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factor in fixing the basis for com- costs since 1914, and of those which puting fair and reasonable rates." 15 will be made before prices and costs

To require that reproduction cost can fall heavily, may soon exceed at the date of the rate hearing be by far the depreciated value of all given weight in fixing the rate base the public utility investments made may subject investors to heavy theretofore at relatively low cost. losses when the high war and post- For it must be borne in mind that war price levels pass and the price depreciation is an annual charge. trend is again downward.16 The That accrued on plants constructed aggregate of the investments which in the long years prior to 1914 is have already been made at high much larger than that accruing on

15 Bay State Rate Case, 4 Ann. Rep. Service Commission (No. 256, October Mass. P. S. C. 3, P.U.R.1916F, 221, 233. Term, 1922 [261 U. S. 679, 67 L. ed. 1176, And see ibid. for a quotation from an ad- 43 Sup. Ct. Rep. 675]), one 50 per cent dress delivered at the “Conference on above the 1914 level was contended for; Valuation” in Philadelphia, November, in the case at bar a plateau 25 per cent 1915, in which the late John M. Eshleman, above. But for the assumption that there first president of the California Railroad will be a plateau, there is no basis in Commission, said: “If we had this prob- American experience. The course of prices lem at the beginning, and were not at- for the last one hundred and twelve years tacking it in the middle, we would have indicates, on the contrary, that there may no difficulty in agreeing with the holder be a practically continuous decline for of capital upon this subject, for he would nearly a generation; that the present quite readily agree to take the cost of price level may fall to that of 1914 within doing the business plus an earning upon a decade; and that, later, it may fall the money actually invested comparable much lower. Prices rose steadily (with to the earning offered in other available but slight and short recessions) for the investments. Therefore, the cost of doing twenty years before the United States the business, plus a return upon the capital entered the World War. From the low necessarily invested in the business, which level of 1897 they rose 21 per cent to return shall be as great as is offered in 1900; then rose further (with minor other businesses of similar hazard, is all fluctuations, representing times of good that ought to be accorded for the future, business or bad) and reached in 1914 a and it is all that will be accorded if the point 50 per cent above the 1897 level. public has any business sense. And if Then the great rise incident to the war more is asked by the private owner, then set in. “Wholesale Prices, 1890 to 1921," he may expect no sympathy when he finds U. S. Department of Labor, Bureau of the public his competitor and his earning Labor Statistics, Bulletin No. 320, pp. power impaired."

9-26. These are averages of the wholeNo case involving the fixing of rates by sale prices of all commodities. In the a commission has ever come to this court Bureau chart the 1913 prices are taken from New England. The only case involv- as the datum line (100). As compared ing in any way the validity of rates is

with them the 1897 level was 67, the 1900 Interstate Consolidated Street R. Co. v.

level 81. The chart on page 10 of the Massachusetts, 207 U. S. 79, 52 L. ed. 111,

pamphlet entitled, “Price Changes and 28 Sup. Ct. Rep. 26, 12 Ann. Cas. 555.

Business Prospects,” published by the See also Re Cripple Creek Water Co.

Cleveland Trust Company, gives price (Colo.) P.U.R.1916C, 788, 799, 800; Butler

fluctuations for the one hundred and ten v. Lewiston, A. & W. Street R. Co. (Me.) P.U.R.1916D, 25, 35.

years prior to 1921. It shows three abrupt 16 Engineers testifying in recent rate

rises in the price level, by reason of war; cases have assumed that there will be a

and some less abrupt falls, by reason of new plateau of prices. In Galveston Elec- financial panic. These may be called abtric Co. v. Galveston, 258 U. S. 388, 66 L.

normal. But the normal has never been ed. 678, 42 Sup. Ct. Rep. 351, the company a plateau. The chart shows that the peak contended that a plateau 70 per cent above price levels were practically the same durthe price level of 1914 should be accepted, ing the War of 1812, the Civil War, and and a plateau 33 per cent above was the World War; and it shows that pracfound probable by the master and assumed tically continuous declines, for about thirty to be such by the lower court. In Bluefield years, followed the first two wars. The Water Works & Improv. Co. v. Public experience after the third may be similar. (262 U. 8. 276, 67 L. ed. 981, 43 Sup. Ct. Rep. 544.) the properties installed in the short- would yield an income of $140,000, er period since.17

