It is not a question of discretion or comity for the federal
court to take jurisdiction of a case; it is the duty of that court
to take jurisdiction when properly appealed to, and it should not
be criticized for so doing even though the case be one of local
interest.
Cohens v.
Virginia, 6 Wheat. 264,
19 U. S. 404.
The right of a party plaintiff to choose the
Page 212 U. S. 20
federal court cannot be properly denied.
In re Metropolitan
Receivership, 208 U. S. 90,
208 U. S.
110.
Rates, when fixed by legislative authority for public service
corporations, should allow a fair return upon the reasonable value
of the property at the time it is being used, but the legislative
act will not be
Page 212 U. S. 21
declared invalid by the courts unless the rates are so
unreasonably low that their enforcement would amount to taking the
property for public use without compensation.
San Diego Land
and Town Co. Cases, 174 U. S. 739;
189 U. S. 189 U.S.
439.
Except in very clear cases, courts should not interfere with
state rate
Page 212 U. S. 22
legislation before the legislation goes into effect.
Knoxville v. Water Co., ante, p.
212 U. S. 1.
Value of the property employed being an essential element in
determining whether a rate is or is not confiscatory, and being
also largely a matter of opinion, where the determination of the
question depends upon such value, a court of equity should hesitate
to interfere by injunction to suspend the rate before it goes into
operation and a fair trial has been made.
Franchises of public service corporations are property, and
cannot be taken or used by others without compensation, and, where
a state has by legislative enactment permitted such corporations to
capitalize such franchises, their value at the time of such
capitalization should be included in the value of the property as
an element for fixing rates; but no increased value of such
franchises should be allowed.
Public service corporations such as gas companies are subject to
the legislative right to fix rates which permit not more than a
fair return on the property used.
Whether a rate yields such a fair return as not to be
confiscatory depends upon circumstances, locality, and risk, and no
particular rate can be established for all cases.
Under all the circumstances of this case, this Court concurs
with the court below that six per cent is a fair return on the
value of property employed in supplying gas in the City of New
York, and a rate yielding that return is not confiscatory.
In estimating value of franchises for the purpose of fixing
rates, it is immaterial that the corporation is taxed on a greater
value than that allowed if it charges its taxes as operating
expenses in determining net income.
Where a public service corporation has a monopoly, such as of
supplying gas in a large city, "goodwill" cannot be considered as
an element of value of the property employed.
For purpose of fixing rates, the value of property employed
should be determined as of the time when the inquiry is made, and,
as a general rule, the corporation is entitled to the benefit of
increased value since acquisition.
Page 212 U. S. 23
A provision in a state statute requiring a public service
corporation to perform its service in such a manner that its entire
plant would have to be rebuilt at a cost on which no return could
be obtained at the rate fixed deprives the company of its ability
to secure such return, and is unconstitutional and void.
Ex parte Young, 209 U. S. 123,
followed as to the unconstitutionality of provisions in a state
statute for penalties for violations so enormous as to be
overwhelming.
Provisions in a gas rate bill for rate, pressure, and penalties
for violation may be, as held in this case, separable, and the
unconstitutionality of the provisions as to pressure and penalties
will not affect the provisions as to rates.
Provision in a gas rate act establishing one rate for the
municipality and another for individual consumers is not an
unreasonable classification, and does not render the act
unconstitutional under the equal protection clause of the
Fourteenth Amendment.
Where none of the different classes of consumers complain of
different rates, the corporation cannot complain of such
differences provided the total receipts are sufficient to yield an
adequate return.
Where, as in this case, in an action brought before the rate
takes effect, complainant fails to sustain the burden of clearly
showing that a rate act is confiscatory, the bill should be
dismissed without prejudice to right of the complainant to bring
another action after the rate goes into effect if it then proves to
be confiscatory.
So held in regard to the New York Eighty-Cent Gas Law.
157 F. 849 reversed.
The appellee, complainant below, filed its bill May 1, 1906, in
the United States Circuit Court for the Southern District of New
York against the City of New York, the Attorney General of the
State, the District Attorney of New York County and the Gas
Commission of the State to enjoin the enforcement of certain acts
of the legislature of the state, as well as of an order made by the
Gas Commission, February 23, 1906, to take effect May 1,1906,
relative to rates for gas in New York City. Since the commencement
of the suit, the Gas Commission has been abolished and the Public
Service Commission has been created by the legislature in its
stead. The official term of Attorney General Mayer has also
expired, and Attorney General Jackson, his successor, has been
substituted in his place.
