DRISCOLL ET AL., CONSTITUTING PENNSYLVANIA PUBLIC UTILITY COMM‘N, ET AL. v. EDISON LIGHT & POWER CO.
No. 509
Supreme Court of the United States
Decided April 17, 1939.
Argued February 7, 8, 1939.
The cause will be remanded to the District Court with directions to permit the introduction of evidence and for further proceedings not inconsistent herewith.
Reversed.
MR. JUSTICE BLACK dissents.
MR. JUSTICE FRANKFURTER took no part in the consideration or decision of this case.
Mr. Clarence W. Miles, with whom Messrs. Walter Biddle Saul, Edward F. Huber, Bradford S. Magill, and J. Harry La Brum were on the brief, for appellee.
By leave of Court, briefs of amici curiae were filed by Solicitor General Jackson, Assistant Attorney General Arnold, and Messrs. Paul A. Freund, Robert M. Cooper, Milford Springer, David W. Robinson, Jr., Richard J.
MR. JUSTICE REED delivered the opinion of the Court.
This is an appeal from the decree of a three-judge district court granting a permanent injunction against the enforcement of temporary rates.
The appellants are five named persons, individually and as members of the Pennsylvania Public Utility Commission, and the Utility Consumers League of York, Pennsylvania, intervening defendant below, an unincorporated association of consumers of electric current in the territory served by the appellee. The latter is a public utility corporation organized under the laws of Pennsylvania, which generates, transmits, distributes and sells electric energy to approximately 30,000 customers in and about York, Pennsylvania.
An investigation to determine the reasonableness of appellee‘s rates was instituted on January 27, 1936. During its progress the state legislature recodified the utility law of Pennsylvania. Act of May 28, 1937, P. L. 1053,
Acting under
On December 14, 1937, the utility filed a bill in the United States District Court for the Eastern District of Pennsylvania to enjoin this order. A three-judge court was convened under
The court concluded as a matter of law that the utility had no plain, speedy and adequate remedy in the state courts; that the order is void because the “commission acted in direct violation of the mandatory provisions of the Public Utility Act which requires rates for [the company] to be fixed under paragraph (b) of section 310“; that the order is unconstitutional because (1) it violates the procedural requirements of due process, (2) it fails to permit the utility to earn a fair return on the fair value of its property used and useful in the public service, (3) it confiscates the company‘s property, and (4) it is not supported by substantial evidence.2
Jurisdiction of the Statutory Court.—Except as modified by the Johnson Act,3 jurisdiction exists in a statutory court, called pursuant to
The reason for this concession lies, so far as a remedy in equity is concerned, in the provision of the Pennsylvania statute forbidding an injunction against an order, “except in a proceeding questioning the jurisdiction of the commission.”5 The bill in certain allegations attacks the section of the Public Utility Law under which this order issued as violative of the Fourteenth Amendment in that it empowered the commission to fix non-compensatory and discriminatory temporary rates, in an arbitrary manner. In one sense this questions the ju-
Statutory Basis for the Order.—
Appellee‘s first contention is that the decree may be sustained for the sole reason that the commission should have proceeded under subsection (b) because the appellee does not have continuing property records. As the conclusion of the lower court on this point is not supported by a state decision, we analyze for ourselves the provisions of the sections. It is clear from the language of
The commission drew the order in accord with the prior ruling of the Middle District Court on a former order in this rate proceeding.13 The former order had also fixed temporary rates but had not set out the findings of value deemed essential by the court. Although the reversal of the commission‘s order had actually turned on the failure to show the factual basis for the rates, as the district court had stated that compliance with Smyth v. Ames14 was necessary in temporary rate making, the commission based the order now under review on evidence requisite under that rule. By taking this position, it interprets the statute as requiring consideration of elements other than original cost in fixing temporary rates. It is not suggested that the commission omitted consideration of any necessary element in the present order. If we assume with the appellee that the constitutionality of a
There is nothing in the language of
Confiscation.—There remains for examination the appellee‘s argument that the decree of the district court enjoining the enforcement of the order should be sustained because it is confiscatory. The commission, as of November 30, 1937, found the rate base, revenue, expenses and rate, as set out below.18 Appellee urges here that the commission‘s figures are erroneous in the following particulars: (1) The rate base should be $5,866,081; (2) the rate should be 7½ per cent; (3) two items of expense, disallowed by the commission should be added to the operating expenses, (a) some increase in annual salaries and (b) rate case expenses on books to November
(1) The commission estimated the original cost as of December 31, 1936, at $4,576,169.73. The company estimated the original cost as of November 30, 1936, exclusive of financing charges, at $4,619,364.00 and its book cost as of December 31, 1936, at $4,578,793.00. If, to the highest of these items, we add $164,000 for working capital and $142,851.07, representing net additions to September 30, 1937, the amounts claimed by the company, the original cost rate base is found to be not more than $4,926,215.07.
