Source: https://supreme.justia.com/cases/federal/us/295/662/
Timestamp: 2019-04-22 04:09:53+00:00

Document:
1. Since, by legislation prescribing the rates or charges of a public utility company, the use of its property is taken, due process requires that the rates prescribed shall be such as to assure just compensation, i.e., a reasonable rate of return upon the then value of the property. P. 295 U. S. 671.
2. Valuation of the property of a public utility for rate-fixing purposes is a matter of sound judgment involving facts. Actual cost, reproduction cost, and all other evidences of value, including price trends and levels, are to be given their proper weight in reaching the conclusion. P. 295 U. S. 671.
3. The property of a telephone company -- a great, integrated aggregate of many and diverse elements, not primarily intended for sale in the market, but for devotion to the public use now and for the indefinite future -- is not susceptible of being valued like ordinary market commodities. P. 295 U. S. 672.
4. While the owner of such a property must assume, and may not pass on to the public, the risk involved in any general decline of values, and may have the advantage also of a general rise in such values, it would be unfair to both owner and public, and also impracticable, to adjust valuations of the property, and the consequent returns, to sudden fluctuations of the prices of materials and labor. P. 295 U. S. 673.
5. In a suit to enjoin the enforcement of rates alleged to be in violation of the due process clause of the Fourteenth Amendment, the function of the federal court is confined to the question of confiscation; the legislative finding is not to be set aside for mere errors of procedure. Los Angeles Gas & Electric Corp. v. Railroad Commission, 289 U. S. 287. P. 295 U. S. 674.
should enjoin the enforcement of the rates. Northern Pacific Ry. Co. v. Department of Public Works, 268 U. S. 39; Chicago, M. & St. P. Ry Co. v. Public Utilities Comm'n, 274 U. S. 344. Pp. 295 U. S. 674, 295 U. S. 679.
7. A state commission sought to value the physical plant and property of a telephone company, for fixing rates, without recourse to a new appraisal and without giving weight to evidence of reproduction cost and accrued depreciation furnished by the company, by translating the value in dollars, as it had been established in 1923, and cost of subsequent net additions, into an amount of equivalent purchasing power a of December 31, 1932, by means of price indices. To this end, it selected sixteen commodity price indices, prepared to show price trends, one of them covering as many as 784 commodities of different kinds and weighted, the others less comprehensive, and applied them to the old plant valuation and the costs of additions and the depreciation reserves. As the results varied widely, the commission weighted the indices, upon a principle not disclosed, and derived a "fair value index." This, being similarly applied, yielded a figure which, with an addition for working capital, the commission adopted as its rate base. In some of the price indices prepared and used by the commission, price increases during 1931-1932 were disregarded. In the period covered, the price trend was ascending from 1923 to 1929. It then suffered a precipitate decline, so that, at December, 1932, the date of the commission's valuation, it was at the nadir. Subsequently it made a sharp recovery. By November 28, 1933, the date when the commission made its final report and rate-fixing order, it had risen (according to the all-commodities index of the United States Department of Labor) more than 13% over the price level of December 31, 1932. For this reason, the commission made an additional allowance of income to the company; but, judged by the same index, this was absorbed by continued rise of prices in 1934 and 1935. What the commission in effect did was to take the temporary low price level of December, 1932, and apply it for the indefinite future in ascertaining the so-called fair value of the company's plant and property. Held that the method of valuation was inapt and improper, and that the order fixing rates is repugnant to due process of law. Pp. 295 U. S. 666, 295 U. S. 668.
is quite distinct from the application of general commodity indices to a conglomerate of assets constituting the entire plant. P. 295 U. S. 677.
9. Objection by a public utility company to a valuation of its property by the use of commodity price indices, is not met by the fact that, in an earlier suit between the same parties, the court used such an index for that purpose. P. 295 U. S. 677.
