*1 & POTOMAC TELE- al. v. CHESAPEAKE WEST et COMPANY OF BALTIMORE. PHONE Argued April 10, 11, No. 1935.—Decided June 1935. *3 Lewin, John Henry Cleveland and Messrs. Richard F. brief, Herman M. Moser on the for with whom Mr. appellants. Howard, McHenry with whom
Mr. Charles Messrs. Orsdel, Williams, Milne, Raymond S. R. A. Van T. Baxter Bracelen, brief, and John H. were on the Ray C. M. for appellee. Court, Barton, Jr., Messrs.
By Randolph leave a brief on and Forrest Bramble filed behalf of Retail Baltimore, Merchants Association as amicus curiae. delivered the opinion of the Roberts Justice Mr. Court.
Early Public Service Commission of Mary- an investigation land undertook of the rates and charges Potomac Chesapeake Telephone Company of hearings Baltimore, and after extended entered an order 1933, directing November into 28, company put January 1934, effect reductions rates, sufficient annual net diminish income com- $1,000,000. filed a pany bill in the District Court for temporary and final injunction; for application relief interlocutory was heard a court of three A judges. stipulation was made that the cause be treated as upon should final hear- ing and decree was enjoining entered of the enforcement order.1 This appeal challenges the court’s action.
The Commission determined the the property at December 31, as $32,621,190; estimated the net revenue for 1934 at $3,353,793; allowed reasonable re- turn on value, $1,957,271,—which the estimated rev- 6% —
enue would exceed In $1,396,522. view rise general during level 1933, however, the Com- required mission a reduction of but In $1,000,000. com- puting net income the Commission all accepted company’s figures for current expense, the annual except allowance for depreciation; the amount claimed head being and the $2,173,000, $1,720,724. sum allowed cent, The company insisted on return. per a 7% The controversy in the District Court around revolved value, three depreciation annual expense, and matters — rate of return. The court found the the prop- erty to $39,541,921, the necessary depreciation expense $2,000,000, the net return probable under the Commis- *4 order $1,742,005, sion’s or at the rate of per cent., 4% 6 against per cent., as which the court held was the limit the return below which could not be reduced without confiscation.2
All of figures the stated embrace both intrastate and business, interstate but the parties stipulated re- value, spect expense and income, the former repre- 1 Telephone Chesapeake West, & Potomac Co. Supp. v. F. 214. cent, also allowed a return per 2 The of 6 Commission the property as determined it. value
'666 cent, ,and of the total. latter 15 per cent. per
sented whole, property dealt As the with the District Court found parties, their witnesses and fact that in mind the so, having it to convenient do cent, re- involved of the amounts per final result order Commission’s and the flected intrastate business reasons, and For similar accordingly. must be limited the same pursue shall reservation, with a similar we the Com- of this purposes proceeding course. For the requir- considered as order, therefore, mission’s operations of income from intrastate a diminution ing than by $850,000, $1,000,000. rather pre- and In 1916 the Commission valued an in- In company applied rates. 1923 the scribed hearing at ap- fixed ; Commission after crease the value the rates cost, book refused proximately permit and filed Court, The to a bill pursuant be raised. District found book the actual value exceeded company, enjoined $6,000,000, some and the Commission from the current rates.3 The Commission enforcing in the decision an acquiesced passed adopting order finding establishing court’s value and new rates. until initiation the present matters stood So investigation. accurately
The books show company’s installations and from them historical cost plant retirements $50,025,278 as of 31, ascertained to be December 1933, $11,483,357. reserve of Com- depreciation with a appraisal physical no plant prop- mission made but erty, attempted determine trans- the dollar value as was lating plant found the earlier District Court in case at 31, 1923, December net plus additions dollar each value in subsequent year, an equivalent into dollar value at December 3 Chesapeake Telephone Whitman, & Potomac Co. (2d) 3 F. 943, 953.
Its signifies was this: in rate theory regulation Value investment dollars on which a entitled to utility earn. when exchange dollars free invested were units of value having significance an and earning then now they exchange. because are such units When invested they represented plant many so miles of poles, other and items other hand wires, equipment; represented same dollar units then certain quantities bonds, apartment of government houses, automobiles, etc. The services, food.and dollars invested in com- had no pany’s plant value unless were they exchangeable requirements for other stockholders, and desires of the requirements and corresponding all desires of persons use the dollar as a who measure Thus value. regulating finding value, must find a body, number of universal units of earning power and purchasing is, power; exchangeable dollars invested in place present exchangeable dollars. How shall the relation be ascertained? thought
The Commission it found the answer in com- modity indices, prepared show price trends. se- lected sixteen of these, covering one com- many as 784 modities, falling into different classes, weighted others less averaging; much comprehensive; and its wit- ness calculated the use each index the reduction value of company’s assets considered as a conglom- of dollar from erate mass value subsequent date of acquisition, to 1932. As might expected the results widely. varied The lowest any found use index highest $24,983,624; $36,056,408 per—48 cent, higher. The Commission weighted then six- these teen indices principle them disclosed, giving weights of from one to four, thus got a divisor thirty-one for the total obtained by adding weighted results of all. gave This what styled the Commission “ fair index,” applied to the 1923 value of *6 then all additions owned and to cost of net
in subsequent years, to obtain The re- value as adding for sult, $660,000 working after some was a capital, $32,621,190. proof rate base of The submitted company and reproduction of estimated cost accrued depreciation. evidence, The Commission examined and criticized this was offered the valuation opposition, but none and was figures on the obtained use of squarely based index.