which would give the bondholders That part of the rule of Smyth v. $37,500; and to the holders of the Ames which fixes the rate of return $250,000 stock, $102,500,-a return deemed fair at the percentage cus- of 41 per cent per annum. Money tomarily paid on similar invest- required to establish in 1920 many ments at the time of the rate hear- necessary plants has cost the utility ing also exposes the investor and the 10 per cent on thirty-year bonds. public to danger of serious injustice. These long-time securities, issued to If the replacement-cost measure of raise needed capital, will, in 1930 value and the prevailing-rate meas- and thereafter, continue to bear the ure of fairness of return should be extra high rates of interest which applied, a company which raised, in it was necessary to offer in 1920 in 1920, for additions to plant, $1,000,- order to secure the required capital. 000 on a 9 per cent basis, by a stock The prevailing rate for such investissue, or by long-term bond issue, ments may, in 1930, be only 7 per may find, a decade later, that the cent, or, indeed, 6 per cent, as it was value of the plant (disregarding de- found to be in 1904, in Stanislaus preciation) is only $600,000, and County v. San Joaquin & K. River that the fair return on money then Canal & Irrig. Co. 192 U. S. 201, invested in such enterprise is only 48 L. ed. 406, 24 Sup. Ct. Rep. 241; 6 per cent. Under the test of a com- in 1909, in Knoxville v. Knoxville pensatory rate, urged in reliance up- Water Co. 212 U. S. 1, 53 L. ed. 371, on Smyth v. Ames, a prescribed rate 29 Sup. Ct. Rep. 148; and in 1912, would not be confiscatory if it ap- in Cedar Rapids Gaslight Co. v. peared that the utility could earn Cedar Rapids, 223 U. S. 655, 670, 56 under it $36,000 a year, whereas L. ed. 594, 32 Sup. Ct. Rep. 389. A $90,000 would be required to earn rule which limits the guaranteed the capital charges. On the other rate of return on utility investments hand, if a plant had been built in to that which may prevail at the times of low costs, at $1,000,000, time of the rate hearing may fall and the capital had been raised to far short of the capital charge then the extent of $750,000 by an issue resting upon the company. at par of 5 per cent thirty-year In essence, there is no difference bonds, and to the extent of $250,000 between the capital charge and operby stock at par, and ten years later ating expenses, depreciation, and the price level was 75 per cent high- taxes. Each is a part of the current er and the interest rates 8 per cent, cost of supplying the service, and it would be a fantastic result to hold each should be met from current inthat a rate was confiscatory unless it come. When the capital charges are yielded 8 per cent on the then repro- for interest on the floating debt paid duction cost of $1,750,000. For that at the current rate, this is readily

17 The new enterprises undertaken at war was at prices for labor and materials the present high level, or projected, are 120 per cent above those prevailing in many; among them, development and long- 1914. Recent construction was at prices distance transmission of hydroelectric

70 per cent higher. If replacement cost power, and of electric power generated should become the measure of the rate at the coal mines. Moreover, nearly every

base, the return on enterprises entered utility now existing must make expend

upon after 1914 would, obviously, be imitures upon its plant to provide improve

periled. And a serious decline of the price ments, additions, or extensions. The growth of our communities, and increase

level would subject the return on many in the demands of the individual, constant

utilities established earlier to like dangers. ly compel enlargement of a utility's facili

collapse of public-utility values might ties. The present annual investment in

result. And the impairment of publicpublic-utility enterprises is much greater utility credit might be followed by the in amount than at any time in the past. cessation of extensions and new underSome of the construction done during the takings.

seen. But it is no less true of a legal It would, when once made in respect obligation to pay interest on long- to any utility, be fixed for all time, term bonds, entered into years be- subject only to increases to reprefore the rate hearing, and to con- sent additions to plant, after allow. tinue for years thereafter; and it is ance for the depreciation included true also of the economic obligation in the annual operating charges. to pay dividends on stock, preferred The wild uncertainties of the presor common. The necessary cost, ent method of fixing the rate base and hence the capital charge, of the under the so-called rule of Smyth money embarked recently in utili- v. Ames would be avoided; and liketies, and of that which may be in- wise the fluctuations which introvested in the near future, may be duce into the enterprise unnecessary more, as it may be less, than the elements of speculation, create useprevailing rate of return required to less expense, and impose upon the induce capital to enter upon like en- public a heavy, unnecessary burden. terprises at the time of a rate hear- In speculative enterprises the caping ten years hence. To fix the re- ital cost of money is always high; turn by the rate which happens to partly because the risks involved prevail at such future day opens the must be covered; partly because door to great hardships. Where the speculative enterprises appeal only financing has been proper, the cost to the relatively small number of into the utility of the capital required vestors who are unwilling to accept to construct, equip, and operate its a low return on their capital. It is plant should measure the rate of re- to the interest both of the utility turn which the Constitution guaran- and of the community that the captees opportunity to earn.18

