United Rs. & Elec. Co. of Baltimore v. West

280 U.S. 234, 50 S. Ct. 123, 74 L. Ed. 390, 1930 U.S. LEXIS 828

• Court: Supreme Court of the United States
• Decided: January 6, 1930
• Docket: 55 and 64
• Status: Published

Opinions

Mr. Justice Sutherland

delivered the opinion of the Court.

The first of these titles (No. 55) is an appeal, and the second (No. 64) a cross-appeal, from a decree of the Court of Appeals of Maryland. The case arose from an order of the state Public Service Commission limiting the rate of passenger fares to be charged by the United Railways and Electric Company for carrying passengers over its lines in the City of Baltimore. The company, by its appeal, attacks the commission’s order as confiscatory. The cross-appeal seeks to raise the question whether the amount for annual depreciation allowed the company should be calculated upon the present value of the company’s property or upon its cost.

Upon application of the company to the commission, made in 1927, for an increase in fares, the commission passed an order making an increase, but not to the extent sought. Thereupon, suit was brought in a state circuit court on the grounds that the rate fixed by the commission was confiscatory and that the annual allowance for depreciation was calculated upon a wrong basis, namely, upon cost, instead of present value of depreciable property. The circuit court, in an able opinion, sustained the company upon both grounds, and enjoined the enforcement of the commission’s order. On appeal, the court of appeals upheld the view of the circuit court in respect of depreciation, but held the rate of return not confiscatory. 155 Md. 572. Thereupon, the commission increased the depreciation allowance in accordance with the decree of the court and adjusted the rate of fare to the extent necessary to absorb the increased allowance. A second suit and an appeal to the court of appeals followed, and that court entered a decree, 157 Md. 70, sustaining the action of the commission; and it is that decree which is here for review.

The facts, so far as we find.it necessary to review them, are not in dispute. The company since 1899 has owned and operated all the street railway lines in the City of Baltimore. Its present capital structure consists of $24,000,000 of common stock, $38,000,000 of • ordinary bonded indebtedness, and $14,000,000 of perpetual income bonds redeemable at the option of the company after 1949. Due to the increased use of automobiles, the total number of passengers carried has for some time steadily decreased, while the number carried during the “rush hours” has increased. This has resulted in an increase of expenses in proportion to the whole number of passengers carried, since equipment, etc., must be maintained and men employed sufficient to care for the increased business of the “ rush hours,” notwithstanding their reduced productiveness during the hours of decreased business. Since the war operating expenses have almost if not quite doubled.

The present value of the property used was fixed by the commission at $75,000,000, and this amount was accepted without question by both parties in the state circuit court and in the court of appeals. Included in this valuation is $5,000,000 for easements in the streets of Baltimore. The court of appeals had held in another and earlier case, Miles v. Pub. Serv. Comm., 151 Md. 337, that the easements constituted an interest in real estate and that in making up the rate base their value should be included. The commission in the present case, accordingly,- included the amount in the valuation and made no attack upon the item in the courts below, where it passed as a matter not in dispute. ' The item is now challenged by counsel for the commission in this Court, and other objections to the valuation are suggested, likewise for the first time.' We do not find it necessary to consider this challenge or these objections, for, if they ever possessed substance, they come too late. In the further consideration of the case, therefore, we accept, for all purposes, the valuation of $75,000,000 as it was accepted and acted upon by parties, commission and courts below.

The commission fixed a rate of fare permitting the company to earn a return of 6.26‘ per cent, on this valuation; and, so far as No. 55 is concerned, the case resolves itself into the simple question whether that return is so inadequate as to result in a deprivation of property in violation of the due process of law clause of the Fourteenth Amendment. . In answering that question, the fundamental principle to be observed is that the property of a publié utility, although devoted to the public service and impressed with a public interest, is still private property; and neither the corpus of that property nor the use thereof constitutionally can be taken for a compulsory price which falls below the measure of just compensation. One is confiscation no less than the other.

