Opinion ID: 305495
Heading Depth: 1
Heading Rank: 4

Heading: constitutionality of the commission's action

Text: 60 Asserting that at existing fares it will be operating at a substantial loss in the future, Transit lays claim, as a matter of constitutional right, 180 to fares increased to a point which would enable the company to earn a fair return. The Commission recognized a probable need for additional revenues to achieve that level, 181 but concluded that a demonstration of Transit's willingness and ability to provide, economically and efficiently, adequate transportation to the traveling public was a prerequisite to invocation of that doctrine. 182 We are thus brought to the question whether the orders under consideration can stand consistently with the requirements of due process of law. 183 61 It is, of course, well settled that a governmentally-fixed rate confining a public utility's return from operations to an amount below the point of confiscation violates due process. 184 In Transit's past rate litigation, both the Commission 185 and this court 186 have been keenly sensitive to that principle. It is important to note, however, that the cases forging that limitation have dealt with situations wherein the quality of the utility's service to the public was not in issue. 187 The inquiry we are now summoned to make is whether an established inferiority in service makes for a difference in constitutional precept. 62 Our thoroughgoing research discloses that instances of denials or curtailments of rate increases because of poor service have been considered but infrequently problems reaching constitutional proportions. Where, however, the objection has been framed in terms of confiscation, quite uniformly it has been rejected. 188 A similar position is evident from the more numerous decisions leaving increases ineffective pending service improvements notwithstanding that the utility was left at or below the breakeven point in the meantime. 189 In a real sense, then, these decisions incorporate the view, expressed or implicit, that the utility's fulfillment of its service commitments is a sine qua non to constitutional protection under confiscation principles. Like the Commission, we would be hard put to assume that regulatory agencies, both in this jurisdiction and elsewhere, have engaged in unconstitutional proceedings for over a half century. 190 For reasons now to be explained, we believe that they have not. 63 It has long been recognized that the caliber of a utility's service need not remain a neutral factor in determinations as to its allowable return. The cases have consistently said that superior service commands a higher rate of return as a reward for management efficiency; 191 more importantly for present purposes, they have also maintained that inefficiency and inferior service service deserve less return than normally would be forthcoming. 192 Much the same rationale undergirds the universal rule that expenditures incompatible with economical and efficient management are to be disallowed. 193 Eighty years ago, the Supreme Court, while acknowledging the unconstitutionality of unreasonable rates, 194 made these observations: 64 It is agreed that the defendant's operating expenses for 1888 were $2,404,516.54. Of what do these operating expenses consist? Are they made up partially of extravagant salaries, -fifty to one hundred thousand dollars to the president, and in like proportion to subordinate officers? Surely, before the courts are called upon to adjudge an act of the legislature fixing the maximum passenger rates for railroad companies to be unconstitutional, on the ground that its enforcement would prevent the stockholders from receiving any dividends on their investments, or the bondholders any interest on their loans, they should be fully advised as to what is done with the receipts and earnings of the company; for if so advised, it might clearly appear that a prudent and honest management would, within the rates prescribed, secure to the bond holders their interest, and to the stockholders reasonable dividends. While the protection of vested rights of property is a supreme duty of the courts, it has not come to this: that the legislative power rests subservient to the discretion of any railroad corporation which may, by exorbitant and unreasonable salaries, or in some other improper way, transfer its earnings into what it is pleased to call operating expenses. 195 65 So, in Reagan v. Farmers' Loan & Trust Company, 196 the Court took pains to make clear that it was not 66 laying down as an absolute rule, that in every case a failure to produce some profit to those who have invested their money in the building of a road is conclusive that the tariff is unjust and unreasonable. And yet justice demands that every one should receive some compensation for the use of his money or property, if it be possible without prejudice to the rights of others. There may be circumstances which would justify such a tariff. There may have been extravagance and a needless expenditure of money. There may be waste in the management of the road, enormous salaries, . . . . The road may have been unwisely built, in localities where there is no sufficient business to sustain a road. Doubtless, too, there are many other matters affecting the rights of the community in which the road is built as well as the rights of those who have built the road. 197 67 And in Smyth v. Ames, 198 the Court put the point succinctly: 68 [W]hat 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. 199 69 Not surprisingly, then, the Court, in Bluefield Water Works and Improvement Company v. Public Service Commission, 200 ] spoke of adequacy of return under efficient and economical management. 201 Throughout the almost 50 years since Bluefield was decided, that standard has been gospel in the ratemaking field. 