SUPPLEMENTAL OPINION ON MOTION FOR REHEARING. The Laclede Gas Light Company in its motion for rehearing has so misjudged the opinion that lest its misunderstandings make difficulties in a rehearing before the Public Service Commission it is important that the ineptness of some of the points made be noticed.
I. It is first charged that this court's rulings were in "conflict" with "express statutes" governing its jurisdiction, "to which the attention of the court was not called through inadvertence of counsel." The writer of the motion "through inadvertence of counsel," of course, failed to notice that the opinion cited, quoted and construed each and all of those statutes, outlined the court's duty under them and followed their requirements.
In like manner it was overlooked that the Company failed to appeal from the judgment of the circuit court affirming the report of the Commission on account of which the Company is not in position to complain of this court's approval of several findings of the Commission.
II. The inquiry started with the fair value of all the property found in the Valuation Case $45,600,000, and concerned only changes since that date, though the motion asserts error to the contrary. *Page 953
It is well to keep in mind the purpose and effect of the Public Service Commission law, that the community served by a public utility shall protect the investment in such utility against loss:
(a) Where the property employed becomes impaired or wears out in the service so that it must be repaired or replaced, and
(b) Where the property depreciates by wear and tear and isnot repaired or replaced.
The former is cared for as a part of the operating expenses, and the latter is made good by the depreciation reserve fund, kept at a figure to balance such unrepaired depreciation. All this comes out of the earnings at the expense of the consumers.
There is also depreciation and appreciation by fluctuation in values with no change in the efficiency of the property. Of this it was proper for the Commission to take account. The Company seems to agree that such decrease in values is the Company's loss as their increase is the Company's gain. The Company profited enormously by such fluctuation at the time of the hearing in the Valuation Case.
Besides all that there is depreciation by total abandonment of property not "used up" or worn out in the service and not repaired or replaced. In regard to this last the motion assumes a position in conflict with itself and contrary to that held by the Company in its original brief. It was the loss of this property that Commissioner Porter declared was not depreciation (in the sense that it should be made good), but "one of the hazards of the game." It was no longer used in the public service.
It is asserted in the motion:
"The court erred in holding that the fair value of abandoned property, including mains, entered into the estimates of the Commission and that the fair value of such property was not deducted from the former valuation."
Which amounts to an assertion that such abandoned propertywas deducted from the former valuation and that the Commission approved of the deduction. As proof that it was so deducted the motion continues:
"The evidence clearly shows, without dispute, that all property, when retired or abandoned, is charged off and written out of the plant account. Mr. White (the Company's Comptroller) testified: `When property is retired we write it off the books at the figure included in the Commission's value.'"
Yet the motion further on calls attention to the passage in the opinion where it classed the abandoned lights and mains, which are never replaced, as a risk which investors in public utilities must take, and asserts that such a ruling is in conflict with controlling decisions and would result in confiscation in violation of Sections 21 and 30, Article II of the Missouri Constitution. *Page 954
If the writer of the motion means that the opinion in the passage mentioned refers to something other than the abandoned property "written off the books" he has not read the context. If he means that abandoned property, he asserts that the court committed error in approving the Company's act; the Company voluntarily deducted the value of abandonments, but the court in holding it properly deducted permits confiscation.
There is no occasion for misunderstanding the plain designation in the opinion of property not "used up in the public service," as the motion says, but abandoned and never replaced, instancing the supersession of the gas lamps by electricity.
The record shows that such abandoned property was not deducted from the former valuation. Mr. White's statement that it was written off the books does not necessarily mean that the write-off was carried to the Commission so as to affect their valuation in this case.
It was the theory expressed throughout the argument in the Company's brief and elaborated in Mr. White's evidence, that thereserve fund should be sufficient to overcome abandonments, and charges on the Company's books were made accordingly. A depreciation reserve of 3.2 per cent was demanded to cover such retirements, and the motion for rehearing before the Commission assigned error for failure to allow it. The Commission allowed an annual reserve of 1.5 per cent and we held the finding supported by competent evidence without including the abandonments which the Company desired to have included. The Company, not having appealed, has now no right to complain of that holding. Under one of its present theories it is bound to concede the finding was correct.
All this occurred in considering the depreciation reserve. No mention was made of "writing off the books" the value of abandoned property when considering the value of the iron pipe mains nor in considering changes in the former valuation of other property. The Commission apparently was not apprised of such writing off and took no notice of it until the Company demanded an increase of the depreciation reserve sufficient to cover such property.
In order to account for that failure to mention abandoned property the motion for rehearing here says: (In this and the following quotations significant parts are put in italics.)
