Galveston Electric Co. v. City of Galveston

• Decision Date: 10 February 1921
• Docket Number: 40.
• Citation: 272 F. 147
• Parties: GALVESTON ELECTRIC CO. v. CITY OF GALVESTON et al.
• Court: U.S. District Court — Southern District of Texas

272 F. 147

GALVESTON ELECTRIC CO. v. CITY OF GALVESTON et al.

No. 40.

United States District Court, S.D. Texas, Galveston Division.

February 10, 1921

On Motion for Rehearing, April 27, 1921.

Syllabus by the Court.

It is the function of the legislative and not of the judicial branch to make rates, and no injunction ought to be granted against the collection of rates established under legislative sanction, unless the case is so clear and free from doubt as to compel the court to say that the rates prescribed will necessarily have the effect to deny just compensation for private property taken for public use.

'Regulation of public service corporations is a delicate and dangerous function, and ought to be exercised with a keen sense of justice on the part of the regulating body, and met with frank disclosures on the part of the company to be regulated,' and the granting or refusal by the court of an injunction in no manner relieves either party to the controversy from the recognition of these obligations in their future dealings.

In fixing the present value of a street railway company for the purpose of a rate base, the reproduction method should be applied reasonably, and as applied to the inflated values which have arisen since and because of the war it must appear that the level of prices is not transitory.

A street railroad company held not entitled to an allowance for brokerage in determining the value on which it is entitled to earn a fair return.

While for the purpose of determining the value of the property of the street railway company for rate-fixing purposes the property should be valued as a going concern, and due allowance made therefor, no allowance should be made for going concern value, in the sense of 'development cost,' and where valuation has been made on the basis of a plant in full operation, with due allowance for reproduction cost and all overhead expenses during construction, including organization costs, an addition for development cost or cost of attaching business is not allowable.

The true rule in any case where a plant is fully valued upon the cost of reproduction basis is that the allowance of any element for 'development cost' cannot in a judicial procedure be reasonably sustained, for the reason that such a utility is entitled to a reasonable rate of return upon its plant from the day it goes into operation, and the court does not take into consideration at all whether the years of its past history have been lean or fat.

In determining the income which a street railroad company is entitled to earn as a fair return on its investment, it is not entitled to deduct the amount of federal income tax imposed on it.

Where the evidence shows an increase in maintenance figures from $40,000 in 1918 before the rate controversy commenced to $92,000, or over 136 per cent., the actual maintenance charges must be regarded as too unreliable to be taken into account in fixing maintenance for the future, and maintenance requirements must be fixed in the light of the past history of the company, as affected by present conditions.

Though it appeared from the report of the master and the findings of the court thereon that, under an ordinance fixing the rate of street car fare for adults in the city of Galveston at 5 cents, the company had earned during the preceding year less than a fair return, to wit, 5 per cent. upon the fair value of its investment, since the reference to the master was only for advisory purposes, and additional evidence, taken after the coming in of his report, showed such a large and steady incrase in operating returns as that, if they continued, the company's earnings would be for the ensuing year approximately 8 per cent., held, that the ordinance is not so clearly confiscatory as to authorize the court to enjoin its enforcement without permitting its operation for a further period.

That portion of the former opinion denying grade raising reversed it appearing on rehearing that this expense has not been reflected in any manner in the valuation of the property, and that the grade raising has added to the value of the property at least the amount of the expenditure.

Though in appreciating pre-war costs, to arrive at reproduction value of the plant, overhead items should not as items be increased in value, yet, since the amount of them was arrived at by taking a percentage of the physical property, when that physical property is appreciated, the overheads must necessarily increase in the same ratio.

In arriving at depreciation annuity, only those items of the plant which are susceptible of annual depreciation should be taken into account; therefore the sum of all overhead items should be excluded from the sum taken as the basis for these amounts.

