Source: https://supreme.justia.com/cases/federal/us/294/63/
Timestamp: 2019-04-22 04:08:45+00:00

Document:
1. In computing the operating expenses of a gas distributing company, in the process of fixing its rates, the company's books are presumptively correct. P. 294 U. S. 67.
2. Where the company's accounts showed that the amount of gas lost through leakage, etc., was 9% per annum of the amount purchased by it, and the books were found regular, but the public commission, in fixing its rates, struck off 2% of this from operating expense upon the ground that, with proper care, the loss would have been less, and did so without any evidence of waste or neglect, and without giving to the company any warning of this action or opportunity to oppose it by proof of due care, held that the action was wholly arbitrary. P. 294 U. S. 67.
3. Where the sole method provided by state law for review of a rate-fixing order is by hearing upon the law and facts on an appeal to the state supreme court, the facts relied on to sustain the rates against unimpeached evidence submitted by the utility must be exhibited in the record; otherwise the hearing is inadequate, and not judicial. P. 294 U. S. 68.
4. In fixing rates of a gas company, a public commission, after closing the hearings and without further notice to the company, adopted a new method of distributing certain expenses over the area served, and applied it to one city, where its effect on the rate was unfavorable to the company, and omitted to apply it to another where the effect would have been favorable. The reallocation was based on the commission's construction of annual reports of the company which had not been put in evidence, and no opportunity was allowed to contest the reallocation or to secure a rate readjustment in harmony with it. Held that the procedure was unfair, and contrary to due process. Pp. 294 U. S. 69, 294 U. S. 71.
5. In reviewing rate cases coming from state courts, under the due process clause, the function of this Court is not concerned with error or irregularity in the ratemaking, however gross, if the consequences, in their totality, are consistent with enjoyment by the regulated utility of a revenue something higher than the line of confiscation, and if suitable opportunity was afforded the utility through evidence and argument to challenge the result. P. 294 U. S. 70.
6. In deciding a rate case, the Court may take judicial notice of the record of a similar and related case pending before it between the same parties. P. 294 U. S. 70.
7. Within the limits of reason, advertising or development expenses to foster normal growth are legitimate charges upon income for rate purposes, and a refusal by a public commission to make allowance for such expenditures, on the ground that they were excessive and wasteful but without any evidence to support it, is contrary to due process. P. 294 U. S. 72.
8. Good faith on the part of the managers of a business is to be presumed, and, in the absence of a showing of inefficiency or improvidence, a court will not substitute its judgment for theirs as to the measure of a prudent outlay. P. 294 U. S. 72.
9. Judicial notice is taken of the fact that gas is in competition with other fuels, such as oil or electricity. P. 294 U. S. 72.
10. Rates fixed by city ordinance for a term of years were set aside as unfair, and higher rates substituted for the same term in a proceeding brought before a public commission by the utility affected.
Held that, in determining whether the higher rate yield a fair return, the amount reasonably laid out by the utility as expenses of the proceeding, including the charges of engineers and counsel, should be included in the costs of operation and spread over the period for which the rates were prescribed. P. 294 U. S. 72.
11. As applied to a corporation engaged in the sale of gas during 1928-1931, compulsory rates which net an income of only 4.53% upon its proper rate base, are confiscatory. P. 294 U. S. 75.
12. The claim made by the Gas Company that the allowance for depreciation reserve was inadequate, and that it was entitled to add to operating charges the amortized value of a transmission main extending from the city to fields of natural gas, cannot be upheld. P. 294 U. S. 77.
128 Ohio St. 301, 191 N.E. 105, reversed.
Appeal from the affirmance of an order of the Public Utilities Commission fixing the rates of the Gas Company in the City of Lima, Ohio.
feet per month, 80 cents per M.c.f.; for the next 6,000, 75 cents per M.c.f., and for all over 10,000 per month, 55 cents per M.c.f. This was a sharp reduction of the rates previously charged, which were $1.25 for the first 400 cubic feet; $1.05 for the next 9,600 cubic feet; $1 for the next 15,000, and for all over 25,000, 75 cents per M.c.f.
cents per M.c.f., with penalties to be charged if payment was delayed. The rates so fixed were to be retroactive as of the effective date of the ordinance, April 19, 1928, from which time they were to remain in force for a term of five years, and the difference between their yield and the amount collected by the company was to be refunded to consumers. A motion for a rehearing having been denied, the company filed a petition in error with the Supreme Court of Ohio, invoking the protection of the Fourteenth Amendment. The order of the commission was affirmed, 128 Ohio St. 301, 191 N.E. 105, and the case is here upon appeal.
