Home Telephone Co. v. City of Carthage

KENNISH, J. — This suit was instituted in the circuit court of Jasper county on the 28th day of August, 1907, by the respondent, the Home Telephone Company, herein referred to as the complainant, against the City of Carthage, appellant, and certain officers of said city. The Act of the General Assembly of 1907, known as the Public Utilities Act, now sections 9568, 9569 and 9570, Revised Statutes 1909, had gone into force and effect shortly before the filing of this suit, and pursuant to the power conferred upon municipalities by said act,' the city of Carthage had adopted an ordinance regulating the telephone business and prescribing maximum rates of charge for the use of telephones within said city. Immediately upon the taking effect of said ordinance, complainant brought this suit for the purpose of having the court decree and adjudge the ordinance invalid and the rates therein prescribed unreasonable, and to have — 653 — the city and its officers restrained and enjoined’ from taking any steps for the enforcement thereof. A restraining order was issued upon the filing of the petition, and upon final hearing at the February-term, 1908, the.said ordinance was adjudged invalid and the rates prescribed unreasonable, and the city and its officers were perpetually enjoined as prayed forín the petition. The city alone, in due time, appealed to this court. After the appeal was perfected complainant filed a motion in this court praying that the causabe advanced on the docket and assigning as a reason: therefor that under the provisions of said Act of 1907' the case was entitled to precedence over other civil causes. This motion was sustained and the ease is now before us for decision. The petition alleged substantially the following facts: That plaintiff was incorporated under the laws of this State in the year 1902, and now owns and operates a telephone exchange in the city of Carthage and adjoining territory. That the defendant is a municipal-corporation, organized under the laws of this State as a city of the third class, and that the other defendants-are officers of said city, charged with the enforcement of its ordinances. That on the 25th day of March, 1895, an ordinance, which is set out in extenso, was adopted, by the said city, granting a franchise to the American Electric Telephone Company, its successors and assigns, to construct and maintain a telephone exchange and telephone lines, with all of the-rights incident to and necessary for the carrying on of a telephone business in-said city. The provisions of said ordinance exempted; the said telephone company from the payment of special licenses and taxes and, in consideration therefor, the-company obligated itself, its successors and assigns,, for the period of twenty years from the date of the acceptance of the ordinance, to perform certain agreements therein set out, one of which was that tha — 654 — grantee would furnish telephone service to subscribers at the rate of twenty-four dollars per annum for business houses and eighteen dollars for residences, within a radius of one mile from the exchange of said company, which exchange should be located as near as possible to the business center of said city. That the said grantee assigned and conveyed all of its property and franchise rights in said city of Carthage, including its exchange, to Wheeler & Clark, and that the latter made the same transfer and assignment to the Mineral Belt Telephone Company, which in turn, on the 6th day of September, 1902, made a like conveyance and assignment to the complainant, and that the latter has ever since owned and operated said telephone exchange, with all of the rights and privileges in connection therewith. It is alleged that said property of. the plaintiff within the city of Carthage represents an investment of one hundred and fifty thousand dollars and is reasonably worth that amount, all of which is necessary •for the carrying on of said business. That to operate said telephone property in said city of Carthage and adjacent territory and to meet the fixed charges, consisting of interest and a renewal reserve, will require an outlay and total expense of $28,402.28 per annum. That plaintiff is supplying 1396 subscribers in said city with telephone service, and that plaintiff had established and put into effect a rate for single line telephones of thirty dollars per year for business houses and twenty-four dollars for residences, and for party line service, twenty-four dollars per year for business houses and eighteen dollars for residences. That the rates so fixed are fair, reasonable, equitable and just. It is further alleged that the defendant, the city of Carthage, on the 28th day of August, 1907, pursuant to an act of the General Assembly of that year, known as the Public Utilities Act, adopted Ordinance No. •926, fixing maximum rates for telephone service in said — 655 — city, which rates and ordinances are set ont in the petition, the rates being practically the same as those fixed by the franchise ordinance of 1895. It is then alleged that the rates so fixed by Ordinance 926 are unreasonable, confiscatory and insufficient to permit plaintiff to operate its said property without loss. That said ordinance and the act of the General Assembly are