1. A suit for a permanent injunction of state-made rates alleged
to be confiscatory, no interlocutory injunction being prayed, is
properly heard in the District Court by one judge. P.
302 U. S.
420.
2. In a suit praying a permanent, but not a temporary,
injunction against state-made rates already in effect, upon the
ground of confiscation, it was erroneous to value the plaintiff's
property as of the date of decree upon proofs taken and concluded
thirty-two months previously, and to dismiss the bill on that
valuation, without regard to known economic changes, and the actual
results of the plaintiff's business, in the interval. P.
302 U. S.
422.
89 F.2d 522 affirmed with modification.
Certiorari,
post, p. 665, to review the reversal of a
decree, 13 F. Supp. 110, which dismissed a bill to enjoin the
enforcement of water rates fixed by the Public Service Commission
of Indiana.
PER CURIAM.
This suit was originally brought by the Indianapolis Water
Company to restrain the enforcement of an order of the Public
Service Commission of Indiana fixing a temporary schedule of rates
pending the Commission's investigation. The District Court of three
judges, 28 U.S.C. ยง 380, denied an interlocutory injunction, and
the temporary rates became effective. The Commission, on
Page 302 U. S. 420
December 30, 1932, adopted a different and permanent schedule of
rates to be effective January 1, 1933. The Company then filed an
amended and supplemental bill assailing those rates as confiscatory
and invoking the Fourteenth Amendment of the Constitution of the
United States. An interlocutory injunction was not sought, and the
case was properly heard in the District Court by a single judge.
Indianapolis Water Company v. McCart, 13 F. Supp. 107;
Smith v. Wilson, 273 U. S. 388;
Stratton v. St. Louis Southwestern Ry. Co., 282 U. S.
10;
Healy v. Ratta, 289 U.S. 701. Pursuant to
the Commission's final order, the Company filed the schedule of
rates as prescribed, and these rates went into effect on January 1,
1933, and under that order have since been in effect without
limitation of time.
The Commission found that the fair value of the Company's
property as of November 1, 1932, was not less than $22,500,000, and
that the income under the new rates would be "approximately
$1,400,000, or a return slightly in excess of six percent" on that
amount. The District Court appointed a special master, who received
evidence between May 1, 1933, and August 10, 1933, and held a
further and reopened session on October 18, 1933, when the hearing
of evidence was closed. On April 18, 1934, the master offered to
receive evidence as to the actual operations of the Company for
1933, but the respective parties informed the master that they did
not desire to offer any such testimony. The master filed his report
on May 18, 1934. The appraisals before the master were made as of
April 1, 1933. He found the fair value of the Company's property to
be $20,282,143 as of that date and also as of the time of filing
his report. He estimated and found that the income applicable to
return for the year 1933 and for a reasonable time thereafter would
be $1,294,566.51. He concluded that the rates were not
confiscatory.
Page 302 U. S. 421
After a hearing upon exceptions to the master's report, the
District Court entered a final decree on November 29, 1935,
dismissing the amended and supplemental bill of complaint. 13 F.
Supp. 110. The court found that the value of the Company's property
was $21,392,821 as of April 1, 1933, and, although the evidence of
value had been addressed to that date, the court went further and
found in its decree that this amount
"was the fair and reasonable value thereof as of the time of
filing the report of the Special Master herein and as of the date
of these findings, and that such value will continue to be a fair
and reasonable value of the plaintiff's used and useful property
for a reasonable time in the future."
The court adopted the finding of the master that the income
would be not less than $1,294,566.51 for the year 1933 and for a
reasonable time thereafter.
Upon appeal, the Circuit Court of Appeals, reviewing the
evidence upon disputed points, found that there should be certain
increases, amounting to $975,437, in the rate base, making it
$22,368,258. The court observed that, from April 1, 1933, the
valuation date, to the date of the decree of the District Court,
November, 29, 1935, thirty-two months had intervened; that this
period was no longer one for prophecy, but had passed "from the
field of speculation to one of experience;" and that experience had
shown that, in that period, there had been "a constant and definite
trend upward in commodity values." 89 F.2d 522, 525, 526. With
respect to income, the court said that the amount found by the
master for 1933 ($1,294,566.51) was about $57,000 higher than that
indicated by the testimony of any witness, but the finding was not
overruled in view of the failure of the Company to take advantage
of its opportunity to show the actual receipts and disbursements
for that calendar year. 89 F.2d 522 at 527, 528. Holding that the
District Court
Page 302 U. S. 422
had erred in determining in its decree that the valuations as of
April 1, 1933, were applicable to the date of the decree in
November, 1935, without taking appropriate account of changed
conditions in the interval, the court reversed the decree and
remanded the cause for further proceedings in accordance with the
views expressed in its opinion. 89 F.2d 522, at 528.
