In examining whether the due process clause allows the regulation of business prices, the Supreme Court, almost from the inception of the Fourteenth Amendment, has devoted itself to the examination of two questions: (1) whether the clause restricted such regulation to certain types of business, and (2) the nature of the regulation allowed as to those businesses.
Types of Businesses That May be Regulated.—For a brief interval following the ratification of the Fourteenth Amendment, the Supreme Court found the due process clause to impose no substantive restraint on the power of States to fix rates chargeable by any industry. Thus, in Munn v. Illinois,136 the first of the "Granger Cases," maximum charges established by a state for Chicago grain elevator companies were challenged, not as being confiscatory in character, but rather as a regulation beyond the power of any state agency to impose.137 The Court, in an opinion that was largely dictum, declared that the due process clause did not operate as a safeguard against oppressive rates, and that if regulation was permissible, the severity thereof was within legislative discretion and could be ameliorated only by resort to the polls. Not much time elapsed, however, before the Court effected a complete withdrawal from this position, and by 1890138 it had fully converted the due process clause into a restriction on state agencies seeking to impose rates which, in a judge's estimation, were arbitrary or unreasonable. This state of affairs continued for more than fifty years.
136 94 U.S. 113 (1877). See also Davidson v. New Orleans, 96 U.S. 97 (1878); Peik v. Chicago & Nw. Ry., 94 U.S. 164 (1877);
137 The Court not only asserted that governmental regulation of rates charged by public utilities and allied businesses was within the States' police power, but added that the determination of such rates by a legislature was conclusive and not subject to judicial review or revision.
Prior to 1934, unless a business was "affected with a public interest," control of its prices, rates, or conditions of service was viewed as an unconstitutional deprivation of liberty and property without due process of law. During the period of its application, however, this standard, "business affected with a public interest," never acquired any precise meaning, and as a consequence lawyers were never able to identify all those qualities or attributes which invariably distinguished a business so affected from one not so affected. The most coherent effort by the Court was the following classification prepared by Chief Justice Taft.139 "(1) Those [businesses] which are carried on under the authority of a public grant of privileges which either expressly or impliedly imposes the affirmative duty of rendering a public service demanded by any member of the public. Such are the railroads, other common carriers and public utilities. (2) Certain occupations, regarded as exceptional, the public interest attaching to which, recognized from earliest times, has survived the period of arbitrary laws by Parliament or Colonial legislatures for regulating all trades and callings. Such are those of the keepers of inns, cabs and grist mills… (3) Businesses which though not public at their inception may be fairly said to have risen to be such and have become subject in consequence to some government regulation. They have come to hold such a peculiar relation to the public that this is superimposed upon them. In the language of the cases, the owner by devoting his business to the public use, in effect grants the public an interest in that use and subjects himself to public regulation to the extent of that interest although the property continues to belong to its private owner and to be entitled to protection accordingly."
Through application of this formula, the Court sustained state laws regulating charges made by grain elevators,140 stockyards,141 and tobacco warehouses,142 and fire insurance rates143 and commissions paid to fire insurance agents.144 The Court also voided statutes regulating business not "affected with a public interest," including state statutes fixing the price at which gasoline may be sold,145 regulating the prices for which ticket brokers may resell theater tickets,146 and limiting competition in the manufacture and sale of ice through the withholding of licenses to engage therein.147
138 Chicago, M. & St. P. Ry. v. Minnesota, 134 U.S. 418 (1890).
139 Wolff Packing Co. v. Industrial Court, 262 U.S. 522, 535-36 (1923).
140 Munn v. Illinois, 94 U.S. 113 (1877); Budd v. New York, 143 U.S. 517, 546 (1892); Brass v. North Dakota ex rel. Stoesser, 153 U.S. 391 (1894).