Page 212 U. S. 24
The ground for the relief asked for in the bill was the alleged
unconstitutionality of the acts and the order because the rates
fixed were so low as to be confiscatory. Upon filing the bill, a
preliminary injunction was granted (146 F. 150) and, after issue
was joined, the case was referred to one of the standing masters of
the court to take testimony, in conformity to the practice
indicated in
Railroad v. Tompkins, 176 U.
S. 167,
176 U. S.
179.
A hearing was had before the master, who reported in favor of
the complainant. The case then came before the circuit court, and,
after argument, a final decree was entered restraining defendants
from enforcing the provisions of the acts and the order relating to
rates or penalties. 157 F. 849. These various defendants, except
the district attorney, have taken separate appeals directly to this
Court from the decree so entered. The acts which are declared void
as unconstitutional are chapter 736 of the Laws of 1905, which
limits the price of gas sold to the City of New York to a sum not
to exceed 75 cents per thousand cubic feet. The act also requires
that the gas sold shall have a specified illuminating power, and a
certain pressure at all distances from the place of manufacture.
Penalties are attached to a violation of the act. The other act is
chapter 125 of the Laws of 1906, limiting the prices of gas in the
Boroughs of Manhattan and the Bronx, to other consumers than the
City of New York, to 80 cents per thousand cubic feet, with like
penalties as in the act of 1905, and with the same provisions as to
illuminating power and the pressure in the service mains. The order
which was declared invalid was one made by the Gas Commission
created under and by virtue of chapter 737 of the Laws of 1905, the
order providing that the price of gas in the city should be not
more than 80 cents to consumers other than the City of New York.
The order had the same provisions as to illuminating power and
pressure as the acts above mentioned. The master and the court
below found that the 80-cent rate was so low as to amount to
confiscation, and hence the acts and the order were invalid as in
violation of the Federal Constitution.
Page 212 U. S. 39
MR. JUSTICE PECKHAM, after making the foregoing statement,
delivered the opinion of the Court.
At the outset, it seems to us proper to notice the views
regarding the action of the court below, which have been stated
Page 212 U. S. 40
by counsel for the appellants, the Public Service Commission, in
their brief in this Court. They assume to criticize that court for
taking jurisdiction of this case, as precipitate, as if it were a
question of discretion or comity, whether or not that court should
have heard the case. On the contrary, there was no discretion or
comity about it. When a federal court is properly appealed to in a
case over which it has by law jurisdiction, it is its duty to take
such jurisdiction (
Cohens v.
Virginia, 6 Wheat. 264,
19 U. S. 404),
and, in taking it, that court cannot be truthfully spoken of as
precipitate in its conduct. That the case may be one of local
interest only is entirely immaterial so long as the parties are
citizens of different states or a question is involved which, by
law, brings the case within the jurisdiction of a federal court.
The right of a party plaintiff to choose a federal court where
there is a choice cannot be properly denied.
In re Metropolitan
R. Receivership, 208 U. S. 90,
208 U. S. 110;
Prentis v. Atlantic Coast Line R. Co., 211 U.
S. 210. In the latter case it was said that a plaintiff
could not be forbidden to try the facts upon which his right to
relief is based before a court of his own choice, if otherwise
competent. It is true an application for an injunction was denied
in that case because the plaintiff should, in our opinion, have
taken the appeal allowed him by the law of Virginia while the rate
of fare in litigation was still at the legislative stage, so as to
make it absolutely certain that the officials of the state would
try to establish and enforce an unconstitutional rule.
The case before us is not like that. It involves the
constitutionality, with reference to the federal Constitution, of
two acts of the Legislature of New York, and it is one over which
the circuit court undoubtedly had jurisdiction under the act of
Congress, and its action in taking and hearing the case cannot be
the subject of proper criticism.
An examination of the record herein, with reference to the
questions involved in the merits, shows that the act under which
the gas commission was appointed was, subsequently to the
commencement and trial of this suit, declared, on grounds
Page 212 U. S. 41
not here material, to be unconstitutional by the Court of
Appeals of New York. 191 N.Y. 123. The order made by the Commission
must therefore be regarded as invalid. It is not important in this
case, because the act of the legislature of 1906 makes the same
provision as to the price of gas to consumers other than the city
that the order does. We have, as remaining to be considered, the
above mentioned two acts of the legislature.
The question arising is as to the validity of the acts limiting
the rates for gas to the prices therein stated. The rule by which
to determine the question is pretty well established in this Court.
