1. In determining the reproduction value of the plant of a
public utility as a basis for fixing its rates, there should be a
reasonable allowance for organization and other overhead charges
that necessarily would be incurred in reproducing it, and the
amount of such allowance is a matter of estimate not dependent on
proof of actual expenditures originally made to defray such
charges. P.
267 U. S.
362.
2. An order of a state commission, affirmed by the state supreme
court, fixed rates for an electric company allowing a return of
less than 5% upon the value of its property, this result being
reached by arbitrarily refusing any allowance for preliminary
organization expenses, and by arbitrarily reducing allowances for
interest during the construction period, working capital, value of
buildings and plant equipment, and operating expenses, below the
amounts established as reasonable by the undisputed evidence before
the commission,
held that the return was so inadequate as
to result in depriving the company of property without due process
of law, and that the company was not accorded the sort of judicial
inquiry to which under the decisions of this Court it was entitled.
P.
267 U. S.
361.
108 Ohio St. 143 reversed.
Error to a judgment of the Supreme Court of Ohio which affirmed
an order of the Ohio Public Utilities Commission reducing the rates
chargeable by the plaintiff in error for electricity.
Page 267 U. S. 360
MR. JUSTICE SUTHERLAND delivered the opinion of the Court.
The Ohio Utilities Company is engaged in supplying gas and
electricity for light, heat, and power to various communities in
Ohio. In 1920, it filed with the Utilities Commission rate
schedules for gas and electrical service in the Village of
Hillsboro. The rates were protested, and the commission ordered a
hearing. Pending a decision, the company was allowed to collect the
rates in accordance with its schedule upon condition that it would
return to its customers any excess over the rates finally fixed,
for the due performance of which it furnished a bond. After a
hearing and rehearing, the commission reduced the electrical
service rates set forth in the company's schedule, and fixed the
same for residence and commercial lighting at 12 cents per kilowatt
hour for the first 200 hours per month and 10 cents per kilowatt
hour for all over 200 hours, and for private garage automobile
charging a minimum of $1 per month net. As a basis for these rates,
the commission found that the fair value of the physical property
of the company, used and useful in the furnishing of electrical
service to consumers in Hillsboro, was $138,521, to which
allowances were added as follows: taxes during construction,
$1,081; interest during construction, $1,500; to maintain an
adequate stock of materials and supplies, $1,071; working capital
for carrying on the electrical service in Hillsboro, $2,882 --
bringing the value of the property, as of August 30, 1920, for
ratemaking purposes, to the total sum of
Page 267 U. S. 361
$145,055. The commission further found that the reasonable
operating expenses (including an allowance of $3,000 for taxes) in
furnishing such electrical service for a period of one year should
be $37,608, and a reasonable annual allowance for depreciation
should be $7,252 (being 5 percentum of the value), making a total
of $44,860. The commission then found that a reasonable return to
the company for the period of one year would be $8,703, and
estimated that the rates fixed would produce the aggregate of these
two sums, namely, $53,563. Upon error to the state supreme court,
the order of the commission was affirmed. 108 Ohio St. 143.
The order of the commission is assailed as confiscatory, and
therefore in contravention of the Fourteenth Amendment. The
specific grounds of complaint in respect of the order, so far as
necessary to be stated and considered, are as follows: (1) the
value of the property should have been fixed at $154,655.93; (2)
under the evidence, the allowance for operating expenses, including
taxes, should have been at least $38,744.85; (3) the return to the
company should have been on the basis of 8 percent upon the value
stated in (1), or $12,372 annually.
Property Valuation. An examination of the record shows
that the engineers of the commission made an itemized inventory and
valuation of the company's property, based on reproduction value
less depreciation, from which it appears that the aggregate fair
value of the property for ratemaking purposes was $154,655.93. This
valuation was confirmed by the oral testimony of the engineers; it
was acquiesced in by the company, and we find no substantial
evidence in the record to the contrary. The commission accepted the
valuation of its engineers in all respects except that it rejected
or reduced the amount of the following items: preliminary
organization expenses, $5,000, rejected outright; interest for one
year's construction period, reduced from $4,507.98, as estimated
and
Page 267 U. S. 362
recommended, to $1,500, a reduction of $3,007.98; working
capital, being one-twelfth of the annual operating expenses and
cost of coal for one month, reduced from $4,198.42 to $2,882, a
reduction of $1,316.42. It also appears that the engineers'
valuation of the buildings and plant equipment, $122,276.15, was
carried into the commission's computation at the round sum of
$122,000. The aggregate therefore of the rejections and reductions
is $9,600.55.
