The Constitution of the United States of America: Analysis and Interpretation Part 193

[211] 253 U.S. 287, 293-294 (1920).

[212] Ibid. 289. In injunctive proceedings, evidence is freshly introduced whereas in the cases received on appeal from State courts, the evidence is found within the record.

[213] 231 U.S. 298 (1913).

[214] 253 U.S. 287, 291, 295 (1920).

[215] 94 U.S. 113 (1877).

[216] 315 U.S. 575, 586.

[217] 320 U.S. 591, 602.--Although this and the previously cited decision arose out of controversies involving the Natural Gas Act of 1938 (52 Stat. 821), the principles laid down therein are believed to be applicable to the review of rate orders of State commissions, except insofar as the latter operate in obedience to laws containing unique standards or procedures.

[218] 253 U.S. 287 (1920).

[219] In Federal Power Commission _v._ Nat. Gas Pipeline Co., 315 U.S.

575, 599, Justices Black, Douglas, and Murphy, in a concurring opinion, proposed to travel the road all the way back to Munn _v._ Illinois, and deprive courts of the power to void rates simply because they deem the latter to be unreasonable. In a concurring opinion, written earlier in 1939 in Driscoll _v._ Edison Co., 307 U.S. 104, 122, Justice Frankfurter temporarily adopted a similar position; for therein he declared that "the only relevant function of law * * * [in rate controversies] is to secure observance of those procedural safeguards in the exercise of legislative powers, which are the historic foundations of due process."

However, in his dissent in the Hope Gas Case (320 U.S. 591, 625), he disa.s.sociated himself from this proposal, and a.s.serted that "it was decided [more than fifty years ago] that the final say under the Const.i.tution lies with the judiciary."

[220] Federal Power Commission _v._ Hope Gas Co., 320 U.S. 591, 602 (1944).

[221] Federal Power Comm. _v._ Hope Gas Co., 320 U.S. 591, 603 (1944), citing Chicago & Grand Trunk Ry. Co. _v._ Wellman, 143 U.S. 339, 345-346 (1892); Missouri ex rel. Southwestern Bell Teleph. Co. _v._ Public Service Commission, 262 U.S. 276, 291 (1923).

[222] For this reason there is presented below a survey of the formulas, utilization of which was. .h.i.therto deemed essential if due process requirements were to be satisfied.

(1) Fair Value.--On the premise that a utility is ent.i.tled to demand a rate schedule that will yield a "fair return upon the value" of the property which it employs for public convenience, the Court in 1898, in Smyth _v._ Ames (169 U.S. 466, 546-547), held that determination of such value necessitated consideration of at least such factors as "the original cost of construction, the amount expended in permanent improvements, the amount and market value of * * * [the utility's] bonds and stock, the present as compared with the original cost of construction, [replacement cost], the probable earning capacity of the property under particular rates prescribed by statute, and the sum required to meet operating expenses."

(2) Reproduction Cost.--Prior to the demise in 1944 of the Smyth _v._ Ames fair value formula, two of the components thereof were accorded special emphasis, with the second quickly surpa.s.sing the first in terms of the measure of importance attributed to it. These were: (1) the actual cost of the property ("the original cost of construction together with the amount expended in permanent improvements") and (2) reproduction cost ("the present as compared with the original cost of construction"). If prices did not fluctuate through the years, the controversy which arose over the application of reproduction cost in preference to original cost would have been reduced to a war of words; for results obtained by reliance upon either would have been identical.

The instability in the price structure, however, presented the courts with a dilemma. If rate-making is attempted at a time of declining prices, valuation on the basis of present or reproduction cost will advantage the consumer or user, and disadvantage the utility. On the other hand, if the original cost of construction is employed, the benefits are redistributed, with the consumer becoming the loser.

Similarly, when rates are fixed at a time of rising prices, reliance upon reproduction cost to the exclusion of original cost will produce results satisfactory to the utility and undesirable to the public, and vice versa.

