Source: https://supreme.justia.com/cases/federal/us/238/153/
Timestamp: 2019-04-19 20:46:26+00:00

Document:
The public authority is presumed to have acted fairly, and the burden of proof is on a public utility corporation to show that a regulating ordinance has the effect to deprive it of an income equivalent to a fair return upon its property dedicated to public use. Knoxville v. Water Co., 212 U. S. 1.
Goodwill, in the sense generally used as indicating that element of value which inheres in the fixed and favorable consideration of customers arising from an established and well known and well conducted business, has no place in the fixing of valuation for the purpose of ratemaking of public service corporations. Willcox v. Consolidated Gas Co., 212 U. S. 19.
There is, in some cases, a "going concern value" which is an element to be considered in determining valuation on which the owner is entitled to a fair return although the property is dedicated to a public use; there is no fixed rule for ascertaining this, but each case must be controlled by its own circumstances.
Where, as in this case, the Master, after exhaustive testimony certifies the value of a long established and successful public service plant, for ratemaking purposes, upon the basis of a plant in successful operation and overhead charges have been allowed, the court will presume that the element of going concern value has been considered and included in the total value certified.
The Court will not regard the refusal of the lower court to enjoin a ratemaking ordinance as confiscatory upon the conclusion that it allowed a return of six percent per annum, on the valuation of the plant, although the Master expressed the opinion that the corporation ought to earn eight percent, where, as in this case, the ordinance was attacked before opportunity to test its results by actual experience.
Fourteenth Amendment, and in this case, there should be an actual application of the rates.
Following the rule laid don in Knoxville v. Water Co., 212 U. S. 1, and Willcox v. Gas Co., 212 U. S. 19, the bill seeking to enjoin the putting of the ordinance involved in this case into effect should be dismissed without prejudice to the right of complainant to reinstate the case after a reasonable period for an actual demonstration of the effect of the ordinance.
199 F. 204 modified and affirmed.
The facts, which involve the validity under the impairment of obligation provision of, and the due process clause of the Fourteenth Amendment to, the federal Constitution of an ordinance of the City of Des Moines fixing ninety cents as the price of gas in that city, are stated in the opinion.
to the taking of the Gas Company's property without just compensation and operate as confiscation of its property, and thereby deprive it of the same without due process of law, and would deny the equal protection of the laws; further, that it would impair the existing contract between the Gas Company and the city, and between the Gas Company and the State of Iowa, growing out of its incorporation under the statutes of the state and of the ordinances of the city, giving rights to the Gas Company to lay its mains and supply gas to the residents of the city. A temporary injunction was allowed, and after issue made, the case was referred to Robert Sloan, Esquire, as special Master in chancery to report his findings of fact and conclusions of law. The Master afterwards filed his report, and the same coming on before the district court for hearing, upon exceptions, the report of the Master was confirmed, and the bill dismissed "with prejudice" (199 F. 204). From that decree, the present appeal is taken.
transfer up to the first day of January, 1911, to the amount of $412,704.51, and, as provided by the mortgage, bonds have been issued by the trustee to the amount of $1,097,000, and these bonds have all been purchased by the United Gas Improvement Company. The total discount on these bonds is $33,950; $267,000, discounted at 10 percent, and the balance, $145,000 at 5 percent. No dividends have been declared by the present company upon its stock, but the interest upon the stock contracts and bonds has been regularly paid, and $389,000 has been paid on the principal of the stock contracts, leaving January 1st, 1911, only $411,000 unpaid. These payments have been made out of the profits derived from the operation of the plant. The officers of the Gas Company are elected by the United Gas Improvement Company, who own and control all the stock, and these officers are also, in the main, the officers of the United Gas Improvement Company, and the latter controls the Gas Company and its business.
"1. That, for the years 1896 and 7, the price of gas should be $1.30 per M.C.F. net; for the years 1898 and 9, $1.25 net; for the years 1900 and 1, $1.20 net; for the years 1902, 3, and 4, $1.15 net, and for the year 1905, $1.10 net, and for the years 1906 to 1910, $1 net with the proviso that it may add 10 cents per M.C.F. to each of these prices, but shall be required to discount that sum for the payment by or before the 15th day of the month following that in which the gas was consumed."
"2. That the city pay for the term of fifteen years for each street lamp, $18.00 per year, until they should reach 500, when it should be reduced to $17.00 for each lamp."
"3. That its gas should not be less than 22 candlepower."
"The new ordinance deprives the complainant of the right to add ten cents per M.C.F. to the price of gas, unless paid on or before the 15th day of the month following that in which the gas was consumed, and the evidence shows that the average working capital for the past five years was $120,000, and that, when the ordinance went into effect, that they were then using $142,000 as working capital."