Petitioners urge that the Circuit Court of Appeals has virtually
required the District Court to find confiscation. We do not think
that this is the necessary import of the opinion. The appellate
court took judicial notice of an upward trend in prices, but did
not attempt to make a specific application of that trend. The
reversal of the decree requires a hearing anew in the District
Court, and upon that hearing all questions pertinent to the issue
of confiscation should be open. The economic changes to which the
Circuit Court of Appeals has referred may affect income, as well as
values.
In the instant case, we do not have a situation in which rates
as fixed by a Commission have been enjoined. Here, the rates
prescribed by the Commission's order have been in effect all
through this litigation, and are now in effect. A decree for
injunction could operate only as to the future. Another special
circumstance is that the decree of the District Court expressly
provided that the value it found was the value as of the date of
the decree, November 29, 1935, although the evidence before the
court related to April 1, 1933. A decree speaking as of the later
date and operating thereafter should have a basis in evidence. On
the hearing required by the Circuit Court of Appeals, the District
Court will be able to ascertain what have been the actual results
of the Company's business during the intervening years, and thus to
base its decree upon known conditions as to those years which may
show clearly, in the light of the economic changes which have
occurred, whether the prescribed rates are or
Page 302 U. S. 423
are not of a confiscatory character and whether an injunction
restraining the enforcement of the rates should be granted or
denied.
To leave no question as to the authority of the District Court
thus fully to rehear and determine the cause, the decree of the
Circuit Court of Appeals is modified so as to provide that the
cause is remanded to the District Court for further proceedings in
conformity with the views expressed in this opinion. As thus
modified, the decree of the Circuit Court of Appeals is
affirmed.
Modified and affirmed.
MR. JUSTICE CARDOZO took no part in the consideration and
decision of this case.
MR. JUSTICE BLACK, dissenting.
I cannot agree that this cause brought here by the Public
Service Commission and the Attorney General of the Indiana should
be sent back to the District Court for a new trial. After an
examination of the record, I am persuaded that the action of the
Circuit Court of Appeals was wrong, and that its judgment should
not be affirmed either as rendered or in any modified form. The
importance of the questions here involved leads me to set out some
of my reasons for this belief.
Six years ago (1931), the City of Indianapolis filed a petition
with the Public Service Commission of Indiana against the
Indianapolis Water Company, seeking a reduction of water rates for
small consumers. The Commission fixed the rates in December, 1932.
A
master appointed by the District Court reported that
there was
no confiscation May 18, 1934. The
District
Court held there was
no confiscation November, 1935.
The
Circuit Court of Appeals found there
was
confiscation March, 1937. Now, January, 1938,
this
Court sends the case back to the District Court for
trial
"anew." The cause goes back to the District Court with the
admonition from the Circuit Court of Appeals
Page 302 U. S. 424
that a "general and persistent rise in prices should have been
given effect in fixing a fair valuation." Affirmance of the Circuit
Court of Appeals' decree necessarily approves this statement, and
this statement requires an increased valuation of the Company's
property. Experience demonstrates that rate cases continue to come
to this Court until final decisions are reached. If the second
trial follows the course of the first, the case should return to
this Court by 1943. However, it will now be the duty of the
District Court, in trying the case anew, to make a forecast as to
probable commodity values covering this future period up to 1943.
[
Footnote 1] If its forecast
should be wrong, the present case will be a precedent for reversing
the cause in 1943 for still another trial. Sending the case back
indicates that the Circuit Court of Appeals was right in reversing
the District Court.
I believe the Circuit Court of Appeals was in error, that the
evidence did not show confiscation, and I cannot agree to the
action of the majority. This Court has announced the doctrine that
the States have full and complete rights to regulate the rates of
local intrastate utilities, and that the federal courts cannot and
will not interfere with this regulation unless the rates are
confiscatory. Furthermore, "upon that question (of confiscation),
the complainant has the burden of proof, and the court may not
interfere with the exercise of the state's authority unless
confiscation is clearly established." [
Footnote 2] The judicial function does not extend beyond
the decision of the constitutional question. Unless, therefore, the
Water Company satisfactorily overcame the presumption that the rate
set by the Commission is not confiscatory, this Court should not
invade the constitutional sphere of state rate regulation.
[
Footnote 3]
Page 302 U. S. 425
I cannot say that the evidence in the District Court "compelled
a conviction that the rate would prove inadequate," [
Footnote 4] or that the rates were "palpably
and grossly unreasonable," [
Footnote 5] nor was the evidence sufficient to overcome
the presumption that the rates, as fixed by the Commission and
reinforced by the judgment of the master and the District Court,
were not confiscatory. [
Footnote
6]
The master reported the value of the Company's property to be
$20,282,143 as of April 1, 1933. December, 1935, the District
Court, after a review of the evidence and the report of the master,
refused to enjoin the enforcement of the rates fixed by the
Commission. That court excluded from consideration for ratemaking
purposes a group of farms owned by the Company and estimated by the
master to have a value of $264,050, but increased the master's
estimate of the value of "water rights" to $500,000. Evidence
having been given of the "reproduction value" of the Company's
property, the District Court increased by $1,333,333 the master's
"estimate" of the "estimated cost" of labor necessary to
"reproduce" the Company's property; it raised the master's total
"estimate" of this wholly imaginary reproduction from $20,282,143
to $21,392,821.