The rates must be plainly unreasonable to the extent that their
enforcement would be equivalent to the taking of property for
public use without such compensation as, under the circumstances,
it just both to the owner and the public. There must be a fair
return upon the reasonable value of the property at the time it is
being used for the public.
San Diego Land & Town Company v.
National City, 174 U. S. 739,
174 U. S. 757;
Same v. Jasper, 189 U. S. 439,
189 U. S.
442.
Many of the cases are cited in
Knoxville v. Knoxville Water
Co., just decided,
ante, p.
212 U. S. 1. The
case must be a clear one before the courts ought to be asked to
interfere with state legislation upon the subject of rates,
especially before there has been any actual experience of the
practical result of such rates. In this case, the rates have not
been enforced as yet, because the bill herein was filed, and an
injunction obtained restraining their enforcement, before they came
into actual operation.
In order to determine the rate of return upon the reasonable
value of the property at the time it is being used for the public,
it, of course, becomes necessary to ascertain what that value is. A
very great amount of evidence was taken before the master upon that
subject, which is included in five large volumes of the record.
Valuations by expert witnesses were given as to the value of the
real estate owned by the complainant, and as to the value of the
mains, service pipes, plants, meters, and miscellaneous personal
property.
Page 212 U. S. 42
The value of real estate and plant is, to a considerable extent,
matter of opinion, and the same may be said of personal estate when
not based upon the actual cost of material and construction.
Deterioration of the value of the plant, mains, and pipes is also,
to some extent, based upon opinion. All these matters make
questions of value somewhat uncertain, while added to this is an
alleged prospective loss of income from a reduced rate -- a matter
also of much uncertainty, depending upon the extent of the
reduction and the probable increased consumption -- and we have a
problem as to the character of a rate which is difficult to answer
without a practical test from actual operation of the rate. Of
course, there may be cases where the rate is so low, upon any
reasonable basis of valuation, that there can be no just doubt as
to its confiscatory nature, and in that event there should be no
hesitation in so deciding and in enjoining its enforcement without
waiting for the damage which must inevitably accompany the
operation of the business under the objectionable rate. But where
the rate complained of shows in any event a very narrow line of
division between possible confiscation and proper regulation, as
based upon the value of the property found by the court below, and
the division depends upon opinions as to value, which differ
considerably among the witnesses, and also upon the results in the
future of operating under the rate objected to, so that the
material fact of value is left in much doubt, a court of equity
ought not to interfere by injunction before a fair trial has been
made of continuing the business under that rate, and thus
eliminating as far as is possible the doubt arising from opinions,
as opposed to facts.
A short history of the complainant, as to its incorporation and
its capital, and the method by which the value of its franchises
was arrived at, will render the further examination of the case
more intelligible.
Prior to 1884, there were seven gaslight companies in New York
City, each operated under separate charters, granted at different
times between the years 1823 and 1865 or 1871. They
Page 212 U. S. 43
each had the right to use the streets of certain portions of the
city for the purpose of laying their mains and service pipes in
order to furnish gas to the city and the citizens. Not one of the
companies had ever been called upon to pay a penny for such right,
but the grant to each was, in that aspect, a gratuity. It was not,
at the time of granting franchises such as these, the custom to pay
for them.
In 1884, by chapter 367 of the laws of that year, authority to
consolidate manufacturing corporations was granted upon conditions
mentioned in the act. The directors of the corporations proposing
to consolidate were to make an agreement for consolidation,
embracing, among other things, the amount of capital and the number
of shares of stock into which it should be divided, the capital not
to be in amount more "than the fair aggregate value of the
property, franchises, and rights of the several companies to be
consolidated." The agreement was not to be valid until submitted to
the stockholders of each of the companies and approved by two
thirds of each. The constituent companies, which were afterwards
consolidated under their agreement and pursuant to the act
mentioned, were six in number, the seventh, the Mutual Company,
withdrawing. The companies agreed upon the valuation of their
property, which was to be paid for in the stock of the consolidated
company, and the original stock held by the stockholders of each
company was surrendered to the consolidated company. The value of
the franchise of all the companies was set at the figure of
$7,781,000. The court below said that the master reported there was
little direct evidence before him as to the value of the
franchises, to which the court added that, if the master, by direct
evidence, meant testimony of the same kind regarding their value as
had been offered regarding every item of tangible property, there
was none at all.
