292 F. 139 | E.D. Mich. | 1923
The franchise contract rates of the Utility expired'. The city and the Utility joined in an application to the Commission. to fix rates for gas. In February, 1922, the Commission fixed an interim rate, averaging about $1.76 per M, to continue pending hearings. After extensive consideration, and in April, 1923, it made its final order, fixing on a sliding scale rates at what is said to be an average of $1.54. The bill in this cause alleges that this rate is confiscatory,, in violation of the Fourteenth Amendment, and prays an injunction'. A restraining order was made, to have effect- until the motion:could be heard, and the interim rates have therefore continued.
The disposition of this motion is to'be determined by the: interpretation ' and effect given to the Southwestern ‘Bell, the Bluefield Water,-, ancl the Georgia Power Cases,: recently decided'by the Supreme
We have considered the application of all these cases, but have not always referred to them. In the end, Mr. Justice Brandéis’ forceful dissenting opinion in the Southwestern Bell Case may or may not prevail;
“We think the proof shows that for the purposes of 'the present case the valuation should, he at least $25,000,000.”
. Particularly when we read the dissenting opinion, we must construe the majority opinion as the minority of the court interpreted it, viz., as holding that, where it stands not impeached or attacked other
Nor do we find anything inconsistent with this view in the opinion in the Georgia Power Case. It affirms only that the reproduction cost at the date of the inquiry is not necessarily controlling. The reproduction valuation was made at the end of 1921 — about the peak of high costs. The company claimed this value to be $9,500,000. The Commission cut off $4,250,000. $2,000,000, which the company included, was for items obviously improper. About $500,000 was cut off from two items, upon findings which the court approved. This left the company’s valuation of physical property as $7,000,000. It appeared that at the time of the trial court hearing construction costs were reduced, and that the court below had allowed some increases in the value of the property and had given careful attention to the whole matter of reproduction value. The true amount, of accrued depreciation, the amount of fall, in costs before the hearing, and of the other respects in which the company’s valuation was attacked, do not appear. Comparison of the majority and minority opinions makes it clear that the majority did not think it was departing from the principle of the Southwestern Bell decision, but rather was adhering thereto.
It is plain from its exhaustive report that the Michigan Commission in this case followed practically in the lines of Mr. Justice Brandéis’ dissenting opinion in the Southwestern Bell Case; and it will, of course, be noted that the action of the Commission was taken some time before this opinion was announced. The report of the Michigan Commission is most painstaking and - thorough, and displays obvious intent to deal fairly with the Utility — according to the Commission’s view of the legal questions involved — in a degree which unfortunately has been absent in some cases in which judicial review of Commission conclusions in other states has been sought. It will be noted, however,. that, pursuant to a common practice, the report seeks to immunize it-
So much for the method by which a rate base must be fixed. The Michigan Commission in this case fixed the base, considered the other necessary elements, determined what the proper return should be and what the actual return probably would be, and fixed the rate schedule accordingly. The Utility says that the rate so fixed is confiscatory. This the Commission denies. Upon what principle should we proceed in granting or withholding a preliminary injunction? It may be that only a short time would elapse before there could properly be a final hearing; but there can be no certainty of that. Unexpected difficulties might arise in taking proofs or in reaching a final hearing in this court. Certainly there may be substantial delay. In such a situation the applicable principle was stated by the Court of Appeals of this circuit in Louisville v. Louisville Telephone Co., 279 Fed. 949, as follows (pages 956-959):
“It is equally well .understood that the trial court will balance the conflicting equities of the parties, and, if it appears reasonably probable that plaintiff ¿may prevail upon the final hearing, will for the time being preserve plaintiff’s supposed right against destruction, if that temporary maintenance can be accomplished without danger of greater harm to defendant than there will be of benefit to plaintiffs. We see no sufficient reasons why.these principles should not be applied to such a case as this; but we proceed to notice the reasons which are alleged to the contrary. * * * It is also said that the rate ordinance is . a law of the state, within the meaning of that term as used in the Fourteenth Amendment, and that the company is attacking it because in violation of that amendment, and therefore has the burden of showing that a state law is unconstitutional, which burden can be met only by evidence that is wholly convincing. The proposition in effect is that, when plaintiff claims it is about to be deprived of its property by an unconstitutional law, it cannot have the benefit of the usual rule for temporary protection while thei case is pending, but that it must at the outset establish its case by the same degree of demonstration which will be required upon the final hearing. If the unconstitutionality depends wholly upon a matter of law this proposition is forceful; but, where the .result depends upon a disr puted question' of fact, we think there must be some special circumstances— perhaps like the contingent public loss inevitable in a railway fate case — to*145 justify refusing the plaintiff the benefit of the usual presumption that upon the final hearing he may be able to establish his claims with sufficient certainty.”