"Furthermore, it is clearly shown by the record that additionsand betterments are net, that is to say, that from the total ofnew property added is deducted the items retired or abandoned, sothat all property which is retired or abandoned is deducted from the valuation automatically at the time it is retired. Obviously, all property retired at the time of the Commission's valuation had been written off and was not included in the Commission's final figure because the Commission added only thenet additions." *Page 955
That is explained further:
"By net additions and betterments is meant the total additions and betterments, minus the property retired."
Those statements in the present argument are not supported by the evidence. The Company's motion for rehearing before the Commission contains the assignment of error:
"In holding that such items of property or any items ofproperty the Company will not be allowed to make a fulldeduction from the depreciation reserve fund."
If such property was automatically and voluntarily deducted from the valuation by the Company's action, how could the Commission's approval of that action be error?
The motion cites the page where Mr. White testified:
"The net additions and betterments made last year, after deducting the property written off from the gross amount added was $1,200,000, the budget for 1928, I believe, calls for about $1,500,000 for plant additions. All this is new capital."
The witness refrains from saying that the write-off was reported to the Commission. The same witness, explaining the Company's exhibit 1-F, had just used this expression: "After crediting the reserve with the amount allowed by the Commission for depreciation expenses and charging against the reserve theproperty retired during the year."
While the retirements were written off the books the charge-off was balanced by reprisals from the reserve fund, leaving the original valuation unaffected, so there was no "automatic deduction." In 1926, $275,900.56, and in 1927, $420,749.73, was diverted from the reserve fund to fill up the hole made in the value of the property by retirals. Those figures are the exact amounts of the retirals for those years, and kept the property at the same level of book value. Therefore there could have been no automatic deduction of those sums for the Commission to approve. In commenting upon those retirals the Commission in considering the reserve fund said:
"The Company estimates $1,450,000 worth of property will be retired in the years 1928 and 1929, and that such heavy retiralswill soon exhaust the reserve fund."
The witness said further:
"If the annual depreciation allowance is not increased and the charge-off continues as indicated the Company will have consumed its reserve by the end of 1929."
The property which is retired or abandoned was "charged off the books," but the amount was retained out of the reserve fund to balance the charge-off. The consumers pay it and the Company retained it to balance the retirements. *Page 956
The record shows that the Commission did not deduct such retirements from the valuation, and took no account of them except in considering an allowance for the depreciation reserve in the future, in which they refused to allow a per cent sufficient to cover retirements.
What was net additions and betterments? It could not have been a balance of improvements after repairs and replacements.
The Company produced an exhibit showing the "operatingexpenses" for 1926, which contains the following:
"Maintenance — Mains _________________________________ $44,736.69 Services ______________________________ 38,996.26 Street Lamps __________________________ 3,606.44 Meters ________________________________ 86,732.72" These sums added make ___________________________________ $174,072.11,
which does not include setting and removing meters. What does that mean unless the cost of the new mains, services, street lamps and meters are replacements, paid for as operating expenses? That was the way the property was "progressively improved," as alleged in the motion. Then what were "net" additions and betterments?
The report refers to the "last audit of the Commission's accountants showing the net additions" to the property "from October 1, 1925, to August 31, 1927," amounting to $2,713,311.95.
Mr. Houlehan, the accountant, refers to it:
"A complete statement of such expenditures detailed by primary accounts and by years, will be found herein," (referring to a part of the record not in the abstract), and the condensed figures were as follows:
"Additions and Betterments October 1, 1925 to August 31, 1927 "As shown by the books ___________________________ $2,780,624.58 "Our (the Commission's) adjustments: "Deductions ______________________ $122,453.49 "Additions ________________________ 55,140.86 ___________ "Net deductions __________________ $ 67,312.63 67,312.63 _____________ "As determined by us _________________________ $2,713,311.95"
That amount by December, 1927, was increased to $2,922,881, the amount allowed by the Commission.
The witness explained further:
"The audit of expenditures for additions and betterments toproperty covered the period of October 1, 1925, to August 31, 1927. The audit was dated from October 1, 1925, because that is the date of our last audit and also the date of the last valuation fixed by the Commission. This report or audit shows, on page 3, that the additions and *Page 957 betterments as shown by the Company's books for the aboveperiod of the audit is $2,780,624.58. We have made adjustments with a net reduction of $67,312.63, making the net additions and betterments for the period, as determined by us $2,713,311.95."
There is no suggestion in the report nor in the evidence that the gross amount of Additions and Betterments during the period mentioned were more than $2,780,624.58, mentioned. The word "net" is not used anywhere except to designate the balance after subtracting $67,312.63 from that sum.