The commission excluded the cost of financing because there was no evidence of any actual expenditures for such purpose or of any studies of such cost. We find no error in this.19 There was here no foundation for an estimate.20 Appellee‘s suggestion that evidence supporting its claim is found in the capitalization chart of York Railways Company, the owner of appellee‘s common stock, is not accepted. This shows the discount, $298,825.00, paid by the parent company on $2,706,000 face amount of bonds of various issues between 1909 and 1925. It appears that $1,027,904 of the proceeds was expended for construction work of the York Edison Company, apparently appellee‘s predecessor. Nothing is shown as to the cost of this money to the appellee. It may have given notes for or been charged with this exact amount, without a finance charge. The financing cost to appellee may have been covered by the interest rate.
For depreciated reproduction cost as of November 30, 1936, the commission accepted the estimate of the company for direct costs, $3,981,347. It added 19%, $756,456,
The utility states that the commission, in fixing the reproduction cost, erred by refusing to consider the effect of a claimed increase of prices. The commission, on November 30, 1937, fixed reproduction cost upon a computation based by the utility upon prices as of November 30, 1936. This showed a gross cost of $5,572,134, depreciated and reduced by the commission, as explained in the preceding paragraph, to $4,737,803. The utility presented a further computation, showing as of May 31, 1937, that increased prices, due to a rising level, would increase the gross cost to $6,019,832. The argument is that the later estimate should have been considered.23 Proportionally reduced to accord with the action of the commission, this latter figure would become $5,118,465. If to this higher reproduction cost we add working capital, there appears a reproduction cost depreciated figure of $5,282,465.
It is furthermore to be observed that the commission‘s figures do not differ far as to fair value, from the estimate of an important witness for the utility, Mr. Seelye, who testified on March 12, 1937, that the fair value was not less than $5,500,000 and said later in answer to the com-
For the purpose of passing upon the issue of confiscation in the temporary rates, we shall accept $5,500,000 as the fair value of the property as of November 30, 1937.
(2) The rate of return was fixed by the commission at six per cent. Witnesses for the utility brought out facts deemed applicable in the determination of a proper rate of return on the fair value of the property. Their evidence took cognizance of the yield of bonds, preferred and common stocks of selected comparable utilities, the stagnant market for new issues, prevailing cost of money, the implications of the possible substitution of some governmentally operated or financed utilities for those privately owned and the dangers of a fixed schedule of rates in the face of possible inflation. From these factors they deduced that a proper rate of return would be from 7.8 per cent to 8 per cent. An accounting expert of the commission countered with tables showing yields of bonds of utilities; the yield to maturity of Pennsylvania public utility securities, approved by the commission between July 1, 1933, and May 7, 1937, long term and actually sold for cash to non-affiliated interests; yield of Pennsylvania electric utilities; financial and operating statistics of Pennsylvania electric utilities; money rates, and other material information. He concluded 5.5 per cent was a reasonable rate of return.
It must be recognized that each utility presents an individual problem.24 The answer does not lie alone in
(3) and (4). The utility urges that two items of expense and a prospective loss should be added to the operating expenses, allowed by the commission, of $1,382,829. The most important of these items is the rate case expenses. The company by its Exhibit 21 shows these incurred to November 15, 1937, to be $178,374.50. The commission from Exhibit 23 found them to be $127,935 for the twelve months ending September 30, 1937. The difference probably comes from the expenses before and after the period considered by the commission. We assume the higher figures to be correct. As the commission concluded that the prior rates of the company were obviously excessive, it allowed nothing for expense in defending them. Consequently there is no discussion of the reasonableness of the amount of the company‘s charge and we accept them as reasonable. Even where the rates in effect are excessive, on a proceeding by a commission to determine reasonableness, we are of the view that the utility should be allowed its fair and proper
In the allowance of these expenses, the period over which they are to be amortized will depend upon the character of services received or disbursements made. There could rarely be an anticipation of annually recurring charges for rate regulation. Under the circumstances here presented where full statistics on investment, inventory and labor requirements have been made which, as cumulated, will form largely the basis of all future negotiations, we are of the opinion that amortization over a ten year period is reasonable.26 As such an adjustment produces an estimated return very close to the reasonable rate, even with the addition to the operating expenses of the other items of increased salaries, $20,593, and prospective loss of annual profit, $15,089, we do not enter into a discussion of them. Experience will add its weight to the other evidence on further hearing. The note below shows the calculation.27
At best, these estimates are prophecies of expected returns. The incalculable factors of business activity, un-
Reversed.
