C. L. 148] It is apparent that this contract should receive the approval of the "The scope of the inquiry in this case cannot be extended to the determination of a fair rate of profit to the American Telephone and Telegraph Company on its capital invested or to such a rate of profit to the Western Electric Company, which is not a public service corporation, but a private corporation engaged in the business of manufacturing telephone apparatus. The problems presented by the relations of such holding and subsidiary corporations are serious ones, which vitally effect the public interest, but they are problems which primarily call for legislative consideration. "The fact that the American Telephone and Telegraph Company dominates and controls both the plaintiff company and the Western Electric Company, is sufficient to cause the courts to very closely scrutinize any dealings between those corporations whereby any unjust advantage might be taken by the parent company, or the effect of which might be to enable it to receive a larger return than that which forms the basis of the established rate for telephone service to the public. Such corporations, however, are not debarred from entering into contracts with each other, and where such contracts are fair and advantageous to the subordinate corporation, they will be recognized and given effect." A large number of commissions throughout the country have approved the relationship and the 41⁄2 per cent. payment as a proper expenditure. Among the cases to which attention might be called, are those found in the foot note.* * City of Birmingham v. Southern Bell Telephone and Telegraph Company (Alabama), P. U. R. 1919-B, 791; In re Rates and Charges of We quote from some of the decisions below: WISCONSIN. [Bogart et al. v. Wisconsin Telephone Company.] "Payments to American Telephone and Telegraph Company.* payments made by respondent to the American Telephone and Telegraph Company were criticized severely at the time of the hearing, and in the brief filed on behalf of the city of Milwaukee. It appears to us that two important considerations enter here. If such information were available, we should know what the service is worth to the Wisconsin Telephone Company, and what it costs the American Telephone and Telegraph Company. It does not appear practical to measure with exactness the value of the service to the Wisconsin Telephone Company. Value is a relative term, not only when used in connection with the charges made by a public utility for service rendered to the public, but also when used in reference to the charges made to a public utility for service rendered to it. Assuming that the service is of some value to the Wisconsin Telephone Company, there are several measures of value which might be applied, none of which, however, will entirely suffice. We might seek to determine, for example, whether the Wisconsin Tele Telephone Companies (Arizona), P. U. R. 1920-B, 411; Southern California Telephone Company (California), P. U. R. 1922-C, 97; The Mountain States Telephone and Telegraph Company (Colorado), P. U. R. 1917-B, 198; The Mountain States Telephone and Telegraph Company (Idaho), P. U. R. 1921–B, 739; Indiana Bell Telephone Company, P. U. R. 1922-E, 46; Cumberland Telephone and Telegraph Company, Inc., Ex Parte (Louisiana), P. U. R. 1921-C, 363; The Chesapeake and Potomac Telephone Company of Baltimore City (Maryland), P. U. R. 1920-F, 417; Michigan State Telephone Company, P. U. R. 1918-C, 81; City of Detroit v. Michigan Railroad Commission et al., 209 Mich. 395; 177 N. W. 306; P. U. R. 1920-D, 867. Other Commissions have approved rates established during federal control based on a showing of operating expenses which included as items the expense payments under the license contract: New York Telephone Company (New Jersey), P. U. R. 1918-B, 999; Central Union Telephone Company (Ohio), P. U. R. 1920-C, 534; In re Uniform Telephone Rates (Pennsylvania), P. U. R. 1917–D, 259; United Business Men's Association et al. v. The Bell Telephone Company of Pennsylvania, P. U. R. 1920-F, 682; The Chesapeake and Potomac Telephone Company of Virginia, P. U. R. 1920-F, 49; The Chesapeake and Potomac Telephone Company of West Virginia, P. U. R. 1921-B, 97; Bogart et al. v. Wisconsin Telephone Company, P. U. R. 1916-C, 1020. See Commission Leaflet No. 54, p. 217, at p. 248. [Mont. C. L. 148] phone Company might better dispense with the service entirely, whether it could furnish equivalent service at less cost by relying on its own efforts, and whether, assuming that the service rendered by the holding company were to be discontinued, an organization of telephone companies might not be formed to furnish such service at less than the present cost. "With regard to the first of these, we may say that the facts before us hardly indicate, that the cost of service is such a burden upon the Wisconsin company as should be removed, even at the cost of dispensing entirely with the service. No one can be insensible to the immense value to the operating companies which attaches to service such as that furnished to the Wisconsin company by the American company. If the operating companies of the Bell System were independent of any common control and there were no other available method of securing such service as that now furnished by the American company, we doubt very seriously whether we would be justified in holding unreasonable an agreement which would give the Wisconsin company the service it now enjoys at a cost equal to what it now pays. "On the second point, it may be said that we have not been able to discover that the Wisconsin company, by using its own organization, could supply equivalent service at a less cost. Even aside from the question of cost, there are considerations of uniformity and standardization which are important in relation to the development of a universal telephone service, and which could hardly be met by the subsidiaries of the American company acting independently, and which we believe to be of such great importance that the furnishing of the service by the Wisconsin company to itself is out of the question. "The services furnished by the American Telephone and Telegraph Company to its associated companies are divisible into two general groups, one of which relates to the furnishing of receivers, transmitters and induction coils and labor and materials for repairing such parts, and the other to various services along engineering, accounting, legal, traffic, and