10. An appraisal by the court of the property of a public utility company at book cost depreciation reserve held, in the circumstance of the case, arbitrary and erroneous. P. 295 U. S. 678.
11. In a period of low price, costs incurred when the price level was much higher are not a safe guide in appraising present value. P. 295 U. S. 678.
Appeal from a decree of the District Court of three judges which, at the suit of the Telephone Company, enjoined the members of the Maryland Public Service Commission from enforcing an order purporting to fix the company's rates.
November 28, 1933, directing the company to put into effect January 1, 1934, reductions in its rates sufficient to diminish annual net income by $1,000,000. The company filed a bill in the District Court for temporary and final injunction; the application for interlocutory relief was heard by a court of three judges. A stipulation was made that the cause should be treated as upon final hearing, and a decree was entered enjoining enforcement of the order. [Footnote 1] This appeal challenges the court's action.
The commission determined the value of the property at December 31, 1932, as $32,621, 190; estimated the net revenue for 1934 at $3,353,793; allowed for reasonable return 6 percent on value ($1,957,271), which the estimated revenue would exceed by $1,396,522. In view of the rise of the general price level during 1933, however, the commission required a reduction of but $1,000,000. In computing net income, the commission accepted all the company's figures for current expense except the annual allowance for depreciation, the amount claimed on this head being $2,173,000, and the sum allowed $1,720,724. The company insisted on a 7 1/2 percent return.
85 percent, and the latter 15 percent of the total. As the commission dealt with the property as a whole, the parties, their witnesses, and the District Court found it convenient to do so, having in mind the fact that, in the final result, only 85 percent of the amounts involved reflected intrastate business, and the commission's order must be limited accordingly. For similar reasons, and with a similar reservation, we shall pursue the same course. For the purposes of this proceeding, the commission's order therefore is to be considered as requiring a diminution of income from intrastate operations by $850,000, rather than $1,000,000.
In 1916, the commission valued the property and prescribed rates. In 1923, the company applied for an increase, the commission, after a hearing, fixed value at approximately book cost, and refused to permit the rates to be raised. The District Court, pursuant to a bill filed by the company, found the actual value exceeded book value by some $6,000,000, and enjoined the commission from enforcing the current rates. [Footnote 3] The commission acquiesced in the decision and passed an order adopting the court's finding of value and establishing new rates. So matters stood until the initiation of the present investigation.
The company's books accurately show installations and retirements of plant, and from them historical cost is ascertained to be $50,025,278 as of December 31, 1933, with a depreciation reserve of $11,483,357. The commission made no appraisal of the physical plant and property, but attempted to determine present value by translating the dollar value of the plant as it was found by the District Court in the earlier case at December 31, 1923, plus net additions in dollar value in each subsequent year, into an equivalent of dollar value at December 31, 1932.
Its theory was this: value signifies in rate regulation the investment in dollars on which a utility is entitled to earn. The dollars, when invested, were free units of exchange value having an earning significance then and now only because they are such units of exchange. When invested, they represented in the plant so many poles, miles of wires, and other items of equipment; on the other hand, the same dollar units then represented certain quantities of government bonds, apartment houses, automobiles, food and services, etc. The dollars invested in the company's plant had no value unless they were exchangeable for other requirements and desires of the stockholders, and the corresponding requirements and desires of all persons who use the dollar as a measure of value. Thus, a regulating body, in finding value, must find a number of universal units of earning power and purchasing power -- that is, exchangeable dollars invested in place of present exchangeable dollars. How shall the relation be ascertained?
the property then owned and to cost of all net additions in subsequent years, to obtain value as of 1932. The result, after adding some $660,000 for working capital, was a rate base of $32,621,190. The company submitted proof of estimated reproduction cost and accrued depreciation. The commission examined and criticized this evidence, but none was offered in opposition, and the valuation was based squarely on the figures obtained by the use of its index.
