[262 U.S. 679, 680] Messrs. Alfred G. Fox and Jos. M. Sanders, both of Bluefield, W. Va., for plaintiff in error.
Mr. Russell S. Ritz, of Bluefield, W. Va., for defendants in error.
Mr. Justice BUTLER delivered the opinion of the Court.
Plaintiff in error is a corporation furnishing water to the city of Bluefield, W. Va., and its inhabitants. September 27, 1920, the Public Service Commission of the state, being authorized by statute to fix just and reasonable rates, made its order prescribing rates. In accordance with the laws of the state (section 16, c. 15-O, Code of West Virginia [sec. 651]), the company instituted proceedings in the Supreme Court of Appeals to suspend and set aside the order. The petition alleges that the order is repugnant to the Fourteenth Amendment, and deprives the company of its property without just compensation and without due process of law, and denies it equal protection of the laws. A final judgment was entered, denying the company relief and dismissing its petition. The case is here on writ of error.
1. The city moves to dismiss the writ of error for the reason, as it asserts, that there was not drawn in question the validity of a statute or an authority exercised under the state, on the ground of repugnancy to the federal Constitution.
The validity of the order prescribing the rates was directly challenged on constitutional grounds, and it was held valid by the highest court of the state. The prescribing of rates is a legislative act. The commission is an instrumentality of the state, exercising delegated powers. Its order is of the same force as would be a like enactment by the Legislature. If, as alleged, the prescribed rates are confiscatory, the order is void. Plaintiff in error is entitled to bring the case here on writ of error and to have that question decided by this court. The motion to dismiss will be denied. See Oklahoma Natural Gas Co. v. [262 U.S. 679, 684] Russell, 261 U.S. 290 , 43 Sup. Ct. 353, 67 L. Ed. --, decided March 5, 1923, and cases cited; also Ohio Valley Co. v. Ben Avon Borough, 253 U.S. 287 , 40 Sup. Ct. 527.
2. The commission fixed $460,000 as the amount on which the comp ny is entitled to a return. It found that under existing rates, assuming some increase of business, gross earnings for 1921 would be $80,000 and operating expenses $53,000 leaving $27,000, the equivalent of 5.87 per cent., or 3.87 per cent. after deducting 2 per cent. allowed for depreciation. It held existing rates insufficient to the extent of 10,000. Its order allowed the company to add 16 per cent. to all bills, excepting those for public and private fire protection. The total of the bills so to be increased amounted to $64,000; that is, 80 per cent. of the revenue was authorized to be increased 16 per cent., equal to an increase of 12.8 per cent. on the total, amounting to $10,240.
As to value: The company claims that the value of the property is greatly in excess of $460,000. Reference to the evidence is necessary. There was submitted to the commission evidence of value which it summarized substantially as follows:
a. Estimate by company's engineer on basis of reproduction new, less depreciation, at prewar prices $ 624,548 00 b. Estimate by company's engineer on basis of reproduction new, less depreciation, at 1920 prices 1,194,663 00 c. Testimony of company's engineer fixing present fair value for rate making purposes 900,000 00 d. Estimate by commissioner's engineer on basis of reproduction new, less depreciation at 1915 prices, plus additions since December 31, 1915, at actual cost, excluding Bluefield Valley waterworks, water rights, and going value 397,964 38 [262 U.S. 679, 685] e. Report of commission's statistician showing investment cost less depreciation 365,445 13 f. Commission's valuation, as fixed in case No. 368 ($360,000), plus gross additions to capital since made ($92,520.53) 452,520 53
It was shown that the prices prevailing in 1920 were nearly double those in 1915 and pre-war time. The company did not claim value as high as its estimate of cost of construction in 1920. Its valuation engineer testified that in his opinion the value of the property was $900,000-a figure between the cost of construction in 1920, less depreciation, and the cost of construction in 1915 and before the war, less depreciation.
The commission's application of the evidence may be stated briefly as follows:
As to 'a,' supra: The commission deducted $204,000 from the estimate ( details printed in the margin),1 leaving approximately $421,000, which it contrasted with the estimate of its own engineer, $397,964.38 (see 'd,' supra). It found that there should be included $25,000 for the Bluefield Valley waterworks plant in Virginia, 10 per cent. for going value, and $10, 000 for working capital. If these be added to $421,000, there results $500, 600. This may be compared with the commission's final figure, $460,000. [262 U.S. 679, 686] As to 'b' and 'c,' supra: These were given no weight by the commission in arriving at its final figure, $460,000. It said:
As to 'd,' supra: The commission, taking $400,000 (round figures), added $25,000 for Bluefield Valley waterworks plant in Virginia, 10 per cent. for going val e, and $10,000 for working capital, making $477,500. This may be compared with its final figure, $460,000.