violative of several designated provisions of the Constitution of this State and of the Federal Constitution. That the defendant and the defendant’s officers are threatening to enforce said ordinance, which would greatly injure the plaintiff in its business and subject it to a multiplicity of suits, and injunctive relief is prayed as before stated. After an unsuccessful demurrer to the petition, the defendant answered by a general denial, and the cause was thus at issue. Section 1 of Ordinance 926 is as follows: “It shall be unlawful for any person or persons, firm or corporation owning or operating any telephone line, - system or exchange, within the corporate limits of the city of Carthage, to exact, require or demand, for the rental and use of telephones and for telephone service within the corporate limits of said city more than the following rates of charge therefor, to-wit: “For business telephone and service thereof, $24 per year. “For residence telephone and service thereof, $18 per year. “Each of such telephones shall be directly connected by an individual telephone line with the central or exchange office of the system of which such telephone shall be a part; and no other telephone shall be connected'with the central or exchange office through or by the means of the same telephone line. And it shall be unlawful for any such person or persons, firm or corporation, so owning or operating any such telephone fine, system or exchange, in said city, to fail or refuse to — 656 — connect any such telephone, whether the same be now installed or shall be hereafter installed with the central or exchange office of the system of which such telephone shall belong, by an individual telephone line; and it shall be unlawful for any such person or persons, firm or corporation to connect or cause to be connected any other telephone with the central or exchange office through or by means of any such individual line of any such telephone.” At the trial much testimony was introduced by the respective parties in support of the issues presented. It need not be set out here, but will be referred to in connection with the points hereinafter discussed: In order to a proper understanding of the case it should be prefaced that the complainant, Home Telephone Company, owned and operated a telephone system which extended to and included plants in three other large cities, besides the plant in the city of Carthage, concerning which the present controversy arose. The earnings and receipts which were earned by the Carthage plant alone were credited to it, and the expenses incurred by that plant were charged to it, but as to the earnings and expenses which were common to the entire system, twenty-five per cent was assigned to the Carthage plant as a fair apportionment. The foregoing is deemed a sufficient statement for a proper understanding of the questions presented. The Public Utilities Act of 1907 granted to muni-' cipalities the power to fix by ordinance “the rates of charge for the services of such utilities within their corporate limits.” The power of the defendant city to fix telephone rates was thus restricted to the corporate limits of the city, and therefore the testimony of the complainant tending to show a large amount of free service afforded to resident subscribers with persons outside of said limits and in neighboring towns, was not relevant to the issue of the reasonableness of the rates provided by the ordinance for service which was — 657 — ■wholly within the city. Complainant was as much entitled to remuneration for service extending beyond the city limits as for service within, but the ordinance does not include such service, and the subscriber could not legally be charged a higher rate for city service because of free service outside. Neither should the cost of serving subscribers with city service be burdened with additional and more expensive apparatus and facilities made necessary solely by reason of the extension of complainant’s plant for business connections beyond the limits of the city. It is urged by appellant that the judgment should be reversed for the reason that it enjoins the enforcement of the rates prescribed in Ordinance 926 as well as the enforcement of the ordinance itself, and that as the city was entitled to the same rates under the franchise ordinance of 1895, regardless of the validity óf Ordinance 926, the court erred in perpetually enjoining the city from enforcing the said rates. It appears that complainant and its predecessors,, since the granting of the franchise in 1895, had carried out the provisions of the franchise as to rates until February, 1907, being shortly before the said act of 1907 became a law, at which time a different and higher schedule of rates was announced by complainant. If appellant had relied upon its contract rights under the franchise ordinance of 1895 and this appea' had been in a proceeding brought by the city to enforce such rights, the city in that case could have consistently asked the judgment of this court upon that issue, but it did not choose to adopt that course. On the contrary it proceeded to exercise the newly acquired power to legislate upon the subject of telephone rates by adopting Ordinance 926. The law which delegated to municipalities the power to fix maximum rates