In the District Court, the company offered evidence of historical cost and estimates of reproduction cost less depreciation; the commission relied solely upon the figure resulting from trending the dollar value of plant owned in 1923 and cost of net additions subsequently made. The court held the indices used inappropriate for determining present value, and discarded them. It purported to consider both book cost and reproduction cost, but, in fact, as plainly appears from the opinion, [Footnote 4] derived present value by the use of two figures only book cost as at December 31, 1933 ($50,025,278), less the entire depreciation reserve shown by the books ($11,483,357) -- and thus fixed value at $38,541,921. To this it added $1,000,000, for working capital (instead of $660,000 allowed by the commission), giving a rate base of $39,541,921. Annual depreciation expense was raised from $1,352,284, as determined by the commission, to $2,000,000. The appellants charge that, in all these respects, the court's action was arbitrary, and cannot stand. We are not satisfied with the methods pursued either by the court or the commission.
indicate price trends. Indeed, the record shows that one index used by the commission and given a weight of 3 -- that of the Interstate Commerce Commission -- bears a notation that it should not be used "in the determination of unit reproduction costs" upon individual properties. Doubtless the authors of the other indices would have issued a similar warning if they had supposed anyone would attempt such a use.
witness disregarded the increase during the period 1930-1932. The commission gave the index a weight of 3 and applied it to all purchases of the company, although confessedly it was applicable to only one-fourth of them.
The established principle is that, as the due process clauses (Amendments V and XIV) safeguard private property against a taking for public use without just compensation, neither nation nor state may require the use of privately owned property without just compensation. When the property itself is taken by the exertion of the power of eminent domain, just compensation is its value at the time of the taking. So where, by legislation prescribing rates or charges, the use of the property is taken, just compensation assured by these constitutional provisions is a reasonable rate of return upon that value. [Footnote 6] To an extent, value must be a matter of sound judgment, involving fact data. To substitute for such factors as historical cost and cost of reproduction, a "translator"
of dollar value obtained by the use of price trend indices, serves only to confuse the problem and to increase its difficulty, and may well lead to results anything but accurate and fair. This is not to suggest that price trends are to be disregarded; quite the contrary is true. And evidence of such trends is to be considered with all other relevant factors. St. Louis & O'Fallon Ry. Co. v. United States, 279 U. S. 461, 279 U. S. 485; Clark's Ferry Bridge Co. v. Public Service Comm'n, 291 U. S. 227, 291 U. S. 236.
and apply this low level for the indefinite future in ascertaining the so-called fair value of the company's plant and property. The experience of the two years which have elapsed since the commission's order clearly indicates the impropriety of the use of its method in the appraisal of a property such as that of this company.
"The legislative discretion implied in the ratemaking power necessarily extends to the entire legislative process, embracing the method used in reaching the legislative determination as well as that determination itself. We are not concerned with either, so long as constitutional limitations are not transgressed. When the legislative method is disclosed, it may have a definite bearing upon the validity of the result reached, but the judicial function does not go beyond the decision of the constitutional question. That question is whether the rates as fixed are confiscatory."
P. 289 U. S. 304.
The language was used in respect of the claim that values of various elements had been ignored by the commission. It was found, however, that, though error might have been committed in respect of the items specified, other allowances neutralized the possible error. See also Dayton P. & L. Co. v. Public Utilities Comm'n, 292 U.S.
290, 292 U. S. 306. Nothing said in either of these cases justifies the claim that this Court has departed from the principles announced in earlier cases as to the value upon which a utility is entitled to earn a reasonable return or the character of evidence relevant to that issue. It is apparent from what has been said that here, the entire method of the commission was erroneous, and its use necessarily involved unjust and inaccurate results. In such a case, it is not the function of a court, upon a claim of confiscation, to make a new valuation upon some different theory in an effort to sustain a procedure which is fundamentally faulty.
