Where diverse citizenship exists, complainant may assert in a
suit in the circuit court of the United States that rates fixed by
ordinance are so low as to be confiscatory under the Fourteenth
Amendment or unreasonable or unjust under the provisions of state
law. Rates fixed by the body having jurisdiction, after
investigation based on reports of the corporation rendering the
service, are
prima facie fair and valid and the burden of
proof is on the complainant attacking them to how that they are
confiscatory or unreasonable.
Where a public service corporation raises more money in a
particular year than required for actual depreciation, it cannot
carry the excess to capital for the purpose of estimating the
amount on which it is entitled to pay dividends in determining
whether a rate is unconstitutional as confiscatory, and the onus of
showing that this has not been done is on complainant where the
books show that such an excess has been collected.
Quaere, and not decided, whether it would be entitled
to dividends on such excess if invested in extensions and
additions.
While in some businesses where increased demand does not involve
a corresponding increase in expense, increased profits may result
from decreased rate, this rule does not apply to a business, such
as that of a telephone company, where expenses are proportionately
increased with increased demand and service.
Although complainant failed to prove its case, the bill will not
be dismissed, but a new trial ordered, as the rates have been in
force and the inquiry can be founded upon their actual effect.
156 F. 823 reversed.
This case comes here upon appeal by the Railroad Commission,
which was defendant below, from a decree of the Circuit Court of
the United States for the Eastern District of Louisiana enjoining
the enforcement of certain rates prescribed by the
Page 212 U. S. 415
Railroad Commission of that state, for use by the appellee,
telephone company therein. The appellant was created under Article
283 of the Constitution of the State of Louisiana, and Article 284
of that Constitution authorizes it to adopt just and reasonable
rates, charges, and regulations governing and regulating, among
other corporations, those operating the telephone within the state.
The commission has the power to examine and compel the attendance
of and to swear witnesses, and compel the production of books and
papers, to take testimony under commission, and to punish for
contempt, as fully as provided by law for the district courts.
Article 285 of the Constitution provides that, if any
corporation subject to the commission is dissatisfied with its
decision fixing or adopting any rate, the corporation thus
dissatisfied may file a petition, setting forth the cause of its
objection, in a court of competent jurisdiction at the domicil of
the commission, against said commission as defendant, and either
party to such action may appeal the case to the supreme court of
the state without regard to the amount involved.
By Art. 286, it is provided, among other things, that
"whenever any rate, order, charge, rule, or regulation of the
commission is contested in court, as provided for in Art. 285 of
this constitution, no fine or penalty for disobedience thereto, or
disregard thereof shall be incurred until after said contestation
shall have been finally decided by the courts, and then only for
acts subsequently committed."
Under these provisions of the constitution, the Railroad
Commission had been created and was in operation, and on or about
August 6, 1906, it established and promulgated certain rates for
the complainant to charge for its services within the State of
Louisiana, to take effect September 1, 1906. The complainant,
immediately after the promulgation of the order, and before the
time when it was to take effect, applied to the commission for a
rehearing before it, which was granted, but no evidence was taken
on such rehearing, and the commission subsequently
Page 212 U. S. 416
reaffirmed the order and directed that it should take effect on
the twentieth of October, 1906. Thereupon the complainant commenced
this suit for the purpose of enjoining the enforcement of the rates
established by the order, which is designated as Order No. 552.
In the bill filed by the complainant, it was alleged that the
complainant was a corporation organized and existing under the laws
of the State of Kentucky and a citizen and resident of that state,
and that the Railroad Commission of Louisiana was a corporation
organized and existing under the laws of the State of Louisiana,
and was a resident of that state and of the district in which suit
was brought;
viz., in the Eastern District of Louisiana,
Baton Rouge Division.
It was also alleged that, prior to August 6, 1906, the
complainant had in force and effect a tariff of rates between
points in the State of Louisiana, which had been promulgated and
put into effect by the Railroad Commission of that state; that such
rates were entirely fair and reasonable insofar as the public is or
was concerned, as under them subscribers were and are able to use
said service at a price which did not and does not afford
complainant a fair, just, and reasonable compensation for its
services.
