Source: https://openjurist.org/262/us/625
Timestamp: 2019-04-22 10:14:35+00:00

Document:
RAILROAD COMMISSION OF GEORGIA et al.
Messrs. L. Z. Rosser, of Atlanta, Ga., Robert G. Dodge, of Boston, Mass., and W. T. Colquitt, of Atlanta, Ga., for appellants.
Mr. E. J. Reagan, of McDonough, Ga., for appellees.
The gas supply of Atlanta is furnished by the Georgia Railway & Power Company. Authority to fix public utility rates is vested by law in the Railroad Commission. On September 20, 1921, the commission called upon the Georgia Company to show cause why the then maximum rate, $1.65 per 1,000 cubic feet, should not be reduced, and hearings were duly had. The company insisted that under the proposed rate the net income would be less than 3 per cent. on what it claimed to be the fair value of the property. The commission concluded that the net income under the proposed rate would be about 8 per cent. on the value found by it. This difference in their views as to the percentage of probable return arose mainly from their difference as to the value of the property. The company claimed that it was at least $9,500,000. The commission found that it was $5,250,000. On December 30, 1921, it ordered that the price of gas be reduced to $1.55.
The Georgia Company and the Atlanta Gaslight Company, its lessor, then brought, in the federal court for the Northern district of Georgia, this suit to enjoin enforcement of the order, claiming that the rate prescribed is confiscatory. The case was heard upon applica ion for an interlocutory injunction by three judges under section 266 of the Judicial Code (Comp. St. § 1243). The court did not approve in all respects the views expressed by the commission; but it found that, 'even were there considerable error in fixing values by the commission, the rate would not appear to be clearly confiscatory,' and that enforcement of the order ought not be enjoined until the reduced rate had been tried. It therefore refused the interlocutory injunction, and the case is here on appeal under section 238 of the Judicial Code (Comp. St. § 1215).
First. The objections mainly urged relate to the rate base, and one of them is of fundamental importance. The companies assert that the rule to be applied in valuing the physical property of a utility is reproduction cost at the time of the inquiry less depreciation. The 1921 construction costs were about 70 per cent. higher than those of 1914 and earlier dates, when most of the plant was installed. So much of it as was in existence January 1, 1914, was valued at an amount which was substantially its actual cost or its reproduction cost as of that date. The companies claim that it should have been valued at its replacement cost in November, 1921, the time of the rate inquiry, and that the great increase in construction costs was ignored in determining the rate base.
What these relevant facts are had been stated in Smyth v. Ames, 169 U. S. 466, 546, 547, 18 Sup. Ct. 418, 434, 42 L. Ed. 819.
The opinion of the court shows that it also made careful examination of the evidence submitted and that it recognized the applicable rules of law. While it differed from the commission in some matter of detail, it sustained the latter's finding that the value was $5,250,000. The question on which this court divided in the Southwestern Bell Telephone Case, supra, is not involved here.
Second. Two objections to the valuation relate to the exclusion of items from the rate base, namely, the franchise to do business in Atlanta, said to be worth $1,000,000, and so-called losses from operations during recent years, alleged to aggregate $1,000,000. These items were properly excluded. The franchise in question is not a monopoly. It is merely a perpetual permit, granted by the Legislature in 1856, to maintain gas mains in the streets, alleys and public places of Atlanta without the necessity of securing the consent of the municipality. That such franchises are to be excluded in fixing the rate base was settled by Cedar Rapids Gas Co. v. Cedar Rapids, 223 U. S. 655, 669, 32 Sup. Ct. 389, 56 L. Ed. 594, Des Moines Gas Co. v. Des Moines, 238 U. S. 153, 169, 35 Sup. Ct. 811, 59 L. Ed. 1244, and Galveston Electric Co. v. Galveston, 258 U. S. 388, 42 Sup. Ct. 351, 66 L. Ed. 678. The allowance for the franchise made in Willcox v. Consolidated Gas. Co., 212 U. S. 19, 43, 44, 48, 29 Sup. Ct. 192, 53 L. Ed. 382, 15 Ann. Cas. 1034, 48 L. R. A. (N. S.) 1134, was rested on special grounds which do not exist in this case. That past losses are not to be capitalized as property on which the fair return is based was held in Knoxville v. Knoxville Water Co., 212 U. S. 1, 14, 29 Sup. Ct. 148, 53 L. Ed. 371; Galveston Electric Co. v. Galveston, 258 U. S. 388, 42 Sup. Ct. 351, 66 L. Ed. 678. Here this conclusion seems even clearer than it was in those cases. The losses under consideration in the case at bar were obviously not a part of development cost. They were due to insufficiency of previous rates.