The court further stated that it does not appear in the evidence
how the valuation of the franchises was measured, or why the
figures selected were chosen, but that it was true that, when
complainant was organized, in 1884, under the consolidation
Page 212 U. S. 44
statute, which, in terms, permitted it to acquire the property
and franchises of the other companies, it issued stock of the par
value of $7,781,000, representing the franchises it then acquired
and nothing else, and that the stock was held by purchasers who, I
am compelled to think, had a right to rely upon legal protection
for legally issued stock. It is not, of course, contended there was
special stock issued for this particular item, but it was included
in the total sum for which the consolidated company issued its
stock, and, upon its receipt, the stockholders in the various
companies surrendered their stock in those companies. The result
was that the amount of the stock issued by the consolidated company
was increased by $7,781,000, representing a value of franchises
which was agreed upon by the stockholders in the companies, and
which had never cost any of them a single penny.
It cannot be disputed that franchises of this nature are
property, and cannot be taken or used by others without
compensation.
Monogahela Co. v. United States,
148 U. S. 312;
People v. O'Brien, 111 N.Y. 1, and cases cited. The
important question is always one of value. Taking their value in
this case as arrived at by agreement of their owners at the time of
the consolidation, that value has been increased by the finding of
the court below to the sum of $12,000,000 at the time of the
commencement of this suit. The trial court said:
"If, however, complainant's franchises were worth $7,781,000 in
1884, and its tangible property at the same time, was appraised (as
appears in evidence) at $30,000,000 (in round figures), then, since
complainant's business (in sales volume) has, in twenty-three
years, almost quadrupled, and its tangible assets grown to
$47,000,000, it appears to me that a fair method of fixing value of
the franchises in 1905 is to assume the same growth in value for
the franchise as is demonstrated by the evidence in the case of
tangible property. If, therefore, the franchise valuation of 1884
was proportioned to personalty and realty of $30,000,000, a
franchise valuation proportioned to $47,000,000 in 1905 would be
over $12,000,000. This, I think, a logical result
Page 212 U. S. 45
from the assumption I am compelled to start with --
i.e., that franchises have a separable and independent
value. But there is, however, no method of valuing franchises
except by a consideration of earnings. Earnings must be
proportioned to assets, and both kinds of assets, tangible and
intangible, must stand upon the same plane of valuation. Having,
therefore, a measure of growth of tangible assets from 1884 to
1905, the franchise assets must be assumed to have grown in the
same proportion. I find that the value of complainant's franchises
at the date of inquiry was not less than $12,000,000, making a
total valuation of $59,000,000, upon which the probable return is
$3,030,000, or very considerably less than 6 percent."
The judge stated his own views, as opposed to including these
franchises in the property upon the value of which a return is to
be calculated in fixing the amount of rates, but held that he was
bound by decided cases to hold against his personal views.
We are not prepared to hold with the court below as to the
increased value which it attributes to the franchises. It is not
only too much a matter of pure speculation, but we think it is also
opposed to the principle upon which such valuation should be made.
This corporation is one of that class which is subject to
regulation by the legislature in the matter of rates, provided they
are not made so low as to be confiscatory. The franchises granted
the various companies and held by complainant consisted in the
right to open the streets of the city and lay down mains and use
them to supply gas, subject to the legislative right to so regulate
the price for the gas as to permit not more than a fair return
(regard being had to the risk of the business) upon the reasonable
value of the property at the time it is being used for the
public.
The evidence shows that, from their creation down to the
consolidation in 1884, these companies had been free from
legislative regulation upon the amount of the rates to be charged
for gas. The had been most prosperous and had divided very large
earnings in the shape of dividends to their stockholders --
dividends which are characterized by the Senate committee,
Page 212 U. S. 46
appointed in 1885 to investigate the fact surrounding the
consolidation, as enormous. The report of that committee shows that
several of the companies had averaged, from their creation,
dividends over 16 percent, and the six companies in the year 1884
paid a dividend upon capital which had been increased by earnings,
as in the case of the Manhattan and the New York, of 18 percent;
and, had it been upon the money actually paid in, it would have
been nearly 25 percent
The committee also said in the same report that these
"franchises were in force November 10, 1884, the time of the
consolidation, and the money invested in them was earning the same
enormous dividends. So far as the evidence shows, there was nothing
in the condition of affairs on the 10th of November to indicate
that these franchises would not be as valuable for the next twenty
years as they had been in the past. There were gas companies enough
in the city with a capacity capable of supplying the demands for
the next twenty years. A law was on our statute books that
virtually prohibited the laying of any more gas pipes in the
streets. The gas companies had an agreement among themselves,
fixing the price of gas at a figure that paid these dividends. The
people were paying this price, as they had in the past, without
objection or protest. This price may have been too high, and the
dividends were excessive, but they were not illegal, and the
valuation of the franchises computed upon these dividends and that
state of facts cannot be called a violation of a law that expressly
authorized it to be done, unless such valuation was too high."
