Galveston Elec. Co. v. Galveston - 258 U.S. 388 (1922)
U.S. Supreme Court
Galveston Elec. Co. v. Galveston, 258 U.S. 388 (1922)
Galveston Electric Company v. Galveston
Argued December 15, 16, 1921
Decided April 10, 1922
258 U.S. 388
1. The fact that a public utility, such as a street railway, may reach financial success only in time, or not at all, is a reason for allowing a liberal return on the money invested in the enterprise, but it does not make past losses an element to be considered in deciding what the base value is and whether a rate fixed is confiscatory. P. 258 U. S. 395.
2. A so-called "going concern value and development cost" based on calculations, for various periods, of past deficiencies of net income, allowing 4 percent for annual depreciation and 8 percent compound interest on the value of the property used as a fair return, should not be included in the base value of appellant's street railway in determining whether an existing rate is confiscatory. P. 258 U. S. 395.
3. Neither should an allowance for hypothetical brokerage fees based on a percentage customarily obtained by bankers for financing such enterprises. P. 258 U. S. 397.
4. In determining the sufficiency of such rates, the amount normally required for maintenance, not necessarily the amount expended, annually, should be allowed, and many items included in overhead cost of original construction may be excluded in calculating depreciation annuity. P. 258 U. S. 398.
5. Appellant's request that prospective cost of maintenance deferred during the war at the wish of the government be allowed from earnings of future years in testing the rate was an attempt to capitalize past losses, and rightly refused. P. 258 U. S. 399.
6. In calculating whether a rate fixed will yield an adequate return, income taxes which would be payable if a fair return were earned are appropriate deductions from gross revenue. P. 258 U. S. 399.
7. But, where the federal corporate income tax (Act of February 24, 1919, c. 18, §§ 230-238, 40 Stat. 1057, 1075-1080) is thus deducted, the exemption of the stockholder from the "normal" tax on dividends received from the corporation must be taken into consideration in determining what rate of return to the corporation shall be deemed fair. P. 258 U. S. 399.
8. An ordinance rate inadequate when adopted will be valid when, through change of conditions, it yield a fair return. P. 258 U. S. 400.
9. The Court knows judicially that price, in general, and current rate of return on capital have declined since the conclusion of the war, but not the extent to which the economic changes occurring have affected the gross revenues or the net return of the appellant company . P. 258 U. S. 402.
10. A decree of the district court dismissing without prejudice the bill of a street railway company to restrain enforcement of an ordinance rate as confiscatory affirmed where an operation test of more than a year and a half was inconclusive because of abnormal economic conditions then existing, and where the lower court's view of the probable future adequacy of the rate was necessarily based largely on prophecy, and was free from substantial error as to the elements to be considered, and where the actual facts were substantially undisputed and the evidence did not compel a contrary conviction. P. 258 U. S. 401.
272 F. 147 affirmed.
Appeal from a decree of the district court dismissing without prejudice a bill brought by the appellant to restrain the appellees from enforcing a rate fixed for its street railway.