Source: https://openjurist.org/307/us/104
Timestamp: 2019-04-19 10:50:26+00:00

Document:
EDISON LIGHT & POWER CO.
See 307 U.S. —-, 59 S.Ct. 831, 83 L.Ed. —-.
This is an appeal from the decree of a three-judge district court granting a permanent injunction against the enforcement of temporary rates. Sec. 266, Jud.Code, 28 U.S.C.A. § 380.
An investigation to determine the reasonableness of appellee's rates was instituted on January 27, 1936. During its progress the state legislature recodified the utility law of Pennsylvania. Act of May 28, 1937, P.L. 1053, Title 66, P.S.Pa. § 1101 et seq. It enacted a temporary rate section, 310, which is the source of this controversy.
Acting under Sec. 310, the commission, after notice and argument, issued a temporary rate order on July 13, 1937, requiring the utility to file rate schedules which would effect a reduction of approximately $435,000 in annual gross operating revenues. This order was replaced by another on July 27, 1937, which commanded an identical reduction. This time the commission itself prescribed a schedule of rates. The utility filed a bill in equity in a statutory court in the Middle District of Pennsylvania. On October 15, 1937, a permanent injunction issued.1 The Commission did not appeal. On November 30, 1937, another order was issued seeking to establish the same temporary rates and to secure the same reduction in gross revenues as the orders of July 13 and 27.
Jurisdiction of the Statutory Court.—Except as modified by the Johnson Act,3 jurisdiction exists in a statutory court, called pursuant to Sec. 266 of the Judicial Code, to hear and finally determine bills in equity seeking temporary and permanent injunctions against the order of a state administrative commission on the ground of irreparable injury.4 By this amendatory act, where the order attacked as violative of the Federal Constitution affects the rates of a public utility, does not interfere with interstate commerce and has been made after notice and hearing, the jurisdiction of the district court to enjoin its enforcement is withdrawn, unless no 'plain, speedy and efficient remedy may be had, at law or in equity, in the courts of such State.' No challenge to the jurisdiction was made in the statutory court or on appeal. In response to questions from the bench, counsel for the commission conceded that there was no remedy in the state courts which would satisfy the Johnson Act.
The reason for this concession lies, so far as a remedy in equity is concerned, in the provision of the Pennsylvania statute forbidding an injunction against an order, 'except in a proceeding questioning the jurisdiction of the commission.'5 The bill in certain allegations attacks the section of the Public Utility Law under which this order issued as violative of the Fourteenth Amendment, U.S.C.A.Const., in that it empowered the commission to fix non-compensatory and discriminatory temporary rates, in an arbitrary manner. In one sense this questions the jurisdiction of the commission. If Sec. 310 is invalid, there is no other provision to authorize temporary rates. Jurisdiction is a word of uncertain meaning. As used in Sec. 1111, supra, it apparently refers to proceedings by the commission under the terms of the statute. In this use it would permit an injunction, equitable grounds being shown, where the public utility is not covered by the act. Otherwise, action in excess of the powers of the commission, such as a confiscatory rate, might be deemed beyond its jurisdiction. At any rate, without an authoritative determination by the state courts, we cannot say, for this character of proceeding, that the remedy in the state courts is plain, speedy and efficient.6 The remedy at law by appeal is ineffective to protect the utility's position pendente lite. The supersedeas does not postpone the application of the temporary rates.7 The statutory court had jurisdiction of the bill.
Appellee's first contention is that the decree may be sustained for the sole reason that the commission should have proceeded under subsection (b) because the appellee does not have continuing property records. As the conclusion of the lower court on this point is not supported by a state decision, we analyze for ourselves the provisions of the sections. It is clear from the language of Sec. 310(a) that it is applicable not only to public utilities whose reports to the commission show the original cost of their physical property but also to those whose original cost is not so shown. The last clause of the section authorizes the commission to estimate such cost. There is no provision in 310(a) which limits its application to those utilities which maintain the continuing property records of Sec. 502.11 Section 310(b), see note 9, furnishes a partial alternative for Sec. 310(a). Where there are no continuing property records, as provided by Sec. 502, the commission must in fixing the temporary rate arrange for an least a five per cent return on original cost under (a) or the return of an operating income under (b) equal to that for the year 1935 or a subsequent year, as determined by the commission.
