Evening star., 1937-12-12
BRANDE|S' UTILITY
VIEWS RECALLED
Incorporated in RooseveIt's
"Prudent Investment"
Basis for Valuation.
By the Associated Press.


By the Associated Press.
Government attorneys said yester-
day that Louis D. Brandeis, associate
justice Of the Supreme Court, WAS the
father" Of President Roosevelt's pro-
posal Of prudent investment" basis
for valuing public utilities.
The proposal is involved in 4 case
which the Supreme Court will decide
soon, perhaps tomorrow
Mr.. Brandeis, 81-year-old justice,
expressed his views on utility valua-
ton in dissenting to q 1923 Supreme
Court decision that the cost of replac-
ing or reproducing the companies
should be considered in fixing the
value of rate-making purposes.
An attack by the Pacific Gas and
Electric Co. on an order by the Cali
fornia Railroad Commission directing
. reduction in gas rates was used by
the Government as a basis for its
proposal.
vSSSAAD@AAS
1t urged reversal OF the Supreme
Court decisions that the reproduction
cost was an essential element in ar
irving at fair valuation. It contended
that the cost of replacing a utility
varied from day to day, as the price
OF materials advanced and declined.
and that this made valuations un-
stable.
Instead Of the present method, based
on reproduction cost and other ele-
mentS the Government proposed that
the value be determined on prudent
investment" theory. Actual leeiti-
mate original cost" was described "a a
synonymous term.
Here Is how it would work, ss ex-
planned by one of1icial:
III 100000 were prudently invested
IN utility, the stockholders would
be entitled to fair interest on that
investment, plus improvements and
painus depreciation.
Under the present system, If the
cost OF reproduction should double, the
utilities claim that 5000, 900 should be
used in computing the fair valuation.
On the other hand, if the cost should
be cut IN half, the stockholders would
not receive q fair return if based on
$50,000."
"Reproduction" Decision In '9s.
The reproduction cost requirement
was first enunciated in 1898 in an
opinion by Justice Harlan in the case
OF Smyth VS.. Ames, involving a Ne
braska law fixing maximum freight
rates.
The 1923 decision, to which Mr..
Brandeis dissented, clarified the
previous ruling. The litigation was
brought by the Southwestern Bell
Telephone Co. against rates filed bv
the Missouri Public Service Commis-
sion
Advancing the opinion that q utility
should be permitted to earn "a fair
return on the amount prudentiy In
vested in it." Mr.. Brandeis said:
The term prudent investment h
not used in critical sense. There
should not be excluded from the and
1ngs OF the base investments which
under ordinary circumstances would
be deemed reasonable.
The term is applied for the DUP
post OF excluding what mieht be
found to be dishonest or obviously
~aSoe1ul or mprudent expenditures"
Recalled 1893 aPnic.
MI. Brandies said the reproduction
cost requirement was advocted After
the panic of 1893 had brought prices
TO the lowest level reached in the
nineteenth century" and was "adont-
Cd by the courts, largely, as q pro-
'ectlon against inflated claims based
on what were then deemed inflated
prices of the past"
AS prices advanced, however. he
said many State regulatory commits
sions refused to "heed the cost Of
reproduction" in fixing valuations and
that the prudent investment" theory
began to gain favor.
Under the prudent investment"
system, he said, "the rate base would
be ascertained as a fact, not de-
termined as a matter Of opinion"
1T would not fluctuate with the
market price Of labor, or materials.
or money, he added 1T would not
change with hard times or shifting
populations. It would not be dis
torted by the fickle and VARYING
Judgments Of appraisers, commissions
or courts.
1t would, when once made in re-
spect to any utility, be fixed, for all
time, subject only to increases to
represent additions to plant, after al
iowance for the depreciation included
IN the annual operating charges.
The wild uncertainties of the
present method Of fixing the rate base
under the so-called rule of smyth ys
Ames would be avoided"