212 U.S. 1 (1909), 17, City of Knoxville v. Knoxville Water Company

Docket Nº:No. 17
Citation:212 U.S. 1, 29 S.Ct. 148, 53 L.Ed. 371
Party Name:City of Knoxville v. Knoxville Water Company
Case Date:January 04, 1909
Court:United States Supreme Court

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212 U.S. 1 (1909)

29 S.Ct. 148, 53 L.Ed. 371

City of Knoxville


Knoxville Water Company

No. 17

United States Supreme Court

January 4, 1909

Argued April 28, 1908




Ratemaking is a legislative function, whether exercised by the legislature or by a subordinate body to which power has been delegated, such as a municipality.

While courts may refuse to enforce legislation on constitutional grounds, the power should only be exercised in the clearest cases.

In ordinary equity suits, findings of the master and the court below are conclusive here unless unsupported by the evidence or made under erroneous view of law; but where the constitutionality of a legislative act is involved, this Court, from the respect due to legislative authority, will not regard such findings a conclusive.

In estimating for rate-fixing purposes the value of a plant, cost of reproduction is not a fair measure of value unless a substantial allowance is made for depreciation. Quaere whether anything can be allowed in the case of the plant of a public service corporation for "going concern" above the value of the separate tangible elements.

In valuing for rate-fixing the plant of a public service corporation, bonds and stocks issued for its purchase and construction in excess of it cost and by and to parties interested in and controlling the company afford neither measure nor guide.

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In determining whether a rate affords a fair return, the amount must be considered as fixed by the ordinance, and not as voluntarily reduced by the corporation, even if such reduction be in accordance with custom and for the purpose of obtaining prompt payment.

In determining whether a rate is confiscatory, the court is not confined to evidence as to the income of the corporation affected for the fiscal year during or preceding that in which the rate was fixed; it may receive evidence as to such income in subsequent years.

Federal courts should not declare an ordinance fixing rates for a public service corporation unconstitutional and suspend its operation before it goes into effect unless the rate is clearly confiscatory, and unless complainant furnishes substantial evidence to that effect, the bill should be dismissed without prejudice to a further application to the courts if the rate after going into effect is actually confiscatory.

A sufficient amount should be allowed from the earnings of a public service corporation for making good depreciation of plant and replacing deteriorated portions thereof, but amounts so expended cannot be considered as additional to the original cost in valuing the plant for purposes of ascertaining whether a rate is confiscatory.

Quaere, and not decided, whether, under the circumstances of this case, an ordinance fixing a rate yielding a return of four percent after allowing two percent for depreciation is confiscatory, and amounts to a deprivation of property without due process of law or a taking of property without compensation.

The facts, which involve the constitutional validity of an ordinance of the City of Knoxville fixing maximum rates to be charged for water by the defendant water company, are stated in the opinion.

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MOODY, J., lead opinion

MR. JUSTICE MOODY delivered the opinion of the Court.

This is an appeal by the City of Knoxville from a decree of the Circuit Court of the United States for the Eastern District of Tennessee. The appellee is a public service corporation chartered for and engaged in the business of supplying that city and its inhabitants with water for domestic and other uses. The cause in which the decree was rendered is a suit in equity which was brought by the company on December 7, 1901, against the city to restrain the enforcement of a city ordinance fixing in detail the maximum rates to be charged by the company. This ordinance was enacted on March 30, 1901. The bill contained many allegations, which have become immaterial by the decision of this Court in Knoxville Water Co. v. Knoxville, 189 U.S. 434, in which the validity of the ordinance was sustained except so far as it might confiscate the property of the company by fixing rates so law as to have that effect. The latter contention alone was left open to the company, and to it the remainder of the bill is mainly directed. The allegations in that regard are that the rates fixed by the ordinance were so low that they denied to the company a reasonable return upon the property employed in the business, and thereby took it for public use without compensation, in violation of the Fourteenth Amendment to

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the Constitution of the United States. After answer by the respondent and replication by the complainant, the cause was referred to a special master, whose report was confirmed by the court. The master found and reported that the value of the plant and property employed in the business at the date of the passage of the ordinance was $608,427.95; that the gross income from the company's business was $88,481.39, and that the operating expenses were $34,750.91. The figures of income and expense are those of the fiscal year ending March 31, 1901, and the valuation was made as of that date. The master found and reported that the diminution of income which would have resulted from the enforcement of the ordinance during that fiscal year was $17,623.64, and that the gross income would have been reduced thereby to $70,857.75, leaving a net income of $36,106.84. This net income was less than 6 percent on the valuation. In the opinion of the master, 8 percent, which included 2 percent to provide for depreciation, was the minimum net return which the company was entitled to earn. The judge of the circuit court, in his opinion confirming the master's report, adopted the master's valuation of the whole plant and property at $608,427.95 (although he held that it ought to be increased by about $3,000), and the master's finding that the gross income was $88,481.39; that the expenses were $34,750.91; that the effect of the reduction made by the ordinance would [29 S.Ct. 150] be to lessen the gross income by $17,623.64, and that therefore the net income under the ordinance would be $36,106.84, or about $400 less than 6 percent on the valuation. Upon these assumptions of fact as to its effect, the judge regarded the ordinance as confiscatory, and issued a permanent injunction against its enforcement.

At the threshold of the consideration of the case, the attitude of this Court to the facts found below should be defined. Here are findings of fact by a master, confirmed by the court. The company contends that, under these circumstances, the findings are conclusive in this Court unless they are without support in the evidence or were made under the influence of erroneous

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views of law. We need not stop to consider what the effect of such findings would be in an ordinary suit in equity. The purpose of this suit is to arrest the operation of a law on the ground that it...

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