141 Cotting v. Kansas City Stock Yards Co., 183 U.S. 79 (1901).
142 Townsend v. Yeomans, 301 U.S. 441 (1937).
143 German Alliance Ins. Co. v. Kansas, 233 U.S. 389 (1914); Aetna Insurance Co. v. Hyde, 275 U.S. 440 (1928).
144 O'Gorman & Young v. Hartford Ins. Co., 282 U.S. 251 (1931).
In the 1934 case of Nebbia v. New York,148 however, the Court finally shelved the concept of "a business affected with a public interest,"149 upholding, by a vote of five-to-four, a depression-induced New York statute fixing fluid milk prices. "Price control, like any other form of regulation, is [now] unconstitutional only if arbitrary, discriminatory, or demonstrably irrelevant to the policy the legislature is free to adopt, and hence an unnecessary and unwarranted interference with individual liberty."150 Conceding that "the dairy industry is not, in the accepted sense of the phrase, a public utility," that is, a "business affected with a public interest," the Court in effect declared that price control henceforth is to be viewed merely as an exercise by the government of its police power, and as such is subject only to the restrictions which due process imposes on arbitrary interference with liberty and property.151
145 Williams v. Standard Oil Co., 278 U.S. 235 (1929).
146 Tyson & Bro. v. Banton, 273 U.S. 418 (1927).
147 New State Ice Co. v. Liebmann, 285 U.S. 262 (1932). See also Adams v. Tanner, 244 U.S. 590 (1917); Weaver v. Palmer Bros., 270 U.S. 402 (1926).
148 291 U.S. 502, 531-32, 535-37, 539 (1934).
149 In reaching this conclusion the Court might be said to have elevated to the status of prevailing doctrine the views advanced in previous decisions by dissenting Justices. Thus, Justice Stone, dissenting in Ribnik v. McBride, 277 U.S. 350, 359- 60 (1928), had declared: "Price regulation is within the State's power whenever any combination of circumstances seriously curtails the regulative force of competition so that buyers or sellers are placed at such a disadvantage in the bargaining struggle that a legislature might reasonably anticipate serious consequences to the community as a whole." In his dissenting opinion in New State Ice Co. v. Liebmann, 285 U.S. 262, 302-03 (1932), Justice Brandeis had also observed: "The notion of a distinct category of business 'affected with a public interest' employing property 'devoted to a public use' rests upon historical error. In my opinion the true principle is that the State's power extends to every regulation of any business reasonably required and appropriate for the public protection. I find in the due process clause no other limitation upon the character or the scope of regulation permissible."
150 Older decisions overturning price regulation were now viewed as resting upon this basis, i.e., that due process was violated because the laws were arbitrary in their operation and effect.
151 The Court was not disturbed by the "scientific validity" that had been claimed for the theory of Adam Smith that "price that will clear the market," and was content to note that the "due process clause makes no mention of prices" and that the courts are both incompetent and unauthorized to deal with the wisdom of the policy adopted or the practicability of the law enacted to forward it. The minority continued to stress the unreasonableness of any state regulation interfering with the determination of prices by "natural forces." Justice McReynolds, speaking for the dissenting Justices, labeled the controls imposed by the challenged statute as a "fanciful scheme to protect the farmer against undue exactions by prescribing the price at which milk disposed of by him at will may be resold." Intimating that the New York statute was as efficacious as a safety regulation which required "householders to pour oil on their roofs as a means of curbing the spread of a neighborhood fire," Justice McReynolds insisted that "this Court must have regard to the wisdom of the enactment," and must determine "whether the means proposed have reasonable relation to something within legislative power." 291 U.S. 556, 558 (1934).
Having thus concluded that it is no longer the nature of the business that determines the validity of a price regulation, the Court had little difficulty in upholding a state law prescribing the maximum commission which private employment agencies may charge. Rejecting contentions that the need for such protective legislation had not been shown, the Court, in Olsen v. Nebraska152 held that differences of opinion as to the wisdom, need, or appropriateness of the legislation "suggest a choice which should be left to the States;" and that there was "no necessity for the State to demonstrate before us that evils persist despite the competition" between public, charitable, and private employment agencies.153
Substantive Review of Price Controls.—Ironically, private businesses, once they had been found subject to price regulation, seemed to have less protection than public entities. Thus, unlike operators of public utilities who, in return for a government grant of virtually monopolistic privileges must provide continuous service, proprietors of other businesses receive no similar special advantages and accordingly are unrestricted in their right to liquidate and close. Owners of ordinary businesses, therefore, are at liberty to escape the consequences of publicly imposed charges by dissolution, and have been found less in need of protection through judicial review. Thus, case law upholding challenges to price controls deals predominantly with governmentally imposed rates and charges for public utilities.