In company the District Court the offered evidence reproduction less historical cost and estimates cost de- Commission relied figure solely preciation; dollar trending plant from value owned resulting subsequently of net The 1923 and cost made. additions for determining used inappropriate held the indices court them. It purported to con- and discarded value present cost; fact, and reproduction but, book cost both sider opinion,4 from the derived appears plainly as as figures only, two cost at the use of December —book less the entire reserve ($50,025,278) depreciation 1933 ($11,483,357), books thus fixed value shown —and $1,000,000, To this added $38,541,921. working for at $660,000 allowed the Commission), (instead capital $39,541,921. Annual depreciation a rate base of ex- giving $1,352,284 from as determined raised was pense The appellants charge that in $2,000,000. court’s action arbitrary respects these all are not satisfied with We the methods cannot stand. or the by the court Commission. either pursued Commission took value of the physical First. of the then (exclusive depreciation reserve), in 1923 plant $23,689,693 of 1932. It and trended $35,147,912, (exclusive plant deprecia- net additions annual took similarly trended This gave them. reserves) and tion 219, 222, 228. Supp. F.7 plant exclusive of the plant represented in the de- preciation reserve. depreciation took the reserve as at (invested in plant) and the yearly net additions to the reserve trended each figure to 1932 value. In it reduced the book this way which, reserve at cost, stood $10,405,147, $7,318,086, deducted the latter from A table total value. found in plant the Commission’s showing operation in detail report copied margin.5 inappropriate method is
This obtaining the value of An plant. obvious telephone objection *7 a going is that the which are its basis were not prepared as indices an aid to property. They of were appraisal intended merely to 5 The table as follows: one shows that
indicate trends. Indeed the record 3,— given weight a index used the Commission Commission, Commerce that of the Interstate —bears “ in the determination that it should not used notation ” properties. upon costs individual reproduction of unit indices would have authors of the other Doubtless the they supposed anyone warning, if had issued a similar use. attempt such employment the wide of results of Again, variation already their ac- indices, mentioned, impugns of different dis- Sensible curacy implements appraisal. a rule of thumb attempted cor- crepancy, indices weighting principle the several rective, itself, process and thus rendered its known obscure. The possible valuation even more dubious and by the increased use of some indices factors of error are by the Commission’s witness that constructed such as The evidence is that prices. Electric these upon Western cent, per company’s purchases; to about apply rising prices, 1924-1929, period they during prices than other commodities slowly more rose though 1930 other articles; prices manufactured average were raised an Electric’s of 10 per Western fell, *8 from constructing an index these prices, In cent.
671 disregarded witness during increase period 1930- a of 3 and gave weight index applied it to all purchases although of the con- company, fessedly was applicable them. one-fourth of The established principle process is that as the due (Amendments clauses V and XIV) safeguard private property against a for use taking public just without neither Nation nor compensation, may require State use of privately owned property just without compensa- tion. When itself is taken the exertion just power domain, compensation eminent is its time of the taking. So, where by legislation prescribing charges the use rates property is taken, just compensation assured these constitutional provisions rate reasonable of return upon that value.6 To an extent value must be matter sound judgment, involving fact data. To substitute such factors as ” cost and reproduction, historical cost of translator 6 307, 331; 116 U. S. Cases, Railroad Commission Dow v. Beidel- 691; 680, 125 U. S. man, Georgia Banking Railroad Co. v. Smith, & 174, 179; Chicago, 128 S. Ry. U. M. & Co. v. 134 Minnesota, St. P. 458; 418, U. v. Farmers’ Loan Reagan S. 154 Trust Co., 362, U. S. & 399; 165, 176; v. Union Pac. 64 Fed. Ry. Co., v. Smyth Ames, Ames 546; 466, 526, 541-2, 544, 169 U. S. Diego Land & Town Co. v. San 757; 739, 174 City, S. Diego U. National San Land & Town Co. v. 442; 439, 189 U. S. v. San Jasper, County Joaquin Stanislaus C. & I. 215; 201, Knoxville v. 192 U. S. Co., 212 U. S. Co., Knoxville Water 1, 18; 41; 212 13, 19, v. U. S. Co., Willcox Consolidated Gas Lincoln 349, 358; v. Lincoln, U. S. Gas Minnesota Cases, Co. Rate 352, 434, 454; U. S. Denver v. Denver Union Water 246 U. S. Co., 178, 190; Houston v. Southwestern Bell Telephone Co., 259 U. S. 325; 318, 324, v. Public Waterworks Co. Comm’n, Service Bluefield 690; Dayton-Goose 679, 262 U. S. Ry. v. United Creek Co. States, 456, 481; Board 263 U. S. Commissioners v. New York Telephone 31; 23, 271 U. S. Co., Indianapolis Co., McCardle v. 272 U. S. Water 408-409; Railways 249; 280 U. West, v. S. United Smith 133, 149; Co., U. S. Angeles Illinois Bell Tel. Los Gas Co. v. Rail- S, *9 287, 289 Commission, 305. U. road
672 indices, of dollar value obtained trend price the use its diffi- problem to confuse and increase serves culty, may anything and well lead to results but accurate not are to suggest price and fair. This is trends disregarded; is true. And evidence quite contrary be is with all other relevant trends to be considered such States, & Co. v. United Ry. factors. St. Louis O’Fallon Bridge Ferry 279 U. Clark’s Co. Public 485; S. v. Comm’n, S. Service U.
