Full opinion text
ROSE, Circuit Judge. The plaintiff in this cause is the Chesapeake & Potomac Telephone Company of Baltimore City, a Maryland corporation. Whenever there is occasion to distinguish it from any other body corporate, it will be referred to as the Maryland Company, and when there is not, it will be more briefly styled the Company. It supplies telephone service throughout the state. In June, 1924, it wished to raise its charges. As required by law, it published its proposed schedules of rates and filed copies of them with the Public Service Commission of Maryland, herein called the Commission. The changes it contemplated would have increased by over $1,100,000, or by about one-eighth, the total cost to the public of services identical with those rendered by it in 1923. At the instance of the Commission, and for the purpose of giving the latter time to inquire into the reasonableness of the new rates, the Company postponed the date at which they would be put into effect until November 1, 1924. The hearings before the Commission began on the 22d of September. When the 1st of November arrived they had not been concluded, and at the ur-. gent request of the Governor of the state the Company substituted January 1, 1925, for November 1, 1924, as the day upon .which it purposed.to put in force the new and higher charges. The hearings before the Commission continued until December 22, 1924. One week later it announced its conclusions. It embodied them in an elaborate opinion and order, which refused the increase asked for and continued the previously existing rates in force for two years from January 1, 1925, until .December'31, 1926, both dates inclusive, unless within that time the Commission should otherwise direct. ' The Company began this suit on December 31st, two days after the order was entered. In its bill of complaint it says that under the rates the Commission requires it to maintain it. cannot get a fair return upon the fair and reasonable value of its property exclusively devoted to furnishing intrastate telephone service in Maryland. It prays that the order imposing such rates upon it shall be declared void, the Commission enjoined during the litigation, as well as permanently, from attempting to compel it to keep' them in force, and in like manner restrained pending the hearing of the application for an interlocutory injunction. Judge Soper who was asked to issue the temporary restraining order, at once conferred with the Attorney General of the state and with the other counsel on both sides of the case. He concluded that there was small occasion for such a stay,, as the motion for a preliminary injunction could ‘b'e set for hearing within a week from the filing of the bill. Such dispatch was, under the circumstances, both possible and desirable. Both parties were then full of the ease. The trial before the Commission had extended over 3 months, 49 days of which had been occupied in public hearings. They ended only 16 days before the date upon which they began again in. this court. The witnesses required by either party to sustain its position on the important issues involved were accessible in at least as large a proportion as they were ever likely to be again. The members of the court knew how unsatisfactory affidavit evidence usually is. At their instance and with the cordial concurrence of all the counsel engaged, the witnesses were examined and cross-examined in open court. We are indebted to our professional brethren appearing in the ease for their hearty, able, and effective, co-operation with us and with each other in expediting the proceedings, and for the skill with which in the examination of the witnesses, speed, and thoroughness were successfully combined. The hearing before us occupied some 8 days, of rather more than normal length. We regret that the inescapable pressure of other judicial duties has made it necessary for us to keep the case under consideration for a longer time than would have been otherwise required, even after all due allowance is made for the importance and difficulty of many of the questions involved. The Controverted Questions. At the hearing, every one agreed that the Company was entitled to a fair return upon the actual present value of its property employed-in the service of its patrons, for as the Supreme Court has said: “Rates which are not sufficient to yield a reasonable return on the value of the property used at the time it is being used to render the service are unjust, unreasonable, and confiscatory, and their enforcement deprives the public utility company of its property in violation of the Fourteenth Amendment.” (The italics are ours.) Bluefield Waterworks v. Public Service Commission, 262 U. S. 679, 690, 43 S. Ct. 675, 678 (67 L. Ed. 1176). As usual, however, in rate eases, there was wide difference of opinion, both as to what that value is and as to the relative accuracy of the several conceivable ways of aseertaining.it. There were, moreover, two other questions as to which the parties were in conflict. One of them was as to whether certain payments made by the Company to other 'corporations should be charged, as the Company claimed, to expenses, or were, as the Commission held, a part of the net earnings. The other matter in dispute was the minimum percentage of return to which the Company was lawfully entitled. These questions will be considered in the reverse order in which they have been stated. Present Value of Company’s Property-Market Value. Usually the law assumes that, at any particular time, a thing is worth what it will then fetch in the open market. Some commodities are habitually dealt with on exchanges, which keep a record of what is sold on them and of the prices realized. As a rule, the law .for its purposes will accept such quotations as accurately determining what the commodity was worth on any particular day, although doubtless it sometimes may he permissible to show the existence of peculiar conditions which would make the ordinary assumption untrue and unjust. Other articles are subjects of almost daily purchase and sale, but the transactions in them are matters of private bargaining, and the prices paid at the same time by different people may vary considerably. In sueh cases the trier of fact may not find it quite so easy to determine what, at any particular time, may have been the precise actual worth of a unit of the commodity involved in the controversy, but the margin of possible uncertainty is usually relatively small. Then, again, the property, the value of which is to be ascertained, may have peculiarities of its own, as is usually the case with land. Court or jury may have not a little difficulty in determining from conflicting testimony what the real market value is; but the law says they must come as near as they can to valuing the land at the best price which its owner, if willing to sell, but not compelled to do so, could obtain for it from a buyer who wanted it, but who could get along very well without it. It is doubtless easier to state the rule than it is to apply it, by putting oneself in the position of sueh purely imaginary buyers and sellers; but on the whole, in practice, it has worked fairly well. In the nature of things, there can he seldom anything like a free market for a public utility. Except in the case of some comparatively small properties, possible purchasers are few, and probable ones perhaps nonexistent. This was true, even before