The same principle has more recently been announced by the Supreme Court in the case of Prendergast v. New York Telephone Co., 43 Sup. Ct. 466, 67 L. Ed.- (April 16, 1923), as follows:
“ * * * Especially will the granting of the temporary writ be upheld, when the balance of injury as between the parties favors its issue. (City of Amarillo v. Southwestern Telephone Co. (C. C. A.) 253 Fed. 638, 640. Here the. Commission had prescribed temporary rates which were found to be confiscatory, which were to continue in effect pending the final determination of the Commission after its investigation had been completed; and no date had been fixed for the completion of this investigation or the final hearing. The company meanwhile could only be protected from loss by injunction; while, on the other hand, its subscribers were protected by the bond which was required for the return of the excess charges collected if the injunction should be thereafter dissolved.”
These decisions require that a preliminary injunction should issue, if there is reasonable probability that the Utility will prevail upon a final hearing, and if the consumers can be effectively protected against a substantial loss if the final result is in favor of the lower rate.
Beyond that, it would seem that in cases heard under section 266, it would be peculiarly inappropriate to refuse a preliminary injunction on the ground that a final hearing could soon be had. The effect of that procedure would be to deny to both parties any right to have the merits of the application heard by the special court which section 266 creates for that purpose and which is the right of the plaintiff as well as of the defendant (Ex parte Metropolitan Co., 220 U. S. 539, 31 Sup. Ct. 600, 55 L. Ed. 575), and to pass all questions over to the decision of the single district judge upon the final hearing.
If a preliminary injunction otherwise should issue, we cannot rightfully deny it just because the Commission announces that, if this rate shall finally be found noncompensatory, it will permit the loss to be amortized through a later rate. This policy is thoroughly fair, and is to be commended; but this Commission is under no legal duty to take that course, and its intentions or its personnel may1 change. When the court sees a case of week by week and month by month.continuance of confiscation, even if each monthly loss is small, the plaintiff is entitled to his injunction without waiting for possible future' relief, unless for reasons not here present. See Pendergast v. New York Telephone Co. and Oklahoma Co. v. Commission, supra.
It is suggested, perhaps not strenuously, that the Utility has not exhausted its remedy through appeal to the Michigan courts. Prentis v. Atlantic Coast Line, 211 U. S. 210, 29 Sup. Ct. 67, 53 L. Ed. 150. It was held in Detroit, etc., Co. v. Michigan Ry. Commission (D. C.) 203 Fed. 864, 868; that the statutory power of the Michigan courts in an.analogous case was judicial,'not legislative. This wa,s affirmed by the Supreme Court of the United States, 240 U. S. 564, 36 Sup. Ct. 424, 60 L. Ed. 802. We are not aware that it has been questioned by the Supreme Court of Michigan. It follows that the statutory appeal, and an application to a federal court under the Fourteenth Amend-
Turning now to the questions of fact: The engineers of the Commission made a careful inventory and appraisal, and the Commission’s auditors thoroughly examined the Utility’s books and records. These engineers and accountants found — and there was nothing before the Commission to the contrary — that the historical cost of the physical property on January 1, 1923, was $272,000. By “historical cost” was meant what the books showed the cost to have been, as far as the books went, and what the evidence showed the probable cost was in these respects not shown by the books. They also found that the reasonable cost from time to time, or the prudent investment cost, .up to the same date, would be $272,0(X). They also found that the reproduction cost of the physical 'property, new, as of January 1, 1923, would be $445,-000. They also estimated and fixed the actual depreciation of the various items or classes, in amounts which in total were $44,000, or about 10 per cent, of the cost, le'aving the reproduction cost, less depreciation, of the physical property^ as $401,000.