A fundamental in the Commission’s method more defect in that the affected sudden shifts level. is result is into just true that valuation must take account any It is We have therefore held changes prices.7 the level to the property value devoted that where of original cost, utility is in excess com- service public Conversely, if not limited a return cost. is pany value, public should not plant depreciated has measured investment. allow return Of bound to investment to be of that considered the amount is course as presently existing, appraisal with along a fair conclusion to present value, order to arrive at cost and all cost, other elements reproduction for actual given proper weight their are to be affecting final conclusion.8 that such a property as that is be remembered
But it great integrated aggregate under consideration here primarily is not intended for elements; many and diverse public to the for devotion use now but market, sale far has, so as its market future; indefinite resemblance to a bushel of real no concerned, therefore, owner of such While, of iron. a ton wheat may on to pass pub- assume must a property Indianapolis 454; supra, Cases, McCardle Rate Minnesota Angeles Commission, Gas v. Railroad 410; Co. Los Co., supra, Water supra, 311. Commission, supra, 306. v. Railroad Angeles Co. Gas Los *10 general lie the risk involved in a decline and values, general also of a rise such may advantage have the to unfair but values, impracticable it would not be consequent rate return to sud- adjust the value the of and For this in the its essence price den fluctuations level. or ac- fairly is the of whose aggregate sort curately in the market. by abrupt such alterations reflected a ought therefore, A in rate corporation not, public service an last dollar to claim permitted the proceeding, be consequent precipitate increased a sudden ought or more of material labor. No spot prices rise depressed attributable to its property the value level. price a similar sudden decline in the The As the Com- example. an excellent case affords shown price trend was ascend- exhibits, gradually mission's de- It then a ing precipitate from 1923 to 1929. suffered 1932, date of Commis- December, so that at cline was at nadir. then it has Since valuation, sion's recognized The this. recovery. a sharp made 28, made November 1933. At and order were report Its shown the all-commodities price level, time the of had Labor, United States Department index of the cent, For 31, of December 1932. over that per risen 13.1 in- cutting net Commission, instead reason the this has been $1,396,000, allowed what company come ” “ ” of $396,000, ordering cushion spread called level has $1,000,000. The since con- a reduction the same index By application rise. tinued have beén obtained at December 31, valuation February, $39.691,- and at $38,390,922, than $1,000,000 greater the amount 038, or more than fixed December as of It thus appears the court or cushion has spread already been ab- so-called to be based rapid judgment if rise in spot sorbed What Commission in prices. effect commodity did low temporary level of take December, 1932, towas future in ascer- indefinite this low level apply fair value of the taining company’s plant the so-called years the two have property. experience clearly indicates the since the Commission’s order elapsed in the appraisal of the use of method impropriety such as that of company. agree, therefore, with the view of District Court, We *11 method was is not calculated inapt improper, that result, a fair and should not be em obtain or accurate hi ployed utility plants making the valuation of rate observed, it is not the function purposes. As that court inquiring question of a tribunal into the of confiscation to for mere legislative finding proce set aside the errors of a court is to ascertain whether duty merely The dure. in In has resulted confiscation. legislative process Commission, Los Angeles Corp. Gas & Electric v. Railroad supra, this Court said: legislative making The discretion in the rate implied power necessarily legislative extends the entire process, method in embracing reaching legislative used determination as well as that determination itself. We with either, long are concerned so as constitutional transgressed. legislative are not When the limitations a may bearing upon method is have definite disclosed, reached, judicial result but the validity func- beyond tion does not the decision of constitutional go is whether the rates as fixed question That are question. 304.) confiscatory.” (p. in was used of the claim language respect
The ignored had been various elements the Com- values of though however, might error found, mission. in of the items respect specified, been committed have error. possible See, also, neutralized the allowances other Comm’n, 292 U. S. Utilities Public P.& Co. v. Dayton, L. 290, 306. in Nothing said either of these justifies cases the claim that this court has departed from the principles announced earlier cases as to the value upon which a utility is to earn a entitled reasonablé return or the char- acter of evidence relevant to that issue. It is apparent from what has been said that here the entire method of the Commission was erroneous and its use in- necessarily unjust volved and inaccurate results. In such it is case not the function of a court, upon a claim of confiscation, to make newa valuation upon some different theory effort to sustain procedure an which is fundamentally faulty. principle applicable circumstances such as this
record discloses was Northern announced Ry. Pacific Department Works, Public Co. U. S. 39. There commission state out set to determine rates for intra- transportation state logs carloads. The in- carriers troduced evidence that existing rates yield did not any return on property employed or defray the operating *12 costs the traffic and its proportionate taxes. The com- without in mission, introducing evidence contradiction of proof the submitted by the carriers as to actual operating costs, entered an order the lowering rates on the basis a composite figure obtained largely from in data the re- ports submitted the and carriers their in exhibits the representing weighted the proceeding, average operating cost per gross-ton-miles thousand of all revenue freight on the transported systems, carriers’ including main line and branch line freight, interstate and intrastate, carload than less carload. The supreme court of the State order, sustained the and this court reversed, holding that the error in method pursued the was fundamental and amounted process. to denial of due It was 43): said (p.