It was also averred that, while such rates were in force, the
commission, without making any investigation, and without any
evidence in regard to any of the facts necessary to reach a
determination, and without any effort to obtain evidence in that
direction, made and promulgated, on the sixth of August, 1906, the
order known as Order No. 552, by which order it greatly reduced the
rates in existence up to that time, and the former rates were
thereby changed to the rates specified in the order, which order
was to become effective after the first of September, 1906.
The complainant further averred that it had asked for a
rehearing, which the commission granted, and thereafter, being
still without evidence or investigation justifying the same, the
commission reaffirmed the Order No. 552, and declared that
Page 212 U. S. 417
the same should become effective within ten days from the date
of the second order, which was dated October 10, 1906.
It was also further averred that the rates which preceded the
rates provided for in Order No. 552 were reasonable, just, and fair
to the public, and not in any wise excessive, and under them
complainant received for its services only a fair and reasonable
return for the services rendered; that, under the tariff of rates
promulgated and sought to be enforced by the commission under Order
No. 552, complainant would be required to render the services
therein described at an unreasonable, unjust, and unremunerative
rate, which would not afford to it a reasonable return for the
services rendered, and that it would thereby be deprived of its
property without due process of law; that said proposed tariff was
unjust, unreasonable in itself, and was not justified by any
conditions, either concerning the services in question or by the
financial or physical condition of complainant's property or
affairs; that the orders of the commission complained of were
unjust, unfair, and unreasonable and unwarranted, not only with
regard to the tariff as a whole, but with regard to each particular
rate charged by said tariff, and that the tariff of rates, as a
whole and in detail, constituted, for the reasons already set
forth, a taking of complainant's property without due process of
law and without compensation being previously made, contrary to and
in violation of § 1, Article XIV, of the Amendments of the
Constitution of the United States and in violation of certain
(named) articles of the Constitution of the State of Louisiana of
the year 1898.
For answer, the defendant denied that there was no inquiry or
proper investigation of the subject matter prior to the
promulgation of Order No. 552 of the date of October 10, 1906; it
also denied that the rates established were unjust, unreasonable,
or improper, or that they would result in the taking of
complainant's property without due process of law. Testimony was
taken by depositions, and upon the trial, the court directed a
final decree, enjoining the commission from putting the rates in
force as provided for in Order No. 552, and restraining the
commission
Page 212 U. S. 418
from instituting any suit against the complainant for the
recovery of any penalty by reason of complainant's failure to put
into effect the rates in the order of the commission, and it was
further adjudged that the tariff of rates specified in the order
should be cancelled and declared to be null and void and of no
effect. An injunction was issued pursuant to the decree.
See opinion of circuit court, 156 F. 823.
MR. JUSTICE PECKHAM, after making the foregoing statement,
delivered the opinion of the Court.
The complainant herein is a citizen of the State of Kentucky,
while the defendant is a citizen of the State of Louisiana, and a
case of diverse citizenship therefore appears on the record. The
complainant is transacting its business in several states, in a
territory which is said to be 400 miles wide and 1,000 miles long,
beginning in Indiana and Illinois and extending through the States
of Kentucky, Tennessee, Mississippi, and Louisiana to the Gulf of
Mexico. Its capital, from the time of its organization to May,
1898, was $1,695,700. This capital was thereafter increased from
time to time until February 1, 1907, from and after which it was
$20,174,350, represented by stock issued from time to time, to that
amount. This includes the amount invested in Louisiana. The
evidence in the case shows that the company's affairs had been
economically administered, and that its business had been conducted
in the State of Louisiana, ever since its entrance into that state,
with great care and economy; that the stock had not been watered;
that its capital was contributed in cash, and every economy
possible had been practiced. Adverse criticism was
Page 212 U. S. 419
indulged in in the circuit court in regard to the price paid by
the complainant for the property of the Great Southern Telephone
& Telegraph Company, the price being, as alleged, too high, but
the evidence is strongly to the contrary. And, again, the business
that complainant is carrying on, the evidence shows, is regarded as
hazardous by those familiar with its character, and as being still
in an experimental stage with regard to the proper methods of
operating, and also as to appliances and other things necessary to
the conduct of its business. The property is subject to great and
rapid deterioration from exposure to the weather and other causes.