The Commission then, in one part of its report, applied the same percentage of reduction for actual depreciation to-the amount of prudent investment cost, stating that this depreciation would be about $26,000. There are intimations that there might be a further depreciation by way of obsolescence or theoretical depreciation, but this is passed over with the statement that there seems to be no occasion for any substantial allowance for obsolescence in addition to actual depreciation. The Commission then stated that in fixing the rate base it would include an allowance “of something like $25,000” for working capital, and that it also made “a proper allowance,” the amount of which it did not state, for “going concern value.” It then announced its general verdict that the present fair value of the entire property and to be used as a rate base was $275,000. These figures are very persuasive (though perhaps not beyond possible explanation) to the effect that the Commission practically fixed the historical cost, or prudent investment cost, as the rate base, and gave no substantial effect to the reproduction cost, and therefore offended against the rule which must be deduced from the Southwestern Bell Case.
We gather from the report of the Commission and its answer in this case only three suggestions which seem to be thought to weigh against the propriety of the acceptance of the reproduction value, found by the Commission’s engineers, and against the conclusion that the Commission did accept and use the “prudent investment” cost, less depreciation and plus working capital, as its rate base. They are: (1) The depreciation account; (2) the construction overheads; (3) the excessively high cost prevailing during the period selected by the engineers, as a standard. We will consider these things in their order.
1. The utility carried upon its books a depreciation account, which (after a correction directed by the Commission), January 1, 1923, amounted to about $37,000. This was called a “retirement reserve.” In its answer the Commission says:
*147 “Included in the item of $272,000, above mentioned, was property paid for by the use of the reserve fund, or retirement fund of the utility; a retirement reserve of approximately $39,000 being reinvested in the property.”
The Commission does not definitely undertake to deduct this retirement reserve from the present fair value of the property, but there is a suggestion that such deduction might be. made. We think this is an entire misapprehension. An account of this kind is not a fund in hand; it is a bookkeeping estimate of depreciation which accrues beyond and above the amount kept good by repairs and replacements. It appears in the list of assets only because it represents a supposed loss of capital (or of accumulations); and if the capital stock is carried as a liability at par, along with undivided profits and surplus, then the depreciation must appear upon the other side of the account. If the bookkeeping estimate is accurately made, it will precisely balance the actual difference between the present value of the depreciated items and the future cost of proper replacements or substitutions. If the estimate is liberally made, there will be a surplus above the true amount of actual depreciation, just as there is here a surplus-or difference of about $11,-000 between the Commission’s engineer’s estimate, as applied to prudent investment cost, and the defendant’s books.
2. Construction Overheads. Included in the $272,000 stated by the Commissioner’s engineers as prudent investment cost was an allowance for construction overheads of about $34,000. This was about 12% per cent, of the total, or, more accurately stated, an addition to
“Said amount was, in the opinion of the Commission-, far too great. No such overhead costs appeared upon any records of the plaintiff or anybody else, and the Commission was not hound hy any such figures.”
We, can see no escape from the conclusion that the action of the Commission in this respect was arbitrary. Such overheads as were involved, viz., interest and taxes during construction, contractor’s profits, and items which all the witnesses classify as “undistributed costs,” are as much a part of the fair value of the plant, considered on any basis, as are the iron and the bricks. The. only evidence before the Commission was the report of its own engineers, who, both as to reproduction cost and original cost, made this estimate of about 14 per cent. The only additional evidence before the court is that of the Utility’s engineers, who testify that the proper allowance is about 20 per cent. If, perchance, the Commission had in mind evidence or papers in other cases, or general documents in its files which showed that 14 per cent, was too high, it had no right to base its findings on such documents or evidence without calling them to the attention of the Utility and giving it a chance to be heard. U. S. v. B. & O. S. W. Ry., 226 U. S. 14, 33 Sup. Ct. 5, 57 L. Ed. 104; Interstate Commerce Commission v. Louisville & N. R. Co., 227 U. S. 88, 91, 93, 33 Sup. Ct. 185, 57 L. Ed. 431; U. S. v. L. & N. Ry., 235 U. S. 314, 321, 35 Sup. Ct. 113, 59 L. Ed. 245.
