Jurisdictional Statement — American Telephone & Telegraph Co. v. United States

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INDEX.

“4 SUBJECT INDEX.

al Page

nc aaa oak eae 1

Statutory provisions sustaining jurisdiction................... 2

Order of the Federal Communications Commission, the validity

of which is involved .............. ‘eibehagneee saukdh Laban aes 3

Dates of decree and of application for appeal............ ae se 4

PN Me I os a cea Bolas aha kn na'ale ecadiak ake a a ale eee bee 1

Cs SU SII ka oi ok sik eo ons ee eee ek D

BEE occ cesieecreissusnéunadeds chnsdads vatasesandenkaasawenns 7

TABLE OF CASES CITED. °

Colorado v. United States et al., 271 U. S. 153............... omc 6

Home Furniture Co. et al. v. United States et al., 271 U. S. 456..... 6

Louisville and Nashville R. Co. v. U. S., 238 U. S.1................ : G

Norfolk & Western Ry. Co. vy. United States, 287 U. S. 134........... 6

St. Louis and O’Fallon R. Co. v. United States, 279 U. S. 461........ 6

STATUTES CITED.

Act of October 22, 1913 (Urgent Deficiencies Appropriations Act), 38

Stat. L. 219, 220; U. S. C., Title 28, Sections 47 and 47a........... 2

* Communications Act of 1934, Sections 220 (a) and (g)............. 2

' Communications Act of 1934 (48 Stat. L. 1093; U. S. (. Title 47,

Beatin Gaia) ). Beebies GEE CO) sos cnc ck wakendtwanns ines sennwena 2

Constitution of the United States, Fifth Amendment................ 5

* “Telephone Divisions Order No. 7-C,” of the Federal Communications

4

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“

IN THE

DISTRICT -COURT OF THE UNITED STATES FOR THE

SOUTHERN DISTRICT OF NEW YORK

In Equity.

No. 81-366

ae TELEPHONE AND TELEGRAPH COM-

. PANY et AL.

Plawntiff s ;

OHIO ASSOCIATED TELEPHONE COMPANY ert at.,

Additional Plaintiffs;

EASTERN TELEPHONE AND TELEGRAPH COM-

PANY et an,

Intervening Plaintiffs,

a

Vs.

UNITED STATES OF AMERICA anp FEDERAL COM-

MUNICATIONS COMMISSION,

Defendants,

NATIONAL ASSOCIATION OF RAILROAD AND

UTILITES COMMISSIONERS,

Intervening Defendant.

STATEMENT OF JURISDICTION.

Filed April 6, 1936.

¢

Pursuant to Rule 12 of the Supreme Court of the United

States, plaintiffs, intervening plaintiffs and additional

plaintiffs (hereinafter referred to as plaintiffs), in support

le

4

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}

2

of their petition for appeal, file this their statement of the

basis upon which it is‘contended that the Supreme Court

of the United States has jurisdiction upon appeal to review

the final decree of this court in the above entitled cause:

(a)

Statutory Provisions Sustaining Jurisdiction.

The statutory provisions which sustain such jurisdiction

of the Supreme Court of the United States are as follows:

1. Section 402 (a) of the Communications Act of 1934

‘(48 Stat. L. 1064, 1093; U. S. C., Title 47, Section 402 (a)),

which reads as follows:

**Sec. 402. (a) The provisions of the Act of October

22, 1913 (38 Stat. 219), relating to the enforcing or

setting aside of the orders of the Interstate Commerce

Commission, are hereby made applicable to suits to

enforee, enjoin, set aside, annul, or suspend any order

of the Commission under this Act (except any order

of the Commission granting or refusing an application

for a construction permit for a radio station, or for

a radio station license, or for renewal of an existing

radio station license, or for modification of an existing

radio station license), and such suits are hereby an-

thorized to be brought as provided in that act.’’

2. Aet of October 22, 1913—Urgent Deficiencies Appro-

priations Act (38 Stat. L. 219, 220; U. S. C., Title 28, See-

tions 47 and 47a). This act authorizes direct appeals to the

Supreme Court of the United States from decrees of this

Court granting or denying an injunction against the opera-

tion of orders of the Interstate Commerce Commission guch

as the order involved in this cause.

3

(b)

Order of the Federal Communications Commission, the

Validity of Which is Involved.