The profits in this kind of business are shown to be almost
universally low. The complainant's charges for rates in Louisiana
before the promulgation of the Order No. 552 were also shown to be
as low as those of any of the companies in the country, and lower
than most of them. Out of more than a dozen companies, which
substantially cover the whole country, there is one which declares
dividends of 7 percent others 6 percent, 5 percent, and 4 percent,
and some nothing, and some are bankrupt. The dividends of
complainant have not been declared on any artificial capitalization
or watered stock. Complainant has declared dividends as the result
of its business through all the states, for the last few years, of
7 percent. While it is contended by the commission that, from the
returns made by the complainant to it, the complainant has realized
upon its investment in Louisiana from 10 to 15, and even 20
percent, yet, on the other hand, the complainant asserts that the
returns on its investment in Louisiana have been less than 6
percent during most of the time the complainant has been in the
state, and ending June 30, 1907. It is asserted that complainant
had expended in Louisiana up to June 30, 1906, $4,711,000 in the
purchase and construction of exchanges and toll lines, which amount
was still further increased by June 30, 1907, to $5,394,154.43, and
it is upon these totals that the percentage of net income to
investment is made up.
The president of the company testified that, unless things
Page 212 U. S. 420
changed and it was permitted to charge the rates which had been
charged prior to the adoption of these rates which are now in
question, it would be unable to continue to pay 7 percent, and that
the company would necessarily retrograde, and that, while the
company had paid 7 percent to its stockholders for the past few
years, it could not continue so to do if the rates in question were
adopted. That it did not, in fact receive anything like 7 percent
upon its investment in Louisiana, and that the average market for
money in that state on good securities, and much more certain than
telephone stock, was at least 7 percent, and that there was no
inducement to investors in the State of Louisiana, or in the New
Orleans money market, to invest in stock in such a company as that
of the complainant, where there was more risk and probably less
return than in other investments which could be had in that city
and state. This evidence was not, in terms, contradicted, though
other contentions are made by the appellants. The differences
between the parties as to the rate of the return upon the
investment in Louisiana arise from the different data taken by them
upon which to calculate the return, and will be referred to later.
The single question before us is as to the character of the rates
provided in Order No. 552, whether such rates are confiscatory, or,
if there is any difference, whether the rates are only
unreasonable, unjust, and inadequate, although not confiscatory,
and therefore not in violation of the federal Constitution. The
question under Articles 284 and 285 of the Constitution of
Louisiana,
supra, even of the unreasonableness of the
rates, may be inquired into by a federal court, by reason of the
diverse citizenship of the parties to this suit, and the
complainant is not confined to a state court upon this question.
Reagan v. Farmers' Loan & Trust Co., 154 U.
S. 362,
154 U. S. 391.
The complainant comes into court on both grounds, asserting that
the rates are so low as to take its property in violation of the
Fourteenth Amendment to the federal Constitution and also that the
rates are so low as to be unreasonable and unjust under the above
cited articles of the Constitution of Louisiana.
Page 212 U. S. 421
Like any other case, the onus rests upon this complainant to
prove the existence of the fact it alleges --
viz., that
the rates are so low as to be confiscatory, or at least
unreasonable and unjust. The court below held that the rates
actually established by the commission were void because, as was
stated by the court, those rates were not established upon
investigation into the question of their sufficiency, but by a
merely arbitrary conjecture by the commission, not based on
investigation or the exercise of judgment and discretion, and the
order promulgating the establishment of the rates was therefore
illegal and void, and hence there was no presumption of the
correctness of the rates such as generally obtains in relation to
rates adopted by the legislature or a commission appointed by it.