March 23, 1937, six years after the City of Indianapolis had
originally initiated its efforts to obtain a reduction in water
rates, the Circuit Court of Appeals reversed and remanded this
cause. In doing so, it ordered that the Company's Indiana farms be
included in the total valuation upon which the people of
Indianapolis must pay the Company an income; added $361,308 to the
"estimate" of the master and District Court for "undistributed
construction costs;" and raised "going value" $250,079.
Page 302 U. S. 426
The principal reason given for the reversal, however, was that
general price levels had arisen during the thirty-two months
intervening between the date at which valuations were fixed (April
1, 1933) to the date of the District Court's decree (November 29,
1935). Looking at price index figures, the Circuit Court of Appeals
decided that prices had ascended about 25 percent during that
period, and that, if the District Court had given proper
consideration to this increase in determining the value of the
Company's property, that court would have found that the rate fixed
by the commission was "clearly confiscatory."
One month and three days, however, after the price index method
had been used by the Circuit Court of Appeals in finding the
Indianapolis water rates confiscatory, this Court, in the case of
Ohio Bell Telephone Co. v. Public Utilities Comm'n,
301 U. S. 292,
struck down a reduced telephone rate fixed by the Ohio Public
Service Commission. The people of Ohio were deprived of the benefit
of a reduced telephone rate because the decision of the Public
Service Commission rested upon price indices. Yet, if the District
Court follows the opinion of the Circuit Court of Appeals which is
here affirmed, the people of Indianapolis will be deprived of a
reduced water rate because a price index, not introduced in
evidence, indicated to the Circuit Court of Appeals that the
valuation fixed by the District Court was wrong. This opinion of
the Circuit Court of Appeals as to value is not repudiated by the
affirmance. The majority does not reverse the Circuit Court of
Appeals' finding of confiscation.
I cannot agree that the District Court should be reversed for
failure to prophesy the exact future course of commodity prices.
The legal knowledge of few judges is such that they can accurately
foresee and forecast all price fluctuations. In the delays incident
to rate litigation, it is probably true that prices will fluctuate
many
Page 302 U. S. 427
times between the beginning of a litigation and the time when
the cause is won, lost, or abandoned.
It has now been more than five years since the Commission fixed
a valuation for this waterworks property, and it has been more than
four years since the master reached his conclusion. If it requires
four more years for this case to return to the Circuit Court of
Appeals, there can be no doubt but that some price index can be
found to show other changes in prices. Such a result will add still
further to the confusion and chaos of judicial ratemaking. I
believe it forecasts a day when the present long delays in rate
regulation will be endless.
The City of Indianapolis should not be subjected to another
trial unless this Court believes the rates to be confiscatory. When
the District Court tries the case anew, it will be constrained to
follow the decision of the Circuit Court of Appeals that a "general
and persistent rise in prices should have been given effect in
fixing a fair valuation." In the meantime, can a judge be found who
can accurately divine all future prices of commodities to be used
for imaginary reproductions of this Company's property?
I believe this cause should be brought to a conclusion at this
time. [
Footnote 7] My belief
that the Circuit Court of Appeals should be reversed is
strengthened by a study of the record in the case of
McCardle
v. Indianapolis Water Co., 272 U. S. 400, of
which record we take judicial notice. [
Footnote 8]
For the first hundred years of this Nation's history, federal
courts did not interfere with state legislation fixing maximum
rates for public services performed within the respective states.
The state legislatures, according to a custom which this Court
declared had existed "from time immemorial," [
Footnote 9] decided what those maximum rates
should
Page 302 U. S. 428
be. This Court also said that, "for protection against abuses by
legislatures, the people must resort to the polls, not to the
courts." [
Footnote 10] It
was not until 1890 that a divided court finally repudiated its
earlier constitutional interpretation and declared that due process
of law requires judicial invalidation of legislative rates which
the courts believe confiscatory. [
Footnote 11] The dissenting Justices adhered to the long
existing principle that regulation of public utilities was a
"legislative prerogative, and not a judicial one." [
Footnote 12]
From this decision in 1890,
supra, has come the
doctrine that the federal courts have jurisdiction to determine
whether a rate fixed by a state for a purely local utility is
confiscatory. This doctrine does not purport to give to federal
courts more than the limited jurisdiction to determine whether a
given state rate is so low as to be confiscatory.