The item of $5,000 seems to have been rejected upon the ground
that there was no proof of actual expenditure. Reproduction value,
however, is not a matter of outlay, but of estimate, and should
include a reasonable allowance for organization and other overhead
charges that necessarily would be incurred in reproducing the
utility. In estimating what reasonably would be required for such
purposes, proof of actual expenditures originally made, while it
would be helpful, is not indispensable. The commission's chief
engineer, explaining the appearance of the item in his report,
called attention to the account system prescribed by the
commission, which, among other things, provided that under the head
of "organization" was included incorporation fees paid to the
government and other fees and expenses incident to organizing the
utility and placing it in readiness to do business, attorney's
fees, cost of preparing and issuing certificates of stock, etc.,
and testified that the item was an estimate made as the result of
an investigation by the commission's engineer on the spot. There
was no testimony to the contrary, and the company, in view of the
concession, evidently deemed it unnecessary to produce evidence
upon the point. That such expenditures in a substantial amount
would necessarily be made in reproducing the utility is clear; it
is not suggested that the estimate of the engineers is excessive or
unfairly made and the rejection of the entire amount cannot be
regarded as otherwise than arbitrary.
Page 267 U. S. 363
The reduction of the item for interest seems to be of like
character. The engineers' estimate was based upon their conclusion
that it would require one year for the construction of the plant,
and interest at 6 percent was allowed on the estimated cost for
half of that period. There is no justification in the record, so
far as we can see, for a reduction of the item to an amount which
is less than one-third of the engineers' estimate.
The item for working capital was carefully worked out by the
commission's own engineers, there was no evidence to the contrary,
and the reduction seems to have been equally capricious.
The curtailment of the estimated value of the buildings and
plant equipment by the sum of $276.15 finds no explanation in the
record, and probably was a sacrifice to the easy convenience of
round numbers.
Operating Expenses. The commission's engineers reported
and testified that the actual operating expenses for the year
ending February 28, 1921, were $38,744.85, to which should be added
the amount of a reasonable depreciation allowance, fixed by the
commission itself at $7,252. We are unable to find any evidence in
the record which impeaches the accuracy of the sum of these
expenses, or which casts doubt upon their fairness as a measure of
the necessary annual operating expenses. Yet the commission reduced
the amount to $37,608, a difference of $1,136.85. The commission
found, it is true, that the plant had been inefficiently operated.
But we find no evidence to this effect in the record and none has
been called to our attention. To the contrary, the commission's
engineer who examined the property and accounts of the company
testified that he considered the expenditures of the company were
reasonable and that the plant was efficiently and economically
managed.
Return. As bearing upon the amount of return to which
the company is entitled, a summary of the foregoing
Page 267 U. S. 364
may now be considered: value of property for ratemaking
purposes, $154,655.93; annual amount of income based upon rates
fixed by commission, $53,563; operating expenses, together with
amount of annual depreciation allowed by commission, $45,996.85 --
leaving a balance as return to the company of $7,566.15, or less
than 5 percent upon the value of the property. That this is so
plainly inadequate as to result in depriving the company of its
property without due process of law may not be doubted.
See
Bluefield Co. v. Pub. Serv. Comm'n, 262 U.
S. 679,
262 U. S.
692-695, and cases cited;
S.W. Tel. Co. v.Pub. Serv.
Comm'n, 262 U. S. 276,
262 U. S.
288.
From the foregoing, it is evident that the state supreme court
did not accord to the plaintiff in error that sort of judicial
inquiry to which under the decisions of this Court it was entitled.
Bluefield Co. v.Pub. Serv. Comm'n, supra, p. 262 U.S.
262 U. S. 689;
Ohio Valley Co. v. Ben Avon Borough, 253 U.
S. 287,
253 U. S.
289.
Judgment reversed, and cause remanded for further action not
inconsistent with this opinion.