Plaintiff in error is a corporation furnishing water to the city of Bluefield, West Virginia, 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 (§ 16, c. 15-0, Code of West Virginia) 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.
2. The commission fixed $460,000 as the amount on which the company 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 commission's engineer on basis of reproduction new, less depreciation at 1915 prices, plus additions since December 31, 1915, at actual cost, excluding Bluefield Valley Water Works, water rights and going value .................... $397,964.38
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 prewar 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),
"Applicant's plant was originally constructed more than twenty years ago, and has been added to from time to time as the progress and development of the community required. For this reason, it would be unfair to its consumers to use as a basis for present fair value the abnormal prices prevailing during the recent war period, but when, as in this case, a part of the plant has been constructed or added to during that period, in fairness to the applicant, consideration must be given to the cost of such expenditures made to meet the demands of the public."
As to "d", supra. The commission taking $400,000 (round figures) added $25,000 for Bluefield Valley Water Works plant in Virginia, 10 per cent. for going value, 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.
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
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 be 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. Bluefield v. Water Works Co., 81 W.Va. 201, 204; Coal and Coke Co. v. Public Service Commission, 84 W.Va. 662, 678; Charleston v. Public Service Commission, 86. W. Va. 536.
In this case (89 W.Va. 736) it said (p. 738):
"From the written opinion of the commission we find that it ascertained the value of the petitioner's property for rate making [then quoting the commission] `after
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, ante, 276. 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 Water Co. v. Ben Avon Borough, 253 U.S. 287, 289, and cases cited.
We quote further from the court's opinion (pp. 739, 740):
"In our opinion the commission was justified by the law and by the facts in finding as a basis for rate making the sum of $460,000.00 . . . In our case of Coal & Coke Ry. Co. v. Conley, 67 W.Va. 129, it is said: `It seems to be generally held that, in the absence of peculiar and extraordinary conditions, such as a more costly plant than the public service of the community requires, or the erection of a plant at an actual, though extravagant, cost, or the purchase of one at an exorbitant or inflated price, the actual amount of money invested is to be taken as the basis, and upon this a return must be allowed equivalent to that which is ordinarily received in the locality in which the business is done, upon capital invested in similar enterprises. In addition to this, consideration must be given to the nature of the investment, a higher rate
"That the original cost considered in connection with the history and growth of the utility and the value of the services rendered constitute the principal elements to be considered in connection with rate making, seems to be supported by nearly all the authorities."
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. "What the company is entitled to ask is a fair return upon the value of that which it employs for the public convenience." Smyth v. Ames, (1898) 169 U.S. 466, 547.
"There must be a fair return upon the reasonable value of the property at the time it is being used for the public. . . .
"And we concur with the court below in holding that the value of the property is to be determined as of the time when the inquiry is made regarding the rates. If the property, which legally enters into the consideration of the question of rates, has increased in value since it was acquired, the company is entitled to the benefit of such increase." Willcox v. Consolidated Gas Co., (1909) 212 U.S. 19, 41, 52.
"The ascertainment of that value is not controlled by artificial rules. It is not a matter of formulas, but there must be a reasonable judgment having its basis in a proper consideration of all relevant facts." Minnesota Rate Cases, (1913) 230 U.S. 352, 434.
". . . . The making of a just return for the use of the property involves the recognition of its fair value if it be more than its cost. The property is held in private ownership and it is that property, and not the original cost of it, of which the owner may not be deprived without due process of law." Minnesota Rate Cases, supra, 454.
In Missouri ex rel. Southwestern Bell Telephone Co. v. Public Service Commission, supra, applying the principles of the cases above cited and others, this Court said:
"Obviously, the Commission undertook to value the property without according any weight to the greatly enhanced costs of material, labor, supplies, etc., over those prevailing in 1913, 1914 and 1916. As matter of common knowledge, these increases were large. Competent witnesses estimated them as 45 to 50 per centum . . . It is impossible to ascertain what will amount to a fair return upon properties devoted to public service without giving consideration to the cost of labor, supplies, etc., at the time the investigation is made. An honest and intelligent forecast of probable future values made upon a view of all the relevant circumstances, is essential. If the highly important element of present costs is wholly disregarded such a forecast becomes impossible. Estimates for to-morrow cannot ignore prices of today."
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 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
In 1909, this Court, in Willcox v. Consolidated Gas Co., 212 U.S. 19, 48-50, 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 Light Co. v. Cedar Rapids, 223 U.S. 655, 670, 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, 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, declined on the facts of that case to approve a finding that no rate yielding as much as 6 per
"It is a matter of common knowledge that, owing principally to the world war, the costs of labor and supplies of every kind have greatly advanced since the ordinance was adopted, and largely since this cause was last heard in the court below. And it is equally well known that annual returns upon capital and enterprise the world over have materially increased, so that what would have been a proper rate of return for capital invested in gas plants and similar public utilities a few years ago furnishes no safe criterion for the present or for the future."
In 1921, in Brush Electric Co. v. Galveston, the United States District Court held 8 per cent. a fair rate of return.
In January, 1923, in 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
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.
Difference in depreciation allowed ........................ $49,000 Preliminary organization and development cost ............. 14,500 Bluefield Valley Water Works Plant ........................ 25,000 Water rights .............................................. 50,000 Excess overhead costs ..................................... 39,000 Paving over mains ......................................... 28,500 _________ [sic] $204,000
Company City engineer. engineer. 1. Preliminary cost ...................... $14,455 $1,000 2. Water rights .......................... 50,000 Nothing. 3. Cutting pavements over mains .......... 27,744 233 4. Pipe lines from gravity springs ....... 22,072 15,442 5. Laying cast iron street mains ......... 19,252 15,212 6. Reproducing Ada Springs ............... 18,558 13,027 7. Superintendence and Engineering ....... 20,515 13,621 8. General contingent cost ............... 16,415 5,448 _________ ________ $189,011 $63,983