United Rys Electric Co of Baltimore v. West West v. United Rys Electric Co of Baltimore

Decision Date06 January 1930
Docket NumberNos. 55 and 64,s. 55 and 64
Citation280 U.S. 234,74 L.Ed. 390,50 S.Ct. 123
PartiesUNITED RYS. & ELECTRIC CO. OF BALTIMORE v. WEST et al., Public Service Commission of Maryland. WEST et al., Public Service Commission of Maryland, v. UNITED RYS. & ELECTRIC CO. OF BALTIMORE
CourtU.S. Supreme Court

of Baltimore, Md., for United Railways and Electric Co.

[Argument of Counsel from pages 236-241 intentionally omitted] Messrs. Raymond S. Williams and Thomas J. Tingley, both of Baltimore, Md., for West and others.

[Argument of Counsel from pages 241-247 intentionally omitted]

Page 247

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. Public Service Commission v. United Railways & Electric Co. of Baltimore, 155 Md. 572, 142 A. 870. 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, 135 A. 579, 49 A. L. R. 1470, 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 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 per cent. 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 conditions radically different from those which prevail to-day. The problem is one to be tested primarily by present-day conditions. Annual returns upon capital and enterprise, like wages of employees, cost of maintenance, and related expenses, have materially increased the country over. This is common knowledge. 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. Lincoln Gas Co. v. Lincoln, 250 U. S. 256, 268, 39 S. Ct. 454, 63 L. Ed. 968. Nor can a rule 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.

Page 250

Willcox v. Consolidated Gas Co., 212 U. S. 19, 48-50, 50, 29 S. Ct. 192, 53 L. Ed. 382, 48 L. R. A. (N. S.) 1134, 15 Ann. Cas. 1034. The general rule recently has been stated in Bluefield Water Works & Improvement Co. v. Pub. Serv. Comm., 262 U. S. 679, 692-695, 43 S. Ct. 675, 679, 67 L. Ed. 1176:

'What annual rate will constitute just compensation depends upon many circumstances, and must be determined by the exercise of a fair and enlightened judgment, having regard to all relevant facts. A public utility is entitled to such rates as will permit it to earn a return on the value of the property which it employs for the convenience of the public equal to that generally being made at the same time and in the same general part of the country on investments in other business undertakings which are attended by corresponding risks and uncertainties; but it has no constitutional right to profits such as are realized or anticipated in highly profitable enterpises or speculative ventures. The return should be reasonably sufficient to assure confidence in the financial soundness of the utility and should be adequate, under efficient and economical management, to maintain and support its credit and enable it to raise the money necessary for the proper discharge of its public duties. A rate of return may be reasonable at one time and become too high or too low by changes affecting opportunities for investment, the money market and business conditions generally. * * *

'Investors take into account the result of past operations, especially in recent years, when determining the terms upon which they will invest in such an undertaking. Low, uncertain, or irregular income makes for low prices for the securities of the utility and higher rates of interest to be demanded by investors. The fact that the company may not insist as a matter of constitutional right that past losses be made up by rates to be applied in the present and future tends to weaken credit, and the fact that the utility is protected against being compelled

Page 251

to serve for confiscatory rates tends to support it. In this case the record shows that the rate of return has been low through a long period up to the time of the inquiry by the commission here involved.'

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.' Ohio Valley Water Co. v. Ben Avon Borough, 253 U. S. 287, 289, 40 S. Ct. 527, 528, 64 L. Ed. 908; Bluefield, etc., Co. v. Pub. Serv. Comm., supra, pages 262 U. S. 689, 692, 43 S. Ct. 675, 67 L. Ed. 1176; Lehigh Valley R. Co. v. Commissioners, 278 U. S. 24, 36, 49 S. Ct. 69, 73 L. Ed. 161, 62 A. L. R. 805.

There is much evidence in the record to the effect that, in order to induce the investment of capital in the enterprise or to enable the company to compete successfully in the market for money to finance its operations, a net return upon the valuation fixed by the Commission should not be far from 8 per cent. Since 1920 the company has borrowed from time to time some $18,000,000, upon which it has been obliged to pay an average rate of interest ranging well over 7 per cent. and this has been...

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