The committee, upon these facts, were of opinion that the
valuation of $7,781,000 for the franchises was not more than their
fair aggregate value.
Assuming, as the committee did, that the company would be
permitted to charge the same prices in the future which in the past
had resulted in these "enormous" or "excessive" dividends, it need
not be matter of surprise that a franchise by
Page 212 U. S. 47
means of which such dividends had been possible was not regarded
as overvalued at the sum stated in 1884.
We think that, under the above facts, the courts ought to accept
the valuation of the franchises fixed and agreed upon under the act
of 1884 as conclusive at that time. The valuation was provided for
in the act, which was followed by the companies, and the agreement
regarding it has been always recognized as valid, and the stock has
been largely dealt in for more than twenty years past on the basis
of the validity of the valuation and of the stock issued by the
company.
But, although the state ought, for these reasons, to be bound to
recognize the value agreed upon in 1884 as part of the property
upon which a reasonable return can be demanded, we do not think an
increase in that valuation ought to be allowed upon the theory
suggested by the court below. Because the amount of gas supplied
has increased to the extent stated, and the other and tangible
property of the corporations has increased so largely in value, is
not, as it seems to us, any reason for attributing a like
proportional increase in the value of the franchise. Real estate
may have increased in value very largely, as also the personal
property, without any necessary increase in the value of the
franchise. Its past value was founded upon the opportunity of
obtaining these enormous and excessive returns upon the property of
the company, without legislative interference with the price for
the supply of gas; but that immunity for the future was, of course,
uncertain, and the moment it ceased, and the legislature reduced
the earnings to a reasonable sum, the great value of the franchise
would be at once and unfavorably affected, but how much so it is
not possible for us now to see. The value would most certainly not
increase. The question of the regulation of rates did, from time to
time thereafter, arise in the legislature, and finally culminated
in these acts which were in existence when the court below found
this increased value of the franchises. We cannot, in any view of
the case, concur in that finding.
Page 212 U. S. 48
This increase in value did, however, form part of the sum upon
which the court below held the complainant was entitled to a
return. That court found the value of the tangible assets actually
employed at the time of the commencement of this suit in the
business of supplying gas by the complainant to be $47,831,435, to
which it added the $12,000,000 as the value of the franchises as
found by it, making the total of $59,831,435, upon which it held
that the company was entitled to a return of 6 percent, being
$3,589,886.10. It also found its total net income for the year 1905
amounted to $5,881,192.45, almost 10 percent upon the sum above
named. Altering the finding of the court so far only as to place
the value of the franchises at the time agreed upon in 1884,
$7,781,000, the total value upon that basis of the property
employed by the company would be $55,612,435, upon which 6 percent
would be $3,336,746.10, while the sum estimated as the return on
80-cent gas would have been $3,024,592.14, which is nearly 5 1/2
percent on the above total of $55,612,435.
What has been said herein regarding the value of the franchises
in this case has been necessarily founded upon its own peculiar
facts, and the decision thereon can form no precedent in regard to
the valuation of franchises generally, where the facts are not
similar to those in the case before us. We simply accept the sum
named as the value under the circumstances stated.
There is no particular rate of compensation which must, in all
cases and in all parts of the country, be regarded as sufficient
for capital invested in business enterprises. Such compensation
must depend greatly upon circumstances and locality; among other
things, the amount of risk in the business is a most important
factor, as well as the locality where the business is conducted,
and the rate expected and usually realized there upon investments
of a somewhat similar nature with regard to the risk attending
them. There may be other matters which, in some cases, might also
be properly taken into account in determining the rate which an
investor might properly expect
Page 212 U. S. 49
or hope to receive and which he would be entitled to without
legislative interference. The less risk, the less right to any
unusual returns upon the investments. One who invests his money in
a business of a somewhat hazardous character is very properly held
to have the right to a larger return, without legislative
interference, than can be obtained from an investment in government
bonds or other perfectly safe security. The man that invested in
gas stock in 1823 had a right to look for and obtain, if possible,
a much greater rate upon his investment than he who invested in
such property in the City of New York years after the risk and
danger involved had been almost entirely eliminated.
