1. A judgment of the highest court of a state which upholds an
order of a state commission fixing the rates of a public utility
company over the objection that the rates are confiscatory and the
order hence violative of the Fourteenth Amendment is reviewable
here, on the constitutional question, by writ of error. P.
262 U. S.
683.
2. In estimating the value of the property of a public utility
corporation as a basis for rate regulation, evidence of present
reproduction costs less depreciation must be given consideration.
P.
262 U. S. 689.
Southwestern Bell Telephone Co. v. Public Service Commission,
ante, 262 U. S. 276.
3. A public utility corporation challenging as confiscatory
rates imposed by a state commission is entitled, under the due
process clause of the Fourteenth Amendment, to the independent
judgment of the court as to both law and facts.
Id.
4. Rates which are not sufficient to yield a reasonable return
on the value of the property used at the time it is being used to
render the service of the utility to the public are unjust,
unreasonable, and confiscatory, and their enforcement deprives the
public utility company of its property, in violation of the
Fourteenth Amendment. P.
262 U. S.
690.
5. A public utility is entitled to such rates as will permit it
to earn a return on the value of the property it employs for the
convenience of the public equal to that generally being made at the
same time and in the same region of the country on investments
Page 262 U. S. 680
in other business undertakings which are attended by
corresponding risks and uncertainties, but it has no constitutional
right to profits such as are realized or anticipated in highly
profitable enterprises or speculative ventures. P.
262 U. S.
692.
6. The return should be reasonably sufficient to assure
confidence in the financial soundness of the utility, and should be
adequate, under efficient and economical management, to maintain
its credit and enable it to raise the money necessary for the
proper discharge of its public duties.
Id.
7. A rate of return may be reasonable at one time, and become
too high or too low by changes affecting opportunities for
investment, the money market, and business conditions generally.
Id.
8. In this case, 6% was inadequate to constitute just
compensation. P.
262 U. S. 695.
89 W Va. 736 reversed.
Error to a judgment of the Supreme Court of Appeals of West
Virginia sustaining an order of a state commission fixing water
rates in a suit brought by the plaintiff in error to set the order
aside.
Page 262 U. S. 683
MR. JUSTICE BUTLER delivered the opinion of the Court.
Plaintiff in error is a corporation furnishing water to the City
of Bluefield, West Virginia, and its inhabitants. September 27,
1920, the Public Service Commission of the state, being authorized
by statute to fix just and reasonable rates, made its order
prescribing rates. In accordance with the laws of the state (ยง 16,
c. 15-O, Code of West Virginia), the company instituted proceedings
in the Supreme Court of Appeals to suspend and set aside the order.
The petition alleges that the order is repugnant to the Fourteenth
Amendment, and deprives the company of its property without just
compensation and without due process of law, and denies it equal
protection of the laws. A final judgment was entered, denying the
company relief and dismissing its petition. The case is here on
writ of error.
1. The city moves to dismiss the writ of error for the reason,
as it asserts, that there was not drawn in question the validity of
a statute or an authority exercised under the state on the ground
of repugnancy to the federal Constitution.
The validity of the order prescribing the rates was directly
challenged on constitutional grounds, and it was held valid by the
highest court of the state. The prescribing of rates is a
legislative act. The commission is an instrumentality of the state,
exercising delegated powers. Its order is of the same force as
would be a like enactment by the legislature. If, as alleged, the
prescribed rates are confiscatory, the order is void. Plaintiff in
error is entitled to bring the case here on writ of error and to
have that question decided by this Court. The motion to dismiss
will be denied.
See Oklahoma Natural Gas Co.
v.
Page 262 U. S. 684
Russell, 261 U. S. 290, and
cases cited; also
Ohio Valley Co. v. Ben Avon Borough,
253 U. S. 287.
2. The commission fixed $460,000 as the amount on which the
company is entitled to a return. It found that, under existing
rates, assuming some increase of business, gross earnings for 1921
would be $80,000 and operating expenses $53,000, leaving $27,000,
the equivalent of 5.87 percent, or 3.87 percent after deducting 2
percent allowed for depreciation. It held existing rates
insufficient to the extent of 10,000. Its order allowed the company
to add 16 percent to all bills, excepting those for public and
private fire protection. The total of the bills so to be increased
amounted to $64,000 -- that is, 80 percent of the revenue was
authorized to be increased 16 percent, equal to an increase of 12.8
percent on the total, amounting to $10,240.