See Chicago, Milwaukee &c. Ry. v. Tompkins,
176 U. S. 167,
176 U. S. 173;
Ex Parte Young, 209 U. S. 123,
209 U. S.
165.
We are of opinion that the court below erred in its conclusion
that there was no presumption in favor of the validity of the rates
promulgated by the Order No. 552. We think the evidence shows that
these rates were really not adopted by arbitrary conjecture, nor
does it show that they were based on no investigation or without
the exercise of judgment or discretion.
It seems there had been complaints as to the tariff of rates
under which the complainant was operating before the Order No. 552
was made, and the commission had investigated these complaints so
far as to make a careful examination of the returns of complainant,
made to the commission. These returns showed generally the
character and operation of the business of complainant, its income,
operating expenses, and investments in Louisiana. The commission,
after examining them, issued the order to show cause why its rates
should not be decreased; the commission, on the final hearing on
the return of the order to show cause, took into consideration both
the statement presented by the complainant on the return of that
order and also the statements or returns previously filed by the
company. The secretary to the commission stated that the items in
these returns which had most weight in causing the commission
to
Page 212 U. S. 422
reach a conclusion that the rates then charged were unreasonable
were the earnings and operating expenses and net earnings, as shown
by these reports made to the commission. These reports were annual,
and were under oath. It appeared from the evidence of the secretary
that he was aware of the fact that the taxing authorities adopted a
basis of valuation on telephone property which was not its full
market value; that property of this nature, like all other
property, was not assessed in Louisiana at its actual value, but
for an appreciably less amount, and the valuation, as returned to
and filed with the commission by the complainant, followed the
valuation placed upon its property by the taxing authorities, and
that the witness therefore knew that the valuation in these reports
of the complainant's property in the State of Louisiana was not its
real value. He also said that, in fixing a schedule of rates, the
commission did not adopt that valuation as a basis. The witness
further stated that the commission, in acting upon the question,
was of opinion that the proof showed that the company was making
what the commission considered were unreasonable earnings, and that
was shown by the annual reports made by it for the years 1904,
1905, and 1906, and the statement filed by the counsel for the
company on his return to the order to show cause. No proof was
offered to the commission in the presence of anyone representing
the complainant other than the statement of receipts and
disbursements contained in the reports mentioned.
Now it may be true that these returns did not contain all the
data upon which a very close and accurate judgment could be based
as to the rates that ought to be charged by complainant, under all
the circumstances. This is only saying the order may have been
erroneous or based upon insufficient evidence, which is no more
than saying that, upon the investigation, the commission may have
come to a mistaken conclusion by reason of erroneous inferences
from the evidence furnished by complainant's own returns; but that
is far from showing that the commission had, by a merely arbitrary
order, promulgated certain rates without making the slightest
effort to obtain any
Page 212 U. S. 423
knowledge whatever upon the subject. It did not lose
jurisdiction by reason of the mistakes it may have made, and, as a
result, the rates adopted were not merely arbitrary conjectures,
but based on reasons which, while they may have been insufficient,
cannot be described as resulting in a decision wholly without
evidence to support it. The rates therefore promulgated, must be
regarded as
prima facie fair and valid, or, in other
words, the onus was upon the complainant to show that they were
what it asserts -- confiscatory or unreasonable. The court below
did state in its opinion that the evidence established that the
complainant had not then earned under the tariff in Order No. 488
(which existed prior to No. 552, and the rates under which were
higher than those under Order No. 552), as much as 7 percent on its
Louisiana business, and it held that a profit of 7 percent on the
Louisiana business would be only a fair return on a business of
this character, and therefore any reduction of existing rates would
be unreasonable and unjust. If the conclusion of the insufficiency
of the prior rates were justified, it would probably be an answer
to the claim of the commission that the reduced rates provided for
in Order 552 were sufficient.