In an investment in a gas company such as complainant's, the
risk is reduced almost to a minimum. It is a corporation which, in
fact as the court below remarks, monopolizes the gas service of the
largest city in America, and is secure against competition under
the circumstances in which it is placed, because it is a
proposition almost unthinkable that the City of New York would, for
purposes of making competition, permit the streets of the city to
be again torn up in order to allow the mains of another company to
be laid all through them to supply gas which the present company
can adequately supply. And so far as it is given us to look into
the future, it seems as certain as anything of such a nature can be
that the demand for gas will increase, and at the reduced price,
increase to a considerable extent. An interest in such a business
is as near a safe and secure investment as can be imagined with
regard to any private manufacturing business, although it is
recognized at the same time that there is a possible element of
risk even in such a business. The court below regarded it as the
most favorably situated gas business in America, and added that all
gas business is inherently subject to many of the vicissitudes of
manufacturing. Under the circumstances, the court held that a rate
which would permit a return of 6 percent would be enough to avoid
the charge of confiscation, and for the reason that a return of
such an amount was the return ordinarily
Page 212 U. S. 50
sought and obtained on investments of that degree of safety in
the City of New York.
Taking all facts into consideration, we concur with the court
below on this question, and think complainant is entitled to 6
percent on the fair value of its property devoted to the public
use. But, assuming that the company is entitled to 6 percent upon
the value of its property actually used for the public, the total
fixed by the court below is, as we have seen, much too large. We
must first strike out the increased value of the franchises
asserted by the court over the amount agree upon in 1884, when the
company was consolidated. We also find that the total value of the
tangible property is made up of several items, two of which are
--
Real Estate . . . . . . $11,985,435
Plants. . . . . . . . . 15,000,000
Both depend largely upon the opinions of expert witnesses as to
the value of that kind of property. Where a large amount of the
total value of a mass of different properties consists in the value
of real estate, which is only ascertained by the varying opinions
of expert witnesses, and where the opinions of the plaintiffs'
witnesses differ quite radically from those of the defendants, it
is apparent that the total value must necessarily be more or less
in doubt. It, in other words, becomes matter of speculation or
conjecture to a great extent. It may be, as already suggested, that
in many cases, the rates objected to might be so low that there
could be no reasonable doubt of their inadequacy upon any fair
estimate of the value of the property. In such event, the
enforcement of the rates should be enjoined even in a case where
the value of the property depends upon the value to be assigned to
real estate by the evidence of experts. But there may be other
cases where the evidence as to the probable result of the rates in
controversy would show they were so nearly adequate that nothing
but a practical test could satisfy the doubt as to their
sufficiency.
In this case, a slight reduction in the estimated value of the
real estate, plants, and mains, as given by the witnesses for
Page 212 U. S. 51
complainant, would give a 6 percent return upon the total value
of the property, as above stated. And again, increased consumption
at the lower rate might result in increased earnings, as the cost
of furnishing the gas would not increase in proportion to the
increased amount of gas furnished.
The elevated railroads in New York, when first built, charged
ten cents for each passenger; but, when the rate was reduced to
five cents, it is common knowledge that their receipts were not cut
in two, but that, from increased patronage, the earnings increased
from year to year, and soon surpassed the highest sum ever received
upon the ten-cent rate.
Of course, there is always a point below which a rate could not
be reduced, and at the same time, permit the proper return on the
value of the property; but it is equally true that a reduction in
rates will not always reduce the net earnings, but, on the
contrary, may increase them. The question of how much an increased
consumption under a less rate will increase the earnings of
complainant, if at all at a cost not proportioned to the former
cost, can be answered only by a practical test. In such a case as
this, where the other data upon which the computation of the rate
of return must be based, are from the evidence, so uncertain, and
where the margin between possible confiscation and valid regulation
is so narrow, we cannot say there is no fair or just doubt about
the truth of the allegation that the rates are insufficient.
The complainant also contends that the state, having taxed it
upon its franchises, cannot be heard to deny their existence or
their value as taxed.
The fact that the state has taxed the company upon its
franchises at a greater value than is awarded them here is not
material. Those taxes, even if founded upon an erroneous valuation,
were properly treated by the company as part of its operating
expenses, to be paid out of its earnings before the net amount
could be arrived at applicable to dividends, and, if such latter
sums were not sufficient to permit the proper return on the
property used by the company for the public,
Page 212 U. S. 52
then the rate would be inadequate. The future assessment of the
value of the franchises, it is presumed, will be much lessened if
it is seen that the great profits upon which that value was based
are largely reduced by legislative action. In that way, the
consumer will be benefited by paying a reduced sum (although
indirectly) for taxes.
We are also of opinion that it is not a case for a valuation of
"goodwill." The master combined the franchise value with that of
goodwill, and estimated the total value at $20,000,000.