the days of public regulation and limitation of rates. Market Value of Securities. In that earlier time the prices commanded in the market by the stocks and bonds of sueh a corporation might be a fairly accurate measure of the then- value of its properties. Nowadays what a public utility’s securities will sell for may be largely, if not altogether, dependent upon what rate the state will permit it to charge, and in consequence may have small relation to the actual worth of its property used in the public service. In the instant ease the great hulk of the Company’s securities have never been bought or sold in any genuine sense of that term. Its entire common capital stock was apparently originally subscribed for by the corporation which still holds it. The only securities it appears ever to have issued to the public were some $3,000,000 of 7 per eent. preferred stock, put out at par some years ago and now selling on the exchanges at a premium of about 11 per cent. In the case before us, no evidence has been offered to prove what its property, or the securities by which it is represented, would fetch, if put up for sale. Beproduction Cost. Another way of ascertaining what is the present fair value of what is used is to show what would be the cost of reproducing so much of it as is really used and is useful. The Company supplies something the public wants. If by a catastrophe, or series of catastrophes, all that it has was either wiped out of existence or made altogether useless for its present purpose, the people of the state would be deprived of all telephone facilities. The demand that they should be replaced would be general and insistent. To meet it, a new plant would be required. The cost of reconstructing it would furnish evidence of the present value of the Company’s property, both ‘to it and to the public. The reproduction post would, of course, exceed the present value by whatever difference there is between that which is altogether new and that which is in varying degree now old. The theoretical objections to this method of arriving at the present worth of the property of a public utility are probably less formidable than are those which develop themselves whenever an attempt is made to use it. At one time or another, almost everybody has advocated it. A decade ago, it was the favorite of legislative bodies, Public Service Commissions, and others who in official position or in private station sought to protect the public against excessive charges. In 1916, as the outcome of an inquiry extending over some years, the Commission valued the Company’s property as of June 30, 1914. Before doing so, it had gone into a minute and painstaking investigation of the cost of reproducing anew what the Company then had. In those pre-war days, the Company did not think that sueh a way of ascertaining the amount upon which it was entitled to a return was fair. The Commission seems to have felt the Company was right to a degree at least, and it therefore did not accept the reproduction figures as conclusive. It added to them certain allowances for what it called intangible values, representing in part the money the Company had necessarily expended in building up its business, and which was not included in the cost of acquiring its physical possessions. Nevertheless, it is fair to say that the' Commission gave great weight to the result of the inquiry into the reproduction , cost. In a very substantial sense its finding of value was in large part based upon it, modified, it is true, by certain additions and subtractions dictated by its sense of fairness, or, as it thought, required, by the application of everyday common sense and business experience to the necessarily somewhat theoretical conclusions of'the experts. ’ Under the circumstances in which it found itself at the time, it could scarcely have done otherwise. Before the days of public regulation of the charges of utilities, there was no compelling reason why their books should be so kept as to preserve and disclose the information needed by rate-making bodies. The Commission learned that to ascertain the cost of reproducing such properties as those of the Company required the services of engineers of great experience and technical training in highly specialized branches of their profession. The work was' troublesome and costly. It could not be repeated frequently. When the Commission fixed the- fair value of the Company’s property as of June 30, 1914, it supposed that many decades would elapse before it would be again necessary to inquire into the cost of reproducing the Company’s property. Value in 1914. The value then ascertained was $12,922,-458, of which, however, $1,367,700 represented the investment in the plant of a depreciation reserve, taken for that purpose out of the rates paid by the public. The Commission held that it was only upon the balance the Company could ask for a return, that is upon $11,554,758. Since -June 30, 1914, tbe Company, as required by the Commission, has periodically reported the cost value of the retirements of its property worn out, or which has become obsolete, and also the cost of new additions, so that the books of the Company and the Commission now show the cost in dollars of the net additions since made to the Company’s possessions. ' Books so kept would show the cost of the Company’s property at any particular time. In the absence of great changes in values, such cost, due allowance being made for depreciation, would be a fairly accurate measure of present value. Depreciation Reserve. The Company’s reports to the Commission always show something carried to the credit of depreciation reserve.- It has been. built up of suins taken out of revenue. It is charged with the actual or with the approximated original cost of property retired from service. It is used in plant extensions, while awaiting the time it may be needed for replacements, instead of being kept in cash or invested in outside enterprises. The Commission in 1916 expressly said it should form no part of the property upon which the Company would be entitled to a return. . Book Costs and Depreciation Reserve. Throughout this opinion, we shall, except where it is otherwise stated, follow the example of the Commission, by bringing down our figures to December 31, 1923, and there stopping. If to the $12,922,458, the value of the Company’s property on June 30, 1914, as found by the Commission, there be added $15,931,443, the aggregate excess since that date of additions over retirements, the total will be $28,853,901. The net additions to depreciation reserve in the same 9 years and 6 months were $4,655,154, and at the end of the period the total amount to the credit of that fund was $6,022,854. In other words, if nothing had happened to render inapplicable the assumption made by the Commission in 1916, the Company on December 31, 1923, would have been entitled to a fair return upon at least $22,831,047; that is to say, upon the difference between the $28,853,901, the cost of its property, and the $6,022,854 then to the credit of its depreciation reserve. The Commission in the instant ease has, however found that^the Company needs a working capital of $975,000, a sum $475,000 greater than was allowed for that purpose in 1914, increasing thereby to $23,306,047 the amount upon which in accordance with the assumption in question the Company may of right demand a return. The Commission’s Yaluation. In reaching the conclusion