other lines. The chief engineer of the American Telephone and Telegraph Company testified at considerable length as to the value to the Wisconsin company of the services in question. Although we deem it unnecessary to review his testimony in any detail, a great deal of weight may reasonably be attached to it. Testimony was also introduced to show that companies in which the Bell System has only a minority interest in some cases accepted the 42 per cent. agreement. "In some of the investigations of this agreement which have been conducted, investigators seem to have lost sight of the fact that the furnishing and repairing of instrument parts is not the only valuable service supplied to the associated companies. In others, there seems to have been an assumption that the agreement would necessarily be unreasonable because of the control of the associated companies by the American company. In cases where investigators have failed to consider services other than the furnishing of instrument parts, we think it is clear that they may not have made sufficient allowance for reasonable payments for service rendered. In other cases where reductions have been recommended, the facts submitted as the basis for such reductions are rather meagre. [Mont "The assumption, not only of the complainants in this case, but of some of those who have investigated the 42 per cent. agreement, seems to have been that any agreement of this kind must be unreasonable because of the relations existing between the American Telephone and Telegraph Company and its associated companies. It is our opinion that the community of ownership of the companies comprising the Bell System does not, in itself, prove the unreasonableness of any intercorporate agreements which they have. However, because any excessive charges which may be made to the Wisconsin company by the American company will have their effect upon rates of the Wisconsin company, it becomes necessary, not to prejudge the case, but to investigate the agreement in the light of all available facts to determine, first, whether or not it is unreasonable, and, second, the extent of any unreasonableness which may be found. "In the first place, it is important that we have clearly before us just what is covered by the 42 per cent. charge. This covers various engineering, accounting, legal and other services, the cost value of which is hard to determine, and all the payment for instruments furnished to the Wisconsin Telephone Company and for a reserve stock of instruments for storeroom purposes not in excess of 3 per cent. of the total number of instruments furnished. "As the testimony of the company's principal witness on the question of the 42 per cent. charge dealt specifically with the year 1914, we will make our analysis of the situation upon the basis of that year. According to the testimony of the chief engineer of the American Telephone and Telegraph Company, the average number of instruments in the hands of the Wisconsin company, including those in reserve for that company during 1914, was 194,415 sets. The witness assumed a cost per set of $3.00, although he stated that the price in the market would average $3.22. He estimated that depreciation, administration, return on investment and reserve for contingencies will amount to 21 per cent., or 63 cents per set of instruments, making a total of $122,481. The cost of repairing done by the American company brings this total to $131,579, which the witness apparently considers a fair payment for the use of instruments, and which, when deducted from the amount paid for these services for the year, leaves $57,702.84 for the State as a whole, to pay for other services." L. 148] MARYLAND. From The Chesapeake and Potomac Telephone Company Case,* we quote: "In addition to financing the associated companies in this way, the parent company protects them in the use of all patents used by any of them, defending all suits for infringement at its own cost and expense, as well as purchasing valuable patents for the use of all the companies. It also maintains at its own expense an engineering force of some 400 or 500 experts who design and create new equipment, such as switchboards and the like. The switchboard, for instance, is designed with all its parts, and the parts are made, assembled and tested, whereupon it is delivered to the associated companies as a finished product embodying the best engineering skill and experience available anywhere in the world. The parent company is now experimenting with an automatic switchboard through which an incoming call, when coming to a busy operator, will travel along back of the switchboard automatically until it reaches one who is not engaged, when the connection can be made and the call completed. 66 This work of experimentation at the cost of the parent company permeates every line of the telephone business. It extends to conduits, eables, instruments, transmitters and receivers. It goes to building construction, even to matters of saving insurance through the reduction of fire hazards. It also goes into the commercial end by devising methods for the better and more satisfactory ways of handling business to the satisfaction of the subscribers and at less cost to the company. "In other forms the activities of the parent company extend to matters of accounting in its many branches, and as well to a large and highly trained legal department, the services of which are at all times free to the associated companies. In addition, the associated companies get the general benefit of the executive department of the parent company, a service the value of which it would be difficult to estimate. "The parent company owns all the telephone sets in use by the subscribers of the associated companies the receivers, transmitters and cord attached thereto it having been realized that uniformity of service was required throughout the entire system, and that this could not always be obtained if the associated companies were required to make extensive changes in equipment at their own expense. These instruments are all kept in repair at the expense of the parent company. "The above is only a very general statement of the relations between the American Telephone and Telegraph Company and its subsidiary companies, but it will give some idea of the intricacy of those relations and of their value to the associated companies, and, through them, to the public at large. * See Commission Leaflet No. 53, p. 1265, at p 1337. |