The commission drew the order in accord with the prior ruling of the Middle District Court on a former order in this rate proceeding.13 The former order had also fixed temporary rates but had not set out the findings of value deemed essential by the court. Although the reversal of the commission's order had actually turned on the failure to show the factual basis for the rates, as the district court had stated that compliance with Smyth v. Ames14 was necessary in temporary rate making, the commission based the order now under review on evidence requisite under that rule. By taking this position, it interprets the statute as requiring consideration of elements other than original cost in fixing temporary rates. It is not suggested that the commission omitted consideration of any necessary element in the present order. If we assume with the appellee that the constitutionality of a delegation of rate making authority is to be tested by what a rate making body may rightfully do under the delegation rather than what it does, appellee's case is advanced not one whit. We have here an interpretation of the Pennsylvania statute by the board charged with its enforcement that it must weigh all the essential elements of valuation required by our past decisions.
Confiscation.—There remains for examination the appellee's argument that the decree of the district court enjoining the enforcement of the order should be sustained because it is confiscatory. The commission, as of November 30, 1937, found the rate base, revenue, expenses and rate, as set out below.18 Appellee urges here that the commission's figures are erroneous in the following particulars: (1) The rate base should be $5,866,081; (2) the rate should be 7 1/2 per cent; (3) two items of expense, disallowed by the commission should be added to the operating expenses, (a) some increase in annual salaries and (b) rate case expenses on books to November 15, 1937; (4) allowance should be made for a prospective loss of annual profit by reason of the loss of a large customer, through abandonment of railway service by York Railways Company.
(1) The commission estimated the original cost as of December 31, 1936, at $4,576,169.73. The company estimated the original cost as of November 30, 1936, exclusive of financing charges, at $4,619,364 and its book cost as of December 31, 1936, at $4,578,793. If, to the highest of these items, we add $164,000 for working capital and $142,851.07, representing net additions to September 30, 1937, the amounts claimed by the company, the original cost rate base is found to be not more than $4,926,215.07.
The commission excluded the cost of financing because there was no evidence of any actual expenditures for such purpose or of any studies of such cost. We find no error in this.19 There was here no foundation for an estimate.20 Appellee's suggestion that evidence supporting its claim is found in the capitalization chart of York Railways Company, the owner of appellee's common stock, is not accepted. This shows the discount, $298,825, paid by the parent company on $2,706,000 face amount of bonds of various issues between 1909 and 1925. It appears that $1,027,904 of the proceeds was expended for construction work of the York Edison Company, apparently appellee's predecessor. Nothing is shown as to the cost of this money to the appellee. It may have given notes for or been charged with this exact amount, without a finance charge. The financing cost to appellee may have been covered by the interest rate.
For depreciated reproduction cost as of November 30, 1936, the commission accepted the estimate of the company for direct costs, $3,981,347. It added 19% $756,456, for indirect costs and reached a total of $4,737,803. This finding reduced the indirect costs from the 24.3 per cent claimed by the company. Evidence was introduced before the commission supporting each percentage estimate. The amount of these indirect costs likely to be incurred is too uncertain for us to conclude that the percentage adopted is erroneous.22 We cannot see that the failure of the commission's witness Bierman to inspect the property made less valuable his estimate on the proper percentage to be applied for indirect costs. These indirect costs are of the character of interest, supervision, cost of financing, taxes and legal expense.
The utility states that the commission, in fixing the reproduction cost, erred by refusing to consider the effect of a claimed increase of prices. The commission, on November 30, 1937, fixed reproduction cost upon a computation based by the utility upon prices as of November 30, 1936. This showed a gross cost of $5,572,134, depreciated and reduced by the commission, as explained in the preceding paragraph, to $4,737,803. The utility presented a further computation, showing as of May 31, 1937, that increased prices, due to a rising level, would increase the gross cost to $6,019,832. The argument is that the later estimate should have been considered.23 Proportionally reduced to accord with the action of the commission, this latter figure would become $5,118,465. If to this higher reproduction cost we add working capital, there appears a reproduction cost depreciated figure of $5,282,465.
It is furthermore to be observed that the commission's figures do not differ far as to fair value, from the estimate of an important witness for the utility, Mr. Seelye, who testified on March 12, 1937, that the fair value was not less than $5,500,000 and said later in answer to the commissioner's question that the fair value, in his opinion was $5,500,000. This estimate was reiterated on December 20, 1937, in the affidavits of Mr. Seelye and Mr. Wayne, the President of the company, in support of the motion for temporary injunction.
