C. L. 148] ings, therefore, are inadequate and insufficient, and, therefore, the rates and charges for service are likewise inadequate and insufficient (the honesty, efficiency and economy of the management standing unquestioned) and, as a consequence, unjust and unreasonable, and we so find.

From the above and the foregoing, it follows that the rates charged by the company within the State as a whole are inadequate and insufficient to meet the service requirements of the company. On the contrary, the company is entitled, on the record made and presented, to obtain a larger net earning from its operations in the State of Montana and is entitled to have its schedules of rates increased. Since we are proceeding on a State-wide basis, all adjustments should be made at one time, and not by piece-meal. But there are certain hard facts common to the daily lives of all our citizens that suggest, if they do not actually command, that no changes be made at the present time in the telephone rate structure.

It appears to the Commission an inopportune time to put into effect a schedule of rates such as the company is entitled to in order to meet its requirements for the giving of service in Montana. The patrons of the company, now and for some years past suffering under adverse economic and financial conditions existing in Montana, would be unable to pay the rates, and to increase the rates in Montana would, in our opinion, result in great numbers of the patrons of the company asking to have their telephones removed. This would result in far greater loss to the company than it is experiencing under present rates and its expenses would not be materially reduced, and, consequently, its net revenues would be greatly decreased. The representatives of the company cannot fail to realize these conditions, and while they must ask for relief in their proceedings before the Commission, they have, in effect, admitted that it would be injurious to the company's best interests to attempt at this time, or until industrial, economical and financial conditions have been improved in the State, to increase rates. The Commission has con

Icluded that at this time there will not be made effective any increase in the charges to be paid by the people of Montana for telephone service to this company. The Commission is further of opinion that it is its duty at this time, in view of the evidence in the case, to provide a method whereby maladjustments that exist in rate schedules as between users and as between localities, be, as soon as possible, eradicated. This duty the law enjoins, and both the patrons and the company are entitled to have this duty performed.

The Commission, acting on its own motion and in accordance with a resolution of the House of Representatives of the Eighteenth legislative assembly, started this investigation into the business affairs, rates, rules, regulations and practices of the company in the State of Montana and caused an inventory and appraisal of its property to be made at an expense to the company of nearly $100,000 and at considerable expense to the Commission, and, consequently, to the State of Montana, in making a check of said inventory and appraisal of the whole inventory and conducting said investigation. These expenditures should not be made in vain and the data and information derived should be made use of to the greatest possible extent. Telephone users are entitled to the benefit of the record now developed.

As shown above, we cannot increase rates now, but we may find the value of the company's property used in giving service in Montana, may pass upon the correctness of its reports and statements as to revenues and expenses, may consider the relationship between the American Telephone and Telegraph Company and the Mountain States company and between the Western Electric Company and the Mountain States company, may approve of the percentage known as the annual requirement for the depreciation reserve, may approve of the rules, regulations and practices of the company, and the principles of the so-called service connection charge practice and the classification and schedule of toll rates now in force and effect, and may provide a classification of exchanges, and prescribe a

[Mont

L. 148]

schedule of rates to be, at a later time, charged in the exchanges in each classification. At a later time we may remove the irregularities now existing and above referred to, and at a still later time may prescribe a schedule of rates for the exchanges in each class or group which, according to the evidence found, should be charged by the company in order to enable it to give adequate telephone service to its patrons in Montana, and it is the opinion of the Commission that it may retain jurisdiction of this case in order to carry out at a later time its findings and orders now to be made in this case.

Turning our attention, therefore, to the classification of exchanges and considering that question alone, it is our duty after determining what the requirements of the company, as to net revenues from the State of Montana as a whole, are, in the giving of telephone service and, as we have done in the former part of this report, to give consideration to the question of what the company is entitled to receive from the respective communities in which exchanges are located, and provide a schedule or schedules of charges which will impose upon the different localities and exchanges the necessity of providing their proper part of the total requirements of the company for the whole State. In arriving at what those charges and schedules should be, we should take into consideration the condition in the respective localities where exchanges are located, and should also determine what method of classification should be employed in grouping exchanges into classes. There is before the Commission evidence showing the number of stations in each exchange and the present rates. There is on file with the Commission the tariff showing the rates, rules, regulations and practices of the company. The evidence shows how exchanges should be classified into groups and the reasons for classification and what should be taken into consideration in making a classification of exchanges. It would seem from the nature of the telephone business, the manner in which it has grown up and developed, the way the construction of rate schedules has taken place, and the