202 70 We believe the constitutionality of governmental recognition of the interrelationship between fair return and quality service can hardly be doubted today. Certainly, as the Supreme Court has said, the due process clause of the Constitution is not violated when a Commission takes into consideration practical results to the public of advances which it has allowed in rates. 203 The context of that declaration was a rate proceeding which had culminated in a reduction of street railway fares from seven cents to six cents. 204 The sevencent fare had been achieved by an experimental increase from a previously existing five-cent charge for the same transportation. 205 The regulatory agency had found that the six-cent rate afforded a reasonable return on the carrier's rate base and that it was all or more than the reasonable value of the services being rendered to patrons. 206 The Court pointed out that [t]he consideration of service as a justification for rates had arisen upon a comparison of the service of the Company under the five-cent rate and under the seven-cent rate, 207 and that the agency had found that the 40 per cent increase of rate had been accompanied by a deterioration of service. 208 The Court also pointed out that [s]ome factors in the bad service were beyond the Company's control but that others were found not to be without remedy by good management. 209 That higher rates failed to improve, failed even to maintain, service said the Court, certainly removed one of the justifications for the increase which the Company was enjoying. 210 So far as the public was concerned, the Court added, the experiment with the seven-cent rate yielded them no better immediate service and, because of the Company's policies, gave them no prospect of more permanent service. 211 The Court held that [t]o the extent that the [agency] was influenced by considerations of the value of service in this case, we find nothing that denies the Company any rights possessed under the Federal Constitution. 212 71 That holding, in our view, solidly supports the thesis that the caliber of a utility's service may constitutionally qualify as a prominent and even decisive factor in the regulation of its rates. We do not suggest that the case discussed and the one at bar are close parallels, 213 nor do we intimate a view as to whether, irrespective of other considerations, rates may lawfully be scaled in proportion to the public worth of the utility's service. 214 We do think, however, that the likely effect of a sought-after rate increase upon the quality of the service is one of the practical results to the public 215 to which due process indulges reasonable regulatory consideration. 72 The precise constitutional issue before us is whether the Commission exceeded the limits of due process when it made a fare raise contingent upon steps calculated to rectify serious deficiencies in the service Transit furnishes the busriding public. Transit's argument has one central theme: its revenues cannot be permitted to fall below the level of fair return, and surely not below the breakeven point, no matter what the circumstances, and even if its management is uneconomical and inefficient and its service inadequate. If Transit is correct, the Commission is powerless to sanction corrective measures by deferring further consideration of a fare increase. If Transit is correct, it may disregard its public responsibilities at will-as the Commission found that it has frequently done- 216 and yet insist that the public respond to its demands for higher fares. We cannot accept that position. We do not believe the Constitution left the Commission impotent to deal with the situation confronting it in a sensible manner. 73 The Due Process Clause strikes a balance between competing governmental and private interests at the point of reasonableness. Action rationally subserving a substantial governmental concern draws condemnation on due process grounds only if it is arbitrary or unreasonable. 217 The importance of the interests of three cooperating sovereigns in the quality of Transit's operations and service is manifest. 218 On the record before us, it must be concluded that Transit has not met its public responsibilities in those areas. 219 It must be accepted, too, that Transit can measure up if only it will, 220 and that preconditioning further consideration of a fare increase upon remedial steps by Transit is the only method of assuring that the public interest will be protected. 221 We cannot say that, in the circumstances here, the Commission's action in pursuing that course is either arbitrary or unreasonable. 222 By the same token, we do not perceive any due process violation occasioned by the Commission's orders. As the Commission said: 74 If, indeed, the company temporarily sustains a loss while it complies with our precondition order, it will not be because we have ordered it to do so, but because the effects of the company's past decisions have now impacted so seriously upon its statutory obligation to provide the public with efficient, economical and adequate transportation service as to require us to direct remedial measures as a precondition to any fare adjustment. The Constitution does not guarantee a public utility immunity from loss occasioned by uneconomic and inefficient management decisions, and we do not believe that it bars a regulatory agency on a record such as this from taking adequate steps to protect the public interest even if the short term effect of such an order is a temporary loss to the company. We made clear in our main order, and we take this occasion to reiterate, that as soon as Transit indicates its willingness to fulfill its statutory obligations to the public, we stand ready to insure that the public fulfills its reciprocal obligations to Transit. 223 75 In our view, the Constitution does not require more. In the aspects discussed herein, the orders under review are 76 Affirmed. 77