1. In valuing the physical properties of a public utility
corporation as a basis for fixing rates, the present cost of
reproduction, less depreciation, is an important element, but not
the only element, to be considered. P.
262 U. S. 629.
Southwestern Bell Telephone Co. v. Public Service Commission,
ante, 262 U. S. 276,
distinguished.
2. The value of a gas company's property for ratemaking purposes
does not include the worth of its franchise to use the city
streets, amounting to a perpetual permit but not to a monopoly. P.
262 U. S.
632.
3. Nor may past losses due to insufficiency of previous rates be
capitalized as part of the property on which the fair return is to
be based.
Id.
4. In such inquiries, the federal corporate income tax is to be
treated as an operating charge, to be deducted in arriving at the
probable net income. P.
262 U. S.
633.
5. Taking into consideration the exemption of dividends from the
normal federal income tax payable by stockholders, a rate fixed for
a gas company which allows it a return of 7 1/4%
held not
confiscatory.
Id.
6. A decree refusing an interlocutory injunction against
enforcement of a rate challenged by a public utility corporation as
confiscatory should be affirmed in the absence of any error by the
court below other than possible error in prophecy or of judgment in
passing upon the evidence, and when the evidence does not compel a
conviction that the rate will prove inadequate. P.
262 U. S.
634.
278 F. 242 affirmed.
Appeal from a decree of the district court refusing an
interlocutory injunction in a suit to enjoin enforcement of a gas
rate fixed by the appellee commission.
Page 262 U. S. 628
MR. JUSTICE BRANDEIS delivered the opinion of the Court.
The gas supply of Atlanta is furnished by the Georgia Railway
& Power Company. Authority to fix public utility rates is
vested by law in the Railroad Commission. On September 20, 1921,
the Commission called upon the Georgia Company to show cause why
the then maximum rate, $1.65 per 1,000 cubic feet, should not be
reduced, and hearings were duly had. The company insisted that,
under the proposed rate, the net income would be less than 3
percent on what it claimed to be the fair value of the property.
The Commission concluded that the net income under the proposed
rate would be about 8 percent on the value found by it. This
difference in their views as to the percentage of probable return
arose mainly from their difference as to the value of the property.
The
Page 262 U. S. 629
company claimed that it was at least $9,500,000. The Commission
found that it was $5,250,000. On December 30, 1921, it ordered that
the price of gas be reduced to $1.55.
The Georgia Company and the Atlanta Gaslight Company, its
lessor, then brought in the Federal Court for the Northern District
of Georgia this suit to enjoin enforcement of the order, claiming
that the rate prescribed is confiscatory. The case was heard upon
application for an interlocutory injunction by three judges under §
266 of the Judicial Code. The court did not approve in all respects
the views expressed by the Commission, but it found that, "even
were there considerable error in fixing values by the Commission,
the rate would not appear to be clearly confiscatory," and that
enforcement of the order ought not be enjoined until the reduced
rate had been tried. It therefore refused the interlocutory
injunction, and the case is here on appeal under § 238 of the
Judicial Code.
First. The objections mainly urged relate to the rate
base, and one of them is of fundamental importance. The companies
assert that the rule to be applied in valuing the physical property
of a utility is reproduction cost at the time of the inquiry less
depreciation. The 1921 construction costs were about 70 percent
higher than those of 1914 and earlier dates, when most of the plant
was installed. So much of it as was in existence January 1, 1914,
was valued at an amount which was substantially its actual cost or
its reproduction cost as of that date. The companies claim that it
should have been valued at its replacement cost in November, 1921,
the time of the rate inquiry, and that the great increase in
construction costs was ignored in determining the rate base.
The case is unlike
Missouri ex rel. Southwestern Bell
Telephone Co. v. Public Service Commission, ante, 262 U. S. 276.