average haul on each system being not more than 32 miles. In using the above composite figure in the determination of this issue, the department necessarily ignored, in the first place, the differences in the average unit cost on the several systems, and then the differences on each in the cost incident to the different classes of traffic and articles of merchandise, and to the widely varying conditions under which the transportation is conducted. In this unit cost figure, no account is taken of the differences in unit cost dependent, among other things, upon differences in the length of haul, in the character of the commodity, in the configuration of the county, in the density of the traffic, in the daily loaded car movement, in the extent of the empty car movement, in the nature of the equipment employed, in the extent to which the equipment is used, and in the expenditures required for its maintenance. Main line and branch line freight, interstate and intrastate, car load and less than car load, are counted alike. The department's error was fundamental in its nature. The use of this factor in computing the operating costs of the log traffic vitiated the whole process of reasoning by which the department reached its conclusion. . . ."
"But where rates found by a regulatory body to be compensatory are attacked as being confiscatory, courts may inquire into the method by which its conclusion was reached. An order based upon a finding made without evidence (The Chicago Junction Case, 264 U. S. 258, 264 U. S. 263), or upon a finding made upon evidence which clearly does not support it (Interstate Commerce Commission v. Union Pacific R. Co., 222 U. S. 541, 222 U. S. 547), is an arbitrary act against which courts afford relief. The error under discussion was of this character. It was a denial of due process."
To the same effect, see Chicago, M. & St. P. Ry. Co. v. Public Utilities Comm'n, 274 U. S. 344, 274 U. S. 351.
were used by the commission, but, on the contrary, offered evidence to show that the use of them as a sole criterion of value would be improper.
It is clear that, in a period of low prices, costs incurred when the price level was much higher are not a safe guide in appraising present value. The court so conceded. The depreciation reserve was built up on the straight line theory. [Footnote 12] The company asserted that the amount of the reserve did not represent observed and accrued depreciation at the date of valuation, [Footnote 13] as much of the total consisted of funds provided in anticipation of future depreciation and obsolescence. The court agreed, and further found that, on account of decreased demand for service, with consequent diminishment of obsolescence, the percentage of reserve had in recent years sharply increased. The question of going value was the subject of controversy. The court recognized that this element must be considered, but refused to make any separate allowance for it.
What the court did, in fact, was this: it found that book cost less actual accrued depreciation would probably give too high a figure. It sought to correct the probable error by deducting from cost the entire depreciation reserve, though conceding this exceeded actual depreciation. It felt that this large deduction would also redress any excess of cost over present value, and, finally, it said the result of its method would be appropriate to allow for going value.
"We are not unmindful that, at the present time, the depreciation reserve is slightly higher than normal, and, to the extent that it is, it is unfavorable to the company in the final result. . . . But this disadvantage to the company is, we think, offset by allowing it the full of its actual costs despite the generally lower trend of prices. [Footnote 14]"
"All relevant facts considered, we are of the opinion that a fair allowance for going value is made when we value the telephone property as a whole as a going concern at its actual book costs less full depreciation. [Footnote 15]"
The opinion, in essence, consists of the conclusion that, all the circumstances considered, it will be fair to appraise the property at cost less depreciation reserve. This rough and ready approximation of value is as arbitrary as that of the commission, for it is unsupported by findings based upon evidence.
base upon correct principles. The District Court, upon finding that the commission reached its conclusions as to fair value from data which furnished no legal support, should have enjoined enforcement of the rate order. The court's action was therefore right, regardless of the method it pursued in reaching the decision that the order was confiscatory.
The grounds upon which we decide the case render it unnecessary for us to consider the appellants' challenge of rulings of the District Court respecting working capital and annual depreciation allowance, or to discuss the rate of return to which the company is entitled, in view of the agreement of the court and the commission upon this point.
Chesapeake & Potomac Telephone Co. v. West, 7 F.Supp. 214.
The Commission also allowed a return of 6 percent upon the value of the property as determined by it.
Chesapeake & Potomac Tel. Co. v. Whitman, 3 F.2d 938, 943, 953.