(2) The rate of return was fixed by the commission at six per cent. Witnesses for the utility brought out facts deemed applicable in the determination of a proper rate of return on the fair value of the property. Their evidence took cognizance of the yield of bonds, preferred and common stocks of selected comparable utilities, the stagnant market for new issues, prevailing cost of money, the implications of the possible substitution of some governmentally operated or financed utilities for those privately owned and the dangers of a fixed schedule of rates in the face of possible inflation. From these factors they deduced that a proper rate of return would be from 7.8 per cent to 8 per cent. An accounting expert of the commission countered with tables showing yields of bonds of utilities; the yield to maturity of Pennsylvania public utility securities, approved by the commission between July 1, 1933, and May 7, 1937, long term and actually sold for cash to non-affiliated interests; yield of Pennsylvania electric utilities; financial and operating statistics of Pennsylvania electric utilities; money rates, and other material information. Utilities Comm., 292 U.S. 290, 308, 54 a reasonable rate of return.
It must be recognized that each utility presents an individual problem.24 The answer does not lie alone in average yields of seemingly comparable securities or even in deductions drawn from recent sales of issues authorized by this same commission. Yields of preferred and common stocks are to be considered, as well as those of the funded debt. When bonds and preferred stocks of well seasoned companies can be floated at low rates, the allowance of an over all rate return of a modest percentage will bring handsome yields to the common stock. Certainly the yields of the equity issues must be larger than that for the underlying securities. In this instance, the utility operates in a stable community, accustomed to the use of electricity and close to the capital markets, with funds readily available for secure investment. Long operation and adequate records make forecasts of net operating revenues fairly certain. Under such circumstances a six per cent return after all allowable charges cannot be confiscatory.
At best, these estimates are prophecies of expected returns. The incalculable factors of business activity, unanticipated demand or forbearance, substitution and other variables lead us to approximations. We are satisfied the reduction required is not shown to be confiscatory.
The decree below was clearly wrong. But in reversing it, the Court's opinion appears to give new vitality needlessly to the mischievous formula for fixing utility rates in Smyth v. Ames, 169 U.S. 466, 18 S.Ct. 418, 42 L.Ed. 819. The force of reason, confirmed by events, has gradually been rendering that formula moribund by revealing it to be useless as a guide for adjudication. Experience has made it overwhelmingly clear that Smyth v. Ames and the uses to which it has been put represented an attempt to erect temporary facts into legal absolutes. The determination of utility rates—what may fairly be exacted from the public and what is adequate to enlist enterprise—does not present questions of an essentially legal nature in the sense that legal education and lawyers' learning afford peculiar competence for their adjustment. These are matters for the application of whatever knowledge economics and finance may bring to the practicalities of business enterprise. The only relevant function of law in dealing with this intersection of government and enterprise is to secure observance of those procedural safeguards in the exercise of legislative powers which are the historic foundations of due process.
Mr. Justice Bradley nearly fifty years ago made it clear that the real issue is whether courts or commissions and legislatures are the ultimate arbiters of utility rates (dissenting in Chicago, Milwaukee & St. Paul Ry. Co. v. Minnesota, 134 U.S. 418, 461, 10 S.Ct. 702, 703, 33 L.Ed. 970). Whatever may be thought of the wisdom of a broader judicial role in the controversies between public utilities and the public, there can be no doubt that the tendency, for a time at least, to draw fixed rules of law out of Smyth v. Ames has met the rebuff of facts. At least one important state has for decades gone on its way unmindful of Smyth v. Ames, and other states have by various proposals sought to escape the fog into which speculations based on Smyth v. Ames have enveloped the practical task of administering systems of utility regulation.
Smyth v. Ames should certainly not be invoked when it is not necessary to do so. The statute under which the present case arose represents an effort to escape Smyth v. Ames at least as to temporary rates. It is the result of a conscientious and informed endeavor to meet difficulties engendered by legal doctrines which have been widely rejected by the great weight of economic opinion,1 by authoritative legislative investigations,2 by utility commissions throughout the country,3 and by impressive judicial dissents.4 As a result of this long process of experience and reflection, the two states in which utilities play the biggest financial part—New York and Pennsylvania—have evolved the so-called recoupment scheme for temporary rate-fixing (thereby avoiding some of the most wasteful aspects of rate litigation) as a fair means of accommodating public and private interests. It is a carefully guarded device for securing 'a judgment from experience as against a judgment from speculation,' Tanner v. Little, 240 U.S. 369, 386, 36 S.Ct. 379, 384, 60 L.Ed. 691, in dealing with a problem of such elusive economic complexity as the determination of what return will be sufficient to attract capital in the special setting of a particular industry and at the same time be fair to the public dependent on such enterprise.