in controversy in this case, the Commission as at present constituted calculated the December 31, 1923, value of the Company’s property in another way, and by so doing fixed it at $24,350,944, or more than $3,000,000 in excess of the amount which would have resulted from a rigid application of the methods seemingly contemplated by it in 1916. In reaching this total of $24,350,945, the Commission started with $13,062,197, the sum originally ascertained to have been on June 30, 1914, the cost value new of the Company’s tangible property. To this it added for net additions since, not the $15,-931,443 shown on the face of the books, but only $15,276,483, and thereby arrived at a cost new on December 31, 1923, of $28,338,-680. The propriety of so reducing the apparent value of net additions to the Company’s property was not made clear to us. However, the Commission did so reduce it, and as a consequence fixed the cost of the Company’s tangible property to December 31, 1923, at $28,338,680, a figure which, but for the deduction mentioned, would have been $28,993,640. From what it found to be the cost of the Company’s property to the date in question, the Commission deducted for depreciation, not the $6,022,854 then standing to the credit of depreciation reserve, hut what was in some sense, at least, the arbitrary amount of $5,667,736, or 20 per cent, of such cost. In this way it arrived at the sum of $22,670,944 as the actual value of the Company’s tangible property. To this it added $975,000 for working capital, and $705,000 as the worth of the Company’s, intangible property; that is to say, “going concern value,” “cost of attaching business,” or whatever other title you may choose to give to it. The total, $24,350,944, is the amount upon which the Commission says the Company is entitled to a fair return. The deduction which can properly be made for depreciation is one of the sharply controverted issues to he later considered. With the exception already noted, we think the Commission used what would have been, in most periods of the world’s history, a sound method of ascertaining the actual value upon which the Company was entitled to a return. These modifications will raise the Commission’s figures of the value of the Company’s property to $30,673,640 before any deduction for depreciation has been made, and upon the assumption that during the preceding decade the purchasing power of the dollar was stable. The Investment. The amount invested in the Company’s property and business should throw some light on the problem with which we are now concerned. The Company’s boobs show that on the 31st of December, 1923, the total investment was $29,078,014, figuring, as we have heretofore done, the balance then credited to the depreciation reserve account at $6,022,854. In this total are included, as for the purposes now in hand should he done, all sums received from the sale of stock, common or preferred, money borrowed, undivided profits, and depreciation reserve. The undivided profits were, in comparison with the size of the Company, small, amounting to $1,044,592. In the 9 years and 6 months from June 30, 1914, they increased only $377,076. They are, of course, the aggregate of the earnings which the Company might have distributed to its stockholders, hut which it did not, preferring to use them in its business. It will be noted that the total investment is $1,595,620 less than the amount of the Commission’s valuation as modified by us. The difference is principally to be found in the fact that the total investment on the Company’s books in 1914 was but $12,727,-528, while the Commission then and now found, including working capital and intangible values, the property was at that time worth new $14,267,197. It appears the amount invested on December 31, 1923,, was $16,350,486 larger than it had been on June 30, 1914. The net additions to the plant during that time eost $15,931,443. The difference between the increase in the investment an-d the net additions to the tangible property of the Company doubtless is due largely or altogether to the greater amount of working capital now in use. The Purchasing Power of the Dollar. In normal times it is highly probable that either the method apparently contemplated by the Commission in 1916 or' that actually followed by it in 1924 would in practice have yielded results at least as accurate as those which could be arrived at by an expert study of the eost of reproduction, and at far less expenditure of time and money; but, as every one knows, times have been very much out of joint. The fluctuations in the prices of both labor and materials during the period in question have been so out of the ordinary that the cost of property in 1914, or, for that matter, in 1919 or 1920, are certain to be very different on one side or the other from the actual value of the property in 1923, or at the present time. It is not probable tha.t the Commission lost sight of these' conditions, but it seems to have felt that under the peculiar circumstances of this ease it was not as a practical matter necessary to make any -substantial allowance for them. It- apparently reached this conclusion- because it thought the Company had bought or built more of its property during times of high prices than of low. Through one of its accountants it submitted to us an estimate, to be presently analyzed, that only about $6,500,-000 of the Company’s property now in use had been in existence before January 1, 1916, that is to say, .in pre-inflation days, while $9,000,000 have been acquired in the four years, from 1917 to 1920, both inclusive, in every one of which prices were materially higher than they now are. If the property acquired before January 1, 1916, is in dollars of to-day worth more than it cost, the reverse is true, although to a less extent, as to that bought or built from the beginning of 1917 to the end of 1920. The Commission seems to have assumed that one of these price movements offsets the other, so that the present value of the Company’s property does not differ greatly from its original hook eost, proper allowance being made for depreciation, and that whatever margin of error there may. be in such an assumption is far less than would result if any considerable weight was given to what the Commission says is the “fantastic character” of' some of the Company’s evidence as to reproduction eost. In this connection its counsel confidently rely upon Georgia Railway v. Railroad Commission, 262 U. S. 625, 43 S. Ct. 680, 67 L. Ed. 1144. On the other hand, the Company says that the estimates made by its experts of the eost of reproducing its tangible property do not exceed by much, if at all, the aggregate it actually expended for that property, when due allowance is made for the fluctuating values of the dollar. Before attempting any analysis of the evidence on the subject of reproduction, it would be well to inquire whether the testimony justifies the assumption of the Commission that, in spite of the ups and downs in the purchasing power of the dollar, or perhaps more properly because there have been ups and downs, the book value- of the Company’s property represents its real present worth as nearly as that is capable of ascertainment. The Calculations of Mr. Collins. In this court, the Commission had one of its accountants, a Mr. Collins, make a calculation which purported to show that the cost of the Company’s property, expressed in terms of dollars of 