7 F.Supp. 214, 219, 222, 228.
Railroad Commission Cases, 116 U. S. 307, 116 U. S. 331; Dow v. Beidelman, 125 U. S. 680, 125 U. S. 691; Georgia Railroad & Banking Co. v. Smith, 128 U. S. 174, 128 U. S. 179; Chicago, M. & St. P. Ry. Co. v. Minnesota, 134 U. S. 418, 134 U. S. 458; Reagan v. Farmers' Loan & Trust Co., 154 U. S. 362, 154 U. S. 399; Ames v. Union Pac. Ry. Co., 64 F. 165, 176; Smyth v. Ames, 169 U. S. 466, 169 U. S. 526, 169 U. S. 541-542, 169 U. S. 544-546; San Diego Land & Town Co. v. National City, 174 U. S. 739, 174 U. S. 757; San Diego Land & Town Co. v. Jasper, 189 U. S. 439, 189 U. S. 442; Stanislaus County v. San Joaquin C. & I. Co., 192 U. S. 201, 192 U. S. 215; Knoxville v. Knoxville Water Co., 212 U. S. 1, 212 U. S. 13, 212 U. S. 18; Willcox v. Consolidated Gas Co., 212 U. S. 19, 212 U. S. 41; Lincoln Gas Co. v. Lincoln, 223 U. S. 349, 223 U. S. 358; Minnesota Rate cases, 230 U. S. 352, 230 U. S. 434, 230 U. S. 454; Denver v. Denver Union Water Co., 246 U. S. 178, 246 U. S. 190; Houston v. Southwestern Bell Telephone Co., 259 U. S. 318, 259 U. S. 324-325; Bluefield Waterworks Co. v. Public Service Comm'n, 262 U. S. 679, 262 U. S. 690; Dayton-Goose Creek Ry. Co. v. United States, 263 U. S. 456, 263 U. S. 481; Board of Commissioners v. New York Tel. Co., 271 U. S. 23, 271 U. S. 31; McCardle v. Indianapolis Water Co., 272 U. S. 400, 272 U. S. 408-409; United Railways v. West, 280 U. S. 234, 280 U. S. 249; Smith v. Illinois Bell Tel. Co., 282 U. S. 133, 282 U. S. 149; Los Angeles Gas Corp. v. Railroad Commission, 289 U. S. 287, 289 U. S. 305.
Minnesota Rate Cases, supra, 230 U. S. 454; McCardle v. Indianapolis Water Co., supra, 272 U. S. 410; Los Angeles Gas Corp. v. Railroad Commission, supra, 289 U. S. 311.
Los Angeles Gas Corp. v. Railroad Commission, supra, 289 U. S. 306.
"Both the Company and the Commission realized that to attempt to find the present day fair value of the Company's property by the usual method of taking an inventory of all items of property owned by the Company and pricing out those items at present day prices would not only take at least two years of constant work, but would cost the Company not less than $300,000, and cost the State a very substantial sum. It was agreed that index numbers should be used in arriving at present-day costs."
Compare St. Louis & O'Fallon Ry. Co. v. United States, 279 U. S. 461, 279 U. S. 486-487.
See Lindheimer v. Illinois Telephone Co., 292 U. S. 151, 292 U. S. 167-168.
Compare Clark's Ferry Bridge Co. v. Public Service Comm'n, supra, 291 U. S. 239.
The suit is in equity, brought in a Federal District Court to set aside the legislative action of the state in prescribing telephone rates through the agency of its public service commission. The sole issue raised by the pleadings, and the only one presented to us and to the court below, is whether there is confiscation of appellee's property by reduction of its rates. It is not within the province of the federal courts to prescribe rates, or to revise rates fixed by state authority, unless property is taken without due process in violation of the Fourteenth Amendment. Central Kentucky Natural Gas Co. v. Railroad Commission, 290 U. S. 264, 290 U. S. 271-272. This Court, in setting aside the order of the commission and leaving the old rates in force, does not pass upon that issue. It does not hold that the rate fixed by the commission will confiscate appellee's property, nor does it agree with the determination of the District Court below that it will.