This appeal involves the validity of that certain order

of the Federal Communications Commission designated

‘‘Telephone Division Order No. 7-C,’’ which order pre-

scribes a Uniform System of Accounts for telephone coiu-

panies subject to the provisions of the Communications Act

of 1934 and having average annual operating revenues ex-

ceeding $50,000, and requires all such telephone companies

to keep all accounts in conformity therewith after Decem-

ber 31, 1935. |

' The said order and the instructions constituting the sys-

tem of accounts prescribed thereby comprise, as officially

published by the said Federal Communications Commis-

sion, 121 printed pages, and it is impracticable to set them

forth herein verbatim or to further summarize their perti-

. nent provisions. A copy of said order and instructions is

attached to the bill of complaint herein as Exhibit B.

Said order of the Federal Communications Commission

was issued pursuant to the authorization contained in Sec-

tion 220 of said Communications Act of 1934, sub-sections

(a) and (g) thereof being as follows:

**Sec. 220. (a) The Commission may, in its discre-

tion, prescribe the forms of any and all accounts, rec-

ords, and memoranda to be kept by carriers subjeet to

this Act, including the accounts, records, and mefno-

randa of the movement of traffic, as well as of the

receipts and expenditures of. moneys

‘*(g) After the Commission has prescribed the

forms and manner of keeping of accounts, records, and

memoranda to be kept by any person as herein pro-

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+

vided, it shall be unlawful for such person to keep any

other accounts, records, or memoranda than those so

prescribed or such as may be approved by the Comnis-

sion or to keep the accounts in any other manner. than

that prescribed or approved by the Commission. Notice

of alterations by the Commission in the required man- t

ner or form of keeping accounts shall be given to such

persons by the Commission at least six. months before

the same are to take effect.’’

(c)

Dates of Decree and of Application for Appeal.

The decree of this court sought to be reviewed was en-

tered Mareh 24th, 1936.

°

The application for appeal was presented on April 4th

1936. .

’

(d) -

Nature of Case.

The suit was brought in the District Court of the United

States for the Southern District of New York and was

heard by a specially constituted court of three judges, pur-

suant to the provisions of said Urgent Deficiencies Appro-

priations Act of October 22, 1913. The purpose thereof was

to enjoin, set aside and annul the said order of the Federal

Communications Commission designated ‘‘Telephone Di-

vision Order No. 7-C’’, which requires plaintiffs, on and

after January 1, 1936, to keep all their accounts in ac-

cordance with the system of accounts prescribed thereby.

The bills of complaint allege that numerous requirements

of said system are so contrary to the fundamental prin-.

ciples of correct accounting and so arbitrary and unreason- _

able as to#Mfount to an abuse of the Conmission’s power,

are beyoml the authority of the Commission and are void,

and that thev will cause plaintiffs serious financial loss

BARI ab APPT TG ANN

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5)

and will deprive them of their right to keep a reasonable

and adequate set of accounts, in violation of the due process

clause of the Fifth Amendment to the Constitution of the

United States; that certain requirements of said system

lay down rules which are so vague as not to constitute legal

standards of conduct, and that the enforcement thereof by

the penalties prescribed by the said: Act or otherwise would

violate the rights of plaintiffs to due process of law as

guaranteed by the Fifth Amendment to the Constitution of

the United States. Plaintiffs alleged that the requirements

complained of were nonseverable from the other provisions

of said system, and prayed that said order and system of

accounts-as a whole be enjoined. The final decree of the

court, from which this appeal is sought, denied the prayer

of the plaintiffs that said order and system of accounts as

a whole be permanently enjoined, and said decree enjoined

the enforcement of only two of the several requirements

complained of. The decree therefore constitutes a decision

adverse to plaintiffs.

There is appended hereto a copy of the opinion delivered

by this court upon the rendering of the detree sought to

be reviewed. a

(e)

Cases Sustaining Jurisdiction.

Since the enactment of the Communications Act of 1934,

no cases involving the validity of an order of the Federal

Communications Commission have been taken on appeal

to the Supreme Court of the United States. There are,

therefore, no cases reported in which Section 402 (a) of

the Communications Act of 1934 has been interpreted or

commented upon. However, Section 402 (a) merely pro-

vides that the provisions of the Urgent Deficiencies Ap-

propriations Act of October 22, 1913, relating to the en-

forement or setting aside or orders of the Interstate Com-

y - cueannines “ - aad

| Fog SST RAR SERS alee Et t

Wenpreeraeteany fete eae

6

merce Commission are made applicable to suits to enforce,

enjoin, set aside, annul or suspend orders of the Federal

Communications Commission.

