Case Name: GEORGIA RAILWAY & POWER COMPANY ET AL. v. RAILROAD COMMISSION OF THE STATE OF GEORGIA ET AL.
Court: Supreme Court of the United States
Jurisdiction: United States
Decision Date: 1923-06-11
Citations: 262 U.S. 625
Docket Number: No. 298
Parties: GEORGIA RAILWAY & POWER COMPANY ET AL. v. RAILROAD COMMISSION OF THE STATE OF GEORGIA ET AL.
Judges: 
Reporter: United States Reports
Volume: 262
Pages: 625–639

Head Matter:
GEORGIA RAILWAY & POWER COMPANY ET AL. v. RAILROAD COMMISSION OF THE STATE OF GEORGIA ET AL.
APPEAL FROM THE DISTRICT COURT OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF GEORGIA.
No. 298.
Argued November 29, 1922.
Decided June 11, 1923.
1. In valuing the physical properties of a public utility corporation as a basis for fixing rates, the present cost of reproduction, less depreciation, is an important element, but not the only element, to be considered. P. 629. Southwestern Bell Telephone Co. v. Public Service Commission, ante, 276, distinguished.
2. The value of a gas company's property for rate-making purposes, does not include the worth of its franchise to use the city streets, amounting to a perpetual permit but not to a monopoly. P. 632.
3. Nor may past losses, due to insufficiency of previous rates, be capitalized as part of the property on which the fair return is to be based. Id.
4. In such inquiries, the federal corporate income tax is to be treated as an operating charge, to be deducted in arriving at the probable net income. P. 633.
5. Taking into consideration the exemption of dividends from the normal federal income tax payable by stockholders, a rate fixed for a gas company which allows it a return of 714%, held, not confiscatory. Id.
6. A decree refusing an interlocutory injunction against enforcement of a rate challenged by a public utility corporation as confiscatory, should be affirmed in the absence of any error by the court below other than possible error in prophecy or of judgment in passing upon the evidence, and when the evidence does not compel a conviction that the rate will prove inadequate. P. 634.
278 Fed. 242, affirmed.
Appeal from a decree of the District Court refusing an interlocutory injunction in a suit to enjoin enforcement of a gas rate fixed by the appellee Commission..
Mr. L. Z. Rosser and Mr. Robert G. Dodge, with whom Mr. Jack J. Spalding, Mr. Walter T. Colquitt, Mr. J. Prince Webster and Mr. Linton C. Hopkins were on the briefs, for appellants.
In rate cases the value of the property is to be determined as of the time of the inquiry. Houston v. Southwestern Bell Tel. Co., 259 U. S. 318; Galveston Electric Co. v. Galveston, 258 U. S. 388; Lincoln Gas Co. v. Lincoln, 223 U. S. 349.
Cost is not the test. If the value of the property at the time of the inquiry is less than its cost, the Company cannot complain that the rate does not yield an adequate return upon the cost of the property. San Diego Land Co. v. National City, 174 U. S. 739; San Diego Land Co. v. Jasper, 189 U. S. 439; Stanislaus County v. San Joaquin Co., 192 U. S. 201.
If, on the other hand, the value of the property has appreciated, a rate which yields a reasonable return on the cost is nevertheless confiscatory if it does not produce a fair return upon the present value. San Diego Land Co. v. Jasper, supra; Willcox v. Consolidated Gas Co., 212 U. S. 19; Minnesota Rate Cases, 230 U. S. 352; Houston v. Southwestern Bell Tel. Co., 259 U. S. 318.
Reproduction cost, less depreciation, furnishes the approved measure of valuation. Knoxville v. Knoxville Water Co., 212 U. S. 1; Des Moines Gas Co. v. Des Moines, 238 U. S. 153; Denver v. Denver Union Water Co., 246 U. S. 178; Consolidated Gas Co. v. Newton, 267 Fed. 231; 258 ü. S. 165.
The method of taking pre-war costs, plus the cost of later additions, is improper. St. Joseph Ry. Co. v. Public Service Comm., 268 Fed. 267; London v. Court of Industrial Relations, 269 Fed. 433; Potomac Electric Power Co. v. Public Utilities Comm., 276 Fed. 327; Public Service Ry. Co. v. Board of Public Utilities Commrs., 276 Fed. 979; Petersburg Gas Co. v. Petersburg, 132 Va. 82.
In the case at bar the Commission held, in effect, that increased reproduction cost due to conditions incident to so abnormal an event as the World War is an exception to the general rule and cannot be taken into account. It is, of course, true that rates are established with some idea of permanency and that, if the value of the property at the moment a rate is established is inflated from some transitory cause, the rate is not necessarily confiscatory because it does not yield a full return on this inflated valuation. This Court cannot, however, fail to take notice of the fact that the price level of the latter part of 1921, considerably lower as it was than the prevailing level of the preceding two or three years, was vastly higher than any pre-war level and seems to have become stabilized to a very considerable degree since 1921. Joplin By. Co. v. Public Service Comm.; 267 Fed. 684; Lincoln Gas Co. v. Lincoln, 250 U. S. 266.
To value gas property in 1921 in the dollars of 1914 is palpably unjust and improper. Elizabethtown Gas Co. v. Public Utility Commrs., 95 N. J. L. 18.
The mistake in valuing the physical property was reflected in the estimate of going concern value and the amount allowed for annual depreciation.
The allowance for working capital was figured on an improper basis and is wholly inadequate.