Notwithstanding the admonition of Smyth _v._ Ames that original cost, no less than reproduction cost, was to be considered in determining value, the Court, in the years which intervened between 1898 and 1944, wavered only slightly in its preference for the reproduction cost formula, and moderated its application thereof only in part whenever periods of rising or sustained high prices appeared to require such deviation in behalf of consumer interests. As examples of the varied application by the Court of the reproduction cost formula, the following cases are significant: San Diego Land and Town Co. _v._ National City, 174 U.S.

739, 757 (1899); San Diego Land & Town Co. _v._ Jasper, 189 U.S. 439, 443 (1903); Willc.o.x _v._ Consolidated Gas Co., 212 U.S. 19, 52 (1909); Minnesota Rate Cases, 230 U.S. 352 (1913); Galveston Electric Co. _v._ Galveston, 258 U.S. 388, 392 (1922); Missouri ex rel. Southwestern Bell Teleph. Co. _v._ Public Service Commission, 262 U.S. 276 (1923); Bluefield Waterworks & Improv. Co. _v._ Pub. Serv. Comm., 262 U.S. 679 (1923); Georgia R. & Power Co. _v._ Railroad Comm., 262 U.S. 625, 630 (1923); McCardle _v._ Indianapolis Water Co., 272 U.S. 400 (1926); St.

Louis & O'Fallon Ry. _v._ United States, 279 U.S. 461 (1929).

(3) Prudent Investment (versus Reproduction Cost).--This method of valuation, which was championed by Justice Brandeis in a separate opinion filed in Southwestern Bell Teleph. Co. _v._ Pub. Serv. Comm.

(262 U.S. 276, 291-292, 302, 306-307 (1923)), was defined by him as follows: "The compensation which the Const.i.tution guarantees an opportunity to earn is the reasonable cost of conducting the business.

Cost includes not only operating expenses, but also capital charges.

Capital charges cover the allowance, by way of interest, for the use of the capital, * * *; the allowance for the risk incurred; and enough more to attract capital. * * * Where the financing has been proper, the cost to the utility of the capital, required to construct, equip and operate its plant, should measure the rate of return which the Const.i.tution guarantees opportunity to earn." Advantages to be derived from "adoption of the amount prudently invested as the rate base and the amount of the capital charge as the measure of the rate of return" would, according to Justice Brandeis, be nothing less than the attainment of a "basis for decision which is certain and stable. The rate base would be ascertained as a fact, not determined as a matter of opinion. It would not fluctuate with the market price of labor, or materials, or money. * * *"

As a method of valuation, the prudent investment theory was not accorded any acceptance until the depression of the 1930's. The sharp decline in prices which occurred during this period doubtless contributed to the loss of affection for reproduction cost; and in Los Angeles Gas Co. _v._ R.R. Comm'n., 289 U.S. 287 (1933) and R.R. Comm'n. _v._ Pacific Gas Co., 302 U.S. 388, 399, 405 (1938) the Court upheld respectively a valuation from which reproduction cost had been excluded and another in which historical cost served as the rate base. Later, in 1942, when in Power Comm'n. _v._ Nat. Gas Pipeline Co., 315 U.S. 575, the Court further emphasized its abandonment of the reproduction cost factor, there developed momentarily the prospect that prudent investment might be subst.i.tuted. This possibility was quickly negatived, however, by the Hope Gas Case (320 U.S. 591 (1944)) which dispensed with the necessity of relying upon any formula for the purpose of fixing valid rates.

(4) Depreciation.--No less indispensable to the determination of the fair value mentioned in Smyth _v._ Ames was the amount of depreciation to be allowed as a deduction from the measure of cost employed, whether the latter be actual cost, reproduction cost, or any other form of cost determination. Although not mentioned in Smyth _v._ Ames, the Court gave this item consideration in Knoxville _v._ Knoxville Water Co., 212 U.S.

1, 9-10 (1909); but notwithstanding its early recognition as an allowable item of deduction in determining value, depreciation continued to be the subject of controversy arising out of the difficulty of ascertaining it and of computing annual allowances to cover the same.