"Without the means of enforcing prompt payment, and without any inducement so to do, on the part of their customers, in my judgment, the working capital should not be diminished, and the"
it would cost to produce it at the present time new, without adding thereto any overhead charges." This figure he fixed at $1,975,026. To this he added overhead charges, fifteen percent -- $296,254. From this he deducted depreciation, $333,878, leaving as the value of the property thus ascertained $1,937,402.
As appears from the opinion of the court and the arguments of counsel in this case, exceptions to the Master's report so far as the Gas Company is concerned pertain principally to two questions: one as to his manner of dealing with what is termed the "going value" of the concern, and the other as to the addition of the sum of $140,000 to the valuation, because appellant insists, upon the plan of valuation by cost of reproduction less depreciation, it would cost that sum to take up and replace pavements not laid when the mains were put in, but necessary to be removed and replaced in the reproduction thereof.
of the property, and therefore the company would be entitled to a decree in its favor. It therefore follows that the determination of the correctness of the decree below, confirming the Master's report, depends upon and requires a consideration of these two items.
We may premise that the public authority is presumed to have acted fairly, and that the burden of proof is upon the Gas Company to show that the regulating ordinance has the effect to deprive it of an income equivalent to a fair return upon its property dedicated to public use. Knoxville v. Knoxville Water Co., 212 U. S. 1.
"It may be asked upon what basis this amount is determined. The evidence, followed strictly, might require me to make it higher, could my mind rest satisfied that the 'going value' of this concern is worth more, but I cannot feel satisfied that such is the case, and regard $300,000 as ever dollar it is worth over and as every dollar it is worth over and it is worth that much more than a plant would be that had to develop its business. But that would be much more rapid, in my judgment, than is estimated. I think a purchaser would be willing to add this amount for its developed business, and that a seller would not be willing to sell unless he got that much more than its physical value, but I could not give the mental process by which this conclusion is reached any more than a jury could do so, under like circumstances, but it is nevertheless my judgment under all the evidence in the case."
public utility like the one in question in this case, because the complainant has a monopoly of the business in which it is engaged in the City of Des Moines, and those who desire to use its product must buy of it. They have no choice in the matter. But there is a great difference even in a monopoly which has a business already developed and one that must develop it. The plant of complainant has all its parts working in harmony, performing their several functions in producing and conveying the gas to its customers. These several parts are not only in place, but have been brought to a harmonious operation throughout. Even the employees of the concern are familiar with their duties and experienced in performing them. But, without business, no matter how perfect it may be, it would be unprofitable. It is ready, however, for business, and has the business to transact. It was a small concern at the start in 1864, but its books show that it has had a steady growth for many years in the past, and everything indicates that it will continue in the future. There is great difference between such a plant and one whose business must be developed. All a purchaser of such a plant would have to do would be to take charge of the plant, 'touch the button,' and he is making money from the start. There is no element of uncertainty connected with it."
"He can retain its experienced employees as a rule, should he so desire, at the same wages. There is no question that such a plant has a 'going value,' because it is a money maker from the start."
"The only difficulty is to determine how much its 'going value' is worth. No interest during its construction is allowed, nor anything that is included in the 'overhead charges,' which are part of the physical value. But simply the fact that it has a developed business that will make money for its owner, with reasonable rates allowed for the product which it manufactures and sells."
generally used as indicating that element of value which inheres in the fixed and favorable consideration of customers, arising from an established and well known and well conducted business, has no place in the fixing of valuation for the purpose of ratemaking of public service corporations of this character, was established in Willcox v. Consolidated Gas Co., 212 U. S. 19, 212 U. S. 52. "Going value," or "going concern value" -- i.e., the value which inheres in a plant where its business is established, as distinguished from one which has yet to establish its business, has been the subject of much discussion in ratemaking cases before the courts and commissions. Many of those cases are collected in Whitten on "Valuation of Public Service Corporations," §§ 550-569, and the supplement to the same work, §§ 1350-1385. That there is an element of value in an assembled and established plant, doing business and earning money, over one not thus advanced, is self-evident. This element of value is a property right, and should be considered in determining the value of the property, upon which the owner has a right to make a fair return when the same is privately owned although dedicated to public use. Each case must be controlled by its own circumstances, and the actual question here is: in view of the facts found, and the method of valuation used by him, did the Master sufficiently include this element in determining the value of the property of this company for ratemaking purposes?
