McCardle v. Indianapolis Water Co.
272 U.S. 400 (1926)

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U.S. Supreme Court

McCardle v. Indianapolis Water Co., 272 U.S. 400 (1926)

McCardle v. Indianapolis Water Company

No. 37

Argued April 16, 19, 1926

Decided November 22, 1926

272 U.S. 400




1. In determining the present value of the property of a public utility for ratemaking purposes, consideration must be given to prices and wages prevailing at the time of the investigation, and, in the light of all the circumstances, there must be an honest and intelligent forecast as to probable price and wage levels during a reasonable period in the immediate future. P. 272 U. S. 408.

2. In every confiscation case, the future as well as the present must be regarded. It must be determined whether the rates complained of are yielding and will yield, over and above the amounts required to pay taxes and proper operating charges, a sum sufficient to constitute just compensation for the use of the property employed to furnish the service -- that is, a reasonable rate of return on the value of the property at the time of the investigation and for a reasonable time in the immediate future. P. 272 U. S. 408.

3. It is well established that values of utility properties fluctuate, and that owners must bear the decline and are entitled to the increase. P. 272 U. S. 410.

4 The weight to be given to the original and present costs of construction and other items or classes of evidence is to be determined in the light of the facts of the case in hand. P. 272 U. S. 410.

5. In this case, prices and values have so greatly changed that the amount paid for land in the early years of the enterprise and the cost of plant elements constructed prior to the great rise of prices due to the war do not constitute any real indication of their value at the present time. P. 272 U. S. 410.

6. The reasonable cost of a system of waterworks, well planned and efficient for the public service, is good evidence of its value at the time of construction. And such actual cost will continue fairly well to measure the amount to be attributed to the physical elements of the property so long as there is no change in the level of applicable prices. P. 272 U. S. 411.

7. If the tendency or trend of prices is not definitely upward or downward and it does not appear probable that there will be a substantial change of prices, then the present value of lands plus

Page 272 U. S. 401

the present cost of constructing the plant, less depreciation, if any, is a fair measure of the value of the physical element of the property. P. 272 U. S. 411.

8. The validity of rates fixed for a public utility depends on property value as of the effective date of the order and for a reasonable time thereafter. P. 272 U. S. 411.

9. While the values of such properties do not vary with frequent minor fluctuations in the prices of material and labor required to produce them, they are affected by and generally follow the relatively permanent levels and trends of such prices. P. 272 U. S. 411.

10. Judicial notice taken of the facts that, since the end of the year 1923, there has been no general decline in the prices of labor and materials, and that the trend has been upward, rather than downward. P. 272 U. S. 412.

11. In valuing the property of a water works company for ratemaking, the value of its water rights should be included, and likewise the "going concern value" of the plant. P. 272 U. S. 413.

12. In determining what shall be deducted for depreciation, the testimony of competent valuation engineers who examined the property and made estimates in respect of its condition is to be preferred to mere calculations based on averages and assumed probabilities. P. 272 U. S. 416.

13. The plant to be valued is the plant used to give the service, and not the estimated cost of a different plant. Save under exceptional circumstances, the court is not required to enter into a comparison of the merits of different systems. P. 272 U. S. 417.

14. Evidence held more than sufficient to sustain 7% a a reasonable rate of return for a water company. P. 272 U. S. 419.

15. Rates of yield on investments in bonds plus brokerage are substantially less than the rate of return required to constitute just compensation for the use of properties in the public service. P. 272 U. S. 419.

16. In a suit like this, the district court should make specific findings as to value, reasonable rate of return, and net earnings. P. 272 U. S. 420.

17. But, to avoid prolonging such a litigation, this Court may determine whether the facts in the record justify the conclusion below, rather than remand for further findings. P. 272 U. S. 420.


Appeal by the members of the Public Service Commission of Indiana and the City of Indianapolis from a decree

Page 272 U. S. 402

of the district court, entered without opinion, enjoining enforcement of the commission's order fixing the rates of the Water Company.

MR. JUSTICE BUTLER delivered the opinion of the Court.

June 8, 1923, the water company filed with the commission its petition, in which it stated that its rates were too low and proposed a higher schedule. The City of Indianapolis answered, alleging that the rates in force were adequate. After hearing the parties, the commission found that, as of May 31, 1923, the value of the property used was not less than $15,260,400; that the annual return under existing rates would be approximately $800,000; that 7 percent was a reasonable rate of return; that the rates in force were insufficient, and that those proposed would be exorbitant and discriminatory, and the commission made an order, effective January 1, 1924, prescribing a schedule increasing some of the rates. In its report, it stated that the rates authorized might not produce a 7 percent return for the immediate future, but it expressed belief that, on the average over a period of approximately three years, the schedule would produce an adequate return.

This suit was brought by the company against the members of the commission to enjoin the enforcement of that order on the ground that the rates prescribed are confiscatory. The members of the commission answered. The

Page 272 U. S. 403

city intervened and answered. There was involved the value of the property used, probable earnings, operating expenses, and the amount required to constitute just compensation safeguarded by the Fourteenth Amendment.

The decree states that the court, in an opinion given orally, sustained as proved the material averments of the complaint, and held that the amount as found by the commission was less than the fair value of the property as of January 1, 1924, by more than $3,500,000, and that

"the fair value of complainant's said property at said time was and is not less than $19,000,000, and that the water rates imposed in that order . . . are too low, and are confiscatory of complainant's said property,"

and it enjoins the enforcement of the order. The members of the commission and the city appeal jointly.

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