“A issue precise was the cost each railroad of trans- in in logs carload lots porting western Washington, the not more than miles. system being on each average haul in determination composite figure the using In the above in necessarily ignored, the Department the of this issue average unit cost on the the differences in the first place, in differences on each systems; and then the the several and articles to the different classes traffic cost incident widely conditions under varying the merchandise, In this cost transportation is conducted. unit which of the differences in unit cost no account is taken figure in differences among things, upon other dependent, in commodity; in the character of the haul; length in country; density traffic; configuration in movement; the extent of the loaded car daily equipment nature of movement; car empty equipment used; to which the in the extent employed; required for its maintenance. Main expenditures interstate freight, intrastate, line and branch line load, are counted alike. The than car less load and car fundamental nature. The was error Department’s operating costs of the factor computing use of this process reasoning the whole which vitiated log traffic its conclusion. reached Department found aby regulatory body rates But where “. . . as being attacked are courts confiscatory, compensatory by which method its conclusion into the may enquire upon finding made order based without An reached. Case, 264 Junction U. S. Chicago 258, 263, evidence, evidence which upon clearly made does finding Commerce Commission Interstate v. Union it, support 541, 547, an arbitrary against act R., 222 S.U. R. Pacific The error relief. under discussion afford Courts *13 a denial of process.” It was due character. this ofwas M. Chicago, Ry. & St. P. see v. effect Co. same To 274 U. S. 351. Comm’n, Utilities Public the effect that suggestion report There is a both agreed parties.9 method was the Commission’s a state opinion, the District Court’s however, We find, subject of cont figures of was the ment that the use index apparent explained est.10 think the contradiction is We company record, reference which discloses the to the present relation to certain price used obtain from but other sorts each kind property, separated This to the comparable practice so treated. is in translating Commerce Commission the Interstate rails, by e. g., railroad steel specific property, use of the differential between the ton per price 1914, the date of original price pre and the appraisal, vailing a later In company at date.11 sense em ployed price indices; but that a use of plain such relation of values of specific as of two given articles dates quite distinct from the application general commod ity indices to a conglomerate of -assets constituting an utility plant. Much is made the fact the suit brought by the company in 1923 the District Court ap plied a index to price cost, and thus determined the then value of the property. But this fact justify cannot application of the procedure same here, in the face of the challenge its propriety. In the present case com did pany not put into evidence any such indices as 9“ Both Company and the Commission realized that attempt present day find fair value of the Company’s property by the taking usual method of an inventory of all items of property owned Company pricing out present those items at day prices would not years take at least two of constant work but would Company cost the $300,000 less than very cost the State agreed substantial sum. It was index numbers should be used arriving day costs.” Supp. 7 F. 11Compare St. Ry. Louis & O’Fallon Co. United States, 279 U. S. 486-7, *14 offered contrary on the the Commission but were used criterion use of sole that them to show evidence improper. would be of value Court con- stated, the District already As Second. Commission, method pursued demned deducting consisted own. This one adopted add- from cost and reserve book depreciation company’s It allowance for working capital. to the difference an ing discussed the evidence company’s is true that the court did less but reproduction new, as to cost of depreciation, of certain amounts disapproval large so to indicate its figures embodied in the total claimed and reconcile the A with its careful reading opinion own estimate. no that all other measures of dis- leaves doubt value were depreciation carded in favor cost less reserve. of low prices is clear that a period
It costs incurred much higher when the level was are not a safe The court so con- guide appraising value. reserve ceded. The was built depreciation up theory.12 company line The straight asserted represent amount of the reserve did not ac- observed and at the date of valuation,13 crued as much of depreciation of funds provided the total consisted in anticipation of and obsolescence. depreciation future The court agreed further found that on account of decreased demand consequent with diminishment service, of obsolescence, of reserve had years recent percentage sharply in- question value was going subject creased. The court recognized that controversy. element considered, but refused make any must be separate for it. allowance Telephone Illinois Bell Co., Lindheimer
12 See U. S. 167-8. Ferry Bridge 13 Compare Clark’s Co. v. Public Comm’n, Service supra, the court did in this:
What fact was It found book cost less depreciation actual accrued probably give high sought too figure. correct the error probable *15 cost by deducting from the entire depreciation reserve, though conceding this exceeded actual It depreciation. that this deduction large felt also ex- any redress cess cost over value; it finally said the of its method appropriate result would be to allow for going value.