The commission made its order, as it has informed us by an amended opinion, in the belief that the new rates would yield a return of 6.65% on the value of the property included in the base. Its estimate was wide of the mark as a result of mathematical errors, and this on the assumption that its rulings as to the items of operating expenses to be allowed or disallowed were correct in fact and law. Even on that assumption, the average net income during the four years of the ordinance period for which figures were available was $109,414, which, upon a rate base of $1,901,696, is equivalent to an average return of about 5.75%. This is now admitted by counsel for the commission, and must be accepted as a datum. What is still to be determined is whether the rate of return has been further overestimated to the point of confiscation through error in the rejection of charges upon income.
proved experience, reported the average loss as 9% per annum. The commission fixed the allowance at 7%, thereby reducing the operating expenses by $3,800 a year. In making this reduction, it did not deny that the loss had been suffered to the extent stated by the company. The presumption of correctness that gives aid in controversies of this order to the books of public service corporations (Consolidated Gas Co. v. Newton, supra at p. 242; Newton v. Consolidated Gas Co., 258 U. S. 165, 258 U. S. 176) was confirmed in this instance by what amounts to a finding of regularity. Accepting the loss as proved, the commission refused to allow it for more than 7% upon the ground that, with proper care of the system, the loss would have been less. A public utility will not be permitted to include negligent or wasteful losses among its operating charges. The waste or negligence, however, must be established by evidence of one kind or another, either direct or circumstantial. In all the pages of this record, there is neither a word nor a circumstance to charge the management with fault. Cf. Ohio Utilities Co. v. Public Utilities Commission of Ohio, 267 U. S. 359, 267 U. S. 363. There is not even the shadow of a warning to the company that fault was imputed and that it must give evidence of care. Without anything to suggest that there was such an issue in the case, the commission struck off 2%; it might with as much reason have struck off 4% or 6%. This was wholly arbitrary. Ohio Utilities Co. v. Public Utilities Commission of Ohio, supra.
the record must exhibit in some way the facts relied upon by the court to repel unimpeached evidence submitted for the company. If that were not so, a complainant would be helpless, for the inference would always be possible that the court and the commission had drawn upon undisclosed sources of information unavailable to others. A hearing is not judicial, at least in any adequate sense, unless the evidence can be known.
of customers in Lima, and thus arrived at the share to be allocated to that city in the determination of the local rates. By that mode of apportionment, the operating expenses were reduced to the extent of $6,200 annually.
We do not now decide that there would be a denial of due process through the spread of distributing costs over the total area of service if the new method of allocation had been adopted after timely notice to the company and then consistently applied. This Court does not sit as a board of revision with power to review the action of administrative agencies upon grounds unrelated to the maintenance of constitutional immunities. Los Angeles Gas & Electric Corp. v. Railroad Commission of California, 289 U. S. 287. Our inquiry in rate cases coming here from the state courts is whether the action of the state officials in the totality of its consequences is consistent with the enjoyment by the regulated utility of a revenue something higher than the line of confiscation. If this level is attained, and attained with suitable opportunity through evidence and argument (Southern Ry. Co. v. Virginia, 290 U. S. 190) to challenge the result, there is no denial of due process, though the proceeding is shot through with irregularity or error. But the weakness of the case for the appellee is that the fundamentals of a fair hearing were not conceded to the company. Opportunity did not exist to supplement or explain the annual reports as to the distribution of the expenses in the neighboring communities, nor did opportunity exist to bring the rates outside of Lima into harmony with the exigencies of a new method of allocation adopted without warning.