In 1886, Chief Justice Waite, in the Railroad Commission Cases,154 warned that the "power to regulate is not a power to destroy; [and] the State cannot do that in law which amounts to a taking of property for public use without just compensation or without due process of law." In other words, a confiscatory rate could not be imposed by government on a regulated entity. By treating "due process of law" and "just compensation" as equivalents,155 the Court was in effect asserting that the imposition of a rate so low as to damage or diminish private property ceased to be an exercise of a State's police power and became one of eminent domain. Nevertheless, even this doctrine proved inadequate to satisfy public utilities, as it allowed courts to intervene only to prevent imposition of a confiscatory rate, i.e., a rate so low as to be productive of a loss and to amount to taking of property without just compensation. The utilities sought nothing less than a judicial acknowledgment that courts could review the "reasonableness" of legislative rates.
152 313 U.S. 236, 246 (1941).
153 The older case of Ribnik v. McBride, which had invalidated similar legislation upon the now obsolete concept of a "business affected with a public interest," was expressly overruled. 277 U.S. 350 (1928). Adams v. Tanner, 244 U.S. 590 (1917), was disapproved in Ferguson v. Skrupa, 372 U.S. 726 (1963), and Tyson & Bro. v. Banton, 273 U.S. 418 (1927), was effectively overruled in Gold v. DiCarlo, 380 U.S. 520 (1965), without the Court hearing argument on it.
154 116 U.S. 307 (1886).
155 This was contrary to its earlier holding in Davidson v. New Orleans, 96 U.S. 97 (1877).
Although as late as 1888 the Court doubted that it possessed the requisite power to challenge this doctrine,156 it finally acceded to the wishes of the utilities in 1890 in Chicago, M. & St. P. Railway v. Minnesota.157 In this case, the Court ruled that "[t]he question of the reasonableness of rates . . . , involving as it does the element of reasonableness both as regards the company and as regards the public, is eminently a question for judicial investigation, requiring due process of law for its determination. If the company is deprived of the power of charging rates for the use of its property, and such deprivation takes place in the absence of an investigation by judicial machinery, it is deprived of the lawful use of its property, and thus, in substance and effect, of the property itself, without due process of law…"
Although the Court made a last-ditch attempt to limit the ruling of Chicago, M. & S.P. Railway to rates fixed by a commission as opposed to rates imposed by a legislature,158 the Court in Reagan v. Farmer's Loan and Trust Co.159 finally removed all lingering doubts over the scope of judicial intervention. In Reagan, the Court declared that, "if a carrier . . . attempted to charge a shipper an unreasonable sum," the Court, in accordance with common law principles, would pass on the reasonableness of its rates, and has "jurisdiction . . . to award the shipper any amount exacted . . . in excess of a reasonable rate … The province of the courts is not changed, nor the limit of judicial inquiry altered, because the legislature instead of a carrier prescribes the rates."160 Reiterating virtually the same principle in Smyth v. Ames,161 the Court not only obliterated the distinction between confiscatory and unreasonable rates but contributed the additional observation that the requirements of due process are not met unless a court further determines whether the rate permits the utility to earn a fair return on a fair valuation of its investment.
156 Dow v. Beidelman, 125 U.S. 680 (1888).
157 134 U.S. 418, 458 (1890).
158 Budd v. New York, 143 U.S. 517 (1892).
159 154 U.S. 362, 397 (1894).
160 Insofar as judicial intervention resulting in the invalidation of legislatively imposed rates has involved carriers, it should be noted that the successful complainant invariably has been the carrier, not the shipper.
161 169 U.S. 466 (1898). Of course the validity of rates prescribed by a State for services wholly within its limits must be determined wholly without reference to the interstate business done by a public utility. Domestic business should not be made to bear the losses on interstate business and vice versa. Thus a State has no power to require the hauling of logs at a loss or at rates that are unreasonable, even if a railroad receives adequate revenues from the intrastate long haul and the interstate lumber haul taken together. On the other hand, in determining whether intrastate passenger railway rates are confiscatory, all parts of the system within the State (including sleeping, parlor, and dining cars) should be embraced in the computation, and the unremunerative parts should not be excluded because built primarily for interstate traffic or not required to supply local transportation needs. See Minnesota Rate Cases (Simpson v. Shepard), 230 U.S. 352, 434-35 (1913); Chicago, M. & St. P. Ry. v. Public Util. Comm'n, 274 U.S. 344 (1927); Groesbeck v. Duluth, S.S. & A. Ry., 250 U.S. 607 (1919). The maxim that a legislature cannot delegate legislative power is qualified to permit creation of administrative boards to apply to the myriad details of rate schedules the regulatory police power of the State. To prevent a holding of invalid delegation of legislative power, the legislature must constrain the board with a certain course of procedure and certain rules of decision in the performance of its functions, with which the agency must substantially comply to validate its action. Wichita R.R. v. Public Util. Comm'n, 260 U.S. 48 (1922).