Two quotations from the opinion will illustrate the of the basis action. court’s
“We are not unmindful that at the present time the is higher reserve depreciation slightly than normal and to is, extent that it is the it unfavorable to the company final . But result . . this disadvantage to the com- think, off-set is, we pany allowing it full of its despite actual costs lower generally trend prices.14 “All considered, relevant facts we are of the opinion a fair going allowance for value is made when we telephone property value the as a whole and a going as 15 at book concern its actual costs less full depreciation.” opinion The essence consists of the conclusion, that, all circumstances it will considered, fair to appraise depreciation cost less reserve. rough This ready approximation of value is arbitrary as as that Commission, unsupported by findings of the based evidence. upon
Third. For the reasons we stated cannot sustain the Court’s valuation. We have District shown that order violates the principle Commission’s of due process, adopted measure of value inadmissible. is not function, and was the function of the our court below, Commission determining the work to do rate Supp. 228. F.7 Supp. 226. F.7 Court, upon upon The District principles. base correct that the reached conclusions as to finding Commission legal no support, fair from-data which furnished enjoined the rate order. The have enforcement of should regardless of the right, was therefore method court’s action the order was reaching the decision it pursued confiscatory. case render it we decide the grounds upon
The appellants’ challenge unnecessary for us to consider respecting working capital Court District rulings or to discuss the rate allowance, depreciation and annual is entitled view company which the return to the court agreement of
point. decree is
Affirmed. Stone, dissenting. Justice Mr. reversed. decree should
I think the in a federal district court brought in equity, The suit is the of State in prescrib action legislative the aside set public the of its serv through agency rates ing telephone the pleadings, The issue raised sole ice commission. below, court and to the -one us only presented and the of appellee’s property is confiscation there is whether province is not within the of rates. by reduction its rates or revise rates fixed prescribe the federal courts is taken without due authority, property unless by state Fourteenth Amendment. in violation process Kentucky Natural Gas Co. v. Railroad Commis Central Court, 272. This sion, 264, 271, setting S. 290 U. Commission and old leaving the order aside not that issue. not force, pass upon It does rates does fixed the Commission will con that the rate hold with the agree nor property, fiscate does appellee’s below it will. district court determination
681 followed district court has not For it declared is determining this Court the rules sanctioned and, public company fair value of the of a service its conclusion that there been con- consequence, has rejected. But, notwithstanding fiscation must be this Court its decree. court, upholds errors district aside, upon order the Commission is thus set raised ground not record or considered This court below. is done because the rate is confisca- tory, the method but because which the Commission “ in- conclusion, at its which is now pronounced arrived ” “ erroneous,” is declared to apt be unconstitutional.
The Fourteenth Amendment is thus to be infringed, said not because appellee has been deprived any substan right, tive but because the action is Commission’s deemed due process a denial of the procedural sense. But not because, procedure is condemned even it lacks those qualities justice which essential fairness are all the Fourteenth Amendment has hitherto been supposed to exercising judicial of bodies gwasi-judicial exact func The Commission punctiliously tions. has adhered to a after acts notice and procedure hears before California, Hurtado v. it condemns. 110 535, U. S. 516, Hardy, Holden v. U. S. 536; 389-391; 366, Chicago, cf. Minnesota, P. Co. v. Ry. M. & St. U. S. 457; Commerce Comm’n Interstate v. Louisville & Nashville Co., S. 91. The sole R. U. transgression, for which work set at painstaking naught, that, the exer *17 “ judgment of the body cise administrative in ” “ ” formed experience appointed by law deal now very problem with the see Illinois presented, Central Comm’n, Interstate Commerce R. Co. v. 441, S.U. upon study it has relied of the historical cost and appellee’s plant ascertained value of in the light of price showing prices, declines indices, arriving at the pres fair of the a procedure ent property, which this approval.
Court has hitherto set the seal of its Clark’s Comm’n, Ferry Bridge 291 U. Co. Public Service S. Ry. Louis v. United 236; see also St. & O’Fallon Co. States, 279 S. 461. U.
In this state of the record it is to consider unnecessary the appellee placed whether has sustained the burden upon establishing it of confiscation, demonstrate, I think may done, be that facts found the court below, acted, showing and on which far it fall short danger appellee’s any property is of confiscation. It is enough to point rejected out that this Court has the con- clusions of the district court because used book value as a measure of fair of falling times prices, findings that even with its of fair value, prob- earnings able and rate of depreciation, the district court found that the rate of return be approximately on the of one of the most stable of public 4%% adjustment If utilities. made be for a plainly excessive depreciation allowance, the rate of return on the court’s figures would be raised to The company sup- 5.10%.'1 ported its claim of confiscation no evidence of the cur- depreciation adopted by rate of 4% place Court in the allowed plainly is so 3.45% erroneous as to rejection. require its The Commission’s conclusion was upon reached ground abrupt expansion cessation of telephone greatly had business reduced the need retiring for property because inadequate to care increased business. The district court con ceded that the 1933 allowance at charged company 4.38% $1,250,000 higher was least than necessary to maintain the customary depreciation 20% against plant reserve in service. The rejected court nevertheless the estimate of the Commission on the ground that too much reliance placed must not expe single year.” rience of a It thus concluded that a federal may court confiscatory a rate order declare because it differs with the Commis predictions sion’s of future trends in telephone business. It would hardly range judicial seem within the omniscience to establish con by overriding fiscation the Commission's determination that the tele phone business is likely markedly expand in the near future.
683 yields rent evidence comparable investments no of the in obtaining rate of return generally money market.2 general money market conditions may and the of return on invested have capital rate con- trolling determining influence the issue of confiscation. Comm’n, Works Water Co. Public Service v. 262 Bluefield West, U. Railways United S. S. 679, 693; 234, v. U. 249. grave There at least doubt whether a return of yield is so out line with the current on invested 4%% be if capital doubt, as to deemed This confiscatory. ac- be cepted principles applied, against must resolved be no company, has offered evidence which the Twenty-five years doubt could removed. in times ago, far more prosperous than unanimously this Court these, judicial declined to take notice that an estimated net re- turn of Knoxville v. Knox- be confiscatory. 4% Co., ville Water U. S.