The following cases, involving orders of the Interstate

Commerce Commission and brought pursuant to the pro-

visions of said Urgent Deficiencies Appropriations Act, are

cited as sustaining the jurisdiction of the Supreme Court of

the United States upon direct appeal to review the decree

herein: |

Louisvile and Nashville R. Co. v. U. S., 238 U.S. 1, 10;

‘Colorado vy. United States, et al, 271 U.S. 153, 161;_

Home Furniture Co. et al. v. United States, et al, 271

U.S. 456, 459;

St. Louis and O’Fallon R. Co. vy. United States, 279

U.S. 461, 481-482 ;

Norfolk & We stern Ry. Co. v. Unite " States, 287 U.S.

134.

It, is, therefore, respectfully submitted that the Supreme

Court of the United States has jurisdiction of this appeal

by virtue of Section 402 (a) of the Communications Act of

1934 (U.S. C., Title 47, Section 402 (a)),; and the Urgent

Deficiencies Appropriations Act of October 22, 1913

(U.S. C., Title 28, Sections 47 and 47 (a)).

Dated April 4th, 1936.

C. M. Braceten,

Cuas. T. Russet,

Epwarp L. Buackman,

Auan J. McBean,

Solicitors for Plaintiffs

and Intervening Plaintiffs;

Auten T. Kuots,

Haypen N. Smita,

Solicitors for Additional Plaintiffs.

APPENDIX.

IN THE DISTRICT COURT OF THE UNITED STATES

FOR THE SOUTIIBRN DISTRICT OF NEW YORK.

Amentcan TELEPHONE AND TELEGRAPH Company et al.,

Plaintiffs; Onto AssoctatEep TELEPHONE Company et al., ie

Additional Plaintiffs; Waastern TELEPHONE AND TELE-

crapH Company et al., Intervening Plaintiffs,

Vs. °

Unirep Srares or AMERICA AND FEDERAL COMMUNICATIONS

Commission, Defendants; NationaL Association OF RaIL-

roAD AND Urtinities Commissioners, Intervening Defend-

ant.

Opinion.

Before Martix T. Manron and Avcustus N. Hann, Circuit

Judges, and Joun C. Knox, District Juiee, Constituting

a Statutory Court under 28 U.S. C. 47.

Manton, Cireuit Judge:

-

Plaintiffs, common earriers of communication by wire,

file this bill under the Urgent Deficiencies Act, October’ 22,

1913, ¢. 32, 38 Stat. 208, 219, made applicable by §402(a) of

the Communieations Act [June 19, 1934, ce. 652, §402(a), 47

U.S. C. 402(a), 48 Stat. 1093]. They seek to restrain the

Federal Communications Commission from enforeing its

Order No. 7-C issued June 19, 1935 and effective January 1],

1936 to govern the system of accounts for. telephone com-

panies engaged in interstate commerce and having average

annual operating revenues exceeding $50,000. A tempo-

rary stay was granted pendit.. decision on the permanent

| injunction. The issues are submitted for final determina-

| tion on affidavits and the arguments thereon.

| The accounting system now in operation was promul-

| gated by the Interstate Commerce Commission as the ‘“Uni-

form System of Accounts for. Telephone Companies, First’

Revised Issue,’’ effective from January 1, 1933. Upon ob-

,

.

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8

jections by twenty-two state commissions, the Interstate

Commerce Commission had taken under advisement sug-

gested changes in this 1933 system. Its inquiry ended very

shortly before jurisdiction over telephone companies was

transferred to*the Federal Communications Commission

created by the Communications Act of June 19, 1934. In

view of this faet, the Interstate Commerce Commission,

although it issued no order, rendered a report of the pro-

ceedings before it, for the convenience of the incoming

Commission [Accounting Rules for Telephone Companies,

203 1. C. C. 18). In this report, some of the matters now

objected to, were discussed and disapproved. The Com-

munications Commission, after supplemental investigation,

hearings and conferences, did not follow the Interstate

Commerce Commission in its disapproval of these pro-

visions and incorporated them in the system now under re-

view. The National Association of Railroad and Public

Utility Commissioners, which claims to represent the com-

missions having jurisdiction over telephone companies in

forty-six states, has endorsed the proposed system and has

appeared in this case by intervening as a party defendant.