What is a fair return within this principle cannot be settled by invoking decisions of this Court made years ago based upon conditions radically different from those which prevail today. The problem is one to be tested primarily by present day conditions. Annual returns upon capital and enterprise, like wages of employees, cost of maintenance and related expenses, have materially increased the country over. This is common knowledge. A rate of return upon capital invested in street railway lines ,and other public utilities which might have been proper a few years ago no longer furnishes a safe criterion either for the present or the future. Lincoln Gas Co. v. Lincoln, 250 U. S. 256, 268. Nor can a rule be laid down which will apply uniformly to all sorts of utilities. What may be a fair return for one may be inadequate for another, depending upon circumstances, locality and risk. Willcox v. Consolidated Gas Co., 212 U. S. 19, 48-50. The general rule recently has been stated in Bluefield Co. v. Pub. Sen. Comm., 262 U. S. 679, 692-695:

“ What annual rate will constitute just compensation depends upon many circumstances and must be determined by the exercise of a fair and enlightened judgment, having regard to all relevant- facts. A public utility is entitled to such rates as will permit it to earn a return, on the value of the property which it employs for the convenience of the public equal to that generally being made at the same time and in the same general part of the country on investments in other business undertakings which are attended by corresponding risks and uncertáínties; but it has no constitutional- right to profits such as are realized or anticipated in highly profitable enterprises or speculative ventures. The return should be. reasonably sufficient to assure confidence in the financial soundness of the utility and should be adequate, under efficient and economical management, to maintain and support its credit and enable it to raise the money necessary for the proper discharge of its public duties. A rate of return may be reasonable at one time and become too high or too low by changes affecting opportunities for investment, the money market and business conditions generally.

* * * * *

“Investors take into account the result of past operations, especially in recent years, when determining the terms upon which they will invest in -such an undertaking. Low, uncertain or irregular income makes for low prices for the securities of the utility and higher rates of interest to be demanded by investors. The fact that the company may not insist as a matter of constitutional right that past losses be made up by rates to be applied in the present and future tends to weaken credit, and the fact that the utility is .protected against being compelled to serve for confiscatory rates tends to support it. In this case the record shows that the rate of return has been low through a long period up to the time of the inquiry by the commission here involved.”

What will constitute a fair return in a given case is not capable of exact mathematical demonstration. It is a matter more or less of approximation about which conclusions may differ. The court in the discharge of its constitutional duty on the issue of confiscation must determine the amount to the best of its ability in the exercise of a fair, enlightened and “ independent judgment as to both law and facts.” Ohio Valley Co. v. Ben Avon Borough, 253 U. S. 287, 289; Bluefield Co. v. Pub. Serv. Comm., supra, pp. 689, 692; Lehigh Valley R. R. v. Commissioners, 278 U. S. 24, 36.

There is much evidence in the record to the effect that in order to induce the investment of capital in the enterprise or to enable the company to compete successfully in the market for money to finance its operations, *a net return upon the valuation fixed by the commission should be not far from 8 per cent. Since 1920 the company has borrowed from time to time some $18,000,000, upon which it has been obliged to pay an average rate of interest ranging well over 7 per cent., and this has been the experience of street railway lines quite generally. Upon the valuation fixed, with an allowance for depreciation calculated with reference to that valuation, and upon the then prescribed rates, the company for the years 1920 to 1926, both inclusive, obtained a return of little more than 5 per-' cent, per annum. It is manifest that just compensation for a utility, requiring for efficient public service skillful and prudent management as well as use of the plapt,' and whose rates are subject to public regulation, is more than current interest on' mere investment. Sound business management requires that after paying all expenses of operation, setting aside the necessary-sums for depreciation, payment of interest and reasonable dividends, there should still remain something to be passed to the surplus account; and a rate of return which does not admit of that being done is not sufficient to assure confidence in the financial soundness of the utility to maintain its credit and enable it to raise money necessary for the proper discharge of its public duties. In this view of the matter, a return of 6.26 per cent, is clearly inadequate. In the light of recent decisions of this Court and other Federal decisions, it is not certain that rates securing a return of 7½ per cent, or even 8 per cent, on the value of the property would not be necessary to avoid confiscation.¹ But this we need not decide, since the company itself sought from the commission a rate which it appears would produce a return of about 7.44 per cent., at the same time insisting that such return fell short of being adequate. Upon the present record, we are of opinion that to enforce rates producing less than this would be confiscatory and in violation of the due process clause of the Fourteenth Amendment.