In determining whether the procedure of the Commis- any denial federal right, sion involves open review by collateral attack in the courts, federal important to consider closely a little more the nature of error.” In 1925 fair respondent’s property of 1923 judicially determined a federal district court of three judges, brought suit to set aside the Commis- Chesapeake sion’s determination. & Telephone Potomac Whitman, Co. (2d) 3 F. 938. The Commission had found the fair value of the be $24,350,000, $1,500,000 about more than net historical cost. The court 2The Commission introduced evidence that 53.0% of 296 listed the New York corporations, Exchange Stock and chosen at random, loss, a net suffered and earned less than 4% on 65.9% capital; their invested 22.9% of the listed Exchange railroads on the loss, suffered net earned less than 4% on 89.6% their invested capital. savings Baltimore paid banks 1933; December, 3% 1933, prime paper brought commercial 1%%; call averaged loans 0.94%; Treasury United States Notes averaged 0.29% Treasury Bonds 3.62%. *19 increase $29,500,000, fair to be an the
found 21% cost. over and of valuation over the Commission’s 29% by the same the precisely at increase court arrived the employed the method Commission basic it has applied Commission case,3 that the present except thoroughness. here far greater care and with re- in its Commission, the history With before it case port present in the states: “ that realized the the Commission Company Both and of the Com- day fair present to to the attempt find inven- taking an method of by the usual pany’s property and tory by Company owned the property of all items of not day prices out items at pricing present those work but would at of constant years take two least $300,000 and cost cost than Company not less It that index very agreed sum. was State substantial arriving at costs.” present day should used numbers ” to agreement which the importance It is of no rec- formally spread Commission refers was not made objection that no ord, for the itself shows was record offered to indices price the introduction evidence ef- that no by by appellee, both the Commission and and ap- fort made value of party prove either of the whole by engineers’ appraisals pellee’s property expert or value based on property, estimates present By entire com- knowledge property. observation was tried before mon consent the case theory fair value for rate present making pur- accuracy by could be arrived with substantial poses price indices the 1923 value it had application been as ascertained, subsequent the cost of an- judicially undertaking universally appli to declare the method While corresponding an cable, increased historical cost amount to the it prices prepared by the changes in the index of wholesale Bureau of Labor Statistics. deducting after accrued to the
nual additions depreciation. adopt any single index.
The Commission did not into translating its own index for book value prepared study on the of an elaborate value, fair basis merit.4 of this recognized The result indices trustworthy than study adopted applied more salient features of prepared .appellee, the index presently which will be considered. Commission, price indices' were used Five of them Sixteen commodity prices, comprehensive
related and included the prices prepared by Bu reliable index wholesale the United States *20 Five of of Labor indices construction costs were in reau Statistics. journals by and the cluded, prepared trade concerns allied with con industry. price building materials Two indices of the of struction general purchasing power, An of consumers’ issued were used. index pains Bank A of New was added. York, the Federal Reserve wages takingly index of was included in order to prepared Baltimore guard against any representation labor To adequate of costs. insure specialized price telephone property, in the trends of two peculiarity into also taken consideration. One was the Interstate indices were telephone telegraph property index Commission of and Commerce by railroads. That the Interstate Commerce Commission owned represent indices territorial index factors and are that “the stated reproduction unit applicable in the determination of not for use costs ” of does lessen the the index as upon individual roads not one or as a check on the results reached the valuation other element of Finally, upon prices index based Western Electric indices. an apparatus (after equipment was used telephone and elimination of a artificial). be the Commission to This found rise incontrovertibly applicable company property. the to of index is 25% rejected perfect wholly because it not a and a not certain It is to property. whole measure of averaged. Since some of the indices were were more These results directly applicable were others, some more and since than accurate assigned greater weights. they were It is telephone property, clear influenced considerations the Commission’s were these weighting. For appropriate example, the Bureau judgment toas weight price index of four; received Labor wholesale of Statistics consider The refuse to receive Commission did not decision and order any presented. the evidence Its for thor an examination, were commendable based error, Its if error evidence. oughness skill, and of all the considering was, receiving there did consist changes in com showing indices evidence submitted of modity have been error for prices. other Louis St. it. In not to have considered Commission States, supra, Ry. & O’Fallon Co. United Court set this of the Interstate Commerce Com recapture aside order ground that had failed mission on the the Commission sole tending to consider evidence before show that cost of railroad reproduction property the structural than cost. The evidence of this greater original the record consisted of index figures character disclosed of labor materi comparative price levels showing .5 each the subsequent recapture years als for 1914 and by the Commission The valuation of the was set ground Court on aside telephone index of and tele- Commerce Commission the Interstate prices graph property and the index based Western Electric each given weight three; weight other were all the indices received a highest and lowest the indices one two. results average only by the Commission and 23.4% differed from 10.6% separately gave respectively. sixteen indices considered Eleven *21 and ranging $30,000,000 $34,600,000. plainly between results There $32,610,327 clustering average by the of found a rather close about the Commission. twenty-four property accounts of structural the O’Fallon theOf prices by from 1914 use the Railroad, were trended the of seventeen by of Statistics, of Bureau Labor one price index wholesale average hourly Board’s index of earn Conference National Industrial railway of by equip the use index ings railways, and four of an on by Federal the President’s Conference Committee of prepared ment at None of accounts two were continued cost. Valuation,” and by adjusted by estimates or price current levels direct direct to equipment purchased of which was equipment, much pricing long in second-hand and service. failed