The determination by the Circuit Court of Appeals that the rates
in the present case are confiscatory can only be supported, if at
all, by giving underserved weight to evidence given to support the
"reproduction cost" theory. The experience of the people of
Indianapolis in their efforts to obtain fair and reasonable water
rates from this company which has long had a monopoly in their
community discloses what appears to me to be the complete
unreliability of the "reproduction cost" theory. Wherever the
question of utility valuation arises today, it is exceedingly
difficult to discern the truth through the maze of formulas and the
jungle of metaphysical concepts sometimes conceived, and often
fostered, by the ingenuity of those who seek inflated valuations to
support excessive rates. Even the testimony of engineers, with
wide
Page 302 U. S. 429
experience in developing this theory and expounding it to
courts, is not in agreement as to the meaning of the vague and
uncertain terms created to add invisible and intangible values to
actual physical property. Completely lost in the confusion of
language -- too frequently invented for the purpose of confusing --
commissions and courts passing upon rates for public utilities are
driven to listen to conjectures, speculations, estimates, and
guesses, all under the name of "reproduction costs." In the
testimony of professional witnesses employed by the litigants,
courts listen to guesses about "going value;" "undistributed
construction costs;" "water rights." [
Footnote 13] This Court has even said,
"Reproduction value, however, is not a matter of outlay, but of
estimate, and . . . proof of actual expenditures originally made,
while it would be helpful, is not indispensable. [
Footnote 14]"
Courts have gone further and further away from considering cost
in determining the value of utility property. The cost of this
Company's property apparently was given little weight
Page 302 U. S. 430
in previous litigation which came to this Court. [
Footnote 15] This Company's property was
valued by this Court at $19,000,000 in the prior litigation,
although the Commission's valuation was $16,495,000. It is
interesting to note what this property valued at $19,000,000
actually cost.
The record in the
McCardle case,
supra, showed
that the property was bought at a judicial sale in 1881 by the
present Company at a cost of not more than $535,000, the purchase
being financed by a sale of bonds; that apparently no cash was paid
for the $500,000 face value of stock issued at that time; that the
maximum book value of the Company's assets on December 31, 1923,
was $9,195,908, but a witness called by the Commission testified
that the Company's records disclosed the actual book value of the
property used for the public convenience to be only $7,967,649;
that, from 1881 to December 31, 1923, stockholder's average annual
net profits were $189,255; that practically all of the added book
value was the result of additional investments financed by
borrowing, and not by investment by stockholders; that no other
investment was made by the stockholders in the Company since 1881,
but, in 1909, a write-up of $5,556,071.85 was made on the books by
virtue of which a common stock dividend of $4,500,000 was declared
in 1910, making the total common stock $5,000,000; that the
$5,000,000 stock was thereafter carried on the books of the
Company; that the stockholders not only paid no additional money
for stock, but that the profits made by the Company between 1881
and 1932 were not reinvested in the Company, but were substantially
all drawn out in dividends. [
Footnote 16]
Page 302 U. S. 431
This Court found in the
McCardle case that the Company
was entitled to a rate based on a $19,000,000, valuation as of
December 31, 1923, although the record indicates that the total
actual investment made by the Company up to that time was less than
$9,000,000 and was not stockholders' investment, but was
substantially all borrowed money; that the stockholders apparently
had made no investment unless (which is very doubtful from the
record) they paid for the $500,000 stock in 1881, and that the
stockholders had received the following percentage of return on
common stock on a $500,000 valuation for the five years preceding
this $19,000,000 appraisal:
1919 . . . . . . . . . . 69%
1920 . . . . . . . . . . 75%
1921 . . . . . . . . . . 88%
1922 . . . . . . . . . . 96%
1923 . . . . . . . . . . 96%
While it is difficult to find in the present record what
additional investments have been made since the $19,000,000
appraisal, it does appear that the Commission found
Page 302 U. S. 432
that the books of the Company showed an additional investment of
$6,661,292. If this is added to the 1923 book value, it would
appear that there is a possibility that, when the appraisal in this
cause was made, there may have been between $13,000,000 and
$16,000,000 invested through the Company's borrowing activities.
But the indebtedness kept pace with the investments, and was
$13,746,900 at this time. The District Court is now reversed,
however, because the Circuit Court of Appeals found that rates
based on an obviously inflated value of $21,392,821 fixed by the
District Court would confiscate the property of the Company's
stockholders.
There is a marked disparity between the actual cost of this
Company's property and its imaginary "reproduction value." I shall
comment upon a few of many reasons for this disparity.
First, the so-called "water rights" -- The Company takes the
position that water rights should have been valued at about
$2,000,000. Expert witnesses for the City valued these right from
nothing to $75,000, and expert witnesses for the Company at
$1,000,000 or more. This illustration is typical of the wide
variations in expert evidence on "reproduction cost;" it is a
typical "estimate." The Company claims that the element of greatest
value in the water rights is the "diversion right." This "diversion
right" is based, in part, on the theory that, for a long number of
years, the Company has diverted water from the White river.