Third. Two further objections to the rate base relate to items of property included in it, which are alleged to have been undervalued. The companies contend that the working capital required was $420,000, whereas only $266,677 was allowed. They also contend that the 'going concern' value is at least $750,000, whereas only $441,629 was allowed. These are findings of fact made by the commission and approved by the lower court. We are not satisfied that either finding is erroneous.
Fourth. The companies contend that there was error, also, in estimating the amount of the probable net income. One objection relates to the federal corporate income tax (10 per cent.) assumed to be $45,3 4. The commission treated the tax as a proper operating charge. The court disallowed it, and thus increased its estimate of probable net income. In this the court erred. Galveston Electric Co. v. Galveston, 258 U. S. 388, 42 Sup. Ct. 351, 66 L. Ed. 678. Its estimate of '$424,150 as the probable income per year under the new rate, with no allowance made for increased consumption or reduced cost of production that seem quite probable,' should therefore be reduced to about $380,000. This is the amount indicated by the commission's findings.
The other objections relate to the amount of the depreciation charge. The companies say the rate should be 2 1/2 per cent. The commission and the court allowed only 2 per cent. This question is one of fact, and we are not convinced that it was wrongly decided below. The amount of the depreciation charge is also objected to on the ground that the percentage should have been figured on a larger value. This objection depends upon the value to be placed upon the physical property which has already been discussed.
Fifth. The probable return based on the value and the probable income found by the commission would be nearly 7 1/4 per cent. It must be borne in mind, as pointed out in Galveston Electric Co. v. Galveston, supra, that, since dividends from the corporation are not included in the income on which the normal federal tax is payable by stockholders, the tax exemption is, in effect, an additional return on the investment. A return of 7 1/4 per cent.—in addition to this tax exemption—cannot be deemed confiscatory. The solicitude of the commission to secure to the companies a fair return is shown by its treatment of them during the three years preceding the order here in question. Long prior to 1918, the gas rate had been fixed by the utility at $1. Operating and construction costs having risen owing to the World War, the commission raised the rate to $1.15, effective September 1, 1918; to $1.35, effective October 1, 1920; to $1.90, effective March 1, 1921. After costs had fallen materially, the rate was reduced to $1.65 June 1, 1921, and the order to reduce it to $1.55 was entered, effective January 1, 1922. In making each of these changes the commission fixed a rate which it estimated would permit the company to earn a return of about 8 per cent. on the fair value of the property. Each change of rate was made upon careful consideration. If there was error, it was error in prophecy or error of judgment in passing upon the evidence. We cannot say that the evidence compelled a conviction that the rate would prove inadequate. Compare San Diego Land & Town Co. v. National City, 174 U. S. 739, 754, 19 Sup. Ct. 804, 43 L. Ed. 1154; San Diego Land & Town Co. v. Jasper, 189 U. S. 439, 23 Sup. Ct. 571, 47 L. Ed. 892; Knoxville v. Knoxville Water Co., 212 U. S. 1, 17, 29 Sup. Ct. 148, 53 L. Ed. 371; Galveston Electric Co. v. Galveston, 258 U. S. 388, 401, 402, 42 Sup. Ct. 351, 66 L. Ed. 678. Moreover, the decree is merely interlocutory.
I am constrained to dissent on the authority of Missouri ex rel. Southwestern Bell Telephone Co. v. Public Service Commission of Missouri et al., 262 U. S. 276, 43 Sup. Ct. 544, 67 L. Ed. ——, decided May 21, 1923, and Bluefield Waterworks & Improvement Co. v. Public Service Commission of West Virginia, 262 U. S. 679, 43 Sup. Ct. 675, 67 L. Ed. ——, decided to-day.