had to consider the evidence value over of increased In Ferry cost. Clark’s Bridge Public Service Co. Comm’n, supra, this Court held that the Supreme in Pennsylvania, Court the action of a sustaining state rejected commission, rightly engineers’ and appraisals value, in favor of a estimates lower valuation Commission based cost and a on of charts study showing price of labor and trends materials from 1924 to In affirming inclusive. the judgment court, of the state expressly this Court approved this of arriving method value, fair it was less although meticulously and carefully than in applied case, and held that the evidence of cost and trends, same char- as those acter on which the Commission acted here, out- appraisals weighed engineering of the whole property, here did not appellee choose offer. extent of the Commission’s error appears The thus to be it, all the evidence considering before the man- approved by Ferry Bridge case, ner the Clark’s Co. supra, thought the 1923 value the appellee’s plant and cost equipment, subsequent .additions, actual rea- sonably adjusted to conform recognized so as generally changes of labor prices and materials, shown price indices, reliable guide afford a better fair value than the evidence offered com- The pany. results thus against obtained were checked wage current scales construction industries Balti- vicinity, against more and the prices specific com- entering modities into construction of telephone company’s equipment. evidence consisted of its price index, own derived appraising samples of its ranging from property, of the total property 1% 20% type, assuming of each similar appraisals for each in- year since 1923. tervening Its index was based in sub- monopoly part prices stantial charged appellee for from its equipment purchased .affiliate, the Western Elec- *22 688 con corporate subject to the same
trie which is Company, for construc own labor costs appellee, trol as and on its time when was as books tion shown work its Western construction. The important in no engaged prices of to have Electric is shown increased Company time very at the November, 1930, equipment 10.2% manufactures commodities and similar of prices when index This increase is reflected declining. were evidence, the Com company. Upon all used bur did not sustain the appellee concluded that mission Public it, Distributing see Western Co. v. resting den on Comm’n, 119, Bell 124; U. Smith Illinois S. Service v. Co., 133, 153; Dayton U. S. Power & Telephone Comm’n, Public Utilities 292 U. S. Light Co. reasonableness of the it to prices paid of showing The labor costs the small amount of con its affiliate. work carried on were company struction shown than those materially higher to be the con prevailing vicinity. (the Baltimore and In 1930 struction trades company) they chosen were about date 147% level, 1932, (the while valua December, their 1923 date) wages tion Baltimore were about generally 87% It unnecessary of that level. discuss other defects extreme it.6 Its appellee’s proof so discredit re its own is at most proof perfunctory. liance here below, sustain conclusions of the seeks court rejects. Court which this commissions, utility like other g«<m-judicial
Public try the evidence bodies, must cases before judicial them. during proof construction appellee's overhead cost 6 In was esti “ directly deprecia distributed cost.” Accrued mated at 19% impairment physical rather than reduction in was based on tion ” ignored. was Going obsolescence the element swollen valuation amounting thus obtained added, 10.7% necessity any showing independent additional or no allow with going value. ance *23 been, the work suggested declaring
No basis has of its re- rejected must be because of the Commission un- consider, liance evidence which was bound to wrong. are that its prepared say less we also result was If on any we are unable find that confiscation ground to say I occur, will cannot that actual cost or ascertained telephone value of the of the com- equipment structural pany, price indices, trended accordance with reliable any less value trustworthy evidence of fair than present customary estimates, the more engineers’ appraisals did not think appellee it worth while offer, that, a any case, infringes any such determination con- immunity. stitutional
In assuming the determining judicially task of the pres- ent fair of replacement properties the vast of public utilities, have been into most projected courts specu- lative undertaking imposed upon them in the entire his- English jurisprudence. of tory from Precluded consid- eration of the unregulated earning capacity the utility, they find present must theoretical value of a complex property, built up by gradual accretions through long pe- Such years. riods a has no value, market be- there cause is no market in which it is bought and sold. Market would not be acceptable, any event, be- cause it would 'plainly be determined by estimates regulated earnings. future value, Estimates of its includ- “ ” the items of ing overheads and going concern value,” any cannot be tested by actual sale byor the actual pres- ent constructing cost of and assembling the property under competitive conditions. Public utility properties are not created full fledged thus single a stroke. If it were to presently rebuilt in its entirety, all probability it not be constructed in its present form. When we a arrive at theoretical value based upon such uncertain fugitive data we gain at best only an illusory cer- tainty. No court can from evolve its inner consciousness cer- question to the whether illusion