In addition, the New York State Public Service Commission

pleads for the order as amicus curie.

The attack on the order requiring the uniform system of

accounts is based upon the claim that it is invalid because it

violates the Fifth Amendment to the Constitution and §404

of the Communications Act,‘(a) sinee it is unsupported by

a report stating conclusions and basic findings; (b) the re-

quirements exceed the statutory power of the Commission

and are so contrary to the fundamental principles of correct

accounting as to constitute an abuse of that ‘power in so far

as they treat of original cost, contributions, certain classi-

fieations of telephone plant and depreciation thereon, and

just and reasonable charges; (c) amendments in requiring

obedience to standards so vague and indefinite as to .be un-

intelligible, or violate the Fifth and Sixth Amendments.

-Before other diseussion, it should be settled that the

order is not void for lack of a report stating the conclusions

and findings of fact by the Comniission. Section 220(a) of

the Communications Act provides: a

9

“The Commission may, in its diseretion, prescribe

the forms of any and all accounts, records, and memo-

randa to be kept by carriers subject. to this chapter

* * * 99 :

There is an identical provision in the Interstate Commerce

Act, §20(5).. When a system of accounts is laid down under

these sections, the action is a legislative, rather than a

judicial function. It is making a new rule to be applied

in the future, not applying an already existent rule to past

facts. This is the characteristic of legislation. See Keller

y. Potomac Electric Power Co., 261 U. 8. 428, 440; Prentis

vy, Atlantic Coast Line Co., 211 U. S. 210, 226. And to

claim that findings are essential to support this order is to

ignore this difference. ~ Assigned Car Cases, 274 U. S..064,

583. An administrative body can exercise a delegated legis-

lative function without first reporting the data upon which

it decided that the proposed rule should be established.

Pacific States Box & Basket Co. v. White, 80 L. Kd. 133.

Since the Commission is authorized to act ‘‘in its discre-

-tion’’, there is no requirement that it find the facts upon

which its authority to act is conditioned as in Atchison,

Topeka & Santa Fe Ry. Co. v. United States, 295 U.S. 193;

United States v. Chicago, Milwaukee, St. Paul & Pac. R.

Co., 294 U. 8. 499; United States v. Baltimore & Ohio R. R.

Co., 293 U.S. 454. The case last cited points out the differ-

ence at p. 462. In holding an order void for lack of-a finding

on a jurisdictional fact, the court said:

“The Act (Boiler Inspection Act) does not confer

upon the Commission legislative authority to require

the adoption on locomotives of such services as, i its

discretion, it may from time to time deem desirable.”’

Section 220 (a) conferring power to prescribe the account-

- ing system does confer upon the Commission power to act’

in its discretion.

_ Nor does § 404 of the Aet render an order under § 220 (a)

void if a report is lacking. Section 404 provides:

‘‘Whenever an investigation shall be made by the

Commission it shall be its duty to make a report in

10°

writing in respect thereto, which shall state the conclu-

sions of the Commission, together with its decision, or-

der or requirement in the aaa and in case dam-

ages are awarded such report shall include the findings

of fact on which the award is made.”’

=

This section requires findings of fact only in the event

damages are awarded. The order No. 7-C does not award

damages. Although the Commission, as outlined above,

did extensive preliminary work before entering the order,

a report of its conclusions is not a condition to the order’s

validity. The conclusions of the Commission are very evi-

dent from the order itself.

In support of this position, there is the fact that § 404 and

220(a) of the Communications Act are identical with § 14(1)

and § 20(5) of the Interstate Commerce Act. It has not

been the practice of the Interstate Commerce Commission

to preface‘its general accounting orders with reports, and

the incorporation of these sections in the Communications

Act is an indication that Congress approved this adminis-

trative interpretation. See McGaughen v. Hershey Choco-

late Co., 283 U. S. 488, 492, 3; National Lead Co. v. United

States, 252 U.S. 140, 146.