MR. JUSTICE FRANKFURTER, concurring.
The decree below was clearly wrong. But in reversing it, the Court‘s opinion appears to give new vitality needlessly to the mischievous formula for fixing utility rates in Smyth v. Ames, 169 U. S. 466. The force of reason, confirmed by events, has gradually been rendering that formula moribund by revealing it to be useless as a guide for adjudication. Experience has made it overwhelmingly clear that Smyth v. Ames and the uses to which it has been put represented an attempt to erect temporary facts into legal absolutes. The determination of utility rates—what may fairly be exacted from the public and what is adequate to enlist enterprise—does not present questions of an essentially legal nature in the sense that legal education and lawyers’ learning afford peculiar competence for their adjustment. These are matters for the application of whatever knowledge economics and finance may bring to the practicalities of business enterprise. The only relevant function of law in dealing with this intersection of government and enterprise is to secure observance of those procedural safeguards in the exercise of legislative powers which are the historic foundations of due process.
Mr. Justice Bradley nearly fifty years ago made it clear that the real issue is whether courts or commissions and legislatures are the ultimate arbiters of utility rates, (dissenting, in Chicago, M. & St. P. Ry. Co. v. Minnesota, 134 U. S. 418, 461). Whatever may be thought of the wisdom of a broader judicial rôle in the controversies between public utilities and the public, there can be no
Smyth v. Ames should certainly not be invoked when it is not necessary to do so. The statute under which the present case arose represents an effort to escape Smyth v. Ames at least as to temporary rates. It is the result of a conscientious and informed endeavor to meet difficulties engendered by legal doctrines which have been widely rejected by the great weight of economic opinion,1 by authoritative legislative investigations,2 by utility commissions throughout the country,3 and by impressive judicial dissents.4 As a result of this long process of experience and reflection, the two states in which utilities play the biggest financial part—New York and Pennsylvania—have evolved the so-called recoupment scheme for temporary rate-fixing (thereby avoiding some of the most
That this Court should not “decide an issue of constitutionality if the case may justly and reasonably be decided under a construction of the statute under which the act is clearly constitutional” is, as an abstract proposition, basic to our judicial obligation. But this is not a formal doctrine of self-restraint. Its rationale is avoidance of conflict with the legislature. The opinion from which the preceding quotation is taken and the decisions to which it refers are all cases in which constitutionality was in obvious jeopardy. It is one thing to avoid unconstitutionality even at the cost of a tortured statutory construction. It is quite another to recognize the validity of a statute directed expressly to the situation in hand and so employed by the state authorities, when constitutionality of that statute is as incontestably clear as the decision of the New York Court of Appeals has demonstrated it to be in sustaining the sister statute of the Pennsylvania Act, In the Matter of Bronx Gas & Electric Co. v. Maltbie, 271 N. Y. 364; 3 N. E. 2d 512. The Court‘s opinion in the present case does not avoid issues of constitutionality. It accepts the much more dubious constitutional doctrines of Smyth v. Ames and its successors to solve the very easy constitutional issues raised by the Pennsylvania Act.
MR. JUSTICE BLACK concurs in the above views.
Notes
| Rate Base or Fair Value of Property | $5, 250, 000. 00 | |
| Rate of return 6%. | ||
| Required return | 315, 000. 00 | |
| Revenue after Reduction | $1, 767, 329. 00 | |
| Operating Expenses | $1, 033, 898. 00 | |
| Taxes | 206, 400. 00 | |
| Annual Depreciation | 142, 531. 00 | 1, 382, 829. 00 |
| Estimated Return | 384, 500. 00 |
| Rate Base or Fair Value of Property | $5, 500, 000. 00 | |
| Rate of return 6%. | ||
| Required return | 330, 000. 00 | |
| Revenue after Reduction | $1, 767, 329. 00 | |
| Operating Expenses | $1, 033, 898. 00 | |
| Taxes | 206, 400. 00 | |
| Annual Depreciation | 142, 531. 00 | |
| Rate Expense, 10-year Amortization | 17, 838. 00 | |
| Salary Increase | 20, 593. 00 | |
| Prospective Loss | 15, 089. 00 | 1, 436, 349. 00 |
| Estimated Return | 330, 980. 00 |