Indicative of such controversy has been the disagreement as to whether annual allowances granted shall be in such amount as will permit the replacement of equipment at current costs; i.e., present value, or at original cost. In the Hope Gas Case, 320 U.S. 591, 606 (1944), the Court reversed United R. & Electric Co. _v._ West, 280 U.S. 234, 253-254 (1930), insofar as the latter holding rejected original cost as the basis of annual depreciation allowances.

(5) Going Concern Value and Good Will.--Whether or not intangibles were to be included in valuation was not pa.s.sed upon in Smyth _v._ Ames; but shortly thereafter, in Des Moines Gas Co. _v._ Des Moines, 238 U.S. 153, 165 (1915), the Court declared it to be self-evident "that there is an element of value in an a.s.sembled and established plant, doing business and earning money, over one not thus advanced, * * * [and that] this element of value is a property right, and should be considered in determining the value of the property, upon which the owner has a right to make a fair return * * *." Generally described as going concern value, this element has never been precisely defined by the Court, and the latter has accordingly been plagued by the difficulty of determining its worth. In its latest p.r.o.nouncement on the subject, uttered in Power Comm'n. _v._ Nat. Gas Pipeline Co., 315 U.S. 575, 589 (1942), the Court denied that there is any "const.i.tutional requirement that going concern value, even when it is an appropriate element to be included in a rate base, must be separately stated and appraised as such * * * valuations for rate purposes of a business a.s.sembled as a whole * * * [have often been] sustained without separate appraisal of the going concern element.

* * * When that has been done, the burden rests on the regulated company to show that this item has neither been adequately covered in the rate base nor recouped from prior earnings of the business." Franchise value and good will, on the other hand, have been consistently excluded from valuation; the latter presumably because a utility invariably enjoys a monopoly and consumers have no choice in the matter of patronizing it.

The latter proposition has been developed in the following cases: Willc.o.x _v._ Consolidated Gas Co., 212 U.S. 19 (1909); Des Moines Gas Co. _v._ Des Moines, 238 U.S. 153, 163-164 (1915); Galveston Electric Co. _v._ Galveston, 258 U.S. 388 (1922); Los Angeles Gas & E. Corp. _v._ Railroad Commission, 289 U.S. 287, 313 (1933).

(6) Salvage Value.--It is not const.i.tutional error to disregard theoretical reproduction cost for a plant which "no responsible person would think of reproducing." Accordingly, where, due to adverse conditions, a street-surface railroad has lost all value except for sc.r.a.p or salvage, it was permissible for a commission, as the Court held in Market St. R. Co. _v._ Comm'n., 324 U.S. 548, 562, 564 (1945), to use as a rate base the price at which the utility offered to sell its property to a citizen. Moreover, the Commission's order was not invalid even though under the prescribed rate the utility would operate at a loss; for the due process cannot be invoked to protect a public utility against business hazards, such as the loss of, or failure to obtain, patronage. On the other hand, in the case of a water company whose franchise has expired (Denver _v._ Denver Union Water Co., 246 U.S. 178 (1918)), but where there is no other source of supply, its plant should be valued as actually in use rather than at what the property would bring for some other use in case the city should build its own plant.

(7) Past Losses And Gains.--"The Const.i.tution [does not] require that the losses of * * * [a] business in one year shall be restored from future earnings by the device of capitalizing the losses and adding them to the rate base on which a fair return and depreciation allowance is to be earned." Power Comm'n. _v._ Nat. Gas Pipeline Co., 315 U.S. 575, 590 (1942). Nor can past losses be used to enhance the value of the property to support a claim that rates for the future are confiscatory (Galveston Electric Co. _v._ Galveston, 258 U.S. 388 (1922)), any more than profits of the past can be used to sustain confiscatory rates for the future (Newton _v._ Consolidated Gas Co., 258 U.S. 165, 175 (1922); Public Utility Commissioners _v._ New York Teleg. Co., 271 U.S. 23, 31-32 (1926)).