The Communications Act made the judicial procedure ap-

plicable in proceedings to enforce or test the validity of the

Communications Commission orders similar to like proceed-

ings affecting the orders of the Interstate Commerce Com-

mission (§ 402 [a]). We must, therefore, in reviewing this

order, be guided by the rule that in respect t6 orders of the

Conmission, the court may not ‘‘under the guise of exert-

ing judicial power, usurp merely administrative functions

by setting aside a lawful administrative order upon our

conception as to whether the administrative power has been

wisely exercised.’’ Interstate Commerce Comm. v. Illinois

Central R. R.£Co., 215 U. S. 452, 470. -See Interstate Com-

merce Comm. v. Union Pacific R. R. Co., 222 U. 8. 541, 547.

It is not enough to reason that the order is unwise, inex-

pedient or at variance with the court’s own views as to what

is practicable. This rule guides judicial review of any legis-

.

te. si gatas SS Maier rd ether se *

11

lative act. Chicago, Burlington & Quincy R. R. Co. v. Mc-

Guire, 219 U.S. 549, 569. |

We have already pointed out that the order prescribing

a uniform system of accounts is.df a legislative character.

When § 20(5) of the Interstate Commerce Act was before

the Supreme Court in Interstate Commerce Commission v.

Goodrich Transit Co. (224 U. S. 194), and Kansas City

Southern Railway Co. v. United States (231 U. S. 423), the .

court, while. characterizing the Commission’s power as leg-

islative, also held it not unlawfully delegated saying at 214:

‘““The Congress may not delegate its purely legisla-

tive power to a commission, but, having laid down the

general rules of action under which a commission shall

proceed, it may require of that commission the applica-

tion of such rules to particular situations and the in-

vestigation of facts, with a view to making orders ina

particular matter within the rules laid by the Con-

aa

And referring to § 20, said: ¢

~ «* * * The Commission is permitted, in ifs dis-

cretion, to require a uniform system of accounting, and

to prohibit other methods of accounting than those

which the Commission may prescribe. In other words,

Congress had laid down eeneral rules for the guidance

of the Commission, leaving to it merely the carrying

out of details in the exercise of the powers so conferred.

This,’ we think, is not a delegation of legislative

authority.”’

Noi commission aevounting order is to be reviewed judici-

ally for the purpose of determining whether it conforms

to the court’s views as to what constitutes proper, efficient,

practical accounting methods but it is for the court to say

only whether the commission has atted within statutory

and constitutional limits. See Norfolk & Western R. R. Co.

v. United States, 287 U.S. 134, 143.

Therefore, our inquiry as far as it goes beyond a con-

sideration of power within the statute is merely whether the

order is ‘‘so entirely at odds with fundamental principles

(ee te ea gD

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12

—

of eerrect accounting as to manifest an abuse of power.”’

See Chesapeake & Ohio Ry. Co. v. United State8, 5 Fed.

Supp. 7, 14 (KE. D.N. Y.). |

Section 213(c) in specific terms authorized the commis-

sion to obtain from telephone carriers at any time informa-

tion concerning original cost of their properties whigk may

be needed for rate fixing purposes. <Anid it is asse1 by

plaintiffs, that this section is the full measure of the Com-

mission’s authority to — information as -to original

cost and that an order under § 220(a ) requiring data in re-

spect of original cost to be kept in a system of accounting

may not be prescribed. Section 220(a) authorized the Com-

mission in ifs discretion to ‘*preseribe the forms of any and

all accounts, records and memorandum to be kept by the

eafrier’’. The powers. conferred by § 213(¢) are not re-

strictive of § 2920(a) nor does the latter section restrict the

former. The two sections are ‘apable of complementary

treatment.

The requirement that original cost be set forth in account-

ing records of the telephone companies serves to complete

the picture of value in revealing the property’s financial

background and showing the relationship of a carrier’s

monetary return to the original as well as to its own invest-

ment. It aids the Commission in its duty to determine from

all the pertinent circumstances and factors, the Just and

reasonable rates which the carrier may exact from its serv-

ice. Original cost is a relevant factor. - Smyth v. dimes, 169

U.S. 466, 547; Los Angeles Co. vy. RoR. Comm., 289 U.S.

287, 306, cf. § 213(a) of the Act. The object of the system

of accounts might well be to display the pertinent financial

operation and throw light upon. its present condition.