Without reference to further errors of the Commission the new rate is shown to be confiscatory.
The value-of the franchise should have been included in the valuation. Atlanta v. Gas Light Co., 71 Ga. 106; West River Bridge Co. v. Die, 6 How. 507; Monongahela Navigation Co. v. United States, 148 U. S. 312; Louisville v. Cumberland Tel. Co., 224 U. S. 661; New York Electric Lines v. Empire City Subway, 235 U. S. 179; Owensboro v. Cumberland Tel. Co., 230 U. S. 58.
In the legislation of Georgia, franchises of this character are fully recognized as property.
There seems to be no logical reason why the value of franchises should not be included in a valuation for rate purposes; and indeed it has been several times decided that they are properly to be included. Willcox v. Consolidated Gas Co., 212 U. S. 19; Spring Valley Waterworks Co. v. San Francisco, 124 Fed. 574; Joaquin & Kings River Co. v. Stanislaus County, 191 Fed. 875; Louisville & Nashville R. R. Co. v. Railroad Commission, 196 Fed. 800. Galveston Electric Co. v. Galveston, 258 U. S. 388, distinguished.
Past losses should have been taken into consideration.
The court below improperly disallowed the federal income tax as a deduction from gross income.
Upon the evidence the court should have issued the injunction prayed for notwithstanding that there had been no actual trial of the rate.
Mr. E. J. Reagan for appellees.
Mr. Wm. Chamberlain, by leave of court, filed a brief as amicus curios.

Opinion:
MR. Justice Brandéis
delivered the opinion of the Court.
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 1000 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 Gas Light 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 application for an interlocutory injunction by three judges under § 266 of the Judicial Code. 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 § 238 of the Judicial Code.
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 enquiry 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 enquiry; and that the great increase in construction costs was ignored in determining the rate base.
The case is unlike Missouri ex rel. Southwestern Bell Telephone Co. v. Public Service Commission, ante, 276. Here the Commission gave careful considera tion to the cost of reproduction; but it refused to adopt reproduction cost as the measure of value. It declared that the exercise of a reasonable judgment as to the present " fair value " required some consideration of reproduction costs as well as of original, costs, but that " present fair value " is not synonymous with " present replacement cost ", particularly under abnormal conditions. That part of the rule which declares the utility entitled to the benefit of increases in the value of property was, however, specifically applied in the allowance of $125,000 made by the Commission to represent the appreciation in the value of the land owned. The lower court recognized that it must exercise an independent judgment in passing upon the evidence; and it gave careful consideration to replacement cost. But it likewise held that there was no rule which required that in valuing the physical property there must be " slavish adherence to cost of reproduction, less depreciation." It discussed the fact that since 1914 large sums had been expended annually on the plant; that part of this additional construction had been done at prices higher than those which prevailed at the time of the rate hearing; and it concluded that " averaging results, and remembering that values are . . . matters of opinion, . no constitutional wrong clearly appears."
The refusal of the Commission and of the lower court to hold that, for rate-making purposes, the physical properties of a utility must be valued at the replacement cost less depreciation was clearly correct. As was said in Minnesota Rate Cases, 230 U. S. 352, 434: " The ascertainment of that value is not controlled by artificial rules. It is not a matter of formulas, but there must be a reasonable judgment having its basis in a proper consideration of all relevant facts."
What these relevant facts are had been stated in Smyth v. Ames, 169 U. S. 466, 546, 547:
" . . . the original cost of construction, the amount expended in permanent improvements, the amount and market value of its bonds and stock, the present as compared with the original cost of construction, the probable earning capacity of the property under particular rates prescribed by statute, and the sum required to meet operating expenses, are all matters for consideration, and are to be given such weight as may be just and right in each case. We do not say that there may not be other matters to be regarded in estimating the value of the property. What the company is entitled to ask is a fair return upon the value of that which it employs for the public convenience. On the other hand, what the public is entitled to demand is that no more be exacted from it for the use of a public highway than the services rendered by it are reasonably worth."
And in Willcox v. Consolidated Gas Co., 212 U. S. 19, 52, it had been made clear " that the value of the property is to be determined as of the time when the inquiry is made regarding the rates. If the property, which legally enters into the consideration of the question of rates, has increased in value since it was acquired, the company is entitled to the benefit of such increase."
The rule laid down in these cases was expressly recognized as controlling, both by the Commission and by the lower court. Evidence bearing on most of the facts there declared to be relevant facts was before them. The court states, and the record establishes, that the " opinion of the . . . Commission . . . evinces a full and conscientious consideration of the evidence." 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 Light Co. v. Cedar Rapids, 223 U. S. 655, 669; Des Moines Gas Co. v. Des Moines, 238 U. S. 153, 169, and Galveston Electric Co. v. Galveston, 258 U. S. 388. The allowance for the franchise made in Willcox v. Consolidated Gas Co., 212 U. S. 19, 43, 44, 48, 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; Galveston Electric Co. v. Galveston, 258 U. S. 388. 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 in come. One objection relates to the federal corporate income tax (10 per cent.) assumed to be $45,364. 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. 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 2y2 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% 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% per cent.— in addition to this tax exemption — can not 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 one dollar. 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; San Diego Land & Town Co. v. Jasper, 189 U. S. 439; Knoxville v. Knoxville Water Co., 212 U. S. 1, 17; Galveston Electric Co. v. Galveston, 258 U. S. 388, 401, 402. Moreover, the decree is merely interlocutory.
Affirmed.