also provided that such rates must be reasonable, and complainant brought this suit as authorized by the express provisions of that law, alleging the unreasonableness and con — 658 — fiscatory character of the rates prescribed by said ordinance 926 and praying relief therefrom. The city filed a general denial, putting in issue the alleged unreasonableness of such rates, and it was upon that theory the case was tried and decided in the trial court. Having accepted the issue thus tendered and tried the case thereon, the city cannot now be permitted to shift its position on appeal. [Henry County v. Citizens’ Bank, 208 Mo. 209, l. c. 226; Sumner v. Rogers, 90 Mo. 324, l. c. 330; Bray v. Seligman, 75 Mo. 31.] An additional reason why the appellant cannot raise the question as to its right to enforce the rates fixed by the franchise ordinance of 1895, is that the rates in controversy in this case were, by the act of appellant in ordinance 926, made applicable to the entire city, while the rates as fixed by the franchise ordinance applied only to telephones within a radius of one mile from the central office of the company. Appellant complains of error in the admission of incompetent evidence' offered by the plaintiff and in the exclusion of competent evidence offered by the defendant. The. testimony admitted over the defendant’s objections is in the record before us and as this is an equity case this court will not reverse the judgment upon the ground now under consideration, but will disregard such testimony as it finds incompetent and render such judgment as equity and justice may require upon the pleadings and the evidence properly admitted. [Hanson v. Neal, 215 Mo. 256; Reynolds v. Kroff, 144 Mo. 433; Padley v. Neill, 134 Mo. 364.] The only testimony offered by defendant which was not admitted was a printed circular issued by the Theodore Gary Investment Company, advertising for sale the bonds of certain telephone companies, among which were alleged bonds of the Home Telephone Company, complainant in this suit. The statement is made in the circular that the net earnings of the complainant, — 659 — -which included the entire system, for the preceding year, were $50,135.00. It was shown that Theodore Gary was the president of both the complainant telephone company and the investment company which issued the circular, but it was not shown that the complainant, through its officers in the discharge of their official duties, caused or was in any manner responsible for the issuance of said circular, and the fact that the president of the complainant was also the president of' the corporation which sent out the circular, was not alone a sufficient foundation to make it competent as an admission against complainant in this case, and. we hold that the evidence was properly excluded by the court. [Northrup v. Ins. Co., 47 Mo. 435; Costigan v. Michael Trans. Co., 38 Mo. App. 219; 1 Ency. of Ev. 556.] The question of dominant importance presented is as to the sufficiency of the evidence to support the decree holding the rates fixed by ordinance 926 unreasonable and the ordinance void and unenforcible. That part of the decree making this finding is as follows: “The court further finds from the evidence that, taking into consideration the value of the property of the plaintiff, to-wit, its telephone plant in the city of Carthage, and taking into consideration its reasonable and necessary expenditures for salaries for its officers, and its servants, agents and employees, together with the cost of maintenance and necessary expenses, the charges permitted and fixed in said ordinance of August 28, 1907, will not yield a revenue to the company so as to permit the plaintiff company to make a reasonable profit on its investment, and for that reason the court doth order and adjudge that the said ordinance of August 28, 1907, is unreasonable and void.” Before entering upon a consideration of the law and the evidence bearing upon the question of the reasonableness of the rates as fixed by Ordinance 926, a preliminary question is presented, as to the statutory — 660 — or constitutional authority by which the reasonableness of such rates and the validity of the ordinance are to be tested. In plaintiff’s petition it is alleged that the Act of the General Assembly of 1907 and Ordinance 926, adopted pursuant thereto, are unconstitutional and void, because in conflict with section 30 of article 2 of the Constitution of this State, and section 1 of the Fourteenth Amendment to the Constitution of the United States, in that they deprive complainant of its property and destroy its business without due process, of law. The Act of 1907, by authority of which alone cities were granted the power to fix rates of charge for the service of public utilities, gave full recognition tO' the right of persons, firms and corporations owning-such utilities, to receive reasonable compensation for the services rendered by providing that the rates fixed “must be reasonable.” In view of this inhibition, it is not clear how said act could be in conflict with the constitutional guaranties invoked, or have the effect ascribed to it in complainant’s petition. Under that act the city was without power to fix rates that were not reasonable, and if the testimony in this case shows that the