Early Limitations on Review.—Even while reviewing the reasonableness of rates the Court recognized some limits on judicial review. As early as 1894, the Court asserted that "[t]he courts are not authorized to revise or change the body of rates imposed by a legislature or a commission; they do not determine whether one rate is preferable to another, or what under all circumstances would be fair and reasonable as between the carriers and the shippers; they do not engage in any mere administrative work; . . . [however, there can be no doubt] of their power and duty to inquire whether a body of rates . . . is unjust and unreasonable . . . and if found so to be, to restrain its operation."162 One can also infer from these early holdings a distinction between unreviewable fact questions that relate only to the wisdom or expediency of a rate order, and reviewable factual determinations that bear on a commission's power to act.163
162 Reagan v. Farmers' Loan & Trust Co., 154 U.S. 362, 397 (1894). And later, in 1910, the Court made a similar observation that courts may not, "under the guise of exerting judicial power, usurp merely administrative functions by setting aside" an order of the commission merely because such power was unwisely or expediently exercised. ICC v. Illinois Cent. R.R., 215 U.S. 452, 470 (1910). This statement, made in the context of federal ratemaking, appears to be equally applicable to judicial review of state agency actions.
163 This distinction was accorded adequate emphasis by the Court in Louisville & Nashville R.R. v. Garrett, 231 U.S. 298, 310-13 (1913), in which it declared that "the appropriate question for the courts" is simply whether a "commission," in establishing a rate, "acted within the scope of its power" and did not violate "constitutional rights . . . by imposing confiscatory requirements." The carrier contesting the rate was not entitled to have a court also pass upon a question of fact regarding the reasonableness of a higher rate the carrier charged prior to the order of the commission. All that need concern a court, it said, is the fairness of the proceeding whereby the commission determined that the existing rate was excessive, but not the expediency or wisdom of the commission's having superseded that rate with a rate regulation of its own.
Further, the Court placed various obstacles in the path of the complaining litigant. Thus, not only must a person challenging a rate assume the burden of proof,164 but he must present a case of "manifest constitutional invalidity."165 And, if, notwithstanding this effort, the question of confiscation remains in doubt, no relief will be granted.166 Moreover, even the Court was inclined to withhold judgement on the application of a rate until the practical effect could be surmised.167
In the course of time this distinction solidified. Thus, the Court initially adopted the position that it would not disturb findings of fact insofar as these were supported by substantial evidence. For instance, in San Diego Land Company v. National City,168 the Court declared that after a legislative body had fairly and fully investigated and acted, by fixing what it believed to be reasonable rates, the courts cannot step in and set aside the action due to a different conclusion about the reasonableness of the rates. "Judicial interference should never occur unless the case presents, clearly and beyond all doubt, such a flagrant attack upon the rights of property under the guise of regulation as to compel the court to say that the rates prescribed will necessarily have the effect to deny just compensation for private property taken for the public use." And in a similar later case169 the Court expressed even more clearly its reluctance to reexamine ordinary factual determinations. It is not bound "to reexamine and weigh all the evidence . . . or to proceed according to . . . [its] independent opinion as to what are proper rates. It is enough if . . . [the Court] cannot say that it was impossible for a fair-minded board to come to the result which was reached."170
164 Des Moines Gas Co. v. Des Moines, 238 U.S. 153 (1915).
165 Minnesota Rate Cases (Simpson v. Shepard), 230 U.S. 352, 452 (1913).
166 Knoxville v. Water Co., 212 U.S. 1 (1909).
167 Willcox v. Consolidated Gas Co., 212 U.S. 19 (1909). However, a public utility which has petitioned a commission for relief from allegedly confiscatory rates need not await indefinitely for the commission's decision before applying to a court for equitable relief. Smith v. Illinois Bell Tel. Co., 270 U.S. 587 (1926).