As to value: the company claims that the value of the
property is greatly in excess of $460,000. Reference to the
evidence is necessary. There was submitted to the commission
evidence of value which it summarized substantially as follows:
a. Estimate by company's engineer on
basis of reproduction new, less
depreciation at prewar prices . . . . . $ 624,548.00
b. Estimate by company's engineer on
basis of reproduction new, less
depreciation at 1920 prices . . . . . . 1,194,663.00
c. Testimony of company's engineer
fixing present fair value for rate-
making purposes . . . . . . . . . . . . 900,000.00
d. Estimate by commissioner's engineer on
basis of reproduction new, less
depreciation at 1915 prices, plus
additions since December 31, 1915, at
actual cost, excluding Bluefield
Valley waterworks, water rights,
and going value . . . . . . . . . . . . 397,964.38
Page 262 U. S. 685
e. Report of commission's statistician
showing investment cost less
depreciation. . . . . . . . . . . . . . 365,445.13
f. Commission's valuation, as fixed in
case No. 368 ($360,000), plus gross
additions to capital since made
($92,520.53). . . . . . . . . . . . . . 452,520.53
It was shown that the prices prevailing in 1920 were nearly
double those in 1915 and pre-war time. The company did not claim
value as high as its estimate of cost of construction in 1920. Its
valuation engineer testified that, in his opinion, the value of the
property was $900,000 -- a figure between the cost of construction
in 1920, less depreciation, and the cost of construction in 1915
and before the war, less depreciation.
The commission's application of the evidence may be stated
briefly as follows:
As to "a," supra: the commission deducted $204,000 from
the estimate (details printed in the margin), [
Footnote 1] leaving approximately $421,000, which
it contrasted with the estimate of its own engineer, $397,964.38
(
see "d," supra). It found that there should be included
$25,000 for the Bluefield Valley waterworks plant in Virginia, 10
percent for going value, and $10,000 for working capital. If these
be added to $421,000, there results $500,600. This may be compared
with the commission's final figure, $460,000.
Page 262 U. S. 686
As to "b" and "c," supra: these were given no weight by
the commission in arriving at its final figure, $460,000. It
said:
"Applicant's plant was originally constructed more than twenty
years ago, and has been added to from time to time as the progress
and development of the community required. For this reason, it
would be unfair to its consumers to use as a basis for present fair
value the abnormal prices prevailing during the recent war period;
but when, as in this case, a part of the plant has been constructed
or added to during that period, in fairness to the applicant,
consideration must be given to the cost of such expenditures made
to meet the demands of the public."
As to "d," supra: the commission, taking $400,000
(round figures), added $25,000 for Bluefield Valley waterworks
plant in Virginia, 10 percent for going value, and $10,000 for
working capital, making $477,500. This may be compared with its
final figure, $460,000.
As to "e," supra: the commission, on the report of its
statistician, found gross investment to be $500,402.53. Its
engineer, applying the straight line method, found 19 percent
depreciation. It applied 81 percent to gross investment and added
10 percent for going value and $10,000 for working capital,
producing $455,500. [
Footnote
2] This may be compared with its final figure, $460,000.
As to "f," supra: it is necessary briefly to explain
how this figure, $452,520.53, was arrived at. Case No. 368 was a
proceeding initiated by the application of the company for higher
rates, April 24, 1915. The commission made a valuation as of
January 1, 1915. There were presented two estimates of reproduction
cost less depreciation, one by a valuation engineer engaged by the
company,
Page 262 U. S. 687
and the other by a valuation engineer engaged by the city, both
"using the same method." An inventory made by the company's
engineer was accepted as correct by the city and by the commission.