Kansas City Southern Ry. v. U.S., supra, at p. 440. Origi-

nal cost as # segregated item on a ; balance sheet may serve

to reveal actualities which may be pertinent in fixing a rate

‘base on the capitalized earning power of a property pur-

chased. In making readily available facts which would tend

to expose discrepancies in valuation, it cannot be said the

system is so arbitrary as to be beyond the commission’s

power. -Forty-seven State public utility bodies acquiesce

e

13

in the proposed requirements. This is not evidence of un-

reasonableness.

The new system requires that when telephone plant in

service is acquired, the amount paid therefor shall be

charged to account 276 (Telephone plant required). The

original cost of the property, estimated if not known, shall

then be charged (debited) to the appropriate telephone

plant account, whether ‘‘in service’? (100.1), ‘‘under con-

struction’? (100.2), or ‘‘held for future use’’ (100.3) and

eredited to account 276. After debits to 276 for ‘*contribu-

tions’’, and for reserve requirements for depreciation and

amortization to date of the plant acquired, the amount re-

maining in 276 shall be debited or credited as appropriated

ty account 100.4 (Telephone plant acquisition adjustment).

As to 100.4, the system provides: ‘*The amounts recorded

in this account with respect to each property acquisition

shall be disposed of, Written off, or provision shall be made

for the uneiiantion thereof in such manner as this (‘om-

mission may direct [100.4(c)].’? ‘*Original cost’* as used

is defined as ‘‘the actual money cost of or the current money

‘alue of any consideration other than money exchanged for

property at the time when it was first dedicated to the pub-

lic use, whether by the accounting company-or by a prede-

cessor public utility’? (instruction 3-S-1).

The plaintiffs direct at this requirement the objection

that these provisions violate the fundamental principles of

accounting in the following respects: although 100.1, 100.2,

100.3 and 100.4 if added together immediately will show the

company’s actual investment in its plant, since 100.4 must

be written off at the will of the Commission, it will be neces-

sary to carry a surplus reserve against this possible write-

off. Once the write-off has been made, they declare that no

‘combination of balances will reflect the company’s actual

investment. And they object further, because there can

be no depreciation charge to any amount in account 100.4.

In considering the merits of these objections, it becomes

necessary to examine, for purposes of comparison, the

system now in effect which the plaintiffs do not attack as

unreasonable and which they seek to.retain. Under the

present system, account 278 ‘‘undistributed cost of prop-

yew

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14

erty’? performs a function similar to account 100.4. Under’

it, when a purchase is made, the estimated current value of

the land, the current cost new (estimated if not knewn) of

certain other telephone plant, the orgginal cost of fran-

chises, and the cost of uncompleted projects are charged to

thtir corresponding accounts. After crediting to reserve

accounts, the estimated depreciation and amortization ap-

plicable, the difference between the total of the foregoing

amounts and the cost to the accounting company of the

plant acquired is debited or credited to 278, ‘‘undistributed

cost of property.’’ Account 278 is classed as a ‘‘telephone

plant account”’ and is reported in the balance sheet as part

of account 100 (Telephone plant).

As an alternative, the Commission may permit the trans-

fer of the amounts in the ‘‘telephone plant accounts’’ and

1 ‘depreciation and amortization reserve accounts’’ as

carried in the books of the vendor company to the books of

the purchaser. In some jnstances, the amounts actually

paid by the purchasing companies have been recorded in

the ‘‘plant’’ accounts. Thus, actual cost, current cost new

at the time of purchase, and original cost at the time of -

first dedication are in use at present as the bases of various

telephone plant accounts. The amount in°278 of the pres-

ent system is subject to no depreciation and may be writ-

ten off only through surplus.

On a comparison of the two sy stems, that of this Com-

mission seems to more accurately reflect the condition and

record-the history of the plant. “Account 100.4 is listed

among investments. It can be subdivided so that there can

he segregated any amount therein not representing (1) the

cost of elimination of competition; (2) payment to an affi-

liate at a price in excess of cost to it with a profit return-

able to the purchasing cempany in the form of dividends

or otherwise; and (3%) any other element not expended in

public interest.

his segregated amount would receive the same treat-

ment substantially in the rate and depreciation basis as

would amounts appearing in 100.1 ‘‘Telephone plant in

service’’. In this light, tt appears that the proposed sys-

tem merely provides segregation, and that the addition of

ee ite lt 6 LK. 1 ms RE RE ke

15

the amounts in these investment accounts’ 100.1 through

100.4 would accurately picture the legitimate investments

of the purchasing company. |

To follow the plaintiffs in their argument that a reserve

of surplus must be maintained against 100.4 and that this

is fundamentally wrong, would be to ignore the similarity

between 278 of the present system and 100.4 of the pro-

posed system, and further it requires the assumption that

the Commission will act improperly in the future under

100.4(c). This cannot be presumed. The order provides

for alternatives adaptable to the facts of individual cases.