Obviously these overhead costs would not appear “upon any records of the plaintiff or anybody else.” There was no reason-why they should. The Utility’s books did not purport to go back' and show total actual disbursements for construction. The engineers arrived at their prudent investment cost by computing what labor- and material should have cost at the respective dates involved, and' there was nothing to indicate that they made the mistake of counting these overheads in again after they had originally estimated for the same things. Therefore we conclude that, at least, that estimate of overheads made by the Commission’s engineers must be accepted in arriving at the rate base.
3. In making their estimate of reproduction cost, the -Commission’s engineers used as a standard the average of costs during the five-year period, 1917-1921.' The Commission as'sumed, as' it rightly could, that the year 1922 had been one of somewhat diminishing costs, and hence that its engineers’ basis was too high to use tin fixing reproduction costs’as of. January 1, 1923. There. seems., to' have been no evidence on this subject. We are not sure that any tribunal may judicially assume that the construction' costs were less January 1, 1923, than they were during the average of the period 1917-1921;; or that ■judicial knowledge can go further than to say that such costs January 1, 1923, were , substantially less than they were at the peak _ in-1920-21. Whatever inference the Commission might have been authorized to. draw, this motion must be decided by this court- upon the .evidence before it, and aside from the figures of the Commission’s engineers, there is no evidence excepting that of the Utility's erigiúéefs,' who' pro
Differing estimates of actual depreciation cannot be used for the purpose of reducing the Utility’s engineers’ estimate, because the amount allowed for actual depreciation by each set of engineers is substantially the same; indeed, the Utility’s engineers allow a slightly higher percentage.
We think no specific criticism of the Utility’s engineers’ figures is made, excepting to say that the overhead charges of 20'per cent, are too large. It would seem that we would be giving the benefit of every doubt to the Commission if we took the percentage of overhead allowance made by the Commission’s engineers, 14 per cent, instead of the 20 per cent, allowance made by the Utility’s engineers. Modification in this respect would cause us to increase the figure of $332,000 substantially $46,000 for overheads making a total of $378,000. We are unable to see how, upon the evidence, any less a figure-than $378,000 can be by us taken as the January 1st reproduction cost of physical property.
Obviously and as expressly held in the Georgia Power Case, this reproduction cost at that date is not absolutely controlling. It must be contemplated that a rate fixed by the Commission is to stand for a substantial period. Our Court of Appeals suggested in the Louisville Telephone Case, 279 Fed. 959, that a three-year period was about as short as should be contemplated when a rate is fixed.. Clearly the Commission should look forward to such a period; and if there is anything before it from which it may draw a reasonable'conclusion that the average cost will be higher or lower than the present cost, it may give due weight to that' conclusion — subject, of course, to later correction by it if the future demonstrates an error. But we do not understand that a Commission can malee or act upon a finding of this kind, express or implied, unless there has been evidence thereon and the Utility has had the chance to be heard. ■ It is difficult enough in
It is agreed upon all sides that to the proper valuation of the physical property a suitable allowance for working capital must be made. The evidence before us indicates $30,000 to be a proper sum. The Commission indicated its approval of “something like $25,000.” No one has suggested that a lesser amount would be sufficient. ■ If we add this to $378,000 we have $403;000.
There perhaps should be added an allowance for the cost of converting the skeleton plant into a profit-returning body., We find no occasion now tó discuss this mooted question.. It is not easy to reconcile all the things which the Supreme Court has said on the subject; nor, indeed, to see why, if we are considering present reproduction value and not historical cost, there is difference in principle between value for exchange and value for earning. However, this subject may be postponed until the matter becomes controlling, in this or some other case.
The foregoing considerations demonstrate to- us that, if we make some allowance for uncertainties and- even for the expectation of lower costs in the immediate future, the -Commission was' not justified in fixing the rate base at less than $375,000. We do not need to decide at the present moment whether the evidence required any greater valuation.
We reje’ct entirely the whole, subject of capitalization, stocks, and bonds. We fail to see how it can have any pertinence. The Utility is entitled to an opportunity to earn a reasonable minimum return upon the proper rate base. How many securities are outstanding is of no importance. Cases may be conceived where the stock and bond history may have evidential value, but its bearing at the best will be remote.