1923, was but $1,600,-000 more than the figures at which it stands upon the Company’s books. To determine the comparative value of the dollar during all of any one year, Mr. Collins used the Department of Labor’s index figures for the average for the entire year of the prices of all commodities. He then calculated what percentage that' average was of the similar figures for December, 1923. By applying the percentage for any particular year to the book cost of property acquired by the Company during that year, he arrived at the present'reproduction worth of that property in terms of dollars of 1923. As, for example, an item which in 1914 was carried on the books at $1 would be worth $1.54 in the shrunken medium of exchange of December, 1923, while something which cost $1 in 1920 could, at the end of 1923, be reproduced for 67 cents. Obviously, when prices go up as rapidly as they did from 1917 to the middle of 1920, or fall, as fast as they did from the1 latter part of 1920 through most of 1921, the use of average index figures for an entire year may lead to a very inaccurate conclusion as to the money eost of something built or bought at any particular time of that year. Mr. Collins, who impressed us, not only as a very intelligent witness, but a candid one as well, admitted that his method was simple almost to the point of crudeness, and that at the best it could yield results which would be nothing more than rough approximations; but, even so, ho thought they were on the whole likely to be as near the truth, or nearer, than any which had been obtained by the much more elaborate calculations made by the Company’s accountant, Mr. Gretz, about which we will later have something more to say. Reserving, therefore, for the moment!, the consideration of whether Mr. Collins is or is not right as to the comparative accuracy obtainable by his methods as contrasted with others, it would be well to inquire whether he is justified in the assumptions he makes as to the dates at which the Company acquired the property it still uses. When Retirements were Made. If all the property it now has had been obtained before January 1, 1916, its cost expressed in terms of dollars of 1923 according to the indices used by him would be about 52 per cent, greater than that shown on the face of the Company’s books. On the other hand, had all of it been procured during the four years from January, 1917, to December 31, 1920, it would be worth to-day not quite three-fourths of the price the Company actually paid for it. Before attempting to test the accuracy of the dates at which he assumes the retirements to have been made, it is necessary to point out that he is seemingly in error in the figures with which his study starts. They are $12,468,250, which are those of the book cost on December 31, 1914, of the tangible property then owned by the Company. The Commission had, however, determined that the real reproduction cost new was at that time $13,458,411; that is to say, on June 30, 1914, it was $13,062,-197, to which the net additions in the succeeding 6 months were $396,214, and in the instant case the Commission, in its ascertainment of present value, uses the same figures. They exceed by $990,161 those employed by Mr. Collins. If this correction be made, the book cost on December 31, 1923, would be $28,993,640, as has been already stated in another connection. Mr. Collins assumes that all the retirements made since December 31, 1914, were of property owned by the Company in that year. He does not claim that the assumption is true, but he testified that he thought it was the only one he could make under the discoverable facts and the rules and practices of the Commission. He explained that the report made by the Company of its retirements did not identify the particular articles taken out of service in such a way as to show when they had been built or otherwise procured, and that therefore the presumption was that the retirements were made from the property longest in service. Now it is true that, when a telephone pole is blown down or has rotted or has become unsafe, or has been moved because it is not strong enough for the increased cables to be strung on it, the Company’s records and reports do not identify it by number or location; but they do show that the thing retired was a pole, and not a telephone instrument, or 100 yards of wire, and the report does state what price the 'Company had put upon that pole in reaching the total value of its retirements. The Company has 30 or more independent property accounts, and everything retired is identified by being entered in one or the other of these. The character of these accounts may be illustrated by the names of some of them, such as “Exchange Right of Way,” “Buildings,” “Central. Telephone Office Equipment,” “Toll Pole Lines,” etc. Prom these records, quite accessible to the Commission, and indeed in its possession for months before Mr. Collins testified, it is easy to demonstrate that the Company, on December 31, 1923, still had in use very much more of the property possessed by it on December 31, 1914, than Mr. Collins has assumed. • We have been at some pains personally to make these calculations. There are some 18 property accounts, in which the aggregate retirements between the two dates was less than the amount of property in those accounts in 1914. Prom them it is easy to demonstrate that, of the property in use on December 31, 1914, at least $8,514,144 at its 1914 cost value was still in use on the 31st of December, 1923. Unquestionably there was more, even in these 18 accounts, as it is certain there must have been some articles carried in them which were renewed more than once in the 9 years. By no possibility could there have been less. Mr. Collins, by assuming that all the retirements since 1914 were of property then owned by the Company, reached the «melusion that only $5,309,782 in value of the things in service at the end of 1914 were in use at the close of 1923. We have carried our studies of the Company’s property account as put in evidence by the Commission far enough to establish that Mr. Collins’ figures of the total cost of the Company’s property in use on December 31, 1923, when expressed in dollars of that year, should have been at least $32,259,575, instead of $29,605,431, as stated by him. The index figures we have used are those employed by him. Indeed, our calculations are made precisely as his were, except that we have availed ourselves of whatever clear light the Company’s accounts in evidence furnish as to the times when the retirements were made. The total stated is the minimum result justified by his index figures. There can be no doubt that, if the precise life of every article now used and owned by the Company could be ascertained, the, above total would be increased to an appreciable extent. The only uncertainty is how great this increase would be. To this $32,259,575 must be added the sum of $975,000, which the Commission finds to be the sum used by the Company as working capital. Moreover, the Commission held that the value in 1914 of the Company’s intangible property in dollars of that year was $705,000, which, brought úp by the use of the index figures employed by Mr. Collins, is equivalent to $1,085,700- in' 1923. The addition of these two sums give a total of $34,320,275 investment in dollars of 1923. Analysis of Accounts of . Net Additions. We have checked the figures named by analysis of