No increased allowance on maintenance account can properly be made for what is called by the company 'deferred maintenance,' a condition of excessive maintenance requirements, due to the failure of the company to keep its property in a proper state of maintenance. Such deferred maintenance must either be made good by the company out of net earnings, or the property should be revalued, with an additional deduction on account of the accrued depreciation due to this condition.

C. R Wharton, of Houston, Tex., Ballinger Mills, of Galveston, Tex., and William E. Tucker, of Boston, Mass., for complainant.

Frank S. Anderson, City Atty., and McDonald & Wayman, all of Galveston, Tex., for defendants.

HUTCHESON District Judge.

This is a rate case arising out of the application by complainant for an injunction to restrain the defendants from enforcing an ordinance fixing the street car fare for adults in the city of Galveston at five cents. A hearing on the application for temporary injunction was had, and on that hearing the city's contention that there was a franchise ordinance fixing irrevocably a five-cent fare was tentatively overruled by me, and an investigation as to the confiscatory character of the rate was entered upon.

On the final hearing, since, as the opinion discloses, the conclusion was reached by me that the ordinance was not confiscatory, and since a similar question involved in the San Antonio rate case is now before the Supreme Court of the United States on appeal, I have not thought it necessary to definitely decide the point as to the irrevocable effect of fixing the rate at five cents in the franchise, and this opinion will be addressed only to the exclusive rate features of this controversy.

In this case a master was appointed in order that the testimony might be adduced at the convenience of the parties, and that its scope and meaning might be, through the arguments of parties and the conclusions of the master thereon, better grasped by me. This being the nature of his appointment, his findings will not be taken by me as binding, but only as advisory and in aid of a right conclusion.

In view of these facts, and of the well-settled principle applicable to suits of this character, that a finding of a master, even though confirmed by the district court, is not binding upon the Supreme Court, it may be unnecessary that the exceptions be specifically disposed of; but, since no harm can come from such a course, I shall dispose of the exceptions, in order that both my views may be indicated on the precise points raised, and that, if the exceptions are of legal value to either party, they may have them.

It is undoubtedly true that public utilities, state and municipal rate-making bodies, their counsel, and the courts in hearings of this kind realize, in a general way, the basis upon which the adjudication proceeds; but it is also true that there is a marked tendency in these rate controversies to forget the basic principles upon which the decisions rest, and as the frequency and magnitude of these controversies increase, and decision piles on decision, the original foundations of the purely judicial decisions are sometimes lost sight of, and the whole superstructure takes a leaning which would be avoided if the nature of the pillars on which it rests were kept clearly in mind. These foundation pillars, two in number, having been hewn and shaped by the decisions of the Supreme Court, are broad and enduring, and are a sufficient basis for the whole structure of the law which has been built upon them.

The first is that principle which inheres in sovereignty, 'the power to govern men and things,' in short, the police power, in the contemplation of which it was authoritatively declared in Munn v. Illinois, 94 U.S. 125, 24 L.Ed. 77, that, when private property is devoted to a public use, it is subject to public regulation, and that such regulation is not in itself obnoxious to the Fourteenth Amendment.

The second are those provisions of the Fourteenth Amendment which guarantee the equal protection of the laws, and which inhibit the deprivation of property without due process of law. It was with reference to these provisions that the Supreme Court said, in Reagan v. Farmers' Loan & Trust Co., 154 U.S. 399, 14 Sup.Ct. 1055, 38 L.Ed. 1014:

'The equal protection of the laws, which, by the Fourteenth Amendment, no state can deny to the individual, forbids legislation, in whatever form it may be enacted, by which the property of one individual is, without compensation, wrested from him for the benefit of another, or of the public.'

And later decisions of that tribunal, dealing specifically with matters of rate legislation and public control, have, with clearness and vigor, marked the outlines of the two principles and the respect and authority which must be conceded to each. I think no utterance of the Supreme Court upon this view of the matter has been better expressed, or more rigidly adhered to, than...