To separate the company from the conditions which existed at the time of regulation was arbitrary, and condemned it, the company, to accept an inadequate return upon the value of its property, not only for the then time, but for an indefinite future time. Similar action was condemned in the Telephone Case—no 'economic cataclysm' repelling. Similar action was condemned in the Bluefield case—no 'economic cataclysm' repelling.2 May I ask what had become of the 'cataclysm'? Had it settled in Georgia in conscious indulgence to life and business in other parts of the country from its bewildering influence?
The contrariety of decision cannot be reconciled. To anticipate a possible criticism, however, I should say a distinction is attempted to be made between this case and the Telephone Case, a distinction, I think, not sustained by the record. It is said that the present case is unlike the Telephone Case, in that 'here the commission gave careful consideration to the cost of reproduction; but it refused to adopt reproduction cost as the measure to value.' The omission was the commission's error; it was in disregard to the rule of the cases—disregard of the value of the utility at the time of its regulation—the time it was being used by the public and such value was available. The problem was direct and simple, with no baffling element in it. It was only to find the reproduction cost of the utility, and this, necessarily, was constituted of the cost of its materials, and the cost of their fabrication, less an estimate of depreciation from the new; these costs and depreciations representing its value at the moment of time it was being regulated and being used by the public, such moment being the time prescribed by the law for the determination of its value—the determination of that upon which the rate for its use was to be based.
The error in this case being of like kind as that which was committed by the commission in that case, it should be visited by the same treatment; that is, a reversal of its action.
'The record [in the case] clearly shows that the commission [whose action is reviewed] in arriving at its final figure did not accord proper, if any, weight to the greatly enhanced costs of construction in 1920 over those prevailing about 1915 and before the war, as established by uncontradicted evidence, and the company's detailed estimated cost of reproduction new, less depreciation, at 1920 prices, appears to have been wholly disregarded. This was erroneous'—citing the Telephone Case as well as other cases.
From this error, all of the other errors in the case followed, and it and they constituted the mistake of the Supreme Court of West Virginia in sustaining the action of the commission, and the ground of reversal of the Supreme Court.
The cases, this and the Bluefield Case, are identical in errors. In this case the values that existed at the time of regulation were wholly disregarded, and those of seven years before, those which existed in 1914—that is, before the war—were deliberately selected. This action was affirmed, as I have pointed out, by the District Court, from whose decree this appeal was taken. The decree is affirmed, which is the affirmance of the action of the commission.
The Supreme Court of West Virginia affirmed the action of the commission. This court in its opinion of to-day reverses that judgment, which is a reversal of the action of the commission.
It will be observed the commissions did exactly the same thing, and yet the action of one is affirmed, and the action of the other reversed. This contrariety of decision I cannot reconcile. There should be reversal of both, or the affirmance of both, if their identities are to be observed. I, therefore must dissent from one or the other of the cases, and, as the Bluefield Case has the support of the Telephone Case, I dissent from the present case; there being a majority against it, and those cases, besides, expressing my view of the law.
The last observation I do not pass upon, as it has no consequential bearing on the question in the case. And I proceed to say that I have the impression that the court's decision of the commission's action was influenced by the court's constitutional views. The court said that 'a rate established as reasonable, whether by the company or by the commission, is not guaranteed by the commission or by the public. Whether it will actually yield more or less than a fair return during its continuance is a risk of the business' to which the company had devoted its property.
The lower federal courts have not felt the bewildering effect—impotent effect, I might say—that the commission discovered in the post-war conditions. St. Joseph Railway, etc., Co. v. Public Service Commission (D. C.) 268 Fed. 267; Landon et al. v. Court of Industrial Relations of the State of Kansas et al. (D. C.) 269 Fed. 433, 444; Potomac Electric Power Co. v. Public Utilities Commission, 276 Fed. 327, 51 App. D. C. 77; Public Service Railway Co. v. Board of Public Utilities Commissioners (D. C.) 276 Fed. 979. And a state court has been equally free from confusion. Petersburg Gas. Co. v. Petersburg, 132 Va. 82, 110 S. E. 533, 20 A. L. R. 542.

References: § 1243
 § 1215
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