This flexibility distinguishes the system at bar from that

held invalid in New York Edison Co. v. Maltbie ( A. D.

‘|N. Y.] 685). This cannot be held, before any order under

100.4(c) has been made by the Commission, to be such an

arbitrary method of accounting that the order imposing it

is void.

The same argument applies to the objection that no

‘depreciation is allowed against item 100.4 ‘‘acquisition ad-

justments’’. This complaint anticipates arbitrary action

by the Commission, under 100.4(c) which authorizes hand-

ling of this item through amortization. The effect would be

the same as writing down through depreeiation, and tntil

the Commission acts so that the accounts become so con-

trary to the principles of correct accounting as to constitute

the Commission’s order arbitrary and unreasonable, the

Commission is within its powers. The court need not agree

thé accounting proposed is the best method, but at this

stage it cannot.be said the provision is arbitrary. The

objection is made that the Commission’s refusal fo act

properly within 100.4(c) would constitute a negative order,

non-reviewable within the doctrine of Proctor € Gamble v.

United States, 225 U. S: 282. This would not cut off the

plaintiffs’ right of attacking the system as it would apply ,

to them after such a refusal. The appeal need not be on

the order denying relief but can be against the system as its

operation is affected by such denial.

There is no deprivation of property involved here. The

Supreme Court has noted that the question merely con-

cerned accounting and that there was no occasion to hold

‘

;

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the order invalid as a deprivation of property until actual

damage was threatened by it as in the use of an improper

rate’ base in setting rates. Norfolk & Western Ry. Co.'v.

>United States, 287 U. 8. 134; United States v. Los Angeles

& Salt Lake R. R. Co., 273 U.S. 299.

The plaintiffs object that ne depreciation is allowed on

property held for future use in account 100.3. Except in

those rare instances when the entire cost of depreciation

covers only the wear and tear on equipment in use, the

plant held in reserve will depreciate because of obsolescence

or deterioration as it is not entirely dependent on use. The

exclusion of depreciation on this account as an item to be

considered in rate determinations may be supportable but

it appears unjustifiable to bar depreciation on this item

altogether. Where the property is withdrawn from service

for any portion of its life, upon its final retirement, the

depreciation reserve set up for it would be inadequate.

This can be adjusted by charging the depreciation to sur-

plus rather than as a current account. Thus a true reflec-

tion of the adjusted value of the property would be ob-

tained, and yet the accounts will so set off the item that

it may be excluded from consideration as a current expense

for rate purposes.

Instruction 21(B)(3) directs a vikndinias of property

which has been acquired by the prior owner as a contribu-

tion, to record the contribution which the seller had re-

ceived. This is done by crediting account 175 ‘‘contribu-

tions of telephone plant’’ and debiting ‘the same amount on

the asset side, to account 100.4 ‘‘Telephone plant acquisi-

tion and adjustment’? [Instructions 21(B)(4)]. Since this

requirement is in addition to the usua! entries covering

* the purchase, it results in swelling the assets and liabilities

by a fictitious entry. It constitutes a double recording of

this portion of the transaction. This part of the property

- is recorded once in the usual record of the transaction, and

to require its inclusion a second time is unreasonable. No

sufficient reason is advanced for such treatment. The de- |

sired record could be made without this inflation by a sub-

division of account 100.4. It is unreasonable to .require

duplication and the plaintiffs are injured in so far as they

are denied a reasonable and true accounting record by this

provision. |

Instruction 2(b)(1) is also objected to. It provides:

‘* All charges to the accounts prescribed in this clas-

sification for telephone plant, income operating reve-

nues, and operating expenses, shall be just and reason-

able and any payment by the company in excess of

such just and reasonable charges shall be included in

account 323 Miscellaneous income charges.’’