The next element in fixing the rate to be charged' is the proper rate of return. The Commission has estimated this at 7 per cent. What rate the court should consider as that minimum below which the Commission cannot go without creating confiscation it is not necessary to°decide. .The Supreme Court said in the Southwestern Bell Case that a rate of 5y3 per cent, and in the Bluefields Water Company Case that a rate of 6 per cent, was too low. We do not see anything to justify a lesser rate in this case; indeed, it is evident that the Commission does not wish to stand upon the rightfulness of any rate of return less than the one that it adopted. The fact that the Utility is operating by sufferance of the city cannot affect that minimum rate constitutionally permissible, however much weight it might have in fixing a rate reasonable in an economic sense. Detroit, etc., Co. v. Mich. Ry. Commission, supra; Louisville Telephone Case, 279 Fed. at pages 952, 953, supra); Toledo Case (C. C. A. 6) 259 Fed. 450, 453, 170 C. C. A. 426.
The next element requires us to estimate the future output or volume of business. For this purpose courts have sometimes re
The remaining important element is the estimated future cost of operation.
It is not worth while for the purposes of this motion to go into the several disputed questions arising upon this, subject. For our present purposes we accept the estimate and allowances of the Commission that the reasonable costs should be considered as $1.22 per M, including proper allowances for depreciation and reserve, and thus leaving a margin of 32 cents per M upon an estimated output of 60,-500,000 to provide for return; the Commission’s estimate of the actual average of its new prescribed rates, as applied to the various classes of customers, being $1.54 per M.
It follows that upon the Commission’s own figures, the return for the year would be substantially $19,360. This is a little less than 5Ye per cent, upon the $375,000 rate base,, and under the recent express holdings of the Supreme Court, is plainly confiscatory. If we readjust the expectant operating net income upon the Utility’s claims as to the actual cost of production and necessary allowance for depreciation reserve, the income would be noncompensatory even upon the $275,000 base; but those questions will be passed by.
Upon the hearing of this motion, the Commission, by affidavits and testimony, made a showing as to thé actual income of the Utility for the first four months, of 1923, under the interim rates which were in force until April and had been continued by the effect of the restraining order. The suggestion is that these figures- show the Utility to be receiving a return unjustly large. A careful comparison and summary of this showing brings the following record: .
. $11,024 for four months equals $33,072 per year, slightly less than 9 per cent, per year, upon $375,000. The readjustments claimed by the Utility would bring this down 2 or 3 per cent.
It is well settled that the court cannot fix the rate, directly or indirectly, but is concerned only with whether the Commission rate is confiscatory. If so, an injunction must issue. While this is the general rule, yet if it appeared that the rate, which the Utility was receiving and after taking into account any equitable right to amortize recent past losses, was excessive to the point of being above the value-of the service and above any reasonable maximum, we should not hesitate to make the granting of an injunction conditional'upon a suitable' voluntary abatement by the Utility. The Toledo Case, supra, 259 Fed. at page 458; The Consolidated Gas Case, 258 U. S. at page 177, 42 Sup. Ct. 264, 66 L. Ed. 538; Id. (D. C.) 267 Fed. at page 273. However, we cannot regard a return which, upon the Commission’s figures, is less than 9 per cent., and which, after deciding matters of dispute, may turn out to be hot more than 6 per cent., as so excessive as to require the application of this rule of voluntary abatement.
We understand that under the Michigan law, the Utility and the municipality must join in an appeal to the Commission in order to give the jurisdiction. If this is still the situation, it might be claimed that the Commission’s jurisdiction was ended by the order which it made, and against which this motion is directed; We do. not so regard it. We think the effect of the injunction now ordered is'to leave the matter open before the Commission as if'its final order had not been made, and that it is fully at liberty to proceed with the hearing, upon its own initiative, giving the Utility suitable opportunity to be heard upon proofs and, arguments, and then to make its further final order, without any embarrassment by the injunction now to issue, excepting as by the direct effect thereof; ■ ' ■ _
If the Commission desires review by the appellate court of any matter involved,', it may have such review upon. t,he present record in its present form, or perfected as aboye; suggested/ or it' may postpone such review until-it has taken such--further evidence and made .such further order as it may desire, and there has, been another hearing upon another similar motion'for injunction,- if such motion. should be made.
