280 U.S. 234 (1929), United Railways and Electric Company of Baltimore v. West

Citation:280 U.S. 234, 50 S.Ct. 123, 74 L.Ed. 390
Party Name:United Railways and Electric Company of Baltimore v. West
Case Date:January 06, 1930
Court:United States Supreme Court

Page 234

280 U.S. 234 (1929)

50 S.Ct. 123, 74 L.Ed. 390

United Railways and Electric Company of Baltimore



United States Supreme Court

Jan. 6, 1930



1. Where a valuation of the property of a public utility has been made by a state commission and has been accepted by it and by the utility and by the state courts in a litigation over the question whether rates fixed by the commission allow a constitutionally adequate return upon that valuation, objections to it come too late when made by the commission, for the first time, in this Court upon the utility's appeal from a judgment sustaining the rate. P. 248.

2. The property of a public utility, although devoted to the public service and impressed with a public interest, is still private property, and neither the corpus of that property nor the use thereof

Page 235

constitutionally can be taken for a compulsory price which falls below the measure of just compensation. One is confiscation no less than the other. P. 249.

3. What is a fair return within this principle cannot be settled by invoking decisions of this Court made years ago based upon conditions radically different from those which prevail today. The problem is one to be tested primarily by present day conditions. Id.

4. It is common knowledge that annual returns upon capital and enterprise, like wages of employees, cost of maintenance, and related expenses have materially increased the country over, so that a rate of return upon capital invested in street railway lines and other public utilities which might have been proper a few years ago no longer furnishes a safe criterion either for the present or the future. Id.

5. Nor can a rule fixing a rate of fair return be laid down which will apply uniformly to all sorts of utilities. What may be a fair return for one may be inadequate for another, depending upon circumstances, locality, and risk. Id.

6. What will constitute a fair return in a given case is not capable of exact mathematical demonstration. It is a matter more or less of approximation about which conclusions may differ. The court, in the discharge of its constitutional duty on the issue of confiscation, must determine the amount to the best of its ability in the exercise of a fair, enlightened, and independent judgment as to both law and facts. P. 251.

7. Just compensation for a utility, requiring for efficient public service skillful and prudent management as well as use of the plant, and whose rates are subject to public regulation, is more than current interest on mere investment. Sound business management requires that, after paying all expenses of operation, setting aside the necessary sums for depreciation, payment of interest, and reasonable dividends, there should still remain something to be passed to the surplus account, and a rate of return which does not admit of that's being done is not sufficient to assure confidence in the financial soundness of the utility to maintain its credit and enable it to raise money necessary for the proper discharge of its public duties. P. 251.

8. In the present case, a return of less than 7.44%, the rate sought by the utility, would be confiscatory. P. 252.

9. Regulation of a state commission requiring a street railway company to abolish a second fare zone applied to a suburban extension of its lines without which the extension would be unprofitable, is

Page 236

not subject to constitutional objection if the extension be an integral part of the railway system and if fares be so readjusted a to yield a fair return upon the property as a whole. P. 252.

10. In reaching its judgment sustaining rates fixed by a state commission, the state court ruled with the public utility and against the commission on the amount to be allowed the utility for annual depreciation, but against the utility on the adequacy of the rates. The utility appealed on the ground that the return yielded by the rate was inadequate, and the commission took a cross-appeal and applied for certiorari on the ground that the allowance for depreciation was erroneous. Held, that the ruling on the depreciation allowance could properly be reviewed in connection with the utility's appeal, and that the petition for certiorari and the question of this Court's jurisdiction over the cross-appeal need not be considered. P. 253.

11. In determining adequate rate for a public utility, the allowances for annual depreciation must be based not upon cost, but upon present value. P. 253.

157 Md. 70 reversed.

Appeal from a judgment of the Court of Appeals of Maryland sustaining street railway fares fixed by the State Public Service Commission, in a suit by the railway company to enjoin their enforcement. The case is decided on the appeal of the Company. The cross-appeal of the commissioners is dismissed and their petition for certiorari denied. For another decision of the court below at an earlier stage of the case, see 155 Md. 572.