According to one theory, it is claimed water which would otherwise
flow down stream is diverted by the Company; that the Tom Taggart
Park in Indianapolis might possibly be injured by this diversion
(but the City has not complained); that the stream offers
possibilities of scenic beauty if there were adequate water and if
it should be made suitable for navigation by small pleasure crafts.
It does not appear that this formula evolved as a result of
anyone's
Page 302 U. S. 433
expressed or frustrated desire to sail this stream. From the
possibility, however, that the stream could be used for this
purpose if imaginary people should so desire, an imaginary damage
to these imaginary sailors is discovered. Based upon this potential
menace to these imaginary people and their imaginary desire to use
this stream, an imaginary value of $200,000 is suggested as the
cost which the Company might incur in discharging its imaginary
duty to improve the stream for these imaginary sailors.
It is difficult to believe that such concepts of property can
establish clear proof that the Constitution of the United States
has been violated. Nor do I believe that, even if the people of
Indianapolis and the surrounding community have permitted the Water
Company to use this stream for a public service, there has been a
grant of a prescriptive property right which can be capitalized by
the Company in order to exact higher water rates from the very
people who granted the privilege.
If the Company had made actual investments in its property
between 1933 and 1935, resort to illusory property concepts would
not be necessary. Clearly, it would be entitled to a reasonable
return upon such actual investment. Such is not the case. The order
for a new trial is not based on a claim that the Company has
invested even one additional dollar. It is not claimed that the
Company bought additional land, added an inch to any of its dams,
extended its distribution pipes, improved its filtration system, or
purchased one additional piece of property.
This Court has frequently declared that, in reaching a
conclusion as to a reasonable rate, the public must be considered
as well as the stockholders and bondholders. [
Footnote 17] The doctrine against confiscatory
rates is based upon
Page 302 U. S. 434
the theory of protecting the right of bondholders to their
interest and that of stockholders to a fair return upon the value
of their actual investments. While this matter has been confused by
the "reproduction cost" theory, the fact remains that, as applied
to corporations, it is the interest of the stockholders and
bondholders which the due process clause protects.
The evidence in this case clearly establishes that the
bondholders have never been, and are not now, in any jeopardy as to
their interest payments. In the margin appears the record of
stockholders' dividends since the $19,000,000 valuation. [
Footnote 18] In view of these
dividends on this stock of uncertain cost, these stockholders were
in no imminent peril because of the District Court's valuation of
more than $21,000,000.
Page 302 U. S. 435
This case is an illustration of the almost insuperable obstacles
to rate regulation today. It involves a single Company supplying
water to a single community. It does not present the difficulties
of a far-flung utility system covering much territory with many
separate corporate creatures. Nevertheless, this particular case
has already consumed more than six years, and is apparently
destined to remain suspended for six more years. [
Footnote 19] More than 2,000 pages of
records and exhibits appear in this Court in the appeal.
This case was first heard by the Public Service Commission.
Evidence and arguments were there introduced, and the questions of
value, rates, etc., were fully explored. Thereafter, the Commission
which had been specially created by the Indiana to investigate such
cases rendered its decree.
Next, the case was investigated by a master in the District
Court. This Court has admonished the lower court
Page 302 U. S. 436
that a master should be appointed for such purposes. [
Footnote 20] Extensive hearings
before the master produced voluminous testimony at tremendous
expense to the litigants. While this expense may appear on the
books of the Company, it will ultimately be borne by the
consumers.
After the master heard the evidence, it went to the District
Court for a third review. Thereafter it appeared in the Circuit
Court of Appeals, where it was again reviewed. Since it has come to
this Court, I believe that the ends of justice require that it be
concluded. History indicates that, if it is not concluded, this is
not likely to be the last journey made by the cause from
Indianapolis to Washington. Litigation costs in rate regulation
today constitute a heavy burden.
In the main, the dispute in this case, as in most rate cases,
revolves around "intangibles" and "reproduction costs."
"Intangibles," as expounded by hired experts in rate
litigations, might well be defined as "properties" that can neither
be seen nor touched and which can rarely be understood. They can
have little meaning when applied to property which is not for sale,
but for use. These property concepts are so uncertain, tenuous, and
elusive that no two witnesses give them the same value except on
occasions when several witnesses have been employed by the same
litigant. [
Footnote 21]
Witnesses in the present case varied as to "organization" costs
from $81,000 to $325,000. Experts differed as to "going value"
between $1,000,000 and $2,700,000, and on water rights from nothing
to $2,000,000.
Page 302 U. S. 437
Such differences are not exceptional. They occur in most cases
that have reached this Court which involve expert appraisal of such
phantom concepts of property.
The estimates made by witnesses of "reproduction costs" of pipes
for this waterworks system strikingly illustrate this method of
valuation. A Company expert estimated that the reproduction cost of
the Company's "main" pipes, as of 1923, was $7,024,289. In this
guess, it was assumed that the pipe had a life of 125 years, and
that, "as a matter of fact, it does not wear out in use." If these
pipes last 125 years, the reproduction cost theory will subject the
water consumers of Indianapolis to innumerable increases in the
price of water during the next century. Experts can undoubtedly be
found who will testify from time to time during the coming century
that the hypothetical digging up of old pipes and the hypothetical
laying of hypothetical new pipes will constantly increase the
hypothetical reproduction value of pipes. In fact, the actual pipes
will not be dug up. They will continue to lie untouched and at rest
-- under the soil.