The method "was that generally employed by courts and commissions
in arriving at the value of public utility properties under this
method," and in both estimates, "five year average unit prices"
were applied. The estimate of the company's engineer was $540,000,
and of the city's engineer $392,000. The principal differences as
given by the commission are shown in the margin. [
Footnote 3] The commission disregarded both
estimates and arrived at $360,000. It held that the best basis of
valuation was the net investment --
i.e., the total cost
of the property less depreciation. It said:
"The books of the company show a total gross investment, since
its organization, of $407,882, and that there has been charged off
for depreciation from year to year the total sum of $83,445,
leaving a net investment of $324,427. . . . From an examination of
the books . . . , it appears that the records of the company have
been remarkably well kept and preserved. It therefore seems that,
when a plant is developed under these conditions, the net
investment, which, of course, means the total gross investment less
depreciation, is the very best basis of valuation for ratemaking
purposes, and that the other methods above referred to should
Page 262 U. S. 688
be used only when it is impossible to arrive at the true
investment. Therefore, after making due allowance for capital
necessary for the conduct of the business and considering the plant
as a going concern, it is the opinion of the commission that the
fair value for the purpose of determining reasonable and just rates
in this case of the property of the applicant company, used by it
in the public service of supplying water to the city of Bluefield
and its citizens, is the sum of $360,000, which sum is hereby fixed
and determined by the commission to be the fair present value for
the said purpose of determining the reasonable and just rates in
this case."
In its report in No. 368, the commission did not indicate the
amounts respectively allowed for going value or working capital. If
10 percent be added for the former and $10,000 for the latter (as
fixed by the commission in the present case), there is produced
$366,870, to be compared with $360,000, found by the commission in
its valuation as of January 1, 1915. To this it added $92,520.53
expended since, producing $452,520.53. This may be compared with
its final figure, $460,000.
The state Supreme Court of Appeals holds that the valuing of the
property of a public utility corporation and prescribing rates are
purely legislative acts, not subject to judicial review except
insofar as may be necessary to determine whether such rates are
void on constitutional or other grounds, and that findings of fact
by the commission based on evidence to support them will not be
reviewed by the court.
City of Bluefield v. Waterworks, 81
W.Va. 201, 204;
Coal & Coke Co. v. Public Service
Commission, 84 W.Va. 662, 678;
Charleston v. Public
Service Commission, 86 W.Va. 536.
In this case, (89 W.Va. 736) it said:
"From the written opinion of the commission, we find that it
ascertained the value of the petitioner's property for ratemaking
[then quoting the commission] 'after
Page 262 U. S. 689
maturely and carefully considering the various methods presented
for the ascertainment of fair value and giving such weight as seems
proper to every element involved and all the facts and
circumstances disclosed by the record.'"
The record clearly shows that the commission, 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.
Missouri ex rel. Southwestern
Bell Telephone Co. v. Public Service Commission of Missouri,
ante, 262 U. S. 276.
Plaintiff in error is entitled under the due process clause of the
Fourteenth Amendment to the independent judgment of the court as to
both law and facts.
Ohio Valley Co. v. Ben Avon Borough,
253 U. S. 287,
253 U. S. 289,
and cases cited.
We quote further from the court's opinion (pp. 739, 740):
"In our opinion, the commission was justified by the law and by
the facts in finding as a basis for ratemaking the sum of
$460,000.00. . . . In our case of
Coal & Coke Ry. Co. v.
Conley, 67 W.Va. 129, it is said:"
"It seems to be generally held that, in the absence of peculiar
and extraordinary conditions, such as a more costly plant than the
public service of the community requires, or the erection of a
plant at an actual, though extravagant, cost, or the purchase of
one at an exorbitant or inflated price, the actual amount of money
invested is to be taken as the basis, and upon this a return must
be allowed equivalent to that which is ordinarily received in the
locality in which the business is done, upon capital invested in
similar enterprises. In addition to this, consideration must be
given to the nature of the investment, a higher rate
Page 262 U. S. 690
being regarded as justified by the risk incident to a hazardous
investment."
"That the original cost considered in connection with the
history and growth of the utility and the value of the services
rendered constitute the principal elements to be considered in
connection with ratemaking seems to be supported by nearly all the
authorities."
The question in the case is whether the rates prescribed in the
commission's order are confiscatory, and therefore beyond
legislative power. Rates which are not sufficient to yield a
reasonable return on the value of the property used at the time it
is being used to render the service are unjust, unreasonable, and
confiscatory, and their enforcement deprives the public utility
company of its property in violation of the Fourteenth Amendment.
This is so well settled by numerous decisions of this Court that
citation of the cases is scarcely necessary: "What the company is
entitled to ask is a fair return upon the value of that which it
employs for the public convenience."
Smyth v. Ames, (1898)
169 U. S. 467,
169 U. S.
547.
"There must be a fair return upon the reasonable value of the
property at the time it is being used for the public. . . . 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."