Edison Light & Power Co. v. Driscoll, D.C., 21 F.Supp. 1.
Edison Light & Power Co. v. Driscoll, D.C., 25 F.Supp. 192.
Judicial Code, § 24(1), as amended by Act of May 14, 1934, c. 283, 48 Stat. 775, 28 U.S.C.A. § 41(1).
Oklahoma Natural Gas Co. v. Russell, 261 U.S. 290, 292, 43 S.Ct. 353, 67 L.Ed. 659; Herkness v. Irion, 278 U.S. 92, 93, 49 S.Ct. 40, 41, 73 L.Ed. 198.
Mountain States Power Co. v. Public Service Comm., 299 U.S. 167, 170, 57 S.Ct. 168, 169, 81 L.Ed. 99; Corporation Comm. v. Cary, 296 U.S. 452, 56 S.Ct. 300, 80 L.Ed. 324.
Sec. 1103, P.L. 1053, Title 66 P.S.Pa. § 1433.
P.L. 1053, Title 66 P.S.Pa. § 1150.
'Temporary rates. (a) The commission may, in any proceeding involving the rates of a public utility brought either upon its own motion or upon complaint, after reasonable notice and hearing, if it be of opinion that the public interest so requires, immediately fix, determine, and prescribe temporary rates to be charged by such public utility, pending the final determination of such rate proceeding. Such temporary rates, so fixed, determined, and prescribed, shall be sufficient to provide a return of not less than five per centum upon the original cost, less accrued depreciation, of the physical property (when first devoted to public use) of such public utility, used and useful in the public service, and if the duly verified reports of such public utility to the commission do not show such original cost, less accrued depreciation, of such property, the commission may estimate such cost less depreciation and fix, determine, and prescribe rates as hereinbefore provided.
P.L. 1053, Title 66, P.S.Pa. § 1212.
Cf. Panama Refining Co. v. Ryan, 293 U.S. 388, 420, 55 S.Ct. 241, 248, 79 L.Ed. 446; Wuchter v. Pizzutti, 276 U.S. 13, 24, 48 S.Ct. 259, 262, 72 L.Ed. 446, 57 A.L.R. 1230; People v. C. Klinck Packing Co., 214 N.Y. 121, 138, 108 N.E. 278, Ann.Cas.1916D, 1051; Montana Co. v. St. Louis Mining & Milling Co., 152 U.S. 160, 170, 14 S.Ct. 506, 509, 38 L.Ed. 398. But see New York ex rel. Hatch v. Reardon, 204 U.S. 152, 160, 27 S.Ct. 188, 190, 51 L.Ed. 415, 9 Ann.Cas. 736; Tyler v. Judges, 179 U.S. 405, 410, 21 S.Ct. 206, 208, 45 L.Ed. 252; Jacobson v. Massachusetts, 197 U.S. 11, 37, 25 S.Ct. 358, 366, 49 L.Ed. 643, 3 Ann.Cas. 765; New York ex rel. Lieberman v. Van De Carr, 199 U.S. 552, 562, 26 S.Ct. 144, 146, 50 L.Ed. 305; Home Telephone & Telegraph Co. v. Los Angeles, 211 U.S. 265, 278, 29 S.Ct. 50, 54, 53 L.Ed. 176.
169 U.S. 466, 18 S.Ct. 418, 42 L.Ed. 819.
'(e) Temporary rates so fixed, determined, and prescribed under this section shall be effective until the final determination of the rate proceeding, unless terminated sooner by the commission. In every proceeding in which temporary rates are fixed, determined, and prescribed under this section, the commission shall consider the effect of such rates in fixing, determining, and prescribing rates to be thereafter demanded or received by such public utility on final determination of the rate proceeding. If, upon final disposition of the issues involved in such proceeding, the rates as finally determined, are in excess of the rates prescribed in such temporary order, then such public utility shall be permitted to amortize and recover, by means of a temporary increase over and above the rates finally determined, such sum as shall represent the difference between the gross income obtained from the rates prescribed in such temporary order and the gross income which would have been obtained under the rates finally determined if applied during the period such temporary order was in effect.' Cf. Prendergast v. New York Telephone Co., 262 U.S. 43, 43 S.Ct. 466, 67 L.Ed. 853. Bronx Gas & Electric Co. v. Maltbie, 271 N.Y. 364, 3 N.E.2d 512.