168 174 U.S. 739, 750, 754 (1899). See also Minnesota Rate Cases (Simpson v. Shepard), 230 U.S. 352, 433 (1913).
169 San Diego Land & Town Co. v. Jasper, 189 U.S. 439, 441, 442 (1903). See also Van Dyke v. Geary, 244 U.S. 39 (1917); Georgia Ry. v. Railroad Comm'n, 262 U.S. 625, 634 (1923).
170 Moreover, in reviewing orders of the Interstate Commerce Commission, the Court, at least in earlier years, chose to be guided by approximately the same standards it had originally formulated for examining regulations of state commissions. The following excerpt from its holding in ICC v. Union Pacific R.R., 222 U.S. 541, 547-48 (1912) represents an adequate summation of the law as it stood prior to 1920: "[Q]uestions of fact may be involved in the determination of questions of law, so that an order, regular on its face, may be set aside if it appears that the rate is so low as to be confiscatory . . . ; or if the Commission acted so arbitrarily and unjustly as to fix rates contrary to evidence, or without evidence to support it; or if the authority therein involved has been exercised in such an unreasonable manner as to cause it to be within the elementary rule that the substance, and not the shadow, determines the validity of the exercise of the power… In determining these mixed questions of law and fact, the Court confines itself to the ultimate question as to whether the Commission acted within its power. It will not consider the expediency or wisdom of the order, or whether, on like testimony, it would have made a similar ruling . . . [The Commission's] conclusion, of course, is subject to review, but when supported by evidence is accepted as final; not that its decision . . . can be supported by a mere scintilla of proof—but the courts will not examine the facts further than to determine whether there was substantial evidence to sustain the order." See also ICC v. Illinois Cent. R.R., 215 U.S. 452, 470 (1910).
These standards of review were, however, abruptly rejected by the Court in Ohio Valley Co. v. Ben Avon Borough171 as being no longer sufficient to satisfy the requirements of due process, ushering in a long period where courts substantively evaluated the reasonableness of rate settings. Although the state court in Ben Avon had in fact reviewed the evidence and ascertained that the state commission's findings of fact were supported by substantial evidence,172 it also construed the statute providing for review as denying to state courts "the power to pass upon the weight of such evidence." Largely on the strength of this interpretation of the applicable state statute, the Court held that when the order of a legislature, or of a commission, prescribing a schedule of maximum future rates is challenged as confiscatory, "the State must provide a fair opportunity for submitting that issue to a judicial tribunal for determination upon its own independent judgment as to both law and facts; otherwise the order is void because in conflict with the due process clause, Fourteenth Amendment."173
History of the Valuation Question.—For almost fifty years the Court wandered through a maze of conflicting formulas and factors for valuing public service corporation property including "fair value,"174 "reproduction cost,"175 "prudent investment",176 "depreciation",177 "going concern value and good will",178 "salvage value,"179 and "past losses and gains"180 only to emerge therefrom in 1944 at a point not very far removed from Munn v. Illinois and its deference to rate-making authorities.181 By holding in FPC v. Natural Gas Pipeline Co.,182 that the "Constitution does not bind rate-making bodies to the service of any single formula or combination of formulas," and in FPC v. Hope Natural Gas Co.,183 that "it is the result reached not the method employed which is controlling, . . . [that] it is not the theory but the impact of the rate order which counts, [and that] if the total effect of the rate order cannot be said to be unjust and unreasonable, judicial inquiry under the Act is at an end," the Court, in effect, abdicated from the position assumed in the Ben Avon case.184 Without surrendering the judicial power to declare rates unconstitutional on ground of a substantive deprivation of due process,185 the Court announced that it would not overturn a result it deemed to be just simply because "the method employed [by a commission] to reach that result may contain infirmities… [A] Commission's order does not become suspect by reason of the fact that it is challenged. It is the product of expert judgment which carries a presumption of validity. And he who would upset the rate order . . . carries the heavy burden of making a convincing showing that it is invalid because it is unjust and unreasonable in its consequences."186
171 253 U.S. 287 (1920).