ital be obtained at as low a cost as The adoption of the amount pru- possible. About 75 per cent of the dently invested as the rate base and capital invested in utilities is reprethe amount of the capital charge as sented by bonds. He who buys the measure of the rate of return bonds seeks primarily safety. If he would give definiteness to these two can obtain it, he is content with a factors involved in rate controver- low rate of interest. Through a sies which are now shifting and fluctuating rate base the bondholder treacherous, and which render the can only lose. He can receive no proceedings peculiarly burdensome benefit from a rule which increases and largely futile. . Such measures the rate base as the price level rises; offer a basis for decision which is for his return, expressed in dollars, certain and stable. The rate base would be the same, whatever the inwould be ascertained as a fact, not come of the company.19 That the determined as matter of opinion. stockholder does not in fact receive It would not fluctuate with the mar- an increased return in time of rapket price of labor, or materials, or idly rising prices under the rule of money. It would not change with Smyth v. Ames, as applied, the fihard times or shifting populations. nancial record of the last six years It would not be distorted by the demonstrates. But the burden upon fickle and varying judgments of the community is heavy, because the appraisers, commissions, or courts. risk makes the capital cost high.

18 The community may, of course, de- invests in utility bonds, the higher agreed mand, in respect to financing, as in re- return upon his capital would be provided spect to operation, that the right to earn for by a rule which measures fair return a fair return be limited by the require- by capital charges, as suggested above. ment that reasonable efficiency be exer- If he elects to invest in the stock, he would, cised.

under the rule suggested, have the oppor19 Of course, anyone who chances to tunity of earning a return commensurate have money to invest when money rates with the value of the capital at the time are high gets the advantage incident to it was embarked as stock in the enter. investing in a favorable market. If he prise.

( 262 U. 8. 276, 67 L. ed. 981, 43 Sup. Ct. Rep. 544.) The expense and loss now inci- always sought to protect in using dent to recurrent rate controversies the term "present value." 20 Twenis also very large. The most serious ty-five years ago, when Smyth v. vice of the present rule for fixing Ames was decided, it was impossible the rate base is not the existing un- to ascertain with accuracy, in recertainty, but that the method does spect to most of the utilities, in most not lead to certainty. Under it, the of the states in which rate controvalue for

for rate-making purposes versies arose, what it cost in money must ever be an unstable factor. to establish the utility, or what the Instability is a standing menace of money cost with which the utility renewed controversy. The direct was established, or what income had expense to the utility of maintain- been earned by it, or how the income ing an army of experts and of coun- had been expended. It was, theresel is appalling. The indirect cost fore, not feasible then to adopt, as is far greater. The attention of offi- the rate base, the amount properly cials, high and low, is, necessarily, invested, or, as the rate of fair rediverted from the constructive tasks turn, the amount of the capital of efficient operation and of develop- charge. Now the situation is fundament. The public relations of the mentally different. These amounts utility to the community are apt to are now readily ascertainable in rebecome more and more strained. spect to a large and rapidly increasAnd a victory for the utility may, ing proportion of the utilities. The in the end, prove more disastrous change in this respect is due to the than defeat would have been. The enlargement, meanwhile, of the community defeated, but uncon- powers and functions of state utilvinced, remembers; and may refuse ity commissions. The issue of secuaid when the company has occasion rities is now, and for many years later to require its consent or co

has been, under the control of comoperation in the conduct and devel- missions, in the leading states. opment of its enterprise. Contro

Contro- Hence, the amount of capital raised versy with utilities is obviously in- (since the conferring of these powjurious also to the public interest. ers) and its cost are definitely The prime needs of the community known, through current superviare that facilities be ample and that sion, and prescribed accounts, suprates be as low and as stable as pos- plemented by inspection of the comsible. The community can get cheap mission's engineering force. Like service from private companies only knowledge concerning the investthrough cheap capital. It can get ment of that part of the capital efficient service only if managers of raised and expended before these the utility are free to devote them- broad functions were exercised by selves to problems of operation and the utility commissions has been seof development. It can get ample cured, in many cases, through inservice through private companies vestigations undertaken later, in only if investors may be assured of connection with the issue of new sereceiving continuously a fair return curities or the regulation of rates. upon the investment.