The net was found by deductions made by the Commission's Accountant, "By an examination of vouchers, invoices, pay rolls, work orders and data we found necessary to make certain adjustments."
The final deduction of $67,312.63 from the Company's claim was due to erroneous bookkeeping. Obviously some items entered as additions were thought by the Commission not to be such, while other items were added. The retired property had nothing to do with it.
IV. A further elucidation of the point appears:
The Company's motion asserts a "fundamental error" where the opinion states (the motion calls it a "holding"), that the depreciation reserve increased from $1,171,348.75 at the end of 1925 to $2,500,782.03 at the end of 1927. In fact those were the amounts at those dates. However the Company's accounts showed only $1,162,719.71, at the end of 1927. The Commission ordered the Company to restore to the fund four items aggregating $1,338,062.32, representing sums which the Company had improperly diverted to other purposes. That sum added to the Company figure made the total $2,500,782.03. Those restored sums had been diverted in previous years, so that there was practically little or no increase of the fund between 1925 and 1927.
The Company argues that this mistake as to when the final sum accrued, affected the court's approval of the Commission's allowance of 1.5 per cent for annual depreciation.
However, there was a "fundamental" omission by the Commission in that matter. The yearly accrual of the reserve fund is set out in a table, as follows:
*Page 958Amount Total in Reserve Year Set Aside Retirals End of Year
1919 ----------- ---------- $ 323,963.71 1920 $360,000.00 $103,494.52 580,469.19 1921 300,000.00 246,644.21 633,824.98 1922 413,782.50 520,139.42 527,468.06 1923 413,782.50 311,574.17 629,676.39 1924 413,782.50 205,168.02 838,290.87 1925 556,528.50 223,470.62 1,171,348.75 1926 413,782.50 275,900.56 1,309,230.69 1927 274,238.75 420,749.73 1,162,719.71
The first column shows the amounts accrued to the reserve fund each year. The middle column shows the retirals each year, subtracted from the accruals and the balance added to the total of the previous year (third column), to make total found at end of the current year. If those sums deducted from the reserve had remained, the fund at the end of 1927 would have been more than double the amount credited to it.
The Company instead of counting the retirals off the new capital used in additions and betterments, took the former value of such retired property from the earnings to fill up that chasm, leaving the former valuation unimpaired. According to the Company's theory, those retirals should be automatically deducted from the valuation and the Commission should have ordered those diverted sums restored to the reserve fund. The Commission on rehearing, considering the effect such items would have had on the reserve fund may see fit to reconsider the allowance for annual depreciation. That matter is for the Commission.
The Company used the money thus diverted for its own purposes, other than improvement of the property, unless as witness Boyles suggested it was used for additions and betterments for which the Company got full credit as an increase to the total value. If that is true the deductions from that reserve were counted twice, once to balance retirals, or to balance accruing depreciation, and once when used for additions and betterments.
V. The treatment of the iron pipe mains shows there could have been no automatic deduction of abandoned property from their value.
The motion asserts: "The court admits in its opinion that the report of the Commission does not show the method by which the Commission and its engineers arrived at the result."
On the contrary the opinion points out exactly the method, by reproduction cost. The only uncertain thing about it was whether the deduction of $560,000 was wholly on account of decrease in the price of pipe, or partly on account of the cost of laying it.
They were treated separately from the other property. The mains considered by the Commission were the same mains considered in the Valuation Case. The reproduction cost of those mains in 1923 and their reproduction cost in 1927, and an estimate for the "immediate future" of the price of pipe. There is no suggestion in the report that the quantity of mains of 1923 was diminished at the time of this hearing. Retirements and additions were not mentioned in that connection.
The motion alleges: "The Commission found a decrease in their `fair value' of $560,000," meaning the fair value of the mains.
The Commission could not have so found. There was no separate fair value found of the iron pipe mains in the Valuation Case and the *Page 959 Commission attempted none as of that date for comparison in this case. It could not subtract the separate fair value of the mains at the later date from the fair value at the former date when there was no finding, no estimate of such value at either date, and no mention of evidence of such separate value at either date. The Commissioners were men of experience and dealt in facts. They could not find in figures the difference between two estimates not expressed at all. According to the motion the Commission found a fact without mentioning it in their report.
The abandoned mains for the most part were not separated in the evidence from the other abandoned property, and therefore there could have been no separate finding of its value to deduct from the former value of the mains which likewise was not separately found. In the many pages of evidence on the subject and in the four or five pages of the Commission's report, no mention is made of any element of value other than reproduction cost, the cost of pipe, the cost of laying it, with conflicting evidence as to the methods of figuring such cost.
