Evening star., 1938-01-03
Alabama and Duke Firms
Denied Right to Attack
P. w. A. Loans.
DECISION CLEARS WAY
FOR So ENTERPRISES
Prudent Investment" Basis for
Setting Utility Rates Also
Upheld in Ruling.
BY JOHN H. CLINE.

Its effort to use P. w. A. funds for
construction of publicly owned electric
systems and at least a partial victory
in the endeavor by President Roose-
Welt to compel the use of his prudent
investment theory in valuing the
property of utilities for rate-makine
purposes
In another important ruling, the
court agreed to review suit by the
Electric Bond & Share Co. and 26
subsidiaries. challenging constitu-
tionality of the 1885 act regulating
public utility holding companies. The
act had been upheld in the lower
courts. Solicitor General Reed an
nounced he would file motion to ad-
vance this case for an early hearing.
In two unanimous decisions, the
justices held the Alabama and Duke
Power Cos. had no standing to at
tack the legality of the P. w. A.
loans and grants to municipalities for
construction Of their own power sys-
TENS. This ruling came as heavy
blow to the private utility owners,
who had contended it was unconsti-
tutlonal to permit the use of public
funds for construction of municipal
power systems to compete with and,
perhaps, eventually destroy their busi-
neSSeS.
Justice Black Concurs.
The opinion in the power cases. de-
delivered by Associate Justice Suther-
land, carried the notation that As
sociate Justice Black "concurred in
the result" This was construed as
meaning he believed the court should
have rendered an affirmative deci-
sion upholding the constitutionality
OF the loans and grants. as we'll as
refusing to permit the power COM
panles to attack the law.
In some respects the rate-making
decision: was Of greater Importance,
since 1t reverses former ruling by
the court and may point the way to
abandonment Of the cost of repro
duction" theory Of valuation for rate.
making purposes.
Involved in this case were gas rates
fixed by the Railroad Commission of
California for the Pacific Gas & Elec-
trio Co. The company contended the
rates were unlawful, since the COM
mission had refused to base them on
the cost of reproducing their plant,
electing instead to fix the prices the
company might charge by determin-
ing their relation to the prudent in
veStment value of the concern.
Action Was Reversed.
A three judge district court re-
versed the action of the commission
on the theory the utility company had
been denied due process of law in the
hearing at which the rates were fixed.
That ruling reached the Supreme
Court last year and was upheld by an
evenly divided court, Justice Suther-
land not participating. A rehearing
was granted, however, and the court
today reversed itself and the lower
tribunal, sending the case back for a
new hearing to determine whether the
rates in question are confiscatory,
Justice Sutherland again did not par
tlclpate, and the vote of Justice Black,
replacing Justice Van Devanter,
brought about the reversal by a vote
OF to 2. Justices Butler and Nc
Reynolds dissented.
Chief Justice Hughes delivered the
majority opinion in the rate case.
In substance, he said the commission
was not guilty of a denial of due
process since it had considered evi-
dence as to the cost of reproduction
but had rejected this evidence as un-
satisfactory. Having reached that
point. he continued, the commission
was justified in basing the rates, pro-
vided they are not confiscatory, on
the historical cost or prudent invest
ment basis.
He said I'VE have frequently held
that historical cost is admissible evi.
dence of value" and that "the (Su-
preme) court has not decided that the
cost of reproduction furnishes an ex-
elusive test"
Not Arbitrary Finding.
To these observations he added the
assertion that in the instant case we
cannot say that the commission, in
taking historical cost as the rate base
was making a finding without evil
dence and, therefore, arbitrary"
This was construed as being tanta.
mount to an assertion that in the fu-
ture rate-making bodies, If they find
cost of reproduction evidence to be
unsatisfactory, may then fix rates
based on the prudent investment val
uation theory.
This, in effect, sanctions the valua-
ton theory advanced by Justice
Brandeis in 1928 and subsequently
adopted by the President. While ap-
parently not reversing a ruling in
1898 that consideration must be
given" to the cost Of reproducing the
property, today's ruling, 1t was be-
lieved, will lead to a much more ex-
tensive use of the prudent investment
theory.
Conference Pointed Out.
1t was pointed out that during the
recent peace negotiations" between
the utilities and the President, Wen
dell L. Willkie, president of the Com
monwealth g. Southern Corp, which
controls companies affected by the
T. v. A. competition, had suggested
the utilities might agree to accept the
prudent investment theory.
The decisions in the Alabama anc
Duke Power cases clear the way fo1
completion Of So power projects fol
which p. w. A. has allotted $780,.
.(see COURT, Page A-3)