The information this requirement makes available is es-

sential! to any determination of reasonable rates within

201(b) of the Act [ch. 1(45) of the Interstate Commerce

. Act] since they are directly affected by such charges. In

the present system, instruction 22 (10) (a) stipulates that

the telephone plant accounts be charged with ‘‘reasonable

amounts"for interest during construction period.’’ The

concept is no more indefinite there than the one more w idely

applied in the proposed system. The idea of ‘reasonable’?

is old in the fixation of publie utility rates and every rate

determination involves consideration of charges here made

subject to a distinction between reasonable and unreason-

able. Although in isolated cases the question -may be very

close, generally the classification will not be impossible.

As an accounting measure merely, the rule canfiot be re-

garded as beyond the Commission’s power.

Exception is also taken to the rule as requiring obedience

to a standard as vague and indefinite as to be uneconstitu-

tional within the doctrine announced in United States v.

Cohen Grocery (255 U. S. 81); Tedrow v. Lewis & Son Co.

(255 U. S. 98), and A. B. Small Co. v. American Sugar. Re-

fining Co. (267 U. S. 233). First, it appears that the re-’

quirement that profits on transactions involving necessaries

should not be unjust or unreasonable is without the special-

ized content of the word ‘‘reasonable’’ with regard to

charges involved in the determination of rates. This serves

to distinguish the plaintiffs’ 6ther cases. Cf. Connally v.

General Construction Co., 264 U. S. 385; Cline v. Trink

Dairy Co., 274 U. S. 445; Champlin Refining Co. v. Okla-

homa Corp. Commission, 286 U.S. 210. Second, telephone

baste ee ee ee rae Set LR RM el CA LGR tM San Oe FING has ps EGA hic aa thls

.

.

. .

18

companies need incur no risk since those occasional eases

which may be doubtful can be submitted for approval under

§ 220(g¢) of the act and instruetion 9 of the order. To the

claim that the Commission is likewise without a standard

for judgment, the answer is that the concept of ‘‘reason-

able” is traditionally defined in utility regulation with suf-

ficient cértainty.

The necessity of this order becomes apparent upon con:

sideration of the interrelations of telephone companies.

License agreements between subsidiaries can furnish ex-.

amples of charges clearly not ‘‘just and reasonable.’’ Yet

‘any exact definition would be objectionable as arbitrary.

_ -Furthermore, these items, in being subject to interpreta-

tion by the Commission and definition as applied to specific

facts, are sufficiently definite to guide the Commission. Cf.

Pennsylvania Co. v. United States, 236 U.S. 351, 361; Inter-

state Commerce Comm. v. Alabama Midland Ry., 168 U.S. °

144, 170.

It j is required that the capital stock expense be set up in

account 134.2 which falls in thé general class of ‘‘Prepaid

Accounts and Deferred Charges.’’ 134,2(c) provides that

the amortization of this account shall be accomplished by

charges to ‘‘ Miscellaneous debits to surplus.’’ Instruction

20(a) states that the telephone plant accounts, 201-277,

shall include the general expense of organization of the

accounting company. While the system may appear to be

inconsistent in this respect, Montgomery, Auditing Theory ~

& Practice. [5th Ed. 1934} p. 416, endorses the write-off of.

organization expenses to charges against earned surplus, |

and this would be not unreasonable in view of the account-

ant’s differences on the point. See Paton Accountant’s

Handbook [2nd Ed. 1934] p. 42.

If inconsistency exists, it may be corrected by the Com-

mission before this requirement can be enforced. What .

we say must not be regarded as an endorsement of the in-

discriminate exclusion of these expenses from the rate base.

See Ohio Utilities v. Pacific Utilities Comm., 267 U. S. 359.

Nor does it mean that expenses of stock flotations subse-

quent to organization are always necessarily to be regarded

as organization expenses.

19

Except as indicated herein in connection with the depre-

ciation for plant and equipment held for future use, and

contributions, the injunction herein prayed for must be>

denied, but a decree will be entered restraining the enforce-

ment of the instructions given as to these two items.

A decree for plaintiffs as limited in this opinion, may be

entered.

February 18, 1936. | M4

<3 Martin T. Manton,

Circuit Judge;

Avcustus N. Hann,

Circuit Judge;

Joun C. Kwox,

District Judge.

(7827-C)