For it is declared that the District Court has not followed the rules sanctioned by this Court for determining the fair value of the property of a public service company, and, in consequence, its conclusion that there has been confiscation must be rejected. But, notwithstanding the errors of the District Court, this Court upholds its decree. The order of the commission is thus set aside upon a ground not raised upon the record or considered by the court below. This is done not because the rate is confiscatory, but because the method by which the commission arrived at its conclusion, which is now pronounced "inapt" and "erroneous," is declared to be unconstitutional.
Court has hitherto set the seal of its approval. Clark's Ferry Bridge Co. v. Public Service Comm'n, 291 U. S. 227, 291 U. S. 236. See also St. Louis & O'Fallon Ry. Co. v. United States, 279 U. S. 461.
yields of comparable investments and by no evidence of the rate of return generally obtaining in the money market. [Footnote 2/2] The general conditions of the money market and the rate of return on invested capital may have a controlling influence in determining the issue of confiscation. Bluefield Water Works Co. v. Public Service Comm'n, 262 U. S. 679, 262 U. S. 693; United Railways v. West, 280 U. S. 234, 280 U. S. 249. There is at least grave doubt whether a return of 4 1/2 percent is so out of line with the current yield on invested capital as to be deemed confiscatory. This doubt, if accepted principles be applied, must be resolved against the company, which has offered no evidence by which the doubt could be removed. Twenty-five years ago, in times far more prosperous than these, this Court unanimously declined to take judicial notice that an estimated net return of 4 percent would be confiscatory. Knoxville v. Water Co., 212 U. S. 1, 212 U. S. 17.
found the fair value to be $29,500,000, an increase of 21 percent over the commission's valuation and of 29 percent over cost. The court arrived at the increase by precisely the same basic method which the commission employed in the present case, [Footnote 2/3] except that the commission has applied it here with far greater care and thoroughness.
"Both the Company and the Commission realized that to attempt to find the present day fair value of the Company's property by the usual method of taking an inventory of all items of property owned by the Company and pricing out those items at present day prices would not only take at least two years of constant work, but would cost the company not less than $300,000 and cost the state a very substantial sum. It was agreed that index numbers should be used in arriving at present day costs."
additions to the property after deducting accrued depreciation.
The commission did not adopt any single index. It prepared its own index for translating book value into present fair value on the basis of an elaborate study of price indices of recognized merit. [Footnote 2/4] The result of this study it adopted and applied as more trustworthy than the index prepared by appellee, the salient features of which will presently be considered.
had failed to consider the evidence of increased value over cost. In Clark's Ferry Bridge Co. v. Public Service Comm'n, supra, 291 U. S. 236, this Court held that the Supreme Court of Pennsylvania, in sustaining the action of a state commission, rightly rejected engineers' appraisals and estimates of value in favor of a lower valuation by the commission based on cost and a study of charts showing the price trends of labor and materials from 1924 to 1930, inclusive. In affirming the judgment of the state court, this Court expressly approved this method of arriving at fair value, although it was less meticulously and carefully applied than by the commission in this case, and held that the evidence of cost and of price trends, of the same character as those on which the commission acted here, outweighed engineering appraisals of the whole property, which the appellee here did not choose to offer.
