Court Opinion

ID: 9418855
Source: CourtListenerOpinion
Date Created: 2023-08-02 22:41:26.33195+00
Date Added: 2024-06-11T17:14:59.507801
License: Public Domain

Mr. Justice Stone,
dissenting.
I think the decree should be reversed.
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, 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. *681For 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.
The Fourteenth Amendment is thus said to be infringed, not because the appellee has been deprived of any substantive right, but because the Commission’s action is deemed a denial of due process in the procedural sense. But not even the procedure is condemned because, it lacks those essential qualities of fairness and justice which are all the Fourteenth Amendment has hitherto been supposed to exact of bodies exercising judicial or gwasi-judicial functions. The Commission has punctiliously adhered to a procedure which acts only after notice and hears before it condemns. Hurtado v. California, 110 U. S. 516, 535, 536; Holden v. Hardy, 169 U. S. 366, 389-391; cf. Chicago, M. & St. P. Ry. Co. v. Minnesota, 134 U. S. 418, 457; Interstate Commerce Comm’n v. Louisville & Nashville R. Co., 227 U. S. 88, 91. The sole transgression, for which its painstaking work is set at naught, is that, in the exercise of the administrative judgment of this body “ informed by experience ” and “ appointed by law ” to deal with the very problem now presented, see Illinois Central R. Co. v. Interstate Commerce Comm’n, 206 U. S. 441, 454, it has relied upon a study of the historical cost and ascertained value of appellee’s plant in the light of price indices, showing declines in prices, in arriving at the present fair value of the property, a procedure on which this *682Court has hitherto set the seal of its approval. Clark’s Ferry Bridge Co. v. Public Service Comm’n, 291 U. S. 227, 236; see also St. Louis & O’Fallon Ry. Co. v. United States, 279 U. S. 461.
In this state of the record it is unnecessary to consider whether the appellee has sustained the burden placed upon it of establishing confiscation, or to demonstrate, as I think may be done, that the facts found by the court below, and on which it acted, fall far short of showing that appellee’s property is in any danger of confiscation. It is enough to point out that this Court has rejected the conclusions of the district court because it used book value as a measure of present fair value in times of falling prices, and that even with its findings of fair value, probable earnings and rate of depreciation, the district court found that the rate of return would be approximately 4%% on the property of one of the most stable of public utilities. If adjustment be made for a plainly excessive depreciation allowance, the rate of return on the court’s figures would be raised to 5.10%.'1 The company supported its claim of confiscation by no evidence of the cur*683rent yields of comparable investments and by no evidence of the rate of return generally obtaining in the money market.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, 693; United Railways v. West, 280 U. S. 234, 249. There is at least grave doubt whether a return of 4%% 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% would be confiscatory. Knoxville v. Knoxville Water Co., 212 U. S. 1, 17.
In determining whether the procedure of the Commission involves any denial of federal right, open to review by collateral attack in the federal courts, it is important to consider a little more closely the nature of its “ error.” In 1925 the fair value of respondent’s property as of 1923 was judicially determined by a federal district court of three judges, in a suit brought to set aside the Commission’s determination. Chesapeake & Potomac Telephone Co. v. Whitman, 3 F. (2d) 938. The Commission had found the fair value of the property to be $24,350,000, about $1,500,000 more than net historical cost. The court *684found the fair value to be $29,500,000, an increase of 21% over the Commission’s valuation and of 29% over cost. The court arrived at the increase by precisely the same basic method which the Commission employed in the present case,3 except that the Commission has applied it here with far greater care and thoroughness.
With this history before it the Commission, in its report in the present case states:
“ 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.” It is of no importance that the “ agreement ” to which the Commission refers was not formally spread upon the record, for the record itself shows that no objection was made to the introduction in evidence of the price indices offered both by the Commission and by appellee, and that no effort was made by either party to prove the value of appellee’s property by engineers’ appraisals of the whole property, or by estimates of present value based on expert observation or knowledge of the entire property. By common consent the case was tried before the Commission on the theory that present fair value for rate making purposes could be arrived at with substantial accuracy by the application of price indices to the 1923 value as it had been judicially ascertained, and to the cost of subsequent an*685nual 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.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.
*686The Commission did not refuse to receive or to consider any of the evidence presented. Its decision and order were based upon an examination, commendable for thoroughness and skill, of all the evidence. Its error, if error there was, did not consist in receiving and considering the evidence submitted of indices showing changes in commodity and other prices. It would have been error for the Commission not to have considered it. In St. Louis & O’Fallon Ry. Co. v. United States, supra, this Court set aside a recapture order of the Interstate Commerce Commission on the sole ground that the Commission had failed to consider evidence before it tending to show that the reproduction cost of the structural property of the railroad was greater than original cost. The only evidence of this character disclosed by the record consisted of index figures showing the comparative price levels of labor and materials for 1914 and each of the subsequent recapture years.5 The valuation of the property by the Commission was set aside by this Court on the ground that the Commission *687had failed to consider the evidence of increased value over cost. In Clark’s Ferry Bridge Co. v. Public Service Comm’n, supra, 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.