telephone rates prescribed by Ordinance 926 were not /reasonable, it must follow that the ordinance is void and the judgment should be affirmed, without regard to the constitutional provisions referred to. On other hand if, under the evidence,, the rates were such that after making the necessary deduction from the gross earnings for the proper operation and maintenance of the telephone property, a sufficient amount remains to pay a fair return upon the reasonable value of the property used in the telephone business then, whether tested by the statute or by the Constitution, the ordinance must be sustained and the judgment reversed. — 661 — In determining the question of the reasonableness ■of the rates as fixed by Ordinance 926, it. becomes necessary to consider four factors: First, the value of the property upon which complainant was entitled to a return. Second, the gross earnings of the property. Third, the amount which complainant was entitled to deduct from the earnings for the successful operation of the property. And, fourth, whether the amount remaining was sufficient to give a reasonable r-eturn on the investment. We shall consider these in the order given. The rule of law now generally recognized as the basis upon which the reasonableness of the return is to be determined, so far as the value of the investment is concerned, is expressed as follows: “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.” [San Diego Land and Town Co. v. National City, 174 U. S. 739; Smythe v. Ames, 169 U. S. 466; San Diego Land and Town Co. v. Jasper, 189 U. S. 439.] . The question arises, what was the reasonable value of complainant’s property being used for the public at the time of the adoption of Ordinance 926? It is shown by the evidence that complainant had purchased the property less than five years before the filing of this suit, and no good reason appears why it could not have given the most satisfactory answer to the foregoing question by the production of its books and invoices. Instead of taking that course several expert witnesses, some from a distance and others who were connected with the company, gave 'in evidence their opinions as to the value of complainant’s property, basing such opinions on its value as an entirety, or by placing an estimated value thereon ranging from seventy-five to one hundred dollars per telephone in use. According to this testimony the value of the prop — 662 — erty was about one hundred and twenty-five thousand dollars. Some confusion exists in the record.upon the question of the value of complainant’s property, because of the fact that in speaking of the Carthage plant, as a part of the system a number of telephones were included which were outside of the limits of the city. One witness testified that while there were 1300 telephones in the Carthage exchange, there were only about 1040 actually within the city. It appears in evidence that when the city council was considering the question of telephone rates, preparatory to the passage of Ordinance 926, complainant submitted a statement of its property, earnings and expenses, sworn to by one of its officers, in which the property of the Carthage plant was valued at one hundred and fifty thousand dollars, and it was therein stated that this “was a very conservative estimate.” The officer who verified that statement testified at the trial that it was an estimated value and that the true value, as since determined, was $125,875.64. It appears in the record that, after the evidence was in and at the argument of the case, complaint was made by counsel for appellant that the city had not been given an opportunity for an expert examination of the complainant’s books and property, whereupon the court appointed an expert to make such examination and continued the case for two weeks in order that the testimony of such expert might be secured. The court named a second expert to assist in such examination. In due time these experts made their report to the court and one of them was examined as a witness by the city. This report was introduced in evidence, not by the city, but by the complainant. The report of these experts sets out an itemized statement of the property of the company and the value of each article. The expert testified that they took the inventory made by the complainant and set opposite each item the catalogue or invoice price. By that — 663 — means the total valuation was arrived at, of which the following summary was given in the report, namely: Material____■......................... $66,256.64 Labor................................ 27,828.78 Incidentals........................... 9,408.54 Engineering, etc............%.......... 3,400.00 Tools................................ 410.00 Wagons and buggies................... 80.00 Furniture & Fixtures.................. 575.00 Wire chief’s desk...................... 70.25 Original cost of plant less deductions 23,038.75 Total cost of plant................ $131,066.86 This report, which made the value of.the plant over five thousand dollars more than the company claimed at the trial, contains some things which deserve mention. The separate item for “incidentals,” according to the testimony of this expert, was not found in the invoice or account of the company, but was included in the report after consultation with another telephone man. The item for “engineering” was obtained in substantially the same manner. The large item of value in the report of this expert, “Original Cost of Plant Less Deductions, $23,038.75,” was arrived at as. follows: The amount paid for the plant when purchased by the complainant in 1902 was said, to be about thirty-seven thousand dollars, although no witness testified of his own knowledge as to the price actually paid. In the inventory as valued by this expert, it was estimated that property of the invoice or catalogue price of $13,961.25 was included, which was a part of the plant at the time of its purchase by complainant. In estimating the total cost of the plant to the complainant at the time of the trial all of the property on hand was valued as new and, therefore, this item of $13,961.25, in order to avoid’duplication, — 664 — was deducted from the thirty-seven thousand dollars, and the remainder, $23,038.75, was added as a part of the cost of the property upon which complainant was entitled to a return. There is no testimony tending to prove that there was any tangible property whatever, at the time of the valuation, represented by this item of $23,038.75. Whether it represented what had been paid for the good will or franchise value of the business when the plant was purchased, or whether the property originally purchased had depreciated or gone into disuse to that extent, does not appear, but in either case we are. not aware of any principle of law which would justify including it as a part of the property which, at the time of the adoption of Ordinance 926, was “being used for the public.” Rejecting the item of $23,038.75 for the original cost of the plant, as not representing any property then in the service of the public, and making an allowance for the depreciation of the plant, we have arrived at the conclusion that one hundred thousand dollars is a reasonable value of the property upon which the complainant was entitled to a, return. This valuation does not differ materially from that of the experts as estimated upon the basis of a value per telephone in use, limiting the number to those actually within the city. There was no conflict in the testimony as to the', gross earnings. Mr. Adams, vice-president and engineer of the company, testified that the total gross earnings for the year under consideration were $24,826.53. That statement was not contradicted by the defendant. It is difficult to determine from the testimony what was the total amount of the expenses of the company for the year considered. The witnesses who testified upon this point were examined as to the items contained in a written statement and testified as to its contents, but the statement was not offered in evidence and does not appear in the record. The written sworn statement — 665 — of expenses and earnings for the six months ending April 30, 1907, submitted to the city council by complainant, was introduced in evidence without objection, and we.shall take that as a basis for the expenses, as well as earnings, of complainant, assuming that for the year each item would be doubled. Accepting this statement, and omitting therefrom the two items of interest on the investment and renewal reserve for depreciation, we have left as expenses for the year a total of $12,352.24. The gross earnings were $25,031.32, and deducting the expenses therefrom, there remains the sum of $11,473.29 as a return on complainant’s property, and for depreciation, if the latter be a proper matter of charge against the earnings.' We thus have earnings in excess of the expenses for the year of over eleven and twQ-thirds per cent upon a property valuation of one hundred thousand dollars, and of over nine and one-third per cent on complainant’s valuation of one hundred and twenty-five thousand dollars. It remains for consideration whether complainant by its evidence met the requirement, upon which alone it was entitled to relief, of showing that the rates fixed by ordinance 926 were not reasonable, but were confiscatory in their character and effect. Upon this question the right of complainant to deduct from the earnings, after allowing for all operating expenses, including maintenance and repairs of the property, a depreciation fund of four dollars per telephone per year, or about five per cent of the total value of the property, becomes of primary importance. The theory of complainant is that before any return upon the investment can be considered, this depreciation fund to cover what was termed “invisible rot” must be taken from the earnings of the plant. Complainant’s testimony upon this point is not at all satisfactory. It shows that no such fund had been provided until two years before the trial and even at the time of the trial no item of expense had ever been charged to — 666 — that fund. When the direct question was asked complainant’s witness, an officer of the company, “How much have you in that fund now, do you know?” an objection was made by complainant that there was “no purpose to this cross-examination,” and the subject was pursued no further. The inconsistency of complainant’s theory of an accumulation of such a fund is shown by the fact that while the sum of five thousand dollars per year, for two years, had been set apart out of the