Company, which is subject to the same corporate control as appellee, and on its own labor costs for construction work as shown by its books at a time when it was engaged in no important construction. The Western Electric Company is shown to have increased its prices of equipment 10.2 percent in November, 1930 at the very time when prices of commodities and similar manufactures were declining. This increase is reflected in the index used by the company. Upon all the evidence, the commission concluded that appellee did not sustain the burden resting on it, see Western Distributing Co. v. Public Service Comm'n, 285 U. S. 119, 285 U. S. 124; Smith v. Illinois Bell Telephone Co., 282 U. S. 133, 282 U. S. 153; Dayton Power & Light Co. v. Public Utilities Comm'n, 292 U. S. 290, 292 U. S. 308, of showing the reasonableness of the prices paid by it to its affiliate. The labor costs of the small amount of construction work carried on by the company were shown to be materially higher than those prevailing in the construction trades in Baltimore and vicinity. In 1930 (the date chosen by the company), they were about 147 percent of their 1923 level, while in December, 1932 (the valuation date), Baltimore wages generally were about 87 percent of that level. It is unnecessary to discuss other defects of appellee's proof so extreme as to discredit it. [Footnote 2/6] Its reliance here upon its own proof is, at most, perfunctory. It seeks only to sustain the conclusions of the court below, which this Court rejects.
Public utility commissions, like other quasi-judicial and judicial bodies, must try cases on the evidence before them.
No basis has been suggested for declaring that the work of the commission must be rejected because of its reliance upon evidence which it was bound to consider, unless we are also prepared to say that its result was wrong. If we are unable on any ground to find that confiscation will occur, I cannot say that actual cost or ascertained value of the structural equipment of the telephone company, trended in accordance with reliable price indices, is any less trustworthy evidence of present fair value than the more customary engineers' appraisals and estimates, which appellee did not think it worthwhile to offer, or that, in any case, such a determination infringes any constitutional immunity.
the answer to the question whether the illusion of certainty will invariably be better supported by a study of the actual cost of the property adjusted to price trends, or by a study of the estimates of engineers based upon data which never have existed and never will. The value of such a study is a question of fact in each case, to be ascertained like any other in the light of the record, and with some regard to the expert knowledge and experience of the commission which, in the present case, are obviously great.
process a possibility of accuracy and certainty wholly fictitious. Present fair value, at best, is but an estimate. Historical cost appropriately adjusted by reasonable recognition of price trends appears to be quite as common sense a method of arrival at a present theoretical value as any other. For a period of twenty years or more of rising prices, commissions and courts, including this one, have regarded price variations as persuasive evidence that present fair value was more than cost. I see no reason for concluding that they are of less weight in times of declining prices.
"The mere admission by an administrative tribunal of matter which under the rules of evidence applicable to judicial proceedings would be deemed incompetent (United States v. Abilene & Southern Ry., 265 U. S. 274, 265 U. S. 288), or mere error in reasoning upon evidence introduced, does not invalidate an order."
"We do not sit as a board of revision, but to enforce constitutional rights. San Diego Land & Town Co. v. Jasper, 189 U. S. 439, 189 U. S. 446. The legislative discretion implied in the ratemaking power necessarily extends to the entire legislative process, embracing the method used in reaching the legislative determination as well as that determination itself. We are not concerned with either, so long as constitutional limitations are not transgressed. When the legislative method is disclosed, it may have a definite bearing upon the validity of the result reached, but the judicial function does not go beyond the decision of the constitutional question. That question is whether the rates as fixed are confiscatory. And upon that question, the complainant has the burden of proof, and the Court may not interfere with the exercise of the state's authority unless confiscation is clearly established."
Such should be our decision now.
The depreciation rate of 4 percent adopted by the court in the place of the 3.45 percent allowed by the commission is so plainly erroneous as to require its rejection. The commission's conclusion was reached upon the ground that the abrupt cessation of expansion of the telephone business had greatly reduced the need for retiring property because inadequate to care for increased business. The district court conceded that the 1933 allowance at the 4.38 percent charged by the company was at least $1,250,000 higher than was necessary to maintain the customary 20 percent depreciation reserve against plant in service. The court nevertheless rejected the estimate of the commission on the ground that "too much reliance must not be placed upon the experience of a single year." It thus concluded that a federal court may declare a rate order confiscatory because it differs with the commission's predictions of future trends in the telephone business. It would seem hardly within the range of judicial omniscience to establish confiscation by overriding the commission's determination that the telephone business is not likely markedly to expand in the near future.