The extent of the Commission’s error thus appears to be that in considering all the evidence before it, in the manner approved by the Clark’s Ferry Bridge Co. case, supra, it thought that the 1923 value of the appellee’s plant and equipment, and actual cost of subsequent .additions, reasonably adjusted so as to conform to generally recognized changes in the prices of labor and materials, as shown by reliable price indices, would afford a better guide to present fair value than the evidence offered by the company. The results thus obtained were checked against current wage scales in construction industries in Baltimore and vicinity, and against the prices of specific commodities entering into the construction of telephone equipment. The company’s evidence consisted of its own price index, derived by appraising samples of its property, ranging from 1% to 20% of the total property of each type, and assuming similar appraisals for each intervening year since 1923. Its index was based in substantial part on monopoly prices charged appellee for equipment purchased from its .affiliate, the Western Elec*688trie 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% 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, 124; Smith v. Illinois Bell Telephone Co., 282 U. S. 133, 153; Dayton Power & Light Co. v. Public Utilities Comm’n, 292 U. S. 290, 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% of their 1923 level, while in December, 1932, (the valuation date) Baltimore wages generally were about 87% of that level. It is unnecessary to discuss other defects of appellee’s proof so extreme as to discredit it.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 g«<m-judicial and judicial bodies, must try cases on the evidence before them. *689No 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 worth while to offer, or that, in any case, such a determination infringes any constitutional immunity.
In assuming the task of determining judicially the present fair replacement value of the vast properties of public utilities, courts have been projected into the most speculative undertaking imposed upon them in the entire history of English jurisprudence. Precluded from consideration of the unregulated earning capacity of the utility, they must find the present theoretical value of a complex property, built up by gradual accretions through long periods of years. Such a property has no market value, because there is no market in which it is bought and sold. Market value would not be acceptable, in any event, because it would 'plainly be determined by estimates of future regulated earnings. Estimates of its value, including the items of “ overheads ” and “ going concern value,” cannot be tested by any actual sale or by the actual present cost of constructing and assembling the property under competitive conditions. Public utility properties are not thus created full fledged at a single stroke. If it were to be presently rebuilt in its entirety, in all probability it would not be constructed in its present form. When we arrive at a theoretical value based upon such uncertain and fugitive data we gain at best only an illusory certainty. No court can evolve from its inner consciousness *690the 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.
It is said that the price indices “ were not prepared as an aid to the appraisal of property,” that “ they were • intended merely to indicate price trends,” a suggestion that seems to assume that known price trends are irrelevant to the determination of the present fair value of property whose cost is known. It is also said that the “ wide variation of results of the employment of different indices . . . impugns their accuracy as implements of appraisal.” The use of a single price index to the exclusion of all others, it is true, might well produce as inaccurate a result as if a single engineer’s estimate were used to the exclusion of all others, and without test of its verity. But the record affords striking evidence of the accuracy of the composite index translators prepared and used by the Commission, quite apart from the relatively close agreement in the results obtained by the individual indices. From 1923 until 1930, when the Western Electric Company raised its prices, the Commission’s index translator accurately reflected the changes in price actually paid by appellee for its purchased equipment, and the Commission and company indices were in close conformity. Eliminating these price changes and the excessive labor costs appearing in the company’s' own index, the resulting present fair value of appellee’s equipment did not differ substantially from the Commission’s valuation of it. So far as the results of the use of standard price indices are impugned by their variation, an examination of the present record will dig-*691close that the results obtained by the application of price indices to the historical cost of plant are far less variable than engineers’ valuations and in general are probably more trustworthy.7 To speak of either class of evidence as so accurate as to require a contmission as a matter of law to accept it, or so inaccurate as to require the rejection of a valuation based upon it, is to attribute to the valua*692tion 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.
If I am mistaken in this view, it does not follow that a like error of judgment by a state commission is a violation of the Constitution, and that a federal court can rightly set aside its order, even though there is no confiscation. It is true that in Northern Pacific Ry. Co. v. Department of Public Works, 268 U. S. 39, this Court, in holding invalid an order arbitrarily lowering rates which the only evidence of probative value showed were already confiscatory, criticized the method adopted by the Commission and characterized its action as a denial of due process. But the Court was careful to point out (p. 44) that:
“ 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, 288, or mere error in reasoning upon evidence introduced, does not invalidate an order.”
And in Chicago, M. & St. P. Ry. Co. v. Public Utilities Comm’n, 274 U. S. 344, 351, where this Court set aside the rate fixed by a state commission as confiscatory, the method of valuation pursued by the commission was characterized as erroneous and open to review by this Court, as of course it is when the validity of the result is the subject of inquiry. But in no case hitherto has this *693Court assumed to set aside a rate fixed by a state commission, not found to be confiscatory, merely for what it. conceived to be an erroneous method of valuation. If such an error in the deliberations of a state tribunal is a violation, of the Constitution, I should think that every error of a state court would present a federal question reviewable here. It would seem that doubts, if any, as to the scope of our review of the action of a state commission in a case like the present, had been put at rest by our decision, two terms ago, in Los Angeles Gas Co. v. Railroad Commission, 289 U. S. 287. There the Commission made its valuation on the basis of prudent investment, a method repeatedly repudiated by this Court. It w,as argued that the erroneous method pursued by the Commission vitiated its order, whether confiscatory or not. The Court emphatically repudiated that argument, saying (pp. 304, 305):
“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, 446. The legislative discretion implied in the rate making 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.
Mr. Justice Brandéis and Mr; Justice Cardozo join in this opinion.