The complainant has a monopoly in fact, and a consumer must take
gas from it or go without. He will resort to the "old stand,"
because he cannot get gas anywhere else. The court below excluded
that item, and we concur in that action.
And we concur with the court below in holding that the value of
the property is to be determined as of the time when the inquiry is
made regarding the rates. If the property which legally enters into
the consideration of the question of rates has increased in value
since it was acquired, the company is entitled to the benefit of
such increase. This is, at any rate, the general rule. We do not
say there may not possibly be an exception to it where the property
may have increased so enormously in value as to render a rate
permitting a reasonable return upon such increased value unjust to
the public. How such facts should be treated is not a question now
before us, as this case does not present it. We refer to the matter
only for the purpose of stating that the decision herein does not
prevent an inquiry into the question when, if ever, it should be
necessarily presented.
The matter of the increased cost of the gas resulting from the
provisions of the acts as to making the gas equal to 22 candlepower
is also alleged as a reason for in adequacy of rate.
It appears that the average candlepower actually produced in the
first six months of the year 1905 was 22, while but 20 candlepower
was exacted by law, and, for the last six months of that year,
while 22 candlepower was exacted, the average
Page 212 U. S. 53
amount was 24.19. This expense was included in the operating
expense of that year, which resulted in the net earnings above
mentioned while the company was complying with the requirements of
the act in this particular.
It is unnecessary, therefore, to further inquire as to the
additional expense caused by this requirement.
Again, it has been asserted that the laws are unconstitutional
because of the provision as to pressure, and also by reason of the
penalties which a violation of the acts may render a corporation
liable to.
The acts provide that the pressure of the gas in the service
mains at any distance from the place of manufacture shall not be
less than one inch nor more than two and a half inches.
The evidence shows that, to put a pressure such as is demanded
by the acts upon the mains and other service pipes in their present
condition would be to run a great risk of explosion and consequent
disaster. Before compliance with this provision would be safe, the
mains and other pipes would have to be strengthened throughout
their whole extent, and at an expenditure of many millions of
dollars, from which no return could be obtained at the rates
provided in the acts. This would take from the complainant the
ability to secure the return to which it is entitled upon its
property, used for supplying gas, and the provision as to the
amount of pressure is therefore void. This particular duty imposed
by the acts is, however, clearly separable from the enactments as
to rates, and we have no doubt that the remainder of the statute
would have been enacted, even with that provision omitted.
The obligation would remain upon the company to have a pressure
sufficient to insure a light of 22 candlepower, as provided in the
acts.
We are of the same opinion as to the penalties provided for a
violation of the acts. They are not a necessary or inseparable part
of the acts without which they would not have been passed. If these
provisions as to penalties have been properly construed by the
court below, they are undoubtedly void
Page 212 U. S. 54
within the principle decided in
Ex Parte Young,
209 U. S. 123, and
cases there cited, because so enormous and overwhelming in their
amount.
When the objectionable part of a statute is eliminated, if the
balance is valid and capable of being carried our, and if the court
can conclude it would have been enacted if that portion which is
illegal had been omitted, the remainder of the statute thus treated
is good.
Reagan v. Trust Co., 154 U.
S. 362,
154 U. S. 395;
Berea College v. Kentucky, 211 U. S.
45,
211 U. S. 54.
This is a familiar principle.
Lastly, it is objected that there is an illegal discrimination
as between the city and the consumers individually. We see no
discrimination which is illegal or for which good reasons could not
be given. But neither the city nor the consumers are finding any
fault with it, and the only interest of the complainant in the
question is to find out whether, by the reduced price to the city,
the complainant is, upon the whole, unable to realize a return
sufficient to comply with what it has the right to demand. What we
have already said applies to the facts now in question.
We cannot see, from the whole evidence, that the price fixed for
gas supplied to the city by wholesale, so to speak, would so reduce
the profits from the total of the gas supplied as to thereby render
such total profits insufficient as a return upon the property used
by the complainant. So long as the total is enough to furnish such
return, it is not important that, with relation to some customers,
the price is not enough.
Minneapolis &c. v. Minnesota,
186 U. S. 257;
Atlantic Coast Line v. North Carolina Commission,
206 U. S. 1.
Upon a careful consideration of the case before us, we are of
opinion that the complainant has failed to sustain the burden cast
upon it of showing beyond any just or fair doubt that the acts of
the Legislature of the State of New York are in fact
confiscatory.