Here, the Commission gave careful consideration
Page 262 U. S. 630
to the cost of reproduction, but it refused to adopt
reproduction cost as the measure of value. It declared that the
exercise of a reasonable judgment as to the present "fair value"
required some consideration of reproduction costs as well as of
original costs, but that "present fair value" is not synonymous
with "present replacement cost," particularly under abnormal
conditions. That part of the rule which declares the utility
entitled to the benefit of increases in the value of property was,
however, specifically applied in the allowance of $125,000 made by
the Commission to represent the appreciation in the value of the
land owned. The lower court recognized that it must exercise an
independent judgment in passing upon the evidence, and it gave
careful consideration to replacement cost. But it likewise held
that there was no rule which required that, in valuing the physical
property, there must be "slavish adherence to cost of reproduction
less depreciation." It discussed the fact that, since 1914, large
sums had been expended annually on the plant; that part of this
additional construction had been done at prices higher than those
which prevailed at the time of the rate hearing, and it concluded
that "averaging results and remembering that values are . . .
matters of opinion . . . ; no constitutional wrong clearly
appears."
The refusal of the Commission and of the lower court to hold
that, for ratemaking purposes, the physical properties of a utility
must be valued at the replacement cost less depreciation was
clearly correct. As was said in
Minnesota Rate Cases,
230 U. S. 352,
230 U. S.
434:
"The ascertainment of that value is not controlled by artificial
rules. It is not a matter of formulas, but there must be a
reasonable judgment having its basis in a proper consideration of
all relevant facts."
What these relevant facts are had been stated in
Smyth v.
Ames, 169 U. S. 466,
169 U. S.
546-547:
Page 262 U. S. 631
". . . the original cost of construction, the amount expended in
permanent improvements, the amount and market value of its bonds
and stock, the present as compared with the original cost of
construction, the probable earning capacity of the property under
particular rates prescribed by statute, and the sum required to
meet operating expenses, are all matters for consideration, and are
to be given such weight as may be just and right in each case. We
do not say that there may not be other matters to be regarded in
estimating the value of the property. What the company is entitled
to ask is a fair return upon the value of that which it employs for
the public convenience. On the other hand, what the public is
entitled to demand is that no more be exacted from it for the use
of a public highway than the services rendered by it are reasonably
worth."
And in Willcox v. Consolidated Gas Co., 212 U. S.
19,
212 U. S. 52, it
had been made clear
"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."
The rule laid down in these cases was expressly recognized as
controlling both by the Commission and by the lower court. Evidence
bearing on most of the facts there declared to be relevant facts
was before them. The court states, and the record establishes, that
"the opinion of the . . . Commission . . . evinces a full and
conscientious consideration of the evidence."
The opinion of the court shows that it also made careful
examination of the evidence submitted, and that it recognized the
applicable rules of law. While it differed from the Commission in
some matter of detail, it sustained the latter's finding that the
value was $5,250,000. The question on which this Court divided in
the
Southwestern Bell Telephone case,
supra, is
not involved here.
Page 262 U. S. 632
Second. Two objections to the valuation relate to the
exclusion of items from the rate base -- namely, the franchise to
do business in Atlanta, said to be worth $1,000,000, and so-called
losses from operations during recent years, alleged to aggregate
$1,000,000. These items were properly excluded. The franchise in
question is not a monopoly. It is merely a perpetual permit,
granted by the legislature in 1856, to maintain gas mains in the
streets, alleys, and public places of Atlanta without the necessity
of securing the consent of the municipality. T hat such franchises
are to be excluded in fixing the rate base was settled by
Cedar
Rapids Gas Co. v. Cedar Rapids, 223 U.
S. 655,
223 U. S. 669,
Des Moines Gas Co. v. Des Moines, 238 U.
S. 153,
238 U. S. 169,
and
Galveston Electric Co. v. Galveston, 258 U.
S. 388. The allowance for the franchise made in
Willcox v. Consolidated Gas. Co., 212 U. S.