Under this reproduction cost theory, the constitutional water
rate in Indianapolis must fluctuate during the next century with
the price of cast-iron pipes. One of the principal elements of the
so-called "reproduction value" in this case is this very pipe. I do
not believe that the constitutionality of action by a sovereign
this Union is dependent upon the market fluctuations of cast iron
pipe.
Testimony was given in this case as to the "reproduction cost"
of a canal used by the Water Company. The Indiana constructed this
canal for navigation purposes a hundred years ago. Some years after
its completion, it was obtained by the Water Works Company of
Indianapolis, and, while the record is not clear, the price might
have been as great as $35,000. When the
Page 302 U. S. 438
reorganization of the company occurred in 1881, this canal was
placed upon the books of the present company at $50,000. It
remained on the books at this figure until the write-up in 1909
which preceded the $4,500,000 stock dividend. At that time, it was
hoisted to $1,773,874. By 1911, this same canal apparently was
carried at $2,746.538. In the rate valuation case in 1923, experts
of the company valued it at more than $3,000,000. Extensive
testimony has been given in this and the
McCardle case,
supra, concerning the "reproduction value" of this canal.
The expert who was "reproducing" the canal in 1923 "assumed a
similar set of conditions to those existing at the time the canal
was originally constructed." In other words, the witness took
himself and his staff back a hundred years to the conditions that
existed in Indiana at the time and place of the construction of
this State navigation canal. Thus, projecting himself back into
history, he found that the water consumers of Indianapolis should
pay to the present owners of the canal 6 percent income on more
than $3,000,000. I cannot subscribe to the belief that it would
violate the Constitution of the United States for the Indiana to
deny the company 6 percent income on a still higher valuation of a
canal that never, at the outside, cost the Company more than
$50,000. The question in the federal courts in connection with
rates is not what would be a reasonable rate to be charged by such
a company, but it is limited wholly and exclusively to a decision
as to whether or not a rate will confiscate the property of the
company. The evidence in this case is not so "compelling" as to
justify a reversal of the District Court's valuation, which
valuation itself necessarily contains a finding of value far in
excess of what this canal cost or what it is reasonably worth. In a
dissenting opinion by certain commissioners of the Public Service
Commission of Indiana in the
McCardle case, they said:
Page 302 U. S. 439
"Would any reasonable man entertain the proposition of
duplicating the canal if a new waterworks system were to be
constructed in Indianapolis? Certainly not."
"In the estimated reconstruction new cost, there is the highly
fancied estimate of the cost of duplicating the canal as it was
constructed ninety years ago. It would be just as germane to the
ascertainment of the actual value of the petitioner's property used
and useful in the present water service of Indianapolis to indulge
in a magnified imagination of the expense of repopulating the canal
banks with the Indians."
The State of Indiana did not appeal from the judgment of the
District Court. We therefore are not called upon to decide whether
the rates now in force are so extortionate as to confiscate the
property of the consumers. The Company appealed from the District
Court seeking a higher valuation. The Circuit Court of Appeals
decided that the Company was entitled to a higher valuation.
As a reason for reversing and remanding this cause, the majority
opinion points to the fact that no interlocutory injunction has
been issued. I believe that the fact that no injunction was issued
after the Public Service Commission of Indiana, the master in the
federal court, and the District Court had all found that the rates
were not confiscatory, is but an added reason why this Court should
not agree to overturn that finding, and should reverse the cause.
It will be wholly impossible, in my judgment, for any trial court
to try this cause again free from the plain implication, in the
action of this Court, that the value of the Company's property
should be found to be approximately 25 percent greater than
$22,000,000. How can any trial court ignore the fact that the
Circuit Court of Appeals has indicated a strong belief that the
value should be raised 25 percent? How can any trial court escape
the conclusion that an injunction should
now be issued to
prevent the enforcement of the rates that have been in effect?
Page 302 U. S. 440
There is nothing strange or unusual about the decree of the
District Court fixing a value as of November 23, 1935, as well as
of April 1, 1933. Any other action by the court would have gone
directly in the teeth of the plain mandates of this Court in other
cases. Not only was the District Court compelled to attempt to find
the value as of 1933 and as of 1935, but, under the opinions of
this Court, it was necessary that it attempt to lift the veil of
the future, peer into its mysteries, and determine the value of the
Company's property for a reasonable time after 1935. Its action was
dictated by the command of this Court that "an honest and
intelligent forecast of probable future values, made upon a view of
all the relevant circumstances, is essential."
Missouri ex rel.