 The depreciation rate of 4% adopted by the Court in the place of the 3.45% 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% charged by the company was at least $1,250,000 higher than was necessary to maintain the customary 20% 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.

 The Commission introduced evidence that in 1932, 53.0% of 296 corporations, listed on the New York Stock Exchange and chosen at random, suffered a net loss, and that 65.9% earned less than 4% on their invested capital; 22.9% of the railroads listed on the Exchange suffered a net loss, and 89.6% earned less than 4% on their invested capital. Baltimore savings banks paid 3% in 1933; in December, 1933, prime commercial paper brought 1%%; call loans averaged 0.94%; United States Treasury Notes averaged 0.29% and Treasury Bonds 3.62%.

 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% 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; *686the 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%.
An example of the variation in results obtained by an engineering appraisal of telephone property is found in the record in New York Telephone Co. v. Prendergast, 36 P. (2d) 54. The minority report of the Commission on Revision of the New York State Public Service Commission Law (1930) at page 266, summarizes the different estimates of fair value as of July 1, 1926, as follows:

Increase over the Commission Valuation Valuation.

Majority of Commission.................$366,915,493
Statutory Court......................... 397,207,925 8.2%
Minority of Commission................. 405, 502,993 10. 5%
Master’s report......................... 518,109,584 41.2%
Company claim based on Whittemore appraisal............................... 528,753,738 44.1%
Company claim based on Stone & Webster appraisal............................. 615,000,000 67.1%
The comment of the report, page 265, is that “ 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.”