There are one or two facts, however, now to be taken into
consideration before the correctness of that conclusion can be
affirmed. In the course of the trial, various questions were argued
as to the manner of conducting such a business as this with regard
to extensions, earnings, and disbursements, as well as questions of
depreciation of plant and how to treat the amount collected
therefor, and other questions of that nature. Exactly how the money
which resulted from the rates in actual operation was used was not,
in all cases, shown in detail, either from the books or by oral
testimony. Something was left in doubt and to conjecture. In the
course of the opinion of the circuit court, the following was
said:
"It is urged by the commission that, included in the Louisiana
investment of complainant, is a sum earned from Louisiana business,
set aside in the reserve fund and then used in extending the system
in
Page 212 U. S. 424
Louisiana, and now treated as a part of the Louisiana investment
of the stockholders. This may be so to some extent -- it is
certainly possible. But it is impossible for me to determine, from
the figures in the record, to what extent, if at all, it is a fact.
Counsel for defendant have not themselves undertaken to indicate
what, even in round figures, they consider is the sum thus earned
in the business and reinvested in the business without having been
distributed to the shareholders in dividends. It will be time to
consider the legal results from such a state of facts when it shall
have been shown to exist in a definite sum, and not in a purely
conjectural amount."
And again:
"Counsel for the commission argued that the complainant's
property in Louisiana was not all paid for with complainant's
capital, but was partly paid for out of a surplus or reserve, or
depreciation fund, which was accumulated by complainant from the
receipts of its Louisiana business, and was then reinvested not in
repairs or maintenance, but in extensions and additions to the
property. This may be a fact, but it is not shown to be a fact. The
commission has power, if it wishes to do so, to direct the books of
complainant to be so kept as to show such use of receipts. In the
present state of the books, this seems to be impossible. And the
floating debt of the complainant would seem to be much greater than
any sum which could possibly have been used from the reserve, or
surplus, or depreciation fund for extensions and additions, after
paying for maintenance and repairs."
If the onus rested upon the commission to show these facts, it
is evident that the obligation has not been fulfilled; but it is
just here that the difficulty lies. It was obligatory upon the
complainant to show that no part of the money raised to pay for
depreciation was added to capital, upon which a return was to be
made to stockholders in the way of dividends for the future. It
cannot be left to conjecture, but the burden rests with the
complainant to show it. It certainly was not proper for the
complainant to take the money, or any portion of it, which it
received as a result of the rates under which it was
Page 212 U. S. 425
operating, and so to use it, or any part of it, as to permit the
company to add it to its capital account, upon which it was paying
dividends to shareholders. If that were allowable, it would be
collecting money to pay for depreciation of the property, and,
having collected it, to use it in another way, upon which the
complainant would obtain a return and distribute it to its
stockholders. That it was right to raise more money to pay for
depreciation than was actually disbursed for the particular year
there can be no doubt, for a reserve is necessary in any business
of this kind, and so it might accumulate; but to raise more than
money enough for the purpose, and place the balance to the credit
of capital upon which to pay dividends, cannot be proper treatment.
The court below said it was impossible to find out from the books
how much of this had been done, and it treated the fact as one to
be explained by the commission, and not by the complainant. In
other words, while this fact was a material one, the onus was
placed upon the commission, and not the complainant, to show it. We
think, on the contrary, that the obligation was upon the
complainant. Now, although the books, it is said, do not show how
much money collected for depreciation has been in fact used to
increase the capital of the complainant, upon which dividends were
paid to stockholders, yet still, even if the books do not show
accurately, or even at all, what disposition was made of these
moneys, at any rate the officers of the complainant must be able to
make up some reasonable approximation of the amount, even if it be
impossible to state it with entire accuracy, and this duty rests
with the complainant, in order that it may discharge the duty
devolving upon it to prove that the rates were not unreasonably
high under Order No. 488, or, in other words, that they were
unreasonably low under Order No. 552. It may be that the sum, if
any, thus used was not enough to affect the claim that the rates
under discussion were unreasonably low. The evidence is
insufficient to show clearly that which complainant is under
obligations to show.
Knoxville v. Knoxville Water Co.,
212 U. S. 1;
Willcox v. Consolidated Gas Co., 212 U. S.