Southwestern Bell Telephone Co. v. Public Service Comm'n,
262 U. S. 276,
262 U. S. 288.
If this language was not sufficient as an imperative admonition for
the judge to become a prophet, there was the statement made by this
Court in connection with the appraisal of this particular Company's
property in
McCardle v. Indianapolis Water Co.,
272 U. S. 400,
272 U. S.
408-409, that:
"It must be determined whether the rates complained of are
yielding and will yield . . . 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."
(Italics added.) Surely it is not a ground for reversing the
cause now that the District Court has followed these instructions.
Is the majority overruling these cases? Must the District Court,
when the case is tried "anew," obey the former mandates "to
prophesy," or does the opinion of the majority mean it should not
prophesy? If the trial court does prophesy, and human fallibility
brings error into the prophecy, will this Court again, six years
hence, reverse and remand for another trial "anew"? I believe this
affirmance adds additional uncertainty to the existing chaos of
rules and formulas created by judicial pronouncement in the field
of rate
Page 302 U. S. 441
litigation. I further believe it to be wrong to send this case
back for another trial, because I believe the record affirmatively
shows that the consumers of water in Indianapolis are already
compelled to pay an unjustifiable price for their water on account
of previous judicial overvaluation of this property.
I believe the State of Indiana has the right to regulate the
price of water in Indianapolis free from interference by federal
courts. The courts did not deny this right to the states for the
first hundred years after the adoption of the Constitution.
[
Footnote 22] But, even
under the comparatively recent doctrine purporting to give federal
courts jurisdiction to invalidate rates fixed by a state, I am of
the opinion that the federal courts have no jurisdiction to proceed
in this cause. I base this belief on the record, which does not
show clearly that the stockholders of the Indianapolis Water
Company have ever made any substantial investment which could be
confiscated. I further believe that the evidence does not clearly
establish that the rates fixed by the Commission will fail to
provide an income amply adequate to pay all interest on the
Company's funded debt and provide far more than a 6 percent profit
on any actual value in excess of the borrowed capital remaining
unpaid. I therefore believe that this Court should order this cause
dismissed for want of jurisdiction, or that the judgment of the
Circuit Court of Appeals should be reversed and the opinion of the
District Court dismissing the Company's bill should be
affirmed.
[
Footnote 1]
McCardle v. Indianapolis Water Co., 272 U.
S. 400,
272 U. S.
408-409.
[
Footnote 2]
Los Angeles Gas & Elec. Corp. v. Railroad
Commission, 289 U. S. 287,
289 U. S.
305.
[
Footnote 3]
Chicago & G.T. Ry. Co. v. Wellman, 143 U.
S. 339.
[
Footnote 4]
Galveston Elec. Co. v. Galveston, 258 U.
S. 388,
258 U. S.
401.
[
Footnote 5]
San Diego Land Co. v. National City, 174 U.
S. 739,
174 U. S.
750.
[
Footnote 6]
Darnell v. Edwards, 244 U. S. 564,
244 U. S.
569.
[
Footnote 7]
See Knoxville v. Knoxville Water Co., 212 U. S.
1,
212 U. S. 16;
also McCardle v. Indianapolis Water Co., 272 U.
S. 400,
272 U. S.
420.
[
Footnote 8]
National Fire Ins. Co. v. Thompson, 281 U.
S. 331,
281 U. S.
336.
[
Footnote 9]
Munn v. Illinois, 94 U. S. 113,
94 U. S.
133.
[
Footnote 10]
Id., p.,
94 U. S. 134;
see Peik v. Chicago & N.W. Ry. Co., 94 U. S.
164,
94 U. S.
178.
[
Footnote 11]
Chicago, Milwaukee & St. Paul R. Co. v. Minnesota,
134 U. S. 418.
[
Footnote 12]
Id., Bradley, J., dissenting,
134 U. S.
461.
[
Footnote 13]
Compare:
". . . and the conclusion of the court below rested upon
that most unsatisfactory evidence, the testimony of expert
witnesses employed by the parties."
Knoxville v. Knoxville Water Co., 212 U. S.
1, at
212 U. S. 18.
"While the experts representing the opposing interests were
thoroughly competent and of high standing, the wide difference in
the results reached led the Commission to the 'irresistible
conclusion that each was not unmindful of his client's
interest.'"
Plymouth Electric Light Co. v. State, 81 N.H. 1, 4, 120
A. 689, 691.
"
To these perturbing tendencies, all operating to weaken,
the persuasive force of their (expert) opinions, there must be
added still another, that of interest or bias, conscious or
unconscious."
Dayton Power & L. Co. v. Public Utilities Comm'n,
292 U. S. 290, at
292 U. S.
299.
"
Skilled witnesses come with such a bias on their minds that
hardly any weight should be given to their evidence."
Appleton Water Works Co. v. Railroad Comm'n, 154 Wis.
121 at 154, 142 N.W. 476, 487.