Water Supply Co. v. Mobile, 186 U. S. 212, 186 U. S. 217; Fritzlen v. Boatmen's Bank, 212 U. S. 364, 212 U. S. 370. The subject matter of that case was the rate schedule for the City of Kenton, served with gas by the appellant. In Kenton, unlike Lima, a spread of distribution costs over the whole area of service would have been favorable to the appellant and unfavorable to customers. Strange to say, the commission, though prescribing the larger area for Lima, adopted the smaller one for Kenton, and this by a decision rendered the same day. An injustice so obvious may not be suffered to prevail. The commission, by its counsel, suggests as an excuse that a division on a different basis was not requested by the company. There was no reason to request it, for the record as made up when the case was finally submitted did not contain the necessary data for a spread over a larger area, nor was there any hint by the commission that such a division was in view. Manifestly, whatever territorial unit is adopted must be made use of consistently, and regardless of the consequences. If a different course were to be followed, there would be less than full requital after all the communities affected had contributed their quotas.
To resume: division on one basis in Lima and on another basis in Kenton, all without notice to the company that the spread was to be altered and new evidence received, was an exercise of arbitrary power at variance with "the rudiments of fair play" (Chicago, Milwaukee & St. Paul Ry. Co. v. Polt, 232 U. S. 165, 232 U. S. 168) long known to our law. The Fourteenth Amendment condemns such methods and defeats them.
to the extent of $1,085.25 yearly. For reasons already stated, the reduction may not stand.
4. The company made claim to expenses incurred in procuring new business or in the endeavor to procure it, such expenses amounting on the average to $12,000 a year. The commission did not question the fact of payment, but cut down the allowance to $5,000 a year on the ground that anything more was unnecessary and wasteful. The criticism has no basis in evidence, either direct or circumstantial. Good faith is to be presumed on the part of the managers of a business. Southwestern Bell Telephone Co. v. Public Service Commission of Missouri, 262 U. S. 276, 262 U. S. 288-289. In the absence of a showing of inefficiency or improvidence, a court will not substitute its judgment for theirs as to the measure of a prudent outlay. Banton v. Belt Line Ry. Corp., 268 U. S. 413, 268 U. S. 421; Brooklyn Borough Gas Co. v. Prendergast, 16 F.2d 615, 623; New York & Richmond Gas Co. v. Prendergast, 10 F.2d 167, 181. The suggestion is made that there is no evidence of competition. We take judicial notice of the fact that gas is in competition with other forms of fuel, such as oil and electricity. A business never stands still. It either grows or decays. Within the limits of reason, advertising or development expenses to foster normal growth are legitimate charges upon income for rate purposes as for others. Consolidated Gas Co. v. Newton, supra at p. 253. When a business disintegrates, there is damage to the stockholders, but damage also to the customers in the cost or quality of service.
must be conceded," said the court, "that the gas company is entitled to a fair and reasonable allowance for rate case expenses." This is followed by the statement that, if the spread be six years (instead of five), and $5,100 be allowed for each of those years "as contended by the commission," the rate fixed by the order will give an adequate return. True, there is also the statement that the commission would have been warranted in ignoring this item altogether "in the absence of proof that the gas company's book figures represented an amount that was fair and reasonable." Even in that remark the implication is obvious that this is not what the commission did. Moreover, there is nothing in the record justifying an inference that the figures were erroneous or the payments improvident. Consolidated Gas Co. v. Newton, supra, at p. 242; Newton v. Consolidated Gas Co., supra, at 258 U. S. 176. The course of the trial exhibits very clearly the understanding of the parties that expenditures shown by the books would be deemed to have been made in good faith and with reasonable judgment unless evidence was at hand overcoming the presumption. In the absence of any challenge of their necessity or fairness, we must view them as they were accepted by the triers of the facts.
A different case would be here if the company's complaint had been unfounded, or if the cost of the proceeding had been swollen by untenable objections. There is neither evidence nor even claim that the conduct of the company's representatives was open to that reproach.
The statute laid a duty on the commission, when it found the ordinance unjust, to prescribe its own schedule. The one it adopted, though higher than the one condemned, did not satisfy the company, but there was nothing unreasonable or obstructive in laying before the commission whatever data might be helpful to that body in reaching a considered judgment. Indeed, we shall be brought to the conclusion, if we analyze the record, that the two phases of the controversy were substantially coincident. Everything relevant to the schedule adopted by the commission was relevant also to an inquiry into the fairness of the ordinance.