[223] Atlantic Coast Line R. Co. _v._ North Carolina Corp. Commission, 206 U.S. 1, 19 (1907), citing Chicago, B.& Q.R. Co. _v._ Iowa, 94 U.S.

155 (1877). _See also_ Prentis _v._ Atlantic Coast Line Co., 211 U.S.

210 (1908); Denver & R.G.R. Co. _v._ Denver, 250 U.S. 241 (1919).

[224] Chicago & G.T.R. Co. _v._ Wellman, 143 U.S. 339, 344 (1892); Mississippi R. Commission _v._ Mobile & O.R. Co., 244 U.S. 388, 391 (1917). _See also_ Missouri P.R. Co. _v._ Nebraska, 217 U.S. 196 (1910); Nashville, C. & St. L.R. Co. _v._ Walters, 294 U.S. 405, 415 (1935).

[225] Cleveland Electric Ry. Co. _v._ Cleveland, 204 U.S. 116 (1907).

[226] Detroit United Railway Co. _v._ Detroit, 255 U.S. 171 (1921). _See also_ Denver _v._ New York Trust Co., 229 U.S. 123 (1913).

[227] Los Angeles _v._ Los Angeles Gas & Electric Corp., 251 U.S. 32 (1919).

[228] Newburyport Water Co. _v._ Newburyport, 193 U.S. 561 (1904). _See also_ Skaneateles Waterworks Co. _v._ Skaneateles, 184 U.S. 354 (1902); Helena Waterworks Co. _v._ Helena, 195 U.S. 383 (1904); Madera Waterworks _v._ Madera, 228 U.S. 454 (1913).

[229] Western Union Teleg. Co. _v._ Richmond, 224 U.S. 160 (1912).

[230] Pierce Oil Corp. _v._ Phoenix Ref Co., 259 U.S. 125 (1922).

[231] Atlantic Coast Line R. Co. _v._ Goldsboro, 232 U.S. 548, 558 (1914). _See also_ Chicago, B. & Q.R. Co. _v._ Chicago, 166 U.S. 226, 255 (1897); Chicago, B. & Q.R. Co. _v._ Illinois ex rel. Grimwood, 200 U.S. 561, 591-592 (1906); New Orleans Public Service, Inc. _v._ New Orleans, 281 U.S. 682 (1930).

[232] Consumers' Co. _v._ Hatch, 224 U.S. 148 (1912).

[233] Panhandle Eastern Pipe Line Co. _v._ State Highway Commission, 294 U.S. 613 (1935).

[234] New Orleans Gas Light Co. _v._ Drainage Commission, 197 U.S. 453 (1905).

[235] Norfolk & S. Turnpike Co. _v._ Virginia, 225 U.S. 264 (1912).

[236] International Bridge Co. _v._ New York, 254 U.S. 126 (1920).

[237] Chicago, B. & Q.R. Co. _v._ Nebraska, 170 U.S. 57 (1898).

[238] Chicago, B. & Q.R. Co. _v._ Illinois ex rel. Grimwood, 200 U.S.

561 (1906); Chicago & A.R. Co. _v._ Tranbarger, 238 U.S. 67 (1915); Lake Sh.o.r.e & M.S.R. Co. _v._ Clough, 242 U.S. 375 (1917).

[239] Pacific Gas & Electric Co. _v._ Police Ct., 251 U.S. 22 (1919).

[240] Chicago, St. P., M. & O.R. Co. _v._ Holmberg, 282 U.S. 162 (1930).

[241] Nashville, C. & St. L.R. Co. _v._ Walters, 294 U.S. 405 (1935).

_See also_ Lehigh Valley R. Co. _v._ Public Utility Comrs., 278 U.S. 24 (1928).

[242] United Fuel Gas Co. _v._ Railroad Commission, 278 U.S. 300, 308-309 (1929). _See also_ New York ex rel. Woodhaven Gas Light Co. _v._ Public Service Commission, 269 U.S. 244 (1925); New York ex rel. New York & O. Gas Co. _v._ McCall, 245 U.S. 345 (1917).