Willcox v. Consolidated Gas Co., (1909)
212 U. S.
19,
212 U. S. 41,
212 U. S.
52.
"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."
Minnesota Rate Cases, (1913)
230 U.
S. 352,
230 U. S.
434.
Page 262 U. S. 691
"And in order to ascertain that value, 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."
Smyth v. Ames, 169 U. S. 546,
169 U. S.
547.
". . . The making of a just return for the use of the property
involves the recognition of its fair value if it be more than its
cost. The property is held in private ownership, and it is that
property, and not the original cost of it, of which the owner may
not be deprived without due process of law."
Minnesota Rate Cases, 230 U. S.
454.
In
Missouri ex rel. Southwestern Bell Telephone Co. v.
Public Service Commission of Missouri, supra, applying the
principles of the cases above cited and others, this Court
said:
"Obviously, the commission undertook to value the property
without according any weight to the greatly enhanced costs of
material, labor, supplies, etc., over those prevailing in 1913,
1914, and 1916. As matter of common knowledge, these increases were
large. Competent witnesses estimated them as 45 to 50 percentum. .
. . It is impossible to ascertain what will amount to a fair return
upon properties devoted to public service without giving
consideration to the cost of labor, supplies, etc. at the time the
investigation is made. An honest and intelligent forecast of
probable future values, made upon a view of all the relevant
circumstances, is essential. If the highly important element of
present costs is wholly disregarded, such a forecast becomes
impossible. Estimates for tomorrow cannot ignore prices of today.
"
Page 262 U. S. 692
It is clear that the court also failed to give proper
consideration to the higher cost of construction in 1920 over that
in 1915 and before the war, and failed to give weight to cost of
reproduction less depreciation on the basis of 1920 prices, or to
the testimony of the company's valuation engineer, based on present
and past costs of construction, that the property in his opinion,
was worth $900,000. The final figure, $460,000, was arrived at
substantially on the basis of actual cost, less depreciation, plus
10 percent for going value and $10,000 for working capital. This
resulted in a valuation considerably and materially less than would
have been reached by a fair and just consideration of all the
facts. The valuation cannot be sustained. Other objections to the
valuation need not be considered.
3.
Rate of return: the state commission found that the
company's net annual income should be approximately $37,000, in
order to enable it to earn 8 percent for return and depreciation
upon the value of its property as fixed by it. Deducting 2 percent
for depreciation, there remains 6 percent on $460,000, amounting to
$27,600 for return. This was approved by the state court.
The company contends that the rate of return is too low, and
confiscatory. What annual rate will constitute just compensation
depends upon many circumstances, and must be determined by the
exercise of a fair and enlightened judgment, having regard to all
relevant facts. A public utility is entitled to such rates as will
permit it to earn a return on the value of the property which it
employs for the convenience of the public equal to that generally
being made at the same time and in the same general part of the
country on investments in other business undertakings which are
attended by corresponding, risks and uncertainties, but it has no
constitutional right to profits such as are realized or anticipated
in
Page 262 U. S. 693
highly profitable enterprises or speculative ventures. The
return should be reasonably sufficient to assure confidence in the
financial soundness of the utility, and should be adequate, under
efficient and economical management, to maintain and support its
credit and enable it to raise the money necessary for the proper
discharge of its public duties. A rate of return may be reasonable
at one time and become too high or too low by changes affecting
opportunities for investment, the money market, and business
conditions generally.
In 1909, this Court, in
Willcox v. Consolidated Gas
Co., 212 U. S. 19,
212 U. S. 48-50,
held that the question whether a rate yields such a return as not
to be confiscatory depends upon circumstances, locality, and risk,
and that no proper rate can be established for all cases, and that,
under the circumstances of that case, 6 percent was a fair return
on the value of the property employed in supplying gas to the City
of New York, and that a rate yielding that return was not
confiscatory. In that case, the investment was held to be safe,
returns certain, and risk reduced almost to a minimum -- as nearly
a safe and secure investment as could be imagined in regard to any
private manufacturing enterprise.
In 1912, in
Cedar Rapids Gas Co. v. Cedar Rapids,
223 U. S. 655,
223 U. S. 670,
this Court declined to reverse the state court where the value of
the plant considerably exceeded its cost, and the estimated return
was over 6 percent
In 1915, in
Des Moines Gas Co. v. Des Moines,
238 U. S. 153,
238 U. S. 172,
this Court declined to reverse the United States district court in
refusing an injunction upon the conclusion reached that a return of
6 percent per annum upon the value would not be confiscatory.