172 Unlike previous confiscatory rate litigation, which had developed from rulings of lower federal courts in injunctive proceedings, this case reached the Supreme Court by way of appeal from a state appellate tribunal. 253 U.S. at 289. In injunctive proceedings, evidence is freshly introduced whereas in the cases received on appeal from state courts, the evidence is found within the record.
173 Without departing from the ruling previously enunciated in Louisville & Nashville R.R. Co. v. Garrett, 231 U.S. 298 (1913) that the failure of a State to grant a statutory right of judicial appeal from a commission's regulation is not violative of due process as long as relief is obtainable by a bill in equity for injunction, the Court also held that the alternative remedy of injunction expressly provided by state law did not afford an adequate opportunity for testing a confiscatory rate order. It conceded the principle stressed by the dissenting Justices that "where a State offers a litigant the choice of two methods of judicial review, of which one is both appropriate and unrestricted, the mere fact that the other which the litigant elects is limited, does not amount to a denial of the constitutional right to a judicial review." 253 U.S. 287, 291, 295 (1920).
174 Smyth v. Ames, 169 U.S. 466, 546-47 (1898) ("fair value" necessitated consideration of original cost of construction, permanent improvements, amount and market value of bonds and stock, replacement cost, probable earning capacity, and operating expenses).
175 Various valuation cases emphasized reproduction costs, i.e, the present as compared with the original cost of construction. See, e.g., San Diego Land Co. v. National City, 174 U.S. 739, 757 (1899); San Diego Land & Town Co. v. Jasper, 189 U.S. 439, 443 (1903)
176 Missouri ex rel. Southwestern Bell Tel. Co. v. Public Serv. Comm'n, 262 U.S. 276, 291-92, 302, 306-07 (1923) (Brandeis, J., concurring) (cost includes both operating expenses and capital charges i.e interest for the use of capital, allowance for the risk incurred, funds to attract capital). This method would require "adoption of the amount prudently invested as the rate base and the amount of the capital charge as the measure of the rate of return." As a method of valuation, the prudent investment theory was not accorded any acceptance until the Depression of the 1930's. The sharp decline in prices which occurred during this period doubtless contributed to the loss of affection for reproduction costs. In Los Angeles Gas Co. v. Railroad Comm'n, 289 U.S. 287 (1933) and Railroad Comm'n v. Pacific Gas Co., 302 U.S. 388, 399, 405 (1938), the Court upheld respectively a valuation from which reproduction costs had been excluded and another in which historical cost served as the rate base.
177 Knoxville v. Water Co., 212 U.S. 1, 9-10 (1909) (considering depreciation as part of cost). Notwithstanding its early recognition as an allowable item of deduction in determining value, depreciation continued to be the subject of controversy arising out of the difficulty of ascertaining it and of computing annual allowances to cover the same. Indicative of such controversy was the disagreement as to whether annual allowances shall be in such amount as will permit the replacement of equipment at current costs, i.e., present value, or at original cost. In the Hope Gas case, 320 U.S. 591, 606 (1944), the Court reversed United Railways v. West, 280 U.S. 234, 253- 254 (1930), insofar as that holding rejected original cost as the basis of annual depreciation allowances.
178 Des Moines Gas Co. v. Des Moines, 238 U.S. 153, 165 (1915) (finding "going concern value" in an assembled and established plant, doing business and earning money, over one not thus advanced). Franchise value and good will, on the other hand, have been consistently excluded from valuation; the latter presumably because a utility invariably enjoys a monopoly and consumers have no choice in the matter of patronizing it. The latter proposition has been developed in the following cases: Willcox v. Consolidated Gas Co., 212 U.S. 19 (1909); Des Moines Gas Co. v. Des Moines, 238 U.S. 153, 163-64 (1915); Galveston Elec. Co. v. Galveston, 258 U.S. 388 (1922); Los Angeles Gas Co. v. Railroad Comm'n, 289 U.S. 287, 313 (1933).
179 Market Street Ry. v. Railroad Comm'n, 324 U.S. 548, 562, 564 (1945) (where a street-surface railroad had lost all value except for scrap or salvage it was permissible for a commission to consider the price at which the utility offered to sell its property to a citizen); Denver v. Denver Union Water Co., 246 U.S. 178 (1918) (where water company franchise has expired, but where there is no other source of supply, its plant should be valued as actually in use rather than at what the property would bring for some other use in case the city should build its own plant).