Even if the Commission did roughly estimate the decrease in the fair value of the mains from 1923 to 1927, they failed to take into consideration the retirals for 1926 and 1927 which were charged against the reserve fund, so that the book value remained the same. The Commission did not interfere with that disposition, notwithstanding Commissioner PORTER'S suggestion that the loss of such abandonments were a part of the hazards of the game. Besides the estimated retirements for the years 1928 to 1929 would be $1,450,000. The report fixes $47 a ton as the "proper cost" of pipe in estimating the fair value for the "immediate future." Those estimated retirements covered that same "immediate future." In that immediate future they would be worthless, and there is nothing to show that the Commission took that into consideration.
VI. The motion criticizes as inconsistent the statement in the opinion that a separate expression of going value was not necessary and the holding that the Commission should have made an independent finding of such value.
The Commission in this case did not find the going value, either as an independent statement nor as included in a general fair value of the whole property. The opinion quotes from the City's brief a statement to the effect that it was impossible to determine from the finding of facts in the Valuation Case upon what the allowance was based. The motion quotes that statementas an expression of the court. The Company admitted that it did not know what going value was found in the Valuation Case. Therefore the Commission erroneously adopted as the former finding a sum which was not found. That misconstruction of the former finding made it necessary for the Commission to make an independent finding. The Company's motion *Page 960 characterizes that ruling as charging the Commission with acting "unreasonably or unlawfully."
In this connection the motion expresses amazement at the court's "suggestion" that the Gas Company was seriously threatened with extinction. The court made no such "suggestion."
Some evidence of the Company's witnesses indicated it. In pointing that out the opinion calls attention to the countervailing evidence showing additional customers for cooking found by the Company, the very evidence quoted in the motion and claimed to have been overlooked. It did not appear from the report in the Valuation Case that all those facts were before the Commission at that time, but they were proper matters to consider in fixing the going value. In fixing it a franchise should not be considered.
VII. The motion charges several "errors" against the court which may be noted:
"In holding" that the original cost was 58 per cent of the reproduction cost found in the Valuation Case. The court did not figure it but took that estimate of Mr. White, the Company's Comptroller.
In characterizing as "heavy retirement," the abandoned gas mains, services, etc. The Commission used the expression and Mr. Houlehan, the Commission's accountant, called it "extra heavy retirements."
In "finding" that Mr. Boyles audited the Company's books. It was Mr. Houlehan who audited the books and Mr. Boyles testified about that audit or some other audit of the same books.
"In holding" that prices were at their peak in 1923, whereas the reproduction cost of iron pipe was not estimated at the highest figure then, but at $54 per ton by the Commission's engineer. The opinion gives the estimated value of 1923 "as found by the Commission's engineer's appraisal," and the figures are not disputed by the Company.
"Erred in holding" that the mains were installed long ago mainly for lighting streets and houses and little adapted to present purposes, because of "no evidence to support it."
Mr. Boyles testified that property retired since 1907 was in existence long before that date. The Commission in its report said the Company began operation in 1873, and expressed the "opinion that a large amount of property being retired was constructed prior to the organization of a depreciation reserve" in 1907.
The Commission would not make such a statement without evidence of facts to justify it. The retirement of mains showed them little adapted to present purposes.
Error in "holding" that the Commission erred in making no allowance for accrued depreciation after the valuation case up to the present time. (That refers to property still in use.) *Page 961
There was no such holding. The court did not disapprove the Conclusion of the Commission which appeared to be that such depreciation was balanced by accruals to the reserve fund. If the property was "progressively improved," as the motion asserts, it was by repairs and replacements paid for as operating expenses at the expense of the consumers. It did not prevent progressive deterioration of the property not repaired or replaced.
Error in "holding" that no account was taken of shrinkage in value of the property. There was a mere mention of the fact and no holding or ruling on it.
VIII. In the opinion appears a statement that the reserve fund also be for "maintenance and repairs," as well as depreciation. That is incorrect, — a careless statement contrary to the context and the holding that maintenance, repairs and replacements are paid for as operating expenses. However, that was one theory of Mr. E.L. White, Comptroller of the Company, who, in speaking of the reserve fund said:
"Company Exhibit No. 1-E is designed to show the estimated allowance for replacement, retirement and depreciation."
The Company is not prejudiced by the statement even if it were a final conclusion; both the operating expenses and the reserve fund are paid by the consumers and do not in any degree affect the Company's rate of return.
The motion should be overruled. All concur, except RAGLAND, J., who takes no part in the decision of the case.