Page 247

SUTHERLAND, J., lead opinion

MR. JUSTICE SUTHERLAND delivered the opinion of the Court.

The first of these titles (No. 55) is an appeal, and the second (No. 64) a cross-appeal, from a decree of the Court of Appeals of Maryland. The case arose from an order of the state Public Service Commission limiting the rate of passenger fares to be charged by the United Railways & Electric Company for carrying passengers over its lines in the City of Baltimore. The company, by its appeal, attacks the Commission's order as confiscatory. The cross-appeal seeks to raise the question whether the amount for annual depreciation allowed the company should be calculated upon the present value of the company's property or upon its cost.

Upon application of the company to the Commission, made in 1927, for an increase in fares, the Commission passed an order making an increase, but not to the extent sought. Thereupon suit was brought in a state circuit court on the grounds that the rate fixed by the Commission was confiscatory and that the annual allowance for depreciation was calculated upon a wrong basis, namely, upon cost, instead of present value, of depreciable property. The circuit court, in an able opinion, sustained the company upon both grounds, and enjoined the enforcement of the Commission's order. On appeal, the Court of Appeals upheld the view of the circuit court in respect of depreciation, but held the rate of return not confiscatory. 155 Md. 572. Thereupon, the Commission increased the depreciation allowance in accordance with the decree of the court and adjusted the rate of fare to the extent necessary to absorb the increased allowance. A second suit and an appeal to the Court of Appeals followed, and that court entered a decree, 157 Md. 70, 145 A. 340, sustaining the action of the Commission, and it is that decree which is here for review.

Page 248

The facts, so far as we find it necessary to review them, are not in dispute. The company, since 1899, has owned and operated all the street railway lines in the City of Baltimore. Its present capital structure consists of $24,000,000 of common stock, $38,000,000 of ordinary bonded indebtedness, and $14,000,000 of perpetual income bonds redeemable at the option of the company after 1949. Due to the increased use of automobiles, the total number of passengers carried has for some time steadily decreased, while the number carried during the "rush hours" has increased. This has resulted in an increase of expenses in proportion to the whole number of passengers carried, since equipment, etc., must be maintained and men employed sufficient to care for the increased business of the "rush hours," notwithstanding their reduced productiveness during the hours of decreased business. Since the war, operating expenses have almost, if not quite, doubled.

The present value of the property used was fixed by the Commission at $75,000,000, and this amount was accepted without question by both parties in the state circuit court and in the Court of Appeals. Included in this valuation is $5,000,000 for easements in the streets of Baltimore. The Court of Appeals had held in another and earlier case, Miles v.Pub. Serv. Commission, 151 Md. 337, that the easements constituted an interest in real estate and that, in making up the rate base, their value should be included. The Commission in the present case accordingly included the amount in the valuation, and made no attack upon the item in the courts below, where it passed as a matter not in dispute. The item is now challenged by counsel for the Commission in this [50 S.Ct. 125] Court, and other objections to the valuation are suggested, likewise for the first time. We do not find it necessary to consider this challenge or these objections, for, if they

Page 249

ever possessed substance, they come too late. In the further consideration of the case, therefore, we accept for all purposes the valuation of $75,000,000 as it was accepted and acted upon by parties, commission, and courts below.

The Commission fixed a rate of fare permitting the company to earn a return of 6.26 percent on this valuation, and, so far as No. 55 is concerned, the case resolves itself into the simple question whether that return is so inadequate as to result in a deprivation of property in violation of the due process of law clause of the Fourteenth Amendment. In answering that question, the fundamental principle to be observed is that the property of a public utility, although devoted to the public service and impressed with a public interest, is still private property, and neither the corpus of that property nor the use thereof constitutionally can be taken for a compulsory price which falls below the measure of just compensation. One is confiscation no less than the other.

What is a fair return within this principle cannot be settled by invoking decisions of this Court made years ago, based upon...

To continue reading