Complaint also is made of the action of the commission in abolishing the second fare zone established by the company on what is called the Halethorpe line and substituting a single fare for the two fares theretofore exacted. Halethorpe is an unincorporated community lying outside the limits of Baltimore city. With a single fare, the extension of the line, to Halethorpe is not profitable, but, nevertheless, it is an integral part of the railway system, and it will be enough if the commission shall so readjust the fares as to yield a fair return upon the property, including the Halethorpe line, as a whole. If, in doing so, the commission shall choose, not to restore the second fare, but to retain in force the single fare, we perceive no constitutional objection.

The commission sought a review of the question in respect of the annual depreciation allowance, both by a cross-appeal and, later, by petition for certiorari. The question of jurisdiction on the cross-appeal as well as the consideration of the petition for certiorari was postponed to the hearing on the merits. We do not now find it necessary to decide either matter. As the amount of depreciation to be allowed was contested throughout, is a necessary element to be determined in fixing the rate of fare and is closely related in substance to the case brought here by the company’s appeal, it well may be considered in connection therewith. In these circumstances neither cross-appeal nor certiorari is necessary to present the question.

The allowance for annual depreciation made by the commission was based upon cost. The court of appeals held that this was erroneous and that it should have been based upon present value. The court’s view of the matter was plainly right. One of the items of expense to be ascertained and deducted is the amount necessary to restore property worn out or impaired, so as continuously to maintain it as nearly as practicable at the same level of efficiency for the public service. The amount set aside periodically for this purpose is the so-called depreciation allowance. Manifestly, this allowance cannot be limited by the original cost, because, if values have advanced, the allowance is not sufficient to maintain the level of efficiency. The utility “ is entitled to see that from earnings the value of the property invested is kept unimpaired, so that at the end of any given term of years the original investment remains as it was at the beginning.” Knoxville v. Knoxville Water Co., 212 U. S. 1, 13-14. This naturally calls for expenditures equal to the cost of the worn out equipment at the time of replacement; and this, for all practical purposes, means present value. It is the settled rule of this Court that the rate base is present value, and it would be wholly illogical to adopt a different rule for depreciation. As the Supreme Court of Michigan, in Utilities Commission v. Telephone Co., 228 Mich. 658, 666, has aptly said: “ If the rate base is present fair value, then the depreciation base as to depreciable property is the same thing. There is no principle to sustain a holding that a utility may earn on the present fair value of its property devoted to public service, but' that it must accept and the public must pay depreciation on book cost or investment cost regardless of present fair value. We repeat, the.purpose of permitting a depreciation charge is to compensate the utility for property consumed in service, and the duty of the commission, guided by experience in rate making, is to spread this charge fairly over the years of the life of the property.” And see Southwestern Bell Tel. Co. v. Pub. Serv. Comm., 262 U. S. 276, 288; Georgia Railway & P. Co. v. Railroad Commission, 262 U. S. 625, 633.

We conclude that an injunction should have been granted against the commission’s order.

No. 55. Decree reversed and cause remanded for further proceedings not inconsistent with this opinion.

No. 64. Cross-appeal dismissed. Certiorari denied.

1 See, for example, Galveston Elec. Co. v. Galveston, 258 U. S. 388, 400; Brush Elec. Co. v. Galveston, 262 U. S. 443; Fort Smith v. Southwestern Bell Tel. Co., 270 U. S. 627, affirming per curiam Southwestern Bell Tel. Co. v. Fort Smith, 294 Fed. 102, 108; Patterson v. Mobile Gas Co., 271 U. S. 131, affirming in part Mobile Gas Co. v. Patterson, 293 Fed. 208, 221; McCardle v. Indianapolis Water Co., 272 U. S. 400, 419 and note; Ottinger v. Brooklyn Union Gas Co., 272 U. S. 579, modifying and affirming Kings County Lighting Co. v. Prendergast, 7 F. (2d) 192, and Brooklyn Union Gas Co. v. Prendergast, 7 F. (2d) 628; Railroad & Warehouse Commission v. Duluth Street R. Co. 273 U. S. 625, affirming Duluth Street R. Co. v. Railroad & Warehouse Commission, 4 F. (2d) 543; Minneapolis v. Rand, 285 Fed. 818, 830; New York Telephone Co. v. Prendergast, 300 Fed. 822, 826; id., 11 F. (2d) 162, 163; New York & Richmond Gas Co. v. Prendergast, 10 F. (2d) 167, 209.