It may possibly be, however, that a practical experience of the
effect of the acts by actual operation under them might
Page 212 U. S. 55
prevent the complainant from obtaining a fair return, as already
described, and, in that event, complainant ought to have the
opportunity of again presenting its case to the court. To that end,
we reverse the decree with directions to dismiss the bill without
prejudice, and
It is so ordered.
* On January 4, 1909, MR. JUSTICE PECKHAM made the following
announcement:
First. At the time of the consolidation, the value of the
franchise of the constituent companies was fixed by them at
$7,781,000 and that amount formed part of the capital of the
complainant for which it issued stock. The consolidation was
effected pursuant to the state statute, and the state has never
questioned the validity or fairness of the valuation. Since the
consolidation, the stock so issued has been dealt in up to the
present time as valid stock of the consolidated company,
capitalized pursuant to the statute at not more than the fair
aggregate value of the property, franchises, and rights of its
constituent companies. The state should not now be heard to
question the value of the franchises at the time of the
consolidation. The method of arriving at the value of these kinds
of franchises, and how they should generally be tested in the
fixing of rates, are questions not now before the Court, and are
left undecided. The case before the Court is decided upon its own
peculiar facts.
Second. The estimated increase in the value of these franchises
as made by the trial court at the time of the commencement of this
suit is only an estimate, and is not based upon evidence sufficient
to warrant the finding of any increase whatever over the amount
agreed upon at the consolidation.
Third. The evidence leaves it is doubt whether the value of the
property used by the company in its business is as great as found
by the trial court after reducing the value of the franchises to
the sum agreed upon at consolidation.
Fourth. But taking the value as found by the court, after
reducing the value of the franchises, the result gives a return of
almost 5 1/2 percent. A reduction in the value of the real estate,
plants, etc., of a small amount only would bring the return to, if
not more than, 6 percent. A possible increased consumption of gas
would probably increase the earnings of the company without a
corresponding increase of cost. Under all the circumstances, the
complainant has failed to make out its case with that degree of
clearness necessary to warrant interference of a court of equity
before an actual and
bona fide test has been made under
the practical operation of supplying gas at the rates mentioned in
the statutes.
Fifth. There is no rule as to any particular rate which any
corporation subject to legislative control in the matter has a
right to obtain without legislative interference. It depends upon
circumstances and locality. In this particular case, with reference
to the risk attending the business and locality where it is carried
on, the complainant is entitled to a return, if it is possible, of
6 per cent upon the fair value of its property actually used in its
business of supplying gas.
Sixth. There is no discrimination between the individual
consumer and the city, by fixing the price of gas for the city at
five cents per thousand cubic feet less than is permitted in the
case of individual consumer, so far at least as the complainant is
concerned. If the amount obtained from the total gas sold to the
city and the individual is enough to secure the requisite return
upon the property, it is all the complainant can require, and the
question of discrimination between city and individual is one in
which the complainant can have no interest.
Seventh. The rate proposed must be with reference to the value
of the property at the time when the rate takes effect. The company
is entitled to the benefit of any increase in value at that time.
This at least is the general rule, and if there be any exception to
the rule, this case does not come within it.
Eighth. Any increased expense arising from the increased
candlepower of the light demanded by the statutes was included
substantially in the expenses of the year (1905) with reference to
which the inquiry was made.
Ninth. The provision in the acts requiring a certain pressure is
unconstitutional. The proof unquestionably shows great possible, if
not probable, danger of explosion in the mains or other pipes if
the pressure demanded were applied to them as they now are. To
eliminate such danger would require strengthening all the mains and
other pipes, which would involve an expenditure of many millions of
dollars upon which no return could be obtained at the rates
prescribed by the acts. The provision can be separated, however,
from the rest of the statute, and the balance thereof made valid.
The pressure must be sufficient to produce a light of the
candlepower mentioned in the acts.
Tenth. If the court below is right in its construction of the
penalties, as to their amount, etc., such penalties are void, but
are separable from the rest of the acts and the balance can be
effectually carried out.
Eleventh. This is not a case for the valuation of goodwill. The
complainant has in fact a substantial monopoly of the gas business
in the City of New York and those who wish to use gas must take it
from complainant. In this case, as there is no possibility of
competition, there should be no allowance for goodwill.
Twelfth. As it may possibly be that a practical experience of
the effect of the acts by actual operation under them might prevent
the complainant from obtaining a fair and just return upon its
property used in its business of supplying gas, the complainant, in
that event, ought to have the opportunity of again presenting its
case to the court. Therefore the decree is reversed with directions
to dismiss the bill without prejudice.