the net additions from time to time made to the Company’s tangible property, as those additions appear on the Company’s books in dollars of the period at which they were made. The result is apparently to show that, in dollars of 1923, such portions of the Company’s property cost $35,178,640, which, with- the additions for working capital and for intangible values, the latter also expressed, not in dollars of 1914, but in those of 9 years later, gives a total new val-úe of $37,239,340. Analysis of Amounts Invested. We have, moreover, examined with care the moneys from time to time invested in the Company’s business. Our data have been taken from the Company’s balance sheets, and not from its so-called investment accounts, as the former, and not the latter, give the information needed in this connection. On June 30, 1914, its balance sheet showed a total investment of $12,727, 528. It has grown year by,year since, but at quite varying speeds. By the use of the index figures which the witnesses on both sides substantially accept, we have reduced the amount of those additions to investment to the values of dollars of 1923, with the result that the total net investment on December 31, -1923, as expressed in the then eontémporary dollar, was $35,037,212, to which should be added for intangible value $1,085,700 in dollars of the same time. The total is $36,122,912. These figures exceed by only $1,802,637 those which the analysis of the calculation of Mr. Collins demonstrated to be the minimum of present cost new of the Company’s property expressed in dollars of 1923. On the other hand, they are $1,-116,428 less than are those which result from the study of the eost of the net additions to the Company’s tangible property, when and as those additions were made. It may be said that the accounts do not sustain the contention of. the Commission that the additions during the high-price period offset or nearly offset those made during the era of low costs. The property acquired before 1917 is now worth, upon the assumption of the accuracy of the index figures and of the way in which they have been used, almost $7,300,000 more than, it cost the Company, while that procured from January 1, 1917, to December 31, 1920, is now newly worth $1,650,000 less than was originally paid for it. The truth, of course, is that the original eost of the .property bought before 1917 was in round numbers $15,000,000 and that acquired from 1917 to 1920, inclusive, was less than $6,500,000. In the years 1921, 1922, and 1923, an aggregate of $7,600,000 was added, and it eost nearly $100,000 less than it would now. In other words, according to this method of calculation, the depreciation in the value of the dollar has made the Company’s property now worth, in terms of dollars, almost $5,750,000 more than it cost. The Purchasing Power of the Dollar. The Company on its part went into an elaborate inquiry as to the effect of the great fall in the purchasing price of the monetary unit and the consequent rise in prices upon present-day values expressed in dollars, and it undertook to show that in all probability the level now reached was likely to be permanent, or at all events to continue for an indefinite period. It put on the stand the eminent economist, Dr. Hollander, of the Johns Hopkins University, who gave persuasive and uncontradieted testimony to that effect. He accepted the index figures of the Department of Labor, used by Mr. Collins, as being on the whole a fair measure of the value of the dollar. He also testified that for two years those figures indicated that its value had been stable, and he gave strong reasons why, in his opinion, that stability was likely to continue for a number of years to come, although, with scientific caution, he did not commit himself to any prophecy on the subject. As has already boon said, no attempt was made to contradict this testimony or to weaken its force. It is so much in common with the conclusion of all observing men that we feel constrained to aecept it, and consequently to put aside the suggestion that speedy return to anything like pre-war prices is at all probable. During the closing months of 1920, throughout 1921, and for some time thereafter, it seemed probable that there might be such a recession, Commissions and courts were then reluctant to give much weight to evidence of reproduction costs, calculated, as they necessarily were, upon prices which might be of the moment only. Mr. Gretz’s Calculations. * The Company’ attempted to show what its present property had cost in dollars of 1923. To that end its highly competent accountant, Mr. Gretz, submitted the result of a laborious study he had made of the actual cost to it of the new additions made to its property since 1914, and then undertook to give their equivalent in dollars of 1923. He reached the conclusion that, in such dollars, the property of the Company had cost it $36,106,848, exclusivo of any allowance for working capital or for going concern value, or, adding the same sums wo have heretofore allowed for those items, $38,167,548. That is about $4,000,000 more than is shown by the figures of Mr. Collins, even with our corrections. The total of Mr. Collins is, of course, only a minimum, and part of the difference between it and that of Mr. Gretz may plausibly be attributed to two causes: Hirst, the books do not furnish data sufficient fully to correct Mr. Collins’ assumptions as to the date of retirements; second, the use by him of an annual average index figure may, in a period of rapidly advancing prices, have made the total cost in dollars of 1923 appear to he less than it was. Mr. Gretz’s tables and charts indicate that, in point of fact, the upward movement of the open markets from 3917 to 1920 was more rapid than was the rise in the cost of the actual work done by the Company. Moreover, the rise in the price of commodities was not uniform, either in point of time or in extent. It is possible that the assumption by Mr. Collins that they were tended to make the cost in 1923 dollars appear to be less than was the case. Mr. Gretz’s calculations were painstaking. They appear to have been skillfully made. Very probably they were actually as well as theoretically correct, in so far as it was possible for him to use ascertained figures, and not to average, assume, or guess; but that was seldom the case. In arriving at them, he had as a rule to make some more or less arbitrary assumptions, and he was compelled to exercise an appreciable measure of judgment and discretion. Doubtless he wished to be fair in all he did, but nevertheless he held a brief for his Company, and he would have been more than human, had he not been subconsciously influenced by that fact. Certain it is that no explanation has been given of the wide margin between his results and those clearly indicated by the sum actually invested in the Company’s business. Cost of Reproduction. The Company sought to support his conclusions in another way. It says they are confirmed by the elaborate testimony it has offered as to the cost of presently reproducing its property. But are they? As we shall presently see, the Company had Mr. Robinson, its chief engineer, carefully estimate what it would cost to reproduce new its physical property. Omitting from his tables the figures for right of way, land, buildings, and interest during the course of construction, there remains a total of allocated costs of $27,784,817, to which he adds