As to 'e,' supra: The commission, on the report of its statistician, found gross investment to be $500,402.53. Its engineer, applying the straight line method, found 19 per cent. depreciation. It applied 81 per cent. to gross investment and added 10 per cent. for going value and $10, 000 for working capital, producing $455,500.2 This may be compared with its final figure, $460,000.
As to 'f,' supra: It is necessary briefly to explain how this figure, $ 452,520.53, was arrived at. Case No. 368 was a proceeding initiated by the application of the company for higher rates, April 24, 1915. The commission made a valuation as of January 1, 1915. There were presented two estimates of reproduction cost less depreciation, one by a valuation engineer engaged by the company, [262 U.S. 679, 687] and the other by a valuation engineer engaged by the city, both 'using the same method.' An inventory made by the company's engineer was accepted as correct by the city and by the commission. The method 'was that generally employed by courts and commissions in arriving at the value of public utility properties under this method.' and in both estimates 'five year average unit prices' were applied. The estimate of the company's engineer was $540,000 and of the city's engineer, $392,000. The principal differences as given by the commission are shown in the margin. 3 The commission disregarded both estimates and arrived at $360,000. It held that the best basis of valuation was the net investment, i. e., the total cost of the property less depreciation. It said:
In its report in No. 368, the commission did not indicate the amounts respectively allowed for going value or working capital. If 10 per cent. be added for the former, and $10,000 for the latter (as fixed by the commission in the present case), there is produced $366,870, to e compared with $360,000, found by the commission in its valuation as of January 1, 1915. To this it added $92,520.53, expended since, producing $ 452,520.53. This may be compared with its final figure, $460,000.
The state Supreme Court of Appeals holds that the valuing of the property of a public utility corporation and prescribing rates are purely legislative acts, not subject to judicial review, except in so far as may be necessary to determine whether such rates are void on constitutional or other grounds, and that findings of fact by the commission based on evidence to support them will not be reviewed by the court. City of Bluefield v. Waterworks, 81 W. Va. 201, 204, 94 S. E. 121; Coal & Coke Co. v. Public Service Commission, 84 W. Va. 662, 678, 100 S. E. 557, 7 A. L. R. 108; Charleston v. Public Service Commission, 86 W. Va. 536, 103 S. E. 673.
In this case (89 W. Va. 736, 738, 110 S. E. 205, 206) it said:
The record clearly shows that the commission, in arriving at its final figure, did not accord proper, if any, weight to the greatly enhanced costs of construction in 1920 over those prevailing about 1915 and before the war, as established by uncontradicted evidence; and the company's detailed estimated cost of reproduction new, less depreciation, at 1920 prices, appears to have been wholly disregarded. This was erroneous. Missouri ex rel. Southwestern Bell Telephone Co. v. Public Service Commission of Missouri, 262 U.S. 276 , 43 Sup. Ct. 544, 67 L. Ed . --, decided May 21, 1923. Plaintiff in error is entitled under the due process clause of the Fourteenth Amendment to the independent judgment of the court as to both law and facts. Ohio Valley Co. v. Ben Avon Borough, 253 U.S. 287, 289 , 40 S. Sup. Ct. 527, and cases cited.
We quote further from the court's opinion (89 W. Va. 739, 740, 110 S. E. 206):
The question in the case is whether the rates prescribed in the commission's order are confiscatory and therefore beyond legislative power. Rates which are not sufficient to yield a reasonable return on the value of the property used at the time it is being used to render the service are unjust, unreasonable and confiscatory, and their enforcement deprives the public utility company of its property in violation of the Fourteenth Amendment. This is so well settled by numerous decisions of this court that citation of the cases is scarcely necessary:
Minnesota Rate Cases, 230 U.S. 454 , 33 Sup. Ct. 762, 48 L. R. A. (N. S.) 1151, Ann. Cas. 1916A, 18.
In Missouri ex rel. Southwestern Bell Telephone Co., v. Public Service Commission of Missouri, supra, applying the principles of the cases above cited and others, this court said:
3. Rate of return: The state commission found that the company's net annual income should be approximately $37,000, in order to enable it to earn 8 per cent. for return and depreciation upon the value of its property as fixed by it. Deducting 2 per cent. for depreciation, there remains 6 per cent. on $460,000, amounting to $27,600 for return. This was approved by the state court.