19,
212 U. S. 43-44,
212 U. S. 48,
was rested on special grounds which do not exist in this case. That
past losses are not to be capitalized as property on which the fair
return is based was held in
Knoxville v. Knoxville Water
Co., 212 U. S. 1,
212 U. S. 14;
Galveston Electric Co. v. Galveston, 258 U.
S. 388. Here, this conclusion seems even clearer than it
was in those cases. The losses under consideration in the case at
bar were obviously not a part of development cost. They were due to
insufficiency of previous rates.
Third. Two further objections to the rate base relate
to items of property included in it, which are alleged to have been
undervalued. The companies contend that the working capital
required was $420,000, whereas only $266,677 was allowed. They also
contend that the "going concern" value is at least $750,000,
whereas only $441,629 was allowed. These are findings of fact made
by the Commission and approved by the lower court. We are not
satisfied that either finding is erroneous.
Fourth. The companies contend that there was error also
in estimating the amount of the probable net income.
Page 262 U. S. 633
One objection relates to the federal corporate income tax (10
percent), assumed to be $45,364. The Commission treated the tax as
a proper operating charge. The court disallowed it, and thus
increased its estimate of probable net income. In this the court
erred.
Galveston Electric Co. v. Galveston, 258 U.
S. 388. Its estimate of
"$424,150 as the probable income per year under the new rate,
with no allowance made for increased consumption or reduced cost of
production that seem quite probable,"
should therefore be reduced to about $380,000. This is the
amount indicated by the Commission's findings.
The other objections relate to the amount of the depreciation
charge. The companies say the rate should be 2 1/2 percent. The
Commission and the court allowed only 2 percent. This question is
one of fact, and we are not convinced that it was wrongly decided
below. The amount of the depreciation charge is also objected to on
the ground that the percentage should have been figured on a larger
value. This objection depends upon the value to be placed upon the
physical property, which has already been discussed.
Fifth. The probable return based on the value and the
probable income found by the Commission would be nearly 7 1/4
percent. It must be borne in mind, as pointed out in
Galveston
Electric Co. v. Galveston, supra, that, since dividends from
the corporation are not included in the income on which the normal
federal tax is payable by stockholders, the tax exemption is, in
effect, an additional return on the investment. A return of 7 1/4
percent -- in addition to this tax exemption -- cannot be deemed
confiscatory. The solicitude of the Commission to secure to the
companies a fair return is shown by its treatment of them during
the three years preceding the order here in question. Long prior to
1918, the gas rate had been fixed
Page 262 U. S. 634
by the utility at $1. Operating and construction costs having
risen owing to the World War, the Commission raised the rate to
$1.15, effective September 1, 1918; to $1.35, effective October 1,
1920; to $1.90, effective March 1, 1921. After costs had fallen
materially, the rate was reduced to $1.65 June 1, 1921, and the
order to reduce it to $1.55 was entered effective January 1, 1922.
In making each of these changes, the Commission fixed a rate which
it estimated would permit the company to earn a return of about 8
percent on the fair value of the property. Each change of rate was
made upon careful consideration. If there was error, it was error
in prophecy or error of judgment in passing upon the evidence. We
cannot say that the evidence compelled a conviction that the rate
would prove inadequate.
Compare San Diego Land & Town Co.
v. National City, 174 U. S. 739,
174 U. S. 754;
San Diego Land & Town Co. v. Jasper, 189 U.
S. 439;
Knoxville v. Knoxville Water Co.,
212 U. S. 1,
212 U. S. 17;
Galveston Electric Co. v. Galveston, 258 U.
S. 388,
258 U. S.
401-402. Moreover, the decree is merely
interlocutory.
Affirmed.
MR. JUSTICE McKENNA, dissenting.
I am constrained to dissent on the authority of
Missouri ex
rel. Southwestern Bell Telephone Co. v. Public Service Commission
of Missouri, ante, 262 U. S. 276, and
Bluefield Waterworks & Improvement Co. v. Public Service
Commission, post, 262 U. S. 679.