While not undertaking to declare the method universally applicable, it increased historical cost by an amount corresponding to the changes in the index of wholesale prices prepared by the Bureau of Labor Statistics.
Sixteen price indices were used by the commission. Five of them related to commodity prices, and included the comprehensive and reliable index of wholesale prices prepared by the United States Bureau of Labor Statistics. Five indices of construction costs were included, prepared by trade journals and concerns allied with the construction industry. Two indices of the price of building materials were used. An index of general consumers' purchasing power, issued by the Federal Reserve Bank of New York, was added. A painstakingly prepared index of Baltimore wages was included in order to insure adequate representation of labor costs. To guard against any peculiarity in the price trends of telephone property, two specialized indices were also taken into consideration. One was the Interstate Commerce Commission index of telephone and telegraph property owned by railroads. That the Interstate Commerce Commission stated that "the indices represent territorial index factors and are not applicable for use in the determination of unit reproduction costs upon individual roads" does not lessen the value of the index as one element of the valuation or as a check on the results reached by other indices. Finally, an index based upon Western Electric prices for telephone equipment and apparatus was used (after elimination of a price rise in 1930, found by the commission to be artificial). This index is incontrovertibly applicable to 25 percent of the company property. It is not to be wholly rejected because it is not a perfect and a certain measure of the whole property.
These results were averaged. Since some of the indices were more accurate than others, and since some were more directly applicable to telephone property, they were assigned greater weights. It is clear that these were the considerations which influenced the commission's judgment as to the appropriate weighting. For example, the Bureau of Labor Statistics' wholesale price index received a weight of four; the Interstate Commerce Commission index of telephone and telegraph property and the index based on Western Electric prices each received a weight of three; all the other indices were given a weight of one to two. The results of the highest and lowest of the indices differed from the commission average only by 10.6% and 23.4%, respectively. Eleven of the sixteen indices separately considered gave results ranging between $30,000,000 and $34,600,000. There is plainly a rather close clustering about the average of $32,610,327 found by the commission.
Of the twenty-four structural property accounts of the O'Fallon Railroad, seventeen were trended from 1914 prices by the use of the wholesale price index of the Bureau of Labor Statistics, one by the National Industrial Conference Board's index of average hourly earnings on railways, and four by the use of an index of railway equipment prepared by the "President's Conference Committee of Federal Valuation," and two were continued at cost. None of the accounts was adjusted to current price levels by direct estimates or by direct pricing of the equipment, much of which was equipment purchased second-hand and long in service.
In appellee's proof, overhead during construction cost was estimated at 19% of the "directly distributed cost." Accrued depreciation was based on physical impairment, rather than reduction in value and the element of obsolescence was ignored. "Going value" amounting to 10.7% of the swollen valuation thus obtained was added, with no showing of necessity of any additional or independent allowance for going value.
The lowest result obtained by the commission in the use of the sixteen classes of price indices was 76.6% of the commission's valuation. The highest was 110.6%. Against these differences of only 23.4% and 10.6%, the record shows that, in rate cases before the Maryland Public Service Commission, the company valuations based on engineering appraisals had exceeded the commission's similar valuations by amounts ranging from 25.0% to 59.4%. The average was 41.3%. Most of the rate cases reported in the 1931 and 1932 Public Utility Reports were examined. In the 1931 reports, the company valuations similarly exceeded commission valuations by amounts ranging from 2.1% to 71.2%. The average was 28.9%. In the 1932 reports, the company valuations exceeded commission valuations by amounts ranging from 7.7% to 135.4%. The average was 57.4%.
"the variety of conclusions reached in the course of this case is dramatic evidence that the concept of 'fair value,' as an objective, provable fact is a judicial myth."

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