[
Footnote 14]
Ohio Utilities Co. v. Public Utilities Comm'n,
267 U. S. 359,
267 U. S.
362.
[
Footnote 15]
See McCardle v. Indianapolis Water Co., supra.
[
Footnote 16]
The books of the Company indicate that the Company spent for
additions between 1881 and December 31, 1923, $8,112,399, but the
books also show that, on December 31, 1923, the outstanding
indebtedness of the Company on which it paid interest was
$8,231,000. During the same period, from 1881 to December 31, 1923,
the books showed available for dividends $8,337,232.74. Dividends
paid out were as follows:
Cash Dividends . . . . . . . . $ 4,585,533.50
Bond Dividends . . . . . . . . 3,000,000.00
Stock Dividends. . . . . . . . 4,500,000.00
--------------
Total Dividends paid between
1881 and December 31, 1923 $12,085,533.50
During the same period, the record shows that interest was paid
by the Company on the bonds issued to the stockholders as
dividends, and that interest amounted to $3,076,250.
It thus appears from the books that the stockholders received an
average of practically 38 percent profit on $500,000 from 1881 to
December 31, 1923.
[
Footnote 17]
See Covington & Lexington Turnpike Co. v. Sandford,
164 U. S. 578,
164 U. S. 587;
Chicago & G.T. Ry. Co. v. Wellman, supra, 143 U. S. 346.
[
Footnote 18]
Since the approval of a $19,000,000 valuation on this company's
property was made, dividends were paid as follows:
-------------------------------------------------
Rate paid
on inflated Rate paid
Year Amount $5,000,000 on possible
stock $500,000
valuation valuation
-------------------------------------------------
1924 500,000.00 10% 100%
1925
1926 600,000.00 12% 120%
1927 950,000.00 19% 190%
1928 1,000,000.00 20% 200%
1929 650,000.00 13% 130%
1930 1,225,000.00 24 1/2% 245%
1931 600,000.00 12% 120%
1932 375,000.00 7 1/2% 75%
-------------------------------------------------
"Surely, before the courts are called upon to adjudge an act of
the legislature fixing the maximum passenger rates for railroad
companies to be unconstitutional, on the ground that its
enforcement would prevent the stockholders from receiving any
dividends on their investments, or the bondholders any interest on
their loans, they should be fully advised as to what is done with
the receipts and earnings of the company; for, if so advised, it
might clearly appear that a prudent and honest management would,
within the rates prescribed, secure to the bondholders their
interest, and to the stockholders reasonable dividends."
(Italics added.)
Chicago & G.T. Ry. Co. v. Wellman,
supra, 143 U. S.
345.
[
Footnote 19]
The following illustrate the delays in rate litigation:
-------------------------------------------------------------------------
Bill Filed Decided Time
-------------------------------------------------------------------------
United Fuel Gas Co. v. Railroad
Comm'n, 278 U. S. 300 Dec.
1923 Jan.1929 5 years
United Fuel Gas Co. v. Public
Serv. Comm'n, 278 U. S. 322
April 1925 Jan.1929 3 yrs. 8 mos.
Ottinger v. Brooklyn Union Gas
Co., 272 U. S. 579 June
1923 Nov.1926 3 yrs. 5 mos.
Ottinger v. Kings County
Lighting Co., 272 U. S. 579 June
1923 Nov.1926 3 yrs. 5 mos.
Ottinger v. Consolidated Gas
Co., 272 U. S. 576 June
1923 Nov.1926 3 yrs. 5 mos.
Patterson v. Mobile Gas Co.,
271 U. S. 131
Aug.1922 April 1926 3 yrs. 8 mos.
McCardle v. Indianapolis Water
Co., 272 U. S. 400
Dec.1923 Nov.1926 2 yrs. 11 mos.
Average . . . . . . . . . . . . . . . . . . . . . . . . 3 yrs. 7
mos.
-------------------------------------------------------------------------
See also Brandeis, J., concurring,
St. Joseph Stock
Yards Co. v. United States, 298 U. S. 38 et
seq.
Lindheimer v. Illinois Bell Telephone Co., 292 U.
S. 151. Commission's order made 1923; cause last
appeared in this Court in 1933.
Ohio Bell Telephone Co. v. Public Utilities Comm'n,
301 U. S. 292.
This case started before the Commission in 1921. By 1931, the
Commission announced its tentative order. 1934 the Commission made
what purports to be a final valuation. April, 1937, this Court
returned the cause for further action.
[
Footnote 20]
Chicago, M. & St.P. R. Co. v. Tompkins,
176 U. S. 167.
[
Footnote 21]
For example, in the
McCardle case,
supra, the
highest estimate was three times as great as the lowest.
See Brandeis, J., dissenting,
Missouri ex rel.
Southwestern Bell Telephone Co. v. Public Service Comm'n, 262
U.S. at
262 U. S.
299.
[
Footnote 22]
Munn v. Illinois, supra.