Fox v. Standard Oil Co. of New Jersey, 294 U.S. 87, 97, 55 S.Ct. 333, 337, 79 L.Ed. 780; Union Ins. Co. v. Hoge, 21 How. 35, 66, 16 L.Ed. 61.
Thompson v. Consolidated Gas Utilities Corp., 300 U.S. 55, 75, 76, 57 S.Ct. 364, 373, 374, 81 L.Ed. 510, and cases cited; cf. Blodgett v. Holden, 275 U.S. 142, 148, 276 U.S. 594, 48 S.Ct. 105, 107, 72 L.Ed. 206; Federal Trade Comm. v. American Tobacco Co., 264 U.S. 298, 307, 44 S.Ct. 336, 337, 68 L.Ed. 696, 32 A.L.R. 786; Texas v. Eastern Texas R. Co., 258 U.S. 204, 217, 42 S.Ct. 281, 283, 66 L.Ed. 566.
Wabash Valley Elec. Co. v. Young, 287 U.S. 488, 500, 53 S.Ct. 234, 237, 77 L.Ed. 447; Galveston Elec. Co. v. Galveston, 258 U.S. 388, 397, 42 S.Ct. 351, 355, 66 L.Ed. 678.
Denver Union Stock Yard Co. v. United States, 304 U.S. 470, 478, 58 S.Ct. 990, 995, 82 L.Ed. 1469; St. Joseph Stock Yards Co. v. United States, 298 U.S. 38, 62, 56 S.Ct. 720, 730, 80 L.Ed. 1033. Cf. Dayton P. & L. Co. v. Public Utilities Comm., 292 U.S. 290, 308, 54 S.Ct. 647, 655, 78 L.Ed. 1267; St. Joseph Stock Yards Co. v. United States, D.C., 11 F.Supp. 322, 334; Des Moines Gas Co. v. City of Des Moines, 238 U.S. 153, 35 S.Ct. 811, 59 L.Ed. 1244; McCardle v. Indianapolis Water Co., 272 U.S. 400, 413, 47 S.Ct. 144, 149, 71 L.Ed. 316.
Dayton P. & L. Co. v. Public Utilities Comm., 292 U.S. 290, 311, 54 S.Ct. 647, 657, 78 L.Ed. 1267.
McCart v. Indianapolis Water Co., 302 U.S. 419, 58 S.Ct. 324, 82 L.Ed. 336.
United Railways & Elec. Co. v. West, 280 U.S. 234, 249, 50 S.Ct. 123, 125, 74 L.Ed. 390; Willcox v. Consolidated Gas Co., 212 U.S. 19, 48, 29 S.Ct. 192, 198, 53 L.Ed. 382, 48 L.R.A.,N.S., 1134, 15 Ann.Cas. 1034; Bluefield Water Works & Improvement Co. v. Public Service Comm., 262 U.S. 679, 692, 43 S.Ct. 675, 678, 67 L.Ed. 1176; Knoxville v. Knoxville Water Co., 212 U.S. 1, 17, 29 S.Ct. 148, 153, 53 L.Ed. 371.
West Ohio Gas Co. v. Public Utilities Comm., No. 1, 294 U.S. 63, 74, 55 S.Ct. 316, 321, 79 L.Ed. 761; see Wabash Valley Elec. Co. v. Young, 287 U.S. 488, 500, 53 S.Ct. 234, 237, 77 L.Ed. 447.
Wabash Valley Elec. Co. v. Young, 287 U.S. 488, 500, 53 S.Ct. 234, 237, 77 L.Ed. 447; West Ohio Gas Co. v. Public Utilities Comm., No. 1, 294 U.S. 63, 74, 55 S.Ct. 316, 321, 79 L.Ed. 761.
Compare with the computation of the Commission, note 18.
See 2 Bonbright, The Valuation of Property, 1081—1086, 1094 1102; 3A Sharfman, The Interstate Commerce Commission, 121—137.
See, e.g., Brandeis, J., concurring in Missouri ex rel. Southwestern Bell Telephone Co. v. Public Service Comm., 262 U.S. 276, 289, 43 S.Ct. 544, 547, 67 L.Ed. 981, 31 A.L.R. 807, and bibliography therein contained.

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 § 1101
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 § 24
 § 41
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 § 1433
 § 1150
 § 1212
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