the answer study invariably supported be better tainty will trends, adjusted to price of the property the actual cost upon data study engineers based byor the estimates The value of will. which never have existed and never case, study question is a of fact each be ascer- such in the and with any light record, tained like other experience of the regard expert knowledge to the some case, obviously in the are which, great. *24 “ It is said price prepared that indices were not as the “ aid to the of appraisal property,” they an were (cid:127) a merely price trends,” suggestion intended to indicate that seems to assume that known are irrele- price trends vant to the determination of the fair value prop- of whose cost is known. It is erty also said wide the of employment variation of results the of different indices accuracy their as impugns implements . . of appraisal.” . to single price The use of index the exclusion of all might well others, true, produce as inaccurate result if a estimate were used to the single engineer’s as exclu- others, verity. all and without of its But the of test sion of striking accuracy affords of the com- record evidence the the prepared by index translators used Com- posite agreement from the close mission, quite apart relatively obtained individual indices. From 1923 by the results the 1930, when the Western Electric raised its Company until index accurately Commission’s translator re- the prices, actually price paid by changes appellee flected the and the Commission and com- equipment, purchased conformity. in close Eliminating were these indices pany and the excessive labor costs changes appearing price index, resulting present the fair own company’s' the substantially did differ equipment from appellee’s of of it. So far as valuation the results Commission’s the indices are price impugned by of standard their use dig- the present will an of record examination variation, 691 close that the results obtained by application price the of indices to the historical of plant cost are far less variable engineers’ than valuations and in general are probably trustworthy.7 more To of speak either class of evidence require accurate as so as contmission as to a matter of it, law so inaccurate accept require rejection of a upon it, valuation based is to attribute to the valua-
7 The lowest result obtained the Commission in the use sixteen classes was indices the Commission’s valua 76.6% highest Against The was 110.6%. tion. these differences of 10.6%, record shows that rate cases before 23.4% Maryland Commission, Company Public Service valuations based engineering appraisals on had exceeded the Commission’s similar val ranging average uations from 59.4%. amounts The 25.0% was reported 41.3%. rate Most cases 1932 Public Utility Reports reports were examined. In company similarly valuations exceeded commission valuations amounts ranging 2.1% average from The In 71.2%. the 1932 28.9%. reports company valuations exceeded commission valuations ranging average amounts from to 135.4%. The 7.7% was 57.4%. example An the variation in results obtained an engineering telephone appraisal in the record in found New York Telephone Prendergast, (2d) P. Co. minority report Revision of the York New State Public Service *25 (1930) page 266, Commission Law summarizes the different esti- July 1, 1926, mates of fair value as of as follows: Increase over Commission Valuation Valuation. Majority of Commission.................$366,915,493 Statutory 397,207,925 Court......................... 8.2% Minority 405, 502,993 of Commission................. 10. 5% report......................... 518,109,584 Master’s 41.2% Company ap- claim based on Whittemore praisal............................... 528,753,738 44.1% Company claim based on & Stone Webster
appraisal............................. 615,000,000 67.1% “ report, page 265, The comment of variety is that of con- clusions reached the course of this is case dramatic evidence that ' concept value,’ objective, provable of fair as an judicial fact is a myth.” accuracy certainty wholly of a process possibility
tion an fair value at best estimate. fictitious. Present but rec- adjusted by reasonable appropriately Historical cost quite to be as common trends ognition appears theoretical present a of arrival at a method sense or more twenty years a any period other. For as courts, including one, this rising prices, commissions as persuasive variations evidence regarded price have I than cost. reason for fair was more see no weight they are of times of concluding that less declin- ing prices. view, does follow
If I am in this not mistaken a state commission is viola judgment error of a like Constitution, and that federal court can tion though there is no con order, even set aside its rightly Ry. Co. in Northern true that v. fiscation. Pacific Works, Public Department of 39, Court, 268 U. S. this arbitrarily lowering an order rates invalid holding value showed were probative evidence the method confiscatory, adopted criticized already and characterized as action a denial was point But the Court careful out process. of due 44) that: (p. an The mere admission administrative tribunal rules of which under evidence applicable matter deemed incompetent, proceedings-
judicial Ry., Abilene Southern & United States 265 U. S. reasoning evidence 288, or mere error introduced, an order.” invalidate does P. Ry. M. & St. Co. v. Public Chicago, Utilities And Comm’n, 351, where S. this Court set U. aside state as confiscatory, rate fixed commission pursued by the commission method valuation open erroneous review characterized *26 it is validity when Court, as course result But in no case subject inquiry. hitherto has is Court set a rate fixed com assumed to aside a state not found to mission, confiscatory, merely what it. conceived be an erroneous method of If valuation. an such error in the deliberations of a tribunal is state violation, I think Constitution, every should that error of court question a state federal It doubts, any, reviewable here. would seem if that to the our review of the action scope of a com state mission in a like the present, case been rest put had our decision, terms ago, two Angeles Los Gas v.Co. Commission, 289 S. Railroad U. Com There the made mission its valuation on the in prudent basis of vestment, a method repeatedly repudiated by this Court. w,as that the erroneous argued method pursued its order, confiscatory vitiated whether emphatically The Court repudiated not. argument, that 305): saying (pp.
“We do not sit as board of revision, but to enforce Diego rights. constitutional San Land & Town Co. v. U. 446. The Jasper, legislative S. im discretion power in the plied making rate necessarily extends process, entire legislative embracing the method used legislative determination reaching as well as de We termination itself. are not either, concerned with so constitutional limitations are long as not transgressed. method legislative disclosed, When the it may have a reached, bearing upon validity definite of the result judicial but the function not go beyond does the decision question. of the constitutional That question is whether rates confiscatory. as fixed are And upon ques tion the complainant has the burden of proof and with may Court interfere the exercise of the State’s authority unless confiscation clearly established.” our should be decision now.
Such Mr; Mr. Justice join Brandéis Justice Cardozo in this opinion.