19. We
Page 212 U. S. 426
are not considering a case where there are surplus earnings
after providing for a depreciation fund, and the surplus is
invested in extensions and additions. We can deal with such a case
when it arises.
The evidence in this case applied generally to the actual
operation of complainant's business under rates in existence prior
to those contained in Order No. 552, and higher than those
contained in that order, and the evidence, as contended, showed
that, even under those rates, the profits were not unreasonably
high. It is not such a case, therefore, as looks only to the
possible effects of the future enforcement of the rates claimed to
be too low. If higher rates have been in operation, and the result
has shown that they were only reasonable and fair rates, it would,
in such a business as this, follow with considerable certainty
that, with lower rates, the profits would be decreased and become
unreasonably low. We say this because the evidence shows that, in
the case of telephone companies, the general result of a reduction
of rates in some other kinds of business does not always follow --
namely, that there would be an increased demand, which could be
supplied at a proportionately less cost than the original business.
Such, it is admitted, would be the case generally in regard to
water companies, gas companies, railroad companies, and perhaps
some others, where the rate is a reasonable one. For example, it is
said that it would cost no more, or certainly scarcely an
appreciable amount more, to haul a train of two cars, both filed,
than it would to haul the same train with both cars half filled,
and if the reduction in rates should result in filling the cars
where previously they had not been half filled, there might be an
increased carriage at a cost very little more than before, and
probably an increased profit. So, in the case of a water company,
the reduced rate might result in furnishing more water to consumers
already existing, and the increased cost of furnishing the same
would be infinitesimal where there was a supply sufficiently large
to fill the demand. So also, in furnishing gas at reduced rates,
the reduction in the rate would very probably result in
increased
Page 212 U. S. 427
consumption, not only in increased demands from more consumers,
but also an increased consumption by consumers already existing,
and the increased cost of furnishing the gas would be nothing like
in proportion to the increase in consumption. In these cases,
increased profits might be the result of decreased rates. But with
telephone companies, as shown by the testimony of the president of
the complainant, the reduction in toll rates does not bring an
increased demand, except upon the condition of corresponding
increase in expenses. As an illustration, the witness took a
telegraph company which, as he said,
"employs one wire, and can send several messages at the same
time over that one wire; it employs its own operators to send the
message, who consult each other's time and convenience in the
handling of it, while the telephone company has to employ two
wires, the sender of the message is his own operator, and the
telephone operator simply fashions up the facilities for him, and
the customer sends his own message, and becomes therefore his own
operator; hence his convenience and time must be consulted; we have
to be ready, in other words, with the operators and the appliances
to suit the convenience of the customer, whereas in the telegraph
business it is just the other way: the customer brings in his
message, and when it suits the convenience of the company to employ
its operators and its apparatus to send it, they send the
message."
The witness then gave further illustration in proof of his
contention that the reduction of rates in the telephone business
does not increase the business without corresponding increase in
the expense.
We do not think this case is one where the bill should be
dismissed, even without prejudice, for the reasons that we have
stated, that the inquiry has been founded upon the actual effect of
rates higher than those permitted under Order No. 552, and
therefore that it is not merely conjecture as to what the result of
such lower rates would be, the tendency of the evidence being to
the effect that the higher rates are still reasonable, and that the
lower rates would be unreasonably low. But the burden, as
Page 212 U. S. 428
we have said, rests with the complainant to prove its case, and
it has not performed its obligation when this fact as to the
disposition of the so-called depreciation fund is left so wholly in
doubt. What is the amount reserved for payments for depreciation?
What, if any of it, has been carried into capital? How much of the
floating debt would carry interest which might be charged as
against the amount of the depreciation fund actually used for
extensions and additions and charged to capital? All these are
questions not answered by the evidence in the case, and which
should be made as clear as possible before an attempt ought to be
made to answer the question as to rates. The whole case should
therefore be opened, so that both sides can, on a new trial, bring
out all the material facts upon which a decision can finally be
based.
We therefore reverse the decree and direct a new trial.
Reversed.
MR. JUSTICE WHITE, not having heard the argument, did not take
part in the decision of the case.
