiff is concerned, unconstitutional, null, and void. (3) That a writ of final injunction do issue from this court permanently and perpetually restraining and enjoining the defendants and each of them, and their successors in office, and all other persons for whom they stand or whom they represent, from enforcing the said act of the General Assembly of South Carolina, approved April 3, 1922, and from enforcing any penalties or other remedies that may be given against the plaintiff, its officers, agents, and employees, on account of its or their failure to observe, maintain, and collect the schedule of rates, or to furnish the free interchange communication prescribed by said act, and from attempting ’by any. means whatsoever to interfere with or prevent the plaintiff, its officers, agents, and employees, from continuing in effect and operation the rates and charges approved by the orders of the Railroad Commission effective April 1,1921, and from charging and collecting such rates and charges. (4) That after the lapse of a reasonable time, if it should then appear that conditions and circumstances have so changed that the rates restored and prescribed by the said act of the General Assembly of South Carolina of April 3, 1922, are no longer unreasonable and confiscatory, but will then yield to the plaintiff reasonable compensation for the services aforesaid, the defendants may apply to this court, upon due notice to the plaintiff and upon proper showing, by bill or oth-wise, for a further order in that behalf. See Smyth v. Ames, 169 U. S. 466, 550, 18 S. Ct. 418, 42 L. Ed. 819; Houston v. Southwestern, etc., 259 U. S. 318, 321, 42 S. Ct. 486, 66 L. Ed. 961. (5) That the costs including the compensation paid the special master be taxed by the clerk of this court, and that the plaintiff pay one-half thereof and the defendants pay one-half. (6) That either party that may have advanced and paid more than its one-half of the costs, as herein provided, shall have the right, after the said costs have been taxed and apportioned one-half to each party as above orderedj to recover and enter judgment herein against the opposite party for the amount which such party has advanced in exeess of its one-half of said costs as herein provided.