Included in going value as usually reckoned is the investment necessary to organizing and establishing the business which is not embraced in the value of its actual physical property. In this case, what may be called the inception cost of the enterprise entering into the establishing of a going concern had long since been incurred. The present company and its predecessors had long carried on business in the City of Des Moines under other ordinances and at higher rates than the ordinance in question established.
For aught that appears in this record, these expenses may have been already compensated in rates charged and collected under former ordinances. As we have said, every presumption is in favor of the legitimate exercise of the ratemaking power, and it is not to be presumed, without proof, that a company is under the necessity of making up losses and expenditures incidental to the experimental stage of its business.
"In reaching the physical value of the plant in question by the process of reproduction, it is necessary to bear in mind that the present value thereof represents much more than the machinery therein, the labor of installing and constructing them, and putting them in place to perform their various functions, ready for the manufacture and distribution of gas to its customers. Were the City of Des Moines without such a plant, and such a one as the complainant now owns was proposed, it would be found that much more than the mere cost of labor and material would be expended. Such expenditures are termed overhead charges, and are as follows:"
"1. Time and money expended in the promotion of the enterprise, in the organization of the company and interesting capital therein, including, also, legal expenses, obtaining the necessary franchise, as well as the costs of incorporating the company."
"2. Then a competent engineer must be employed to prepare the plans and specifications for the plant, and make the necessary surveys, and when the work began, to superintend the construction thereof, and see that it is done properly and according to plans and specifications.
The successful operation of the plant depends largely upon its proper construction."
"3. Then losses arising from accidents and injuries to workmen as well as the material during its construction, which is such an amount as the cost of insuring against such losses, which is between 1 and 2 percent"
"4. Contingencies are such expenditures as arise from the lack of foresight and care preparing the plans and specifications. No matter how careful the engineer may prepare them, such expenditures invariably arise. Mr. Alvord testified that his allowance therefor would depend very much upon his knowledge of the engineer who prepared them, but that no matter who prepared them, they would invariably occur, and an allowance should be made therefor. The careful and thorough inventory in this case reduces very greatly the allowance therefor."
"5. The cost of administration, which includes the time and money expended by the parties who are engaged in the enterprise, purchasing the material, procuring the money for their payment as needed, and generally superintending the entire enterprise during the construction of the plant."
"6. It is estimated that it would take three years to complete the plant in question, and that at least one-half the time and money invested therein would give no return, and that a loss of interest would result therefrom, and that such loss would be included in the overhead charges."
"7. Taxes during the construction."
"The latter is regarded by me as very questionable. It is in a certain sense making taxes an asset, rather than a liability, and the amount is so vague and uncertain that it has been given very little consideration and weight in fixing the overhead charges. Either the money or the property should pay taxes."
plant, and are necessarily a part of the cost thereof. No overhead charges that do not inhere in and add to the cost thereof should be allowed as a part of its physical value. It is not a question of what was actually expended therefor in the plant in question, but what would it cost to reproduce a similar plant at the present time. It is through this method we reach the present value of this plant new, and then when it is properly depreciated, according to the condition, life, and age of its various parts, we reach the present value of the plant in its present condition. It is not a perfect method, but it is the best method therefor, and results as nearly as possible in giving the present value of the plant. No other method known has proved so satisfactory."
"The latter sum we understand to be an expression of the added value of the plant as a whole over the sum of the values of its component parts, which is attached to it because it is in active and successful operation and earning a return. We express no opinion as to the propriety of including these two items in the valuation of the plant, for the purpose for which it is valued in this case, but leave that question to be considered when it necessarily arises. We assume, without deciding, that these items were properly added in this case."
as enhancement of value by reason of being a 'going concern.' As previously intimated, the value of the plant is to be estimated in its entirety, rather than by the addition of estimates on its component parts, though the latter course will materially aid in determining the value. Advantages have accrued through the sagacity of its management as contended by appellant. So, too, there are the inevitable mistakes which would not be likely in the construction of a new plant; but to put a new plant in profitable operation, time would be required, and, aside from the intangible element of goodwill, the fact that the plant is in successful operation constitutes an element of value."
"As said, the value of the system as completed, earning a present income, is the criterion. Insofar as influenced by income, however, the computation necessarily must be made on the basis of reasonable charges, for whatever is exacted for a public service in excess of this is to be regarded as unlawful."
