262 U.S. 625 (1923), 298, Georgia Railway & Power Company v. Railroad Commission

Docket Nº:No. 298
Citation:262 U.S. 625, 43 S.Ct. 680, 67 L.Ed. 1144
Party Name:Georgia Railway & Power Company v. Railroad Commission
Case Date:June 11, 1923
Court:United States Supreme Court

Page 625

262 U.S. 625 (1923)

43 S.Ct. 680, 67 L.Ed. 1144

Georgia Railway & Power Company


Railroad Commission

No. 298

United States Supreme Court

June 11, 1923

Argued November 29, 1922




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 ratemaking 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 7 1/4% 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 F. 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.

Page 628

BRANDEIS, J., lead opinion

MR. JUSTICE BRANDEIS 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 1,000 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 percent 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 percent 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

Page 629

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 Gaslight 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 [43 S.Ct. 681] 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 inquiry less depreciation. The 1921 construction costs were about 70 percent 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 inquiry, 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 consideration

Page 630

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 ratemaking 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:

Page 631

. . . 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 [43 S.Ct. 682] Court divided in the Southwestern Bell Telephone case, supra, is not involved here.

Page 632

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. T hat such franchises are to be excluded in fixing the rate base was settled by Cedar Rapids Gas 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....

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