These two cases follow other cases which they cited, including
that of
Smyth v. Ames, decided a quarter of a century ago,
declaring the rule of regulation to be that, in order to fix a rate
for the use of property devoted to the public service, the property
must be estimated "at the time it is being used for the public,"
and again, "that the value of the property is to be determined as
of the time when the inquiry is made regarding rates."
Page 262 U. S. 635
The Commission in the present case conceded the rule, and
violated it, and upon a unique justification. It said:
"The human race is only recovering from an experience the like
of which the world never before endured -- a world war -- a world
upheaval -- an economic cataclysm. There are no stable measures of
value today."
Upon this the Commission departed from the values which then
prevailed, and from those that the rule of law prescribed -- that
is, the values prevailing
at the time the property was being
used for the public, and reverted to the values which obtained
January 1, 1914 -- values that had not existed for over seven
years, and no prophecy could say when, if ever, they would exist
again.{1}
To separate the company from the conditions which existed at the
time of regulation was arbitrary, and condemned it, the company, to
accept an inadequate return upon the value of its property not only
for the then time, but for an indefinite future time. Similar
action was condemned in the
Telephone case -- no "economic
cataclysm" repelling. Similar action was condemned in the
Bluefield case -- no "economic cataclysm" repelling.{2}
May I ask what had become of the "cataclysm"? Had it settled in
Georgia in conscious indulgence to life and
Page 262 U. S. 636
business in other parts of the country from its bewildering
influence?
The contrariety of decision cannot be reconciled. To anticipate
a possible criticism, however, I should say a distinction is
attempted to be made between this case and the
Telephone
case, a distinction, I think, not sustained by the record. It is
said that the present case is unlike the
Telephone case,
in that
"here, the Commission gave careful consideration to the cost of
reproduction, but it refused to adopt reproduction cost as the
measure to value."
The omission was the Commission's error; it was in disregard to
the rule of the cases -- disregard of the value of the utility at
the time of its regulation -- the time it was being used by the
public and such value was available. The problem was direct and
simple, with no baffling element in it. It was only to find the
reproduction cost of the utility, and this, necessarily, was
constituted of the cost of its materials and the cost of their
fabrication, less an estimate of depreciation from the new, these
costs and depreciations representing its value at the moment of
time it was being regulated and being used by the public, such
moment being the time prescribed by the law for the determination
of its value -- the determination of that upon which the rate for
its use was to be based.
There was nothing obscure or puzzling about it. The cost of the
materials and of their fabrication was as much a measure of the
value of the utility when reproduced as the cost of materials and
their fabrication were a measure of the value of the utility when
it was produced -- a measure of value of reproduction and
production. A measure, it is true, of different degree, which it
was the duty of the Commission to regard, and because the
Commission did not regard it -- that is, because it did not
consider the values at the time it was acting -- its action was
condemned. There are words in the
Page 262 U. S. 637
Telephone case that are pertinent here. Here, as there,
a commission undertook to value the property of a utility without
according any weight to the greatly enhanced costs of material,
labor, supplies, etc., over those prevailing at a prior time. And
it may be said here, as it was said there, "as a matter of common
knowledge, these increases were large."
The error in this case being of like kind as that which was
committed by the Commission in that case, it should be visited by
the same treatment -- that is, a reversal of its action.
It is supposed that this case and the
Telephone case
cannot coexist as declarations of law, without explanation. No
attempt, however, is made to justify this case and the
Bluefield case. It seems to be taken for granted that they
can coexist in the books in harmonious association. Can they?
For answer, it is worth one's while to inquire what the
Bluefield case decides. It is said in the opinion
that--
"The record [in the case] clearly shows that the Commission
[whose action is reviewed], in arriving at its final figure, did
not accord proper, if any, weight to the greatly enhanced costs of
construction in 1920 over those prevailing about 1915 and before
the war, as established by uncontradicted evidence, and the
company's detailed estimated cost of reproduction new, less
depreciation at 1920 prices, appears to have been wholly
disregarded. This was erroneous,"
citing the
Telephone case as well as other cases.