[Mont.

fact that the schedule has followed along the path of growth of a business, State-wide in character (for in the giving of service instrumentalities wherever located are, or potentially are, used in part in giving service in every exchange), and from the fact that these revenues and expenses are considered in the State as a whole, and generally the conduct of its business is based upon State-wide principles, that these all of these-make imperative that there be a classification of exchanges into groups and fixation of the rates for each group of exchanges in order to determine from what place within the State, from what class of service within the State, from what class of users within the State, the necessary revenues are to come in order to meet the requirements of the company within the State, which are arrived at and determined on a State-wide basis. It may be interesting to note what one or two commissions have said upon the subject of classification.

The New York Public Service Commission, in the New York Telephone Company Case*, decided January 25, 1923, P. U. R. 1923-B, 545, at page 638, said:

"Just and reasonable rates are those which cover the cost of the service in the aggregate and do not exceed the value of that service to the subscriber. The company cannot exist unless it has a reasonable return from the service which it sells. On the other hand, the subscriber will not take a service worth less than he has to pay. Therefore, as a first consideration, the rate structure must provide different classifications in order that users can choose the class of service desired. (Italics are ours.) "The company's two principal sources of revenue come from exchange use and toll use. An exchange rate is one where a fixed amount is charged for service rendered subscribers within the local service area. Toll rates are the charges applying to calls from one local service area to another local service area.

"The extent or scope of service given in the local service area must be such as to cover the majority of calls of the average subscriber. If the area be too extensive, that is, carried to such an extent that it will cover all the calls of every subscriber, it necessitates so high a level of exchange rates that a majority of the subscribers will not be able to pay for it and the service rendered will be more extensive than most subscribers require, which operates against the fullest development of

* See Commission Leaflet No. 136, p. 680,

L. 148]

the service. When the size of the exchange area is properly adjusted, a charge can be made which will not penalize the small subscriber and yet be large enough to comprehend the majority of calls of the average subscriber. The entire State of New York is divided up into local service areas, commonly referred to as exchange areas.

"There are two ways in which telephone rates can be made. One is to make a single rate for all types of telephone service in the company's territory; the other is to group different communities into rate groups and apportion the charges so that the revenues from the different rate groups and the different classifications of service within these groups will make up the total amount of revenues necessary to pay the company's operating expenses and provide a fair return on the value of the property used in rendering service. (Italics are ours.) If the company had one general rate covering its entire field, it would be so high as to destroy development. Therefore, rates are made with regard to both cost and value of the service. Value of service is taken into consideration, for if cost alone is considered the rates for identical service will vary with each particular community."

In re Citizens Telephone Company of Grand Rapids, P. U. R. 1921-E, 308, at page 311, the Michigan Public Utilities Commission said:

"The classification of telephone exchanges for rate-making purposes has been urged for many years. In its orders of August 13, 1919, effective August 1, 1919, this Commission grouped the exchanges for ratemaking purposes, of the Michigan State Telephone Company, the Citizens Telephone Company of Grand Rapids, and the Union Telephone Company. That classification, although the result of considerable study, was more or less arbitrary. Population, saturation, competition, and extent of territory served, together with the character of the service, whether automatic, common battery, or magneto, should all be considered. A telephone company sells service. That is what the public buys. When the amount of revenue necessary to enable applicant to function is fixed, the question of allocating that increased revenue must be considered. (Italics are ours.)

"The cost of rendering farm line telephone service is greater than that of rendering some other kinds of telephone service, and if this service paid its pro rata cost of operating expenses, maintenance and repairs, taxes, and depreciation, the rate might be more than the traffic would bear.

"From the early history of the telephone business a part of the cost of maintenance of farm line telephones has been paid by other telephone users on the general theory that the urban exchange is more valuable if