West v. Chesapeake & Potomac Tel. Co. of Baltimore - 295 U.S. 662 (1935)
U.S. Supreme Court
West v. Chesapeake & Potomac Tel. Co. of Baltimore, 295 U.S. 662 (1935)
West v. Chesapeake & Potomac Telephone Company of Baltimore
Argued April 10, 11, 1935
Decided June 3, 1935
295 U.S. 662
1. Since, by legislation prescribing the rates or charges of a public utility company, the use of its property is taken, due process requires that the rates prescribed shall be such as to assure just compensation, i.e., a reasonable rate of return upon the then value of the property. P. 295 U. S. 671.
2. Valuation of the property of a public utility for rate-fixing purposes is a matter of sound judgment involving facts. Actual cost, reproduction cost, and all other evidences of value, including price trends and levels, are to be given their proper weight in reaching the conclusion. P. 295 U. S. 671.
3. The property of a telephone company -- a great, integrated aggregate of many and diverse elements, not primarily intended for sale in the market, but for devotion to the public use now and for the indefinite future -- is not susceptible of being valued like ordinary market commodities. P. 295 U. S. 672.
4. While the owner of such a property must assume, and may not pass on to the public, the risk involved in any general decline of values, and may have the advantage also of a general rise in such values, it would be unfair to both owner and public, and also impracticable, to adjust valuations of the property, and the consequent returns, to sudden fluctuations of the prices of materials and labor. P. 295 U. S. 673.
5. In a suit to enjoin the enforcement of rates alleged to be in violation of the due process clause of the Fourteenth Amendment, the function of the federal court is confined to the question of confiscation; the legislative finding is not to be set aside for mere errors of procedure. Los Angeles Gas & Electric Corp. v. Railroad Commission, 289 U. S. 287. P. 295 U. S. 674.
6. Where the entire method used by a state commission in valuing the property of a public utility for rate purposes was necessarily erroneous and necessarily involved unjust and inaccurate results, it is not the function of the federal court, upon a claim of confiscation, to make a new valuation upon some different theory in an effort to sustain a procedure which was fundamentally faulty; it
should enjoin the enforcement of the rates. Northern Pacific Ry. Co. v. Department of Public Works, 268 U. S. 39; Chicago, M. & St. P. Ry Co. v. Public Utilities Comm'n, 274 U. S. 344. Pp. 295 U. S. 674, 295 U. S. 679.
7. A state commission sought to value the physical plant and property of a telephone company, for fixing rates, without recourse to a new appraisal and without giving weight to evidence of reproduction cost and accrued depreciation furnished by the company, by translating the value in dollars, as it had been established in 1923, and cost of subsequent net additions, into an amount of equivalent purchasing power a of December 31, 1932, by means of price indices. To this end, it selected sixteen commodity price indices, prepared to show price trends, one of them covering as many as 784 commodities of different kinds and weighted, the others less comprehensive, and applied them to the old plant valuation and the costs of additions and the depreciation reserves. As the results varied widely, the commission weighted the indices, upon a principle not disclosed, and derived a "fair value index." This, being similarly applied, yielded a figure which, with an addition for working capital, the commission adopted as its rate base. In some of the price indices prepared and used by the commission, price increases during 1931-1932 were disregarded. In the period covered, the price trend was ascending from 1923 to 1929. It then suffered a precipitate decline, so that, at December, 1932, the date of the commission's valuation, it was at the nadir. Subsequently it made a sharp recovery. By November 28, 1933, the date when the commission made its final report and rate-fixing order, it had risen (according to the all-commodities index of the United States Department of Labor) more than 13% over the price level of December 31, 1932. For this reason, the commission made an additional allowance of income to the company; but, judged by the same index, this was absorbed by continued rise of prices in 1934 and 1935. What the commission in effect did was to take the temporary low price level of December, 1932, and apply it for the indefinite future in ascertaining the so-called fair value of the company's plant and property. Held that the method of valuation was inapt and improper, and that the order fixing rates is repugnant to due process of law. Pp. 295 U. S. 666, 295 U. S. 668.
8. In appraising the property of a public utility company, the use of price indices to obtain the present value of specific property, separating from other sorts each kind of property so treated, and thus using the relation of values of specific articles as of two given dates,
is quite distinct from the application of general commodity indices to a conglomerate of assets constituting the entire plant. P. 295 U. S. 677.
9. Objection by a public utility company to a valuation of its property by the use of commodity price indices, is not met by the fact that, in an earlier suit between the same parties, the court used such an index for that purpose. P. 295 U. S. 677.
10. An appraisal by the court of the property of a public utility company at book cost depreciation reserve held, in the circumstance of the case, arbitrary and erroneous. P. 295 U. S. 678.
11. In a period of low price, costs incurred when the price level was much higher are not a safe guide in appraising present value. P. 295 U. S. 678.
7 F.Supp. 214 affirmed.
Appeal from a decree of the District Court of three judges which, at the suit of the Telephone Company, enjoined the members of the Maryland Public Service Commission from enforcing an order purporting to fix the company's rates.