From this error all of the other errors in the case followed,
and it and they constituted the mistake of the Supreme Court of
West Virginia in sustaining the action of the Commission, and the
ground of reversal of the Supreme Court.
The cases, this and the
Bluefield case, are identical
in errors. In this case, the values that existed at the time
Page 262 U. S. 638
of regulation were wholly disregarded, and those of seven years
before, those which existed in 1914 -- that is, before the war --
were deliberately selected. This action was affirmed, as I have
pointed out, by the district court, from whose decree this appeal
was taken. The decree is affirmed, which is the affirmance of the
action of the Commission.
In the
Bluefield case, the values of the utility at the
time of regulation "appears," according to the declaration of the
court, "to have been wholly disregarded."
The Supreme Court of West Virginia affirmed the action of the
Commission. This Court in its opinion of today reverses that
judgment, which is a reversal of the action of the Commission.
It will be observed the Commissions did exactly the same thing,
and yet the action of one is affirmed and the action of the other
reversed. This contrariety of decision I cannot reconcile. There
should be reversal of both or the affirmance of both if their
identities are to be observed. I therefore must dissent from one or
the other of the cases, and, as the
Bluefield case has the
support of the
Telephone case, I dissent from the present
case, there being a majority against it, and those cases, besides,
expressing my view of the law.
It may be said that, if I get rid of the Commission's action, I
must take account of the district court's judgment of it upon an
independent consideration of the record. I realize that the
challenge has serious strength, but, as the Court's opinion is very
long, I can only meet the challenge by what I consider the error of
the opinion. The court disregarded, as the Commission did, the rule
of law that the value of the company's utility should be at the
time it was being regulated -- that is at the time it was being
used. The Court, however, did not entirely agree with the
Commission. It said:
"in ascertaining the present values of physical properties,
though correct
Page 262 U. S. 639
rules were announced by the Commission, we do not think they
were exactly followed."
And again:
"The Commission did not allow the appreciation claimed on the
investment since 1914, nor did it deduct from the investments of
1919 and 1920 and 1921, which were nearly a million dollars over
their admitted reproduction loss, but it did allow the appreciation
in market price of real estate."
The last observation I do not pass upon, as it has no
consequential bearing on the question in the case. And I proceed to
say that I have the impression that the Court's decision of the
Commission's action was influenced by the court's constitutional
views. The Court said that
"a rate established as reasonable, whether by the company or by
the Commission, is not guaranteed by the Commission or by the
public. Whether it will actually yield more or less than a fair
return during its continuance is a risk of the business"
to which the company had devoted its property.
If this is an intimation that the Court was of the view that,
even if the action of the Commission resulted in a return to the
utility of less than that which would be fair and reasonable, it
would not encounter the opposition of the Constitution, such view
was error, and, laboring under the error, I can understand that the
Court was not anxiously concerned to investigate the grounds of the
Commission's action -- not concerned with the "risk of the
business."
There are questions upon other elements of value upon which I do
not consider it necessary to pass.
I think the order denying the preliminary injunction should be
reversed.
An expert witness of the Commission testified as follows:
"I do not incline to the extreme high value of the war-time
period, but believe that, when business does resume, prices will
again stabilize at figures considerably lower than the peak of
1920, but far above any pre-war level."
^2 The lower federal courts have not felt the bewildering effect
-- impotent effect, I might say -- that the Commission discovered
in the post-war conditions.
St. Joseph Railway, etc., Co. v.
Public Service Commission, 268 F. 267;
Landon v. Court of
Industrial Relations of the Kansas, 269 F. 433, 444;
Potomac Electric Power Co. v. Public Utilities Commission,
276 F. 327;
Public Service Railway Co. v. Board of Public
Utilities Commissioners, 276 F. 979. And a state court has
been equally free from confusion.
Petersburg Gas Co. v.
Petersburg, 132 Va. 82.