The amount involved, as between the interim rate and the rate now enjoined, is about $1,000 per month. The Commission has not
This memorandum heing on file, bearing the signatures^ of the three judges, and thus evidencing the consent and approval required by section 266, we think it proper for the local district judge, acting alone, to approve the bond and thereupon to issue the preliminary injunction •prayed for.
The line of Supreme Court cases, touching this subject, within the last year or so, comprises: Newton v. Consolidated Gas Co., 258 U. S. 165, 42 Sup. Ct. 264, 66 L. Ed. 538; Oklahoma Natural Gas Co. v. Oklahoma, 258 U. S. 234, 42 Sup. Ct. 287, 66 L. Ed. 590; Galveston Electric Co. v. Galveston, 258 U. S. 388, 42 Sup. Ct. 351, 66 L. Ed. 678; Houston v. Southwestern Bell Co., 259 U. S. 318, 42 Sup. Ct. 486, 66 L. Ed. 961; Wichita R. R. & Light Co. v. Kansas Commission, 260 U. S. 48, 43 Sup. Ct. 51, 67 L. Ed. 124; Oklahoma Gas Co. v. Commission (March 5, 1923) 261 U. S. 290, 43 Sup. Ct. 353, 67 L. Ed. -; Keller v. Potomac Co. (April 9, 1923) 261 U. S. 428, 43 Sup. Ct. 445, 67 L. Ed.-; Prendergast v. New York Telephone Co. (April 16, 1923) 43 Sup. Ct. 466, 67 L. Ed. -; Southwestern Bell Co. v. Missouri Commission (May 21, 1923) 43 Sup. Ct. 544, 67 L. Ed.-; Brush Electric Co. v. Galveston (June 4, 1923) 43 Sup. Ct. 606, 67 L. Ed. —; Bluefield Water Co. v. W. Va. Com. (June 11, 1923) 43 Sup. Ct. 675, 67 L. Ed. -; Georgia Power Co. v. Georgia Commission (June 11, 1923) 43 Sup. Ct. 680, 67 L. Ed.-.
We can contribute to the discussion only a reference to the contention of some, economists that an increase of 100 per cent, in reproduction costs indicates that the dollar of return has lost 50 per cent, of its purchasing power, so that to maintain the same actual return either the rate base, or the rate of return, or both, must be increased. It must further be noted that rate fixing involves three main elements — the rate base, the proper .rate of return, and the operating cost. It is easy to “stabilize” the rate base by adopting the “prudent investment” theory, but the other two elements must remain unstable and fluctuating.
It' is not impossible that the Supreme Court has, in effect, yielded to the force of what was said by Judge- Learned Hand, in the Consolidated Gas Case (D. C.) 267 Fed. at pages 236, 237: “With deference, it appears to me to be merely an abandonment of any attempt to deal intelligibly with the question to say that cost of reproduction and the, original cost are each elements to be considered. That statement can mean nothing whatever, unless it is accompanied by a constructive rule, which will establish some standard in the ascer-1 tainment of which these may be used. It would be understandable to say that the two estimates should be averaged, but such a rule could obviously command no support, because it would correspond to no relevant considerations of policy. Merely to leave the question with a caution that several elements are to be considered is to abandon any effort to solve it.” See Bluefield Water Case, 43 Sup. Ct. 675, 67 L. Ed.-.
As compared witli the same engineers’ estimate of depreciation as applied to reproduction costs, the utility’s bookkeeping estimate showed a deficiency (about $7,000) instead of a surplus.
Upon the oral testimony of the utility engineers at the motion hearing, the Commission reserved the right to cross-examine, after time for preparation. We have thought it proper to express our opinion on the record ás it now stands, in order that the Commission might intelligently determine whether it cared to exercise the reserved right. If it does, a time will be fixed,' and due consideration he given to any further. proofs therehy developed. >• We have thought we might save timé by contingently assuming that cross-examination would not be’ thought sufficiently material to1 justify delay.
We include this item without any implication as to its propriety.