The amount and disposition of curWhat is now termed the "prudent rent earnings of all the companies investment" is, in essence, the same

are also known. It is, therefore, thing as that which the court has feasible now to adopt, as the meas

20 Compare Mr. Justice Field in Rail- U. S. 362, 409, 412, 38 L. ed. 1014, 1027, road Commission Cases, 116 U. S. 307, 1028, 4 Inters. Com. Rep. 560, 14 Sup. Ct. 343, 344, 29 L. ed. 636, 648, 6 Sup. Ct. · Rep. 1047, where the necessity of limiting Rep. 334, 388, 1191; Mr. Justice Harlan, the broad power of regulation enunciated id. p. 341; Dow v. Beidelman, 125 U. S. in Munn v. Illinois, 94 U. S. 113, 24 L. ed. 680, 690, 691, 31 L. ed. 841, 844, 2 Inters. 77, was first given expression. See also, Com. Rep. 56, 8 Sup. Ct. Rep. 1028; and “Public Utilities, Their Cost New and DeReagan v. Farmers' Loan & T. Co. 154 preciation,” by H. V. Hayes, pp. 255, 256. ure of a compensatory rate, the an- value. But, obviously, good will and nual cost, or charge, of the capital franchise value are important eleprudently invested in the utility.21 ments when exchange value is inAnd, hence, it should be done.

volved. And where the community “Value” is a word of many mean- acquires a public utility by purchase ings. That with which commissions or condemnation, compensation and courts in these proceedings are must be made for its good will and concerned, in so-called confiscation earning power; at least, under some cases, is a special value for rate- circumstances. Omaha v. Omaha making_purposes,—not exchange Water Co. 218 U. S. 180, 202, 203, value. This is illustrated by our de- 54 L. ed. 991, 1000, 1001, 48 L.R.A. cisions which deal with the elements (N.S.) 1084, 30 Sup. Ct. Rep. 615; to be included in fixing the rate base. National Waterworks Co. v. Kansas In Cedar Rapids Gaslight Co. v. City, 27 L.R.A. 827, 10 C. C. A. 653, Cedar Rapids, 223 U. S. 655, 669, 56 27 U. S. App. 165, 62 Fed. 853, 865. L. ed. 594, 604, 32 Sup. Ct. Rep. 389; Likewise, as between buyer and selland Des Moines Gas Co. v. Des er, the good will and earning power Moines, 238 U. S. 153, 165, 59 L. ed. due to effective organization are 1244, 1250, P.U.R.1915D, 577, 35 often more important elements than Sup. Ct. Rep. 811, good will and tangible property. These cases franchise value were excluded from would seem to require rejection of the rate base in determining wheth- a rule which measured the rate base er the prescribed charges of the pub- by cost of reproduction, or by value lic utility were confiscatory. In in its ordinary sense. Galveston Electric Co. v. Galveston, The rule by which the utilities 258 U. S. 388, 66 L. ed. 678, 42 Sup. are seeking to measure the return is, Ct. Rep. 351, the cost of developing in essence, reproduction cost of the business as a financially success- the utility, or prudent investment, ful concern was excluded from the whichever is the higher. This is inrate base. In Des Moines Gas Co. v. dicated by the instructions conDes Moines, 238 U. S. 153, 171, 59 tained in the Special Report on ValL. ed. 1244, 1253, P.U.R.1915D, 577, uation of Public Utilities, made to 35 Sup. Ct. Rep. 811, the fact that the American Society of Civil Enthe street had been paved (and 'gineers, October 28, 1916, Proceedhence the reproduction cost of lay- ings, vol. 42: ing gas mains greatly increased) “So long as the company owner was not allowed as an element of keeps a sum equivalent to the total

21 In 1898, when Smyth v. Ames was de- railways and carriers; New York, Texas, cided, only one state—Massachusetts- and Vermont, of railroads only. In 1923 had control by commission of the issue of at least thirty-six states and the District securities by all public-utility companies. of Columbia controlled through commis(New Llampshire controlled security is- sions the accounting of public-utility comsues of railroads and street railways; panies. Maine and New York controlled increase In 1898, only one state-Massachusetts of capital stock by railroads; and Con- --exercised, through a commission, control necticut, the issue of bonds by railroads.) of all public utilities. In 1923 such conIn 1923 at least twenty-four states and trol is exercised in at least thirty-nine the District of Columbia controlled through states and the District of Columbia. This commissions the issue of securities of pub- does not include those states exercising lic-utility companies. Legislation for 1923 commission control over railroads and reand 1922 (in part) has not been available. lated utilities, such as street railways, Other states may have legislated on the express companies, telephone and telesubject in 1923 or 1922.

graph companies. These states number In 1898 no state had control by com- forty-seven. The number of states having mission of the accounting of all public commission control of railroads in 1898 utilities. Massachusetts controlled the ac- was twenty-seven. In 1922 every state counting of gas, electric light, street nail- except Delaware had commission control way, and railroad companies; Iowa, of of railroads.

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