James Clark McReynolds

“ 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. ”

“ It is consistent with the federal Constitution for this court now to lay down a rule which will establish such a rate base and such a measure of the rate of return deemed fair. In my opinion, it should do so.
The rule of Smyth v. Ames sets the laborious and baffling task of finding the present value of the utility. It is impossible to find an exchange value for a utility, since utilities, unlike merchandise or land, are not commonly bought and sold in the market. ”

“ The wild uncertainties of the present method of fixing the rate base under the so-called rule of Smyth v. Ames would be avoided, and likewise the fluctuations which introduce into the enterprise unnecessary elements of speculation, create useless expense, and impose upon the public a heavy, unnecessary burden.
In speculative enterprises the capital cost of money is always high-partly because the risks involved must be covered; partly because speculative enterprises appeal only to the relatively small number of investors who are unwilling to accept a low return on their capital. ”

“ As we understand it, the 'prorated book cost' given in evidence by the company for the various exchanges is simply the percentage relation of reproduction cost new, which the original cost of all property bears to reproduction cost new of all property and in individual instances the actual cost might vary greatly, either up or down, from what an appraisal would show. ”

“ Therefore the cost of doing the business, plus a return upon the capital necessarily invested in the business, which return shall be as great as is offered in other businesses of similar hazard, is all that ought to be accorded for the future, and it is all that will be accorded, if the public has any business sense. And if more is asked by the private owner, then he may expect no sympathy when he finds the public his competitor and his earning power impaired.'↑ Engineers testifying in recent rate cases have assumed that there will be a new plateau of prices. ”

“ To require that reproduction cost at the date of the rate hearing be given weight in fixing the rate base may subject investors to heavy losses when the high war and post-war price levels pass and the price trend is again downward. [16] The aggregate of the investments which have already been made at high costs since 1914, and of those which will be made before prices and costs can fall heavily, may soon exceed by far the depreciated value, of all the public utility investments made theretofore at relatively low cost. For it must be borne in mind that depreciation is an annual charge. ”

“ It is to the interest both of the utility and of the community that the capital be obtained at as low a cost as possible. About 75 per cent. of the capital invested in utilities is represented by bonds. He who buys bonds seeks primarily safety. If he can obtain it, he is content with a low rate of interest. Through a fluctuating rate base the bondholder can only lose. He can receive no benefit from a rule which increases the rate base as the price level rises ”

“ 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. ”

“ Likewise, as between buyer and seller, the good will and earning power due to effective organization are often more important elements than tangible property. These cases would seem to require rejection of a rule which measured the rate base by cost of reproduction or by value in its ordinary sense. ”

“ The growth of our communities, and increase in the demands of the individual, constantly compel enlargement of a utility's fa ilities. The present annual investment in public utility enterprises is much greater in amount than at any time in the past. Some of the construction done during the war was at prices for labor and materials 120 per cent. above those prevailing in 1914. Recent construction was at prices 70 per cent. higher. If replacement cost should become the measure of the rate base, the return on enterprises entered upon after 1914 would, obviously, be imperilled. ”

“ The range for difference of opinion on each of the many factors to be taken into consideration in fixing the rate base is so wide that such compelling evidence can rarely be adduced, where the report filed recites that, after full hearing, all the so-called relevant facts were given consideration by the commission in reaching the decision made. ”

“ But, obviously, good will and franchise value are important elements when exchange value is involved; and where the community acquires a public utility by purchase or condemnation, compensation must be made for its good will and earning power, at least under some circumstances. ”

“ When the price levels had risen largely, and estimates of replacement cost indicated values much greater than the actual cost of installation, many commissions refused to consider valuable what one declared to be assumptions based on things that never happened and estimates requiring the projection of the engineer's imagination into the future and methods of construction and installation that have never been and never will be adopted by sane men. ”

“ If the company, to eliminate competition, paid a price in excess of the value or because of discouraged local operation were enabled to purchase a plant far below its actual value, the 'prorated book cost' basis would not reflect anything like the original cost. ”

“ A collapse of public utility values might result. And the impairment of public utility credit might be followed by the cessation of extensions and new undertakings.↑ The community may, of course, demand, in respect to financing, as in respect to operation, that the right to earn a fair return be limited by the requirement that reasonable efficiency be exercised.↑ Of course, any one who chances to have money to invest, when money rates are high, gets the advantage incident to investing in a favorable market. ”

“ Every investment may be assumed to have been made in the exercise of reasonable judgment, unless the contrary is shown.↑ Except that rates may, in no event, be prohibitive, exorbitant, or unduly burdensome to the public. ”

“ Again, the company's estimate of the aggregate cost of reproduction new, less depreciation, of its properties at Caruthersville, St. Louis, and Springfield, in this case is $16,913,673. The ratio of this figure to the aggregate value fixed by the commission at these exchanges, plus additions reported by the company, is 153.7 per cent. This percentage divided into $31,355,278, the company's estimate of the aggregate cost of reproduction new, less depreciation, of its property in Missouri in this case, equals $20,400,000, which may be said to be another measure of the value of the property. ”

“ There should not be excluded, from the finding of the base, investments which, under ordinary circumstances, would be deemed reasonable. The term is applied for the purpose of excluding what might be found to be dishonest or obviously wasteful or imprudent expenditures. ”

“ Ames, as interpreted and applied, means merely that all must be considered. What, if any, weight shall be given to any one, must practically rest in the judicial discretion of the tribunal which makes the deter mination. ”

“ Ames, failed, in ever-increasing numbers to pay heed to it in fixing the rate base. [13] The conviction is widespread that a sound conclusion as to the actual value of a utility is not to be reached by a meticulous study of conflicting estimates of the cost of reproducing new the congeries of old machinery and equipment, called the plant, and the still more fanciful estimates concerning the value of the intangible elements of an established business. ”

“ The necessary cost, and hence the capital charge, of the money embarked recently in utilities, and of that which may be invested in the near future, may be more, as it may be less, than t e prevailing rate of return required to induce capital to enter upon like enterprises at the time of a rate hearing ten years hence. ”

“ Compare Edwin C. Goodard, 'Public Utility Valuation,' 15 Mich. Law Rev. 205; Robert L. Hale, 'The 'Physical Value' Fallacy in Rate Cases,' 30 Yale Law Journal, 710; Donald R. Richberg, 'A Permanent Basis for Rate Regulation,' 31 Yale Law Journal, 263; Robert H. Whitten, 'Fair Value for Rate Purposes,' 27 Harv. Law Rev. 419; Henry W. Edgerton, 'Value of the Service as a Factor in Rate-Making,' 32 Harv. Law Rev. 516; Gerard C. Henderson, 'Railway Valuation and the Courts,' 33 Harv. Law Rev. ”

“ Ct. 198, 41 L. Ed. 560; Smyth v. Ames, 169 U.S. 466, 544, 18 Sup. Ct. 418, 42 L. Ed. 819; San Diego Land & Town Co. v. National City, 174 U.S. 739, 757, 19 Sup. Ct. 804, 43 L. Ed. 1154; Minnesota Rate Cases, 230 U.S. 352, 454, 33 Sup. Ct. 729, 57 L. Ed. 1511, 48 L. R. A. (N. S.) 1151, Ann. Cas. 1916A, 18; Mr. Justice Miller in Chicago, Milwaukee & St. Paul Ry. Co. v. Minnesota, 134 U.S. 418, 456, 10 Sup. Ct. 462, 33 L. Ed. 970.↑ In estimating replacement cost the first step is to determine what part of the property owned is used and useful in the public service. ”