In 1919, this Court, in
Lincoln Gas Co. v. Lincoln,
250 U. S. 256,
250 U. S. 268,
declined on the facts of that case to approve a finding that no
rate yielding as much as 6 percent
Page 262 U. S. 694
on the invested capital could be regarded as confiscatory.
Speaking for the Court, Mr. Justice Pitney said:
"It is a matter of common knowledge that, owing principally to
the World War, the costs of labor and supplies of every kind have
greatly advanced since the ordinance was adopted, and largely since
this cause was last heard in the court below. And it is equally
well known that annual returns upon capital and enterprise the
world over have materially increased, so that what would have been
a proper rate of return for capital invested in gas plants and
similar public utilities a few years ago furnishes no safe
criterion for the present or for the future."
In 1921, in B
rush Electric Co. v. Galveston, the United
States district court held 8 percent a fair rate of return.
[
Footnote 4]
In January, 1923, in
City of Minneapolis v. Rand, the
Circuit Court of Appeals of the Eighth Circuit (285 F. 818, 830)
sustained, as against the attack of the city on the ground that it
was excessive, 7 1/2 percent, found by a special master and
approved by the district court as a fair and reasonable return on
the capital investment -- the value of the property.
Investors take into account the result of past operations,
especially in recent years, when determining the terms upon which
they will invest in such an undertaking. Low, uncertain, or
irregular income makes for low prices for the securities of the
utility and higher rates of interest to be demanded by investors.
The fact that the company may not insist as a matter of
constitutional right that past losses be made up by rates to be
applied in the present and future tends to weaken credit, and the
fact that the utility is protected against being compelled to serve
for confiscatory rates tends to support it. In
Page 262 U. S. 695
this case, the record shows that the rate of return has been low
through a long period up to the time of the inquiry by the
commission here involved. For example, the average rate of return
on the total cost of the property from 1895 to 1915, inclusive, was
less than 5 percent; from 1911 to 1915, inclusive, about 4.4
percent, without allowance for depreciation. In 1919, the net
operating income was approximately $24,700, leaving $15,500,
approximately, or 3.4 percent on $460,000 fixed by the commission,
after deducting 2 percent for depreciation. In 1920, the net
operating income was approximately $25,465, leaving $16,265 for
return, after allowing for depreciation. Under the facts and
circumstances indicated by the record, we think that a rate of
return of 6 percent upon the value of the property is substantially
too low to constitute just compensation for the use of the property
employed to render the service.
The judgment of the Supreme Court of Appeals of West
Virginia is reversed.
MR. JUSTICE BRANDEIS concurs in the judgment of reversal for the
reasons stated by him in
Missouri ex rel. Southwestern Bell
Telephone Co. v. Public Service Commission of Missouri,
supra.
[
Footnote 1]
Difference in depreciation allowed . . . . . . . $49,000
Preliminary organization and development cost. . 14,500
Bluefield Valley waterworks plant. . . . . . . . 25,000
Water rights . . . . . . . . . . . . . . . . . . 50,000
Excess overhead costs. . . . . . . . . . . . . . 39,000
Paving over mains. . . . . . . . . . . . . . . . 28,500
--------
$204,000
[
Footnote 2]
As to "e": $365,445.13 represents investment cost less
depreciation. The gross investment was found to be $500,402.53,
indicating a deduction on account of depreciation of $134,957.40,
about 27 percent, as against 19 percent found by the commission's
engineer.
[
Footnote 3]
Company City
Engineer Engineer
1. Preliminary costs . . . . . . . . $ 14,455 $ 1,000
2. Water rights. . . . . . . . . . . 50,000 Nothing
3. Cutting pavements over mains. . . 27,744 233
4. Pipe lines from gravity springs . 22,072 15,442
5. Laying cast iron street mains . . 19,252 15,212
6. Reproducing Ada springs . . . . . 18,558 13,027
7. Superintendence and engineering . 20,515 13,621
8. General contingent cost . . . . . 16,415 5,448
-------- -------
189,011 $63,983
[
Footnote 4]
This case was affirmed by this Court,
ante,
262 U. S. 443.