about 10.2 per cent, for omissions and contingencies, engineering, administrative and legal costs, taxes, and insurance, and thereby brings up bis aggregate to $30,618,932. Mr. Gretz says that these same properties actually cost the Company, in dollars of 1923, $32,747,028, or almost exactly $2,000,000 more than the sum for which Mr. Robinson testifies they could now he reproduced. Ilow the Revaluation was Made. Before considering the testimony as to the cost of reproduction, a word should be said as to the circumstances under which the ap-praisement was made. The Commission had not been asked to revalue the Company’s property, nor had it ordered such a revaluation. No representative of it took any part in calculating the reproduction cost or value. Na notice appears to have been given the Commission that any such revaluation was to be made. It is true that, if one may judge from intimations in the opinion of the Commission in this case, it is not likely that it would have sanctioned one, had it been requested to do so.' The fact remains that it was not asked, and the results of that made by the Company are accordingly open to much the same criticism to which admiralty subjects ex parte surveys at which interested parties have had no opportunity to be represented. On the other hand, it is, of course, true that the Company could not reasonably have based a request for an increase of rates upon a claim that its property was worth very much more than was shown on its books, without first having made a very careful study of the present value of its holdings. Land and Buildings. How did. the Company go about ascertaining the present reproduction value of its property? In the first place, it asked the Beal Estate Exchange of Baltimore City to nominate three of its members, believed by it to be especially expert in ascertaining land values. The three gentlemen named were employed by the Company to inspect and value each piece of land owned by it. They did so, and the results were laid before the Commission and subsequently before us. Each of them were men of exceptional standing, of long experience, and of high competency, at least as to the value of real property in Baltimore City. They were qualified to testify as experts to the worth of lands in other parts of the state. They gave, lot by lot, their estimate of the present value of the Company’s land, apart from the improvements upon it. The Company employed three practical builders and contractors, with unusual experience in the actual erection of large and important structures, to examine .the buildings owned by it, and to report their conclusion as to what it would cost to reproduce the structures in question. Two of them concurred in the estimate of the deductions which should be made for depreciation, while the third thought that the buildings were so well maintained that, for the purpose to which they were put, they were as good as new. Valuation of Other Property. The valuation of the rest of the Company’s property was made independently by two persons. The first of these was Mr. William E. Sloan, a consulting electrical engineer, specializing almost exclusively in telephone construction and maintenance. He appeared to be a highly competent man, He testified as to the cost of reproducing the Company’s plant, supposing the materials needed were bought in the open market and at prices charged companies or individuals who were not entitled to buy from the Western. Electric Company at the special rates given by it to what are called the associated companies of the Bell System, about which we shall have something more to say. The second was Mr. Charles A. Robinson, the -chief engineer of the Maryland Company, and of the Virginia, West Virginia, and District of Columbia companies, cooperating with it in what is known as the Chesapeake & Potomac group of the associated companies. He gave the results of the calculations he had made as to what .it would cost to reproduce the Company’s property, if those charged with the work of reconstruction could obtain the articles supplied by the Western Electric Company, at the prices at which it sold them to the associated companies. Messrs. Robinson and Sloan each accepted without further inquiry the estimate of the real estate experts and of the builders as to the value of the land and the reproduction cost -of the buildings with the depreciation thereon, and included those figures in their estimates. The result was that Mr. Sloan reached a total reproduction cost of $47,283,275. Mr. Robinson fixed it at $42,829,008. It is certain that all the money which ever went into, the property of the Company did not, even when reduced to 'the terms of dollars of 1923, exceed, as already figured, $35,037,212, to which, for comparison, the Commission’s allowance for intangibles should be added, bringing up the aggregate to $36,122,912. Mr. Sloan made an allowance of $4,397,165 for depreciation, and concluded that, upon the reproduction theory, the property of the Company was presently worth $42,841,110. Mr. Robinson’s deductions for depreciation amounted to $4,513,855, so that he put the present value at $38,315,153. The present value, less depreciation, arrived at by these gentlemen, of $42,841,110 and $38,315,153, is comparable with the $29,507,949 which, as will be subsequently shown, is the difference between what the Company has invested in its present property, expressing that investment in dollars of to-day, and the sum in like dollars now standing, to the credit of its depreciation reserve; that is to say, Mr. Sloan’s reproduction cost exceeds all the. money in post bel-him dollars that has gone into the property, whether from depreciation reserve or from any other source whatever, plus, moreover, an allowance for intangibles, by 31 per cent., and Mr. Robinson’s by 18 per cent. Their estimates of the present depreciated value of the property exceed the money put into it otherwise than from depreciation reserve by 45 per cent, and 30 per cent., respectively. It is quite natural that the Commission was not eager to accept these figures as accurate estimates of real value. Cost of Establishing Business. It is possible to lay a finger on some of the great differences between the Company’s experience and the experts’ opinions. Each ©f them takes into account what one of them calls “cost of establishing business” and the other, “going value.” Their estimates on this score are many times as great as any amount which the Company expended for that purpose. The Company in 1914 was some 30 years old. It had long before incurred and paid all of the charges for bringing it into the world and for nursing it through infancy, childhood, and adolescence to the full stature of manhood. At that time the Commission allowed it $705,000, to malm good what its nurture and education had cost. Apparently it was then quite contented with what had been done. Since then, every dollar that has been used for extension purposes has been treated as an ordinary current expense, and so charged against rates. Mr. Sloan’s estimate of the value of this item is $5,388,575, and Mr. Robinson’s $4,324,424. Even upon the justifiable assumption that the $705,000 allowed by the Commission in 1914 is equivalent to-day to almost $1,100,-000, Mr. Sloan’s estimate is nearly four times as great and Mr. Robinson’s nearly three times. Interest During Construction. Each also figures a very considerable sum for interest during