"Save as above indicated, the element of value designated a 'going concern' is but another name for 'goodwill,' which is not to be taken into account in a case like this, where the company is granted a monopoly. Cedar Rapids Water Co. v. Cedar Rapids, 118 Ia. 234; Willcox v. Consolidated Gas Co., 212 U. S. 19. The witnesses for plaintiff took into account 'goodwill' in giving their opinion of the enhancement in value because of being a going concern, and we have no means of separating these so as to ascertain their estimate of the separate advantage of completion so as to earn a present income."
it excluded was the goodwill or advantage incident to the possession of a monopoly, so far as that might be supposed to give the plaintiff the power to charge more than a reasonable price. Willcox v. Consolidated Gas Co., 212 U. S. 19, 212 U. S. 52. An adjustment of this sort under a power to regulate rates has to steer between Scylla and Charybdis. On the one side, if the franchise is taken to mean that the most profitable return that could be got, free from competition, is protected by the Fourteenth Amendment, then the power to regulate is null. On the other hand, if the power to regulate withdraws the protection of the Amendment altogether, then the property is nought. This is not a matter of economic theory, but of fair interpretation of a bargain. Neither extreme can have been meant. A midway between them must be hit."
". . . it also renders it extremely doubtful that 'going value' will be included in the valuation of such a plant as the basis of return, beyond the fact that it is in 'successful operation.' That would exclude the sum of $300,000 estimated in this case, on the grounds that, when the ordinance was enacted, it already possessed a well developed and paying business."
"In my judgment, after considering the able and thorough arguments of counsel, that it is decisive of the question, and holds that 'going value' should not be considered in determining the basis upon which the complainant is entitled to have its return reckoned, and feel that it is my duty to so state."
value would be much less. The 'going value' is that enhancement which results from a well developed and paying business. This would result in reducing the estimated deficit for each year $24,000, and yield a return to the complainant of at least 6 percent on $2,100,000."
"While this case is close to the borderline, I cannot say on the whole case that the evidence beyond any just and fair doubt satisfies me that the rates will prove confiscatory should the ordinance be put into effect and an actual test thereof be made."
While there is a difference between court and counsel as to what the Master meant by this, we think it is apparent that he meant to say that, applying the rule of the Cedar Rapids case, he had already valued the property in the estimate of what he called its physical value, upon the basis of a plant in actual and successful operation, for he said that otherwise its value would be much less.
As pointed out in the Cedar Rapids case, if return is to be regarded beyond that compensation which a public service corporation is entitled to earn upon the fair value of its property, the right to regulate is of no moment, and income to which the corporation is not entitled would become the basis of valuation in determining the rights of the public. When, as here, a long established and successful plant of this character is valued for ratemaking purposes, and the value of the property fixed as the Master certifies upon the basis of a plant in successful operation, and overhead charges have been allowed for the items and in the sums already stated, it cannot be said, in view of the facts in this case, that the element of going value has not been given the consideration it deserves, and the appellant's contention in this behalf is not sustained.
necessary in such reproduction to take up and replace pavements on streets which were unpaved when the gas mains were laid on order to replace the mains, we are of opinion that the court below correctly disposed of this question. These pavements were already in place. It may be conceded that they would require removal at the time when it became necessary to reproduce the plant in this respect. The Master reached the conclusion that the life of the mains would not be enhanced by the necessity of removing the pavements, and that the company had no right of property in the pavements thus dealt with, and that there was neither justice nor equity in requiring the people who had been at the expense of paving the streets to pay an additional sum for gas because the plant, when put in, would have to be at the expense of taking up and replacing the pavements in building the same. He held that such added value was wholly theoretical, when no benefit was derived therefrom. We find no error in this disposition of the question.
Nor do we think there was error in refusing an injunction upon the conclusion reached that a return of 6 percent per annum on the valuation would not be confiscatory. This is especially true in view of the fact that the ordinance was attacked before there was opportunity to test its results by actual experience. It is true the Master reported that, in his opinion, the company ought to earn 8 percent, but he also found that, in his judgment, gas could be produced for 60 cents per thousand, and the actual effect of the 90-cent rate on an economically managed plant had not had the test of experience.
hearing. And each party may then file such additional pleadings and take and file such additional evidence as to each party may be deemed advisable."
While we agree with the court below that it was right to confirm the Master's report and dismiss the bill, we think, in view of the fact that the attack upon the rates was made before the ordinance went into effect, and before actual application of the rates could demonstrate whether they were remunerative or not, that the court should have followed the recommendation of the Master and dismissed the bill without prejudice. We think this is particularly so in view of the fact that ordinarily time alone can satisfactorily demonstrate in a case like this whether or not the rates established will prove so unremunerative as to be confiscatory in the sense in which that term has been defined in ratemaking cases. The Master's suggestion has the support of the judgment of this Court in Knoxville v. Knoxville Water Co. and Willcox v. Consolidated Gas Co., supra.

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