180 FPC v. Natural Gas Pipeline Co., 315 U.S. 575, 590 (1942) ("The Constitution [does not] require that the losses of . . . [a] business in one year shall be restored from future earnings by the device of capitalizing the losses and adding them to the rate base on which a fair return and depreciation allowance is to be earned"). Nor can past losses be used to enhance the value of the property to support a claim that rates for the future are confiscatory. Galveston Elec. Co. v. Galveston, 258 U.S. 388 (1922), any more than profits of the past can be used to sustain confiscatory rates for the future Newton v. Consolidated Gas Co., 258 U.S. 165, 175 (1922); Board of Comm'rs v. New York Tel. Co., 271 U.S. 23, 31-32 (1926).
181 94 U.S. 113 (1877).
182 315 U.S. 575, 586 (1942).
183 320 U.S. 591, 602 (1944). Although this and the previously cited decision arose out of controversies involving the National Gas Act of 1938, the principles laid down therein are believed to be applicable to the review of rate orders of state commissions, except insofar as the latter operate in obedience to laws containing unique standards or procedures.
184 Ohio Valley Co. v. Ben Avon Borough, 253 U.S. 287 (1920).
185 In FPC v. Natural Gas Pipeline Co., 315 U.S. 575, 599 (1942), Justices Black, Douglas, and Murphy, in a concurring opinion, proposed to travel the road all the way back to Munn v. Illinois, and deprive courts of the power to void rates simply because they deem the latter to be unreasonable. In a concurring opinion, in Driscoll v. Edison Co., 307 U.S. 104, 122 (1939), Justice Frankfurter temporarily adopted a similar position; he declared that "the only relevant function of law . . . [in rate controversies] is to secure observance of those procedural safeguards in the exercise of legislative powers which are the historic foundations of due process." However, in his dissent in FPC v. Hope Natural Gas Co., 320 U.S. 591, 625 (1944), he disassociated himself from this proposal, and asserted that "it was decided [more than fifty years ago] that the final say under the Constitution lies with the judiciary."
186 FPC v. Hope Natural Gas Co., 320 U.S. 591, 602 (1944). See also Wisconsin v. FPC, 373 U.S. 294, 299, 317, 326 (1963), wherein the Court tentatively approved an "area rate approach," that is "the determination of fair prices for gas, based on reasonable financial requirements of the industry, for . . . the various producing areas of the country," and with rates being established on an area basis rather than on an individual company basis. Four dissenters, Justices Clark, Black, Brennan, and Chief Justice Warren, labelled area pricing a "wild goose chase," and stated that the Commission had acted in an arbitrary and unreasonable manner entirely outside traditional concepts of administrative due process. Area rates were approved in Permian Basin Area Rate Cases, 390 U.S. 747 (1968).
The Court recently reaffirmed Hope Natural Gas's emphasis on the bottom line: "[t]he Constitution within broad limits leaves the States free to decide what rate-setting methodology best meets their needs in balancing the interests of the utility and the public." Duquesne Light Co. v. Barasch, 488 U.S. 299, 316 (1989) (rejecting takings challenge to Pennsylvania rule preventing utilities from amortizing costs of canceled nuclear plants).
In dispensing with the necessity of observing the old formulas for rate computation, the Court did not articulate any substitute guidance for ascertaining whether a so-called end result is unreasonable. It did intimate that rate-making "involves a balancing of the investor and consumer interests," which does not, however, "'insure that the business shall produce net revenues' … From the investor or company point of view it is important that there be enough revenue not only for operating expenses but also for the capital costs of the business. These include service on the debt and dividends on the stock… By that standard the return to the equity owner should be commensurate with returns on investments in other enterprises having corresponding risks. That return, moreover, should be sufficient to assure confidence in the financial integrity of the enterprise, so as to maintain its credit and to attract capital."187
187 FPC v. Hope Natural Gas Co., 320 U.S. 591, 603 (1944) (citing Chicago & Grand Trunk Ry. v. Wellman, 143 U.S. 339, 345-46 (1892)); Missouri ex rel. Southwestern Bell Tel. Co. v. Public Serv. Comm'n, 262 U.S. 276, 291 (1923).
Last modified: June 9, 2014