construction; Mr. Sloan’s figure being' $1,556,323, and Mr. Robinson’s $2,000,957. The Company’s net additions to its plant since 1914 have exceeded the entire value of the property in that year, and, even if all allowance be made for increased cost, the construction since must have nearly equaled the worth of all that it then had. The actual cost to the Company of interest during construction has been, according to the figures furnished by Mr. Gretz, the Company’s chief accountant, $173,125.61. A very large part of the new w'ork which the Company has undertaken since 1914 was executed when the current rates for interest-on loans were at least as high as they now are. Administrative and Engineering Costs. Mr. Sloan "estimates the general administrative and engineering costs of reproduction at $2,994,268, and Mr. Robinson at $2,-227,968. It is not possible from any of the exhibits in evidence to compare these figures with the actual expenditures by the Company for the purpose in question. The totals of Mr. Gretz’s calculations, already discussed, suggest that perhaps those of Mr. Robinson are not unreasonable, and yet the Commission may have felt some doubt as to whether they were not rather high. Land and Buildings. Neither Mr. Sloan nor Mr. Robinson were responsible for the valuations of lands and buildings adopted by them. They took them from the report of the real estate and building exports who appraised the Company’s real estate and improvements. As to the prices put upon a portion of them, the Commission was in a position to introduce some testimony on its own behalf, and to cross-examine much more closely the Company’s witnesses than in the nature of things it was able to do as to the cost of telephone material and installation, intimate knowledge as to which is possessed by few not in the employ of the Company or of its associates. Erom conflicting evidence we have concluded that the value put by the Company upon its land is too high. It is not, by any means, grossly excessive, but in the aggregate it is, perhaps, about one-eighth above the present real worth of the property. We are satisfied that the figures for the buildings err in the same direction and to a still greater extent. To go into a minute analysis of the testimony which has led us to this conclusion would lengthen our opinion overmuch. What was told us as to the cost of reproducing the Company’s buildings clearly and forcibly illustrates the almost inescapable difficulties in the way of arriving in that way at an accurate present valuation of properties widely scattered and greatly differing in their characteristics. We were furnished with elaborate and detailed estimates as to the cost of reproducing buildings never originally designed for the use of a telephone company, and which, for such purposes, no human being would ever think of reproducing. In these matters the Company’s witnesses, doubtless in order to escape a suggestion that they had used one method as to one building and a different method as to another, included in their calculations as to what would be the outlay for rebuilding a rural cottage in which the Company happened at present to have a village exchange, the wages of tim'ekeepers and watchmen, and the expenses of providing temporary offices and accommodations for clerks and workmen, doubtless required when buildings costing hundreds of thousands of dollars are in course of construction, but which certainly would not be needed to put up a simple frame building in a small country town. The evidence, moreover, convinced us that there was, in the making of these estimates, a tendency, doubtless unconscious, to as-' sume that, because the character of some of the appliances, fixtures, or construction was in one or more of the buildings high, that the same measure of costliness could'properly be applied to all. As, for example, it was assumed that the average reproduction price of some hundreds of. electrical fixtures installed in a particular building was $22.50, because some of them new were worth that figure or more. We think it established that the cost of replacing all of them would not have exceeded on the average $7 apiece. We cannot say. that the Commission .was wrong in holding that they could not accept the Company’s reproduction evidence as conclusive of the value of the buildings, or even highly persuasive within some hundreds of thousands of dollars. Weight to be Given to Testimony of Sloan and Robinson. From what has already been stated, the Commission would have been justified, we think, in concluding that the estimates of Messrs. Sloan and Robinson in such matters as were susceptible of effective cheek by the Commission were millions too high. This excess is due to their having made certain theoretical assumptions, which neither the Commission nor this court is able to accept. Those portions of their estimates which dealt with the actual present-day cost of the purchase and installation of telephone equipment or apparatus proper are doubtless open to less question. We are, however, satisfied that the Company, or any successor of it which undertook to furnish adequate facilities to the public of the state, could purchase its materials at the prices actually charged the plaintiff by the Western Electric Company. Mr. Sloan’s figures may therefore be ignored. Indeed, it is probable the only importance attached by the Company to his testimony was the light it threw upon the value to the Company of its connection with the other associated telephone companies and with the American Telephone & Telegraph Company, which owns all the 'Maryland Company’s common stock. Present Value of Company’s Property— Before Depreciation is Deducted. ' Giving all possible weight to the testimony of Mr. Robinson as to present-day cost of its telephone apparatus, equipment, conduits, cables, etc., and not losing sight of the thorough way in which Mr. Gretz prepared his estimates,. we do not see that the Company has succeeded in sustaining the burden resting upon it to show that its property today is worth more than it cost in dollars of 1923, plus such allowance as the Commission has made it for the value not recorded on its books, but, nevertheless, present in its well-organized and highly efficient operating concern. On the other hand, the study we have made of the testimony, the exhibits, and arguments has convinced us that the present value of the Company’s property, if it were new, differs little, if at all, from the present worth in the monetary units of to-day of the dollars invested in it, whether in money owned or owed, plus, in the same character of dollars, the allowance made years ago by the Commission for the worth of its established business. We have reached the conclusion we have, not because we suppose that there is, as a rule, any legal reason why proof of the amount invested is to be given greater weight than any other evidence of present value, but simply because, after weighing all the testimony and everything that has been said in argument, and after cheeking up each suggested method of ascertaining the present worth by every other, we are satisfied in this case that the Company’s property on the 31st of December, 1923, was worth as nearly as is possible to ascertain it, the amount invested in it, augmented by the Commission’s allowance for intangible value, the investment and allowance both being put in dollars of 1923 by the use of what both sides accept as accurate