The company contends that the rate of return is too low and confiscatory. What annual rate will constitute just compensation depeds 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 [262 U.S. 679, 693] highly profitable enterprises 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.
In 1909, this court, in Willcox v. Consolidated Gas Co., 212 U.S. 19 , 48-50, 29 Sup. Ct. 192, 15 Ann. Cas. 1034, 48 L. R. A. (N. S.) 1134, held that the question whether a rate yields such a return as not to be confiscatory depends upon circumstances, locality and risk, and that no proper rate can be established for all cases; and that, under the circumstances of that case, 6 per cent. was a fair return on the value of the property employed in supplying gas to the city of New York, and that a rate yielding that return was not confiscatory. In that case the investment was held to be safe, returns certain and risk reduced almost to a minimum-as nearly a safe and secure investment as could be imagined in regard to any private manufacturing enterprise.
In 1912, in Cedar Rapids Gas Co. v. Cedar Rapids, 223 U.S. 655, 670 , 32 S. Sup. Ct. 389, this court declined to reverse the state court where the value of the plant considerably exceeded its cost, and the estimated return was over 6 per cent.
In 1915, in Des Moines Gas Co. v. Des Moines, 238 U.S. 153, 172 , 35 S. Sup. Ct. 811, this court declined to reverse the United States District Court in refusing an injunction upon the conclusion reached that a return of 6 per cent. per annum upon the value would not be confiscatory.
In 1919, this court in Lincoln Gas Co. v. Lincoln, 250 U.S. 256, 268 , 39 S. Sup. Ct. 454, 458 (63 L. Ed. 968), declined on the facts of that case to approve a finding that no rate yielding as much as 6 per cent. [262 U.S. 679, 694] on the invested capital could be regarded as confiscatory. Speaking for the court, Mr. Justice Pitney said:
In 1921, in Brush Electric Co. v. Galveston, the United States District Court held 8 per cent. a fair rate of return. 4
In January, 1923, in City of Minneapolis v. Rand, the Circuit Court of Appeals of the Eighth Circuit (285 Fed. 818, 830) sustained, as against the attack of the city on the ground that it was excessive, 7 1/2 per cent ., found by a special master and approved by the District Court as a fair and reasonable return on the capital investment-the value of the property.
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 to serve for confiscatory rates tends to support it. In [262 U.S. 679, 695] 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. For example, the average rate of return on the total cost of the property from 1895 to 1915, inclusive, was less than 5 per cent.; from 1911 to 1915, inclusive, about 4.4 per cent., without allowance for depreciation. In 1919 the net operating income was approximately $24,700, leaving $15,500, approximately, or 3.4 per cent. on $460,000 fixed by the commission, after deducting 2 per cent. for depreciation. In 1920, the net operating income was approximately $25,465, leaving $16,265 for return, after allowing for depreciation. Under the facts and circumstances indicated by the record, we think that a rate of return of 6 per cent. upon the value of the property is substantially too low to constitute just compensation for the use of the property employed to render the service.
The judgment of the Supreme Court of Appeals of West Virginia is reversed.
Mr. Justice BRANDEIS concurs in the judgment of reversal, for the reasons stated by him in Missouri ex rel. Southwestern Bell Telephone Co. v. Public Service Commission of Missouri, supra.
[ Footnote 1 ]
Difference in depreciation allowed $ 49,000 Preliminary organization and development cost 14,500 Bluefield Valley waterworks plant 25,000 Water rights 50,000 Excess overhead costs 39,000 Paving over mains 28,500 ___ $204,000
[ Footnote 2 ] As to 'e': $365,445.13 represents investment cost less depreciation. The gross investment was found to be $500,402.53, indicating a deduction on account of depreciation of $134,957.40, about 27 per cent., as against 19 per cent. found by the commission's engineer.
[ Footnote 3 ] Company City Engineer. Engineer.
[ Footnote 1 ] Preliminary costs $14,455 $1,000
[ Footnote 2 ] Water rights 50,000 Nothing
[ Footnote 3 ] Cutting pavements over mains 27,744 233
[ Footnote 4 ] Pipe lines from gravity springs 22,072 15,442
[ Footnote 5 ] Laying cast iron street mains 19,252 15,212
[ Footnote 6 ] Reproducing Ada springs 18,558 13,027
[ Footnote 7 ] Superintendence and engineering 20,515 13,621
[ Footnote 8 ] General contingent cost 16,415 5,448 ___ ___ 189,011 $63,983