earnings as a depreciation fund, the plant was valued as new and no deduction whatever was made for depreciation as represented by the amount on hand in that fund. It is obvious that upon that theory a time would be reached whe'n the depreciation fund would amount to almost the total value of the plant and yet, in determining the reasonableness of the rates, the plant, which theoretically would be the victim of almost complete “invisible rot,” would be valued as new in determining “the reasonable value of the property at the time it is being used for the; public,” while no corresponding credit would be given for the depreciation fund on hand. It must be conceded that a wise and proper management of such a public utility as that under consideration requires and demands that a liberal sum should always be reserved from the earnings, whatever such fund may be designated, in order to keep the plant in a high degree of efficiency at all times and to provide for emergencies. For this reason the owner of the public utility is entitled to such rates as will produce sufficient revenue to operate the plant and-‘meet such charges and, in addition, pay a reasonable return upon the value of the property in use. The question remains, what would be a fair return upon the reasonable value of the plaintiff’s property. This question as to what rate of return upon the investment will be considered reasonable or unreasonable by the courts has been considered in many cases. No fixed — 667 — and unvarying rule has been or can be announced upon the subject. Each case must, of necessity, depend upon the surrounding facts and circumstances. The prevailing rate of interest on money loaned, the hazard of the business, the life of the property used, the reliance upon the constancy of a return, which depends largely upon the existence or probability of competition, these, as well as many others, are proper matter for consideration. And in passing upon the question the fact should not be overlooked that no return whatever is guaranteed to the owner of the public utility. Upon that score it occupies no better ground than the owner' of capital invested in a private enterprise. It follows that unless the maximum'rate be placed at such a figure as is above the average rate of return upon reasonably safe investments in private ventures, capital will naturally turn to channels in which no maximum limit as to the return exists. In this case complainant asserts its right to a net return, as a profit on its investment, of at least six per cent, and under the facts and circumstances in evidence we are of opinion that rates which would yield a less return upon complainant’s property would be unreasonably low and could not be sustained. However, as the return on the investment, as shown by the evidence in this case, was in excess of nine and one-third per cent, even on complainant’s valuation of the property, and over eleven and two-thirds per cent, on what we consider a reasonable value, we hold that the complainant failed to prove that it was entitled to the relief prayed for and that the court erred in holding that the rates were unreasonable and the ordinance void. We have discussed the subject upon the assumption of rates for single fine telephones and not for party line service. However, we do not mean to be understood as holding that the complainant did not have the right to install party line telephones and charge reasonable rates therefor. The Public Utilities Act granted to — 668 — cities the power to fix reasonable rates, bnt not to-interfere with the right of the owner of the utility to make such use of its property as would not be inconsistent with the exercise of municipal authority in matters of local concern. We think the trial court, rightly adjudged the ordinance invalid so far as it. attempted to prohibit, under penalty, the use of party line telephones. But as that part of the ordinance fixing rates was entirely independent of the provision forbidding party lines, upon a well recognized principle of law, it can be upheld, although the party line provision be void. [State ex. inf. Major v. Kansas City, 233 Mo. 162; City of St. Louis v. Liessing, 190 Mo. 464; County Court v. Criswold, 58 Mo. 175, l. c. 199.] We make the further observation suggested by the facts of this case, that when an ordinance is adopted prescribing rates of charge for the service of a public utility pursuant to legislative authority, it is attended with the same presumption of validity as in the case of other legislative acts, and when assailed on the ground that such rates are destructive of property rights in the utility affected, there should be no hesitancy on the part of the complainant in placing before the court all of the evidence and the best evidence within its control bearing upon the issues of the ease. And when such an issue is raised the defendant should be granted full opportunity for examination of the books and property of the complainant, by experts of its own selection, in order that the court may have before it all of the material facts as presented from the standpoint of each of the opposing parties to the controversy. For the reasons given the judgment is reversed and the cause remanded. All concur, except Graves, J., who dissents, and Valliant, C. J., not sitting.