index figures. We do not wish to be understood as holding that under all, or perhaps under many, circumstances the most accurate valuation can be obtained by the use of such figures. All that we decide is that the evidence of reproduction cost demonstrates that world-wide conditions of which all men have knowledge have greatly increased the apparent value of this Company’s property as measured in dollars, and that, from all that has been submitted to us, it so happens that in our best judgment the amount of that increase can be most accurately measured by the use of such figures. It follows that we find that the new or undepreciated value of the Company’s property on ihe 31st of December, 1923, was $36,122,912. Depreciation. In so finding, we, of course, do not hold that the Company is entitled to earn a return on that sum. It is true that both sides agree that the Company’s property has been kept in first-class condition. Nevertheless all of it has been used for some time. A substantial part has been in service for a decade or more. The Company admits that some deduction from the new value should be made for depreciation. Its claim, however, is that such depreciation should be determined from the testimony as to the physical condition of the plant, and from that alone, and particularly that it is altogether immaterial what is the amount which is how to the credit of depreciation reserve, although that reserve was built up out of sums taken out of the rates paid by the public and put aside with the consent of the Commission for the sole purpose of making good the ravages of time and chance. In the Company’s depreciation reserve on the 31st of December, 1923, was $6,614,963, as we calculate it. This figure is arrived at by starting, not with the depreciation reserve appearing on the books, but with the $1,367,700 years ago fixed by the Commission, and adding $4,655,154, the net additions to that reserve since. As that reserve has been invested in the Company’s property, it has been affected by the same fluctuations in the dollar as has the rest of the Company’s investments, so we have taken into consideration the times at which this reserve was actually taken out of rates and credited to the account, and in that manner bring it up, as of December 31, 1923, to the $6,614,963 before stated. Mr. Collins has calculated that the average rate of appreciation in the reserve was 5.7 per cent. We figure it at 9.8 per cent. Physical Depreciation. Mr. Robinson puts the actual physical depreciation of the Company’s plant at about $4,250,000. The only testimony the Commission offered on the subject of physical depreciation was with reference to the Telephone Company’s buildings in Baltimore City, and in them it figured the depreciation at about $300,000, more than did the builders whose conclusions Mr. Robinson embodied in his calculations. The figures of the Commission for depreciation in these buildings may perhaps have been a little large; but, on the other hand, we are per- t snadod, from the actual testimony given by the builders who appraised the buildings outside of Baltimore City and estimated the depreciation in them, that their allowance for it was too low. We therefore find, as a matter of fact, the actual physical depreciation of the Company’s property was at least $4,500,000. It may well have been more. We do not think it could have been less. No one questions that, in arriving at the actual present physical value, this $4,-500,000 must be substraeted from reproduction cost of the property. The controversy is as to whether the remainder of the balance now standing to the credit of depreciation reserve — that is, at the most $2,114,963 - — should or should not be. The Status of Depreciation Reserve Not Apparently Presently Needed. The Commission answers in the affirmative; the Company in the negative. The latter says that this $2,114,963 belongs to it as completely as does any of the rest of its property. It has found it convenient to put that amount in its plant, hut it was under no obligation to do so. It might, if it chose, have kept this sum in cash or in bank, or it might have invested the money in any way its charter would have permitted, and whatever income was thereby earned would have been its to do with as it pleased. In point of fact, it found it convenient to use the fund in the extension of its plant, and it therefore confidently asserts it is as clearly entitled to have that money treated as part of its investment as if it had been raised by the issue of new stock or borrowed upon' its bonds or notes of hand. The argument is strong, and so far as we can see is unanswerable, whenever it becomes absolutely certain that the balance to the credit of depreciation reserve will never be needed for the purpose for which it was originally set aside. In legal theory somebody must own if, and it would seem to be elear that nobody other than the Company does. Upon the assumption just made, it would never be required to make good any impairment in the plant. The Company ma,y do with it as it will, and if it chooses to put or keep it usefully invested in the public service, tbe' Company is entitled to earn a return upon it. But is the rule the same so long as it is possible or probable that whatever is to the credit of the reserve will sooner or later be needed for the purpose for whieh it was originally created? Let us take a simple illustration. Let us suppose that considerable numbers of a particular appliance have long been used by all public utilities furnishing a certain kind of service.. Experience has shown that they have an average useful life of 20 years. So long as one of them works at all, it works substantially as well as it did when it first came out of the shop. Until it suddenly breaks down irreparably, it does not show any external or otherwise detectible marks of wear. Let it be assumed that the utility uses 2,000 of these appliances, and that each cost new $100, and can' at any time be replaced for that sum; that is to say, that the aggregate value of all of them new is $200,000. Suppose at the end of 10 years $100,000 has been set aside for their depreciation, but up to that time there had been occasion to use for that purpose only $10,000. There would be a balance of $90,000 to the credit of the fund. The appliances still in use would seem to the eye to be as good as new, and yet experience has made it certain that they were not, and that in 10 years more all of them would be on the scrap heap. It would not be possible for any one who knew the facts to say that the articles in use were worth $190,000 because' they disclosed no physical deterioration, and that therefore the Company was entitled to a fair return out of rates on their original cost of $190,000 and on the $90,000 in the depreciation resérve as well. The fact, of course, would be that the property was then worth only $100,000, and no purchaser who was familiar with the business would pay more for it. Nor would any essential element of the problem be altered, had the Company, in expanding its business, invested the $90,000 in increasing by 900 the number of appliances it had in use. The new value of all that it had would then be $280,000, but their real worth would be only $190,000, Although no one might be able to distinguish one of them put in service yesterday from another which had been in us'e for a decade. Now, in substance, what the supposed utility did is precisely what this