Monroe Gaslight Co. v. Michigan Public Utilities Commission, 11 F.2d 319, 325.
There are suggestions in the books that the cost of litigation is to be reckoned as an extraordinary expense, and so a charge upon capital, rather than a charge upon income to be paid out of the revenues of one year or of many. Cf. New York & Queens Gas Co. v. Newton, 269 F. 277, 290; Reno P., L. & W. Co. v. Public Service Commission, 298 F. 790, 801; contra, New York & Richmond Gas Co. v. Prendergast, supra at pp. 181-182; Mobile Gas Co. v. Patterson, 293 F. 208, 224. There is no need to consider what practice is to be followed where the rate is prescribed for a period of indefinite duration, though there would seem to be little difficulty in amortizing the charge over a reasonable term. Cf. New York & Richmond Gas Co. v. Prendergast, supra. In the case at hand, the period of duration has been definitely fixed, and the charge upon the income can be distributed accordingly.
We conclude that an addition of $5,100 must be made to the yearly operating expenses as the cost of proceedings necessary to keep the business going. Cf. Kornhauser v. United States, 276 U. S. 145. The company makes no point as to the ruling of the commission that the cost should be spread over six years instead of five, and we follow that concession.
6. The items enumerated in subdivisions 1 to 5 of this opinion amount altogether to $23,185.25 annually. Added to the operating charges, they reduce the net income from $109,414 to $86,228.75, or about 4.53% upon the rate base of $1,901,696. This is too low a rate to satisfy the requirements of the Constitution when applied to a corporation engaged in the sale of gas during the years 1928 to 1931, two at least of the four years being before the days of the depression. Los Angeles Gas & Electric Co. v. Railroad Commission of California, supra, at 298 U. S. 319-320; Dayton Power & Light Co. v.
Public Utilities Commission of Ohio, 292 U. S. 290, 292 U. S. 311; Missouri ex rel. Southwestern Bell Telephone Co. v. Public Service Commission, supra, at 262 U. S. 288; Ohio Utilities Co. v. Public Utilities Commission of Ohio, supra, at 267 U. S. 364.
Counsel for the commission argues that disbursements for charitable and other gifts, allowed by the commission, ought in law to have been excluded. This may well be, but the record is too meagre to enable us to ascertain with certainty the reasons for the payments. Cf. Old Mission Portland Cement Co. v. Helvering, 293 U. S. 289; In re Southern California Edison Co., P.U.R. (1924c) 1 at 32, 33. We do not feel at liberty to eliminate them upon inconclusive testimony when court and commission have treated them as proper. If, however, all were to be dropped, the increment to the rate would be only about one-tenth of one percent. The change would be too small to induce a different conclusion.
the court. To put into the case now an issue heretofore kept out of it, and thereby reach another value, would be a denial of a full and fair hearing by the tribunals of the state, a denial forbidden by the Constitution of the nation. If the appellee may be heard to say that, during some part of the term, the valuation was too high, the company must be free to urge that, at other times, it was too low. Upon the record now submitted to us, no such issue is involved. To bring it into the case at all, there is need of a new hearing, with a new reckoning of the rate base unhampered by restrictions to any single point of time. Only in that way can review be full and fair.
As there was a denial of due process by the commission in arbitrarily reducing the allowance for "unaccounted for gas" and in failing to apply consistently either of the two methods of allocation of distribution and commercial expenses adopted in the two cases submitted to us, I concur in the judgment of the Court that the case must be remanded for further proceedings. But with two of the conclusions in the opinion I am unable to agree.
of the burden of showing that the value of the property for the entire period is such that the net return under the commission's rates would have been so low as to confiscate its property. See Los Angeles Gas & Elec. Corp. v. Railroad Commission, 289 U. S. 266, 289 U. S. 304. No contention is made that the Ohio procedure precludes such proof, or that it prevented petitioner from showing facts which would establish confiscation.

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