Opinion — Galveston Elec. Co. v. Galveston

398 OCTOBER TERM, 1921.

Opinion of the Court. 258 U.S.

tion value instead of 33 1/3 per cent. as the master and

the court assumed. The appellees insisted, on the other

hand, that an item of $142,281 for grade raising included

by master and court in the historical cost should be elim-

inated. We cannot say that there was error in overruling

these contentions.

Second. Concerning deductions to be made from gross

revenue in order to determine net earnings, the court dif-

fered from the master in regard both to the yearly charge

for maintenance and to the depreciation annuity. It ap-

peared that in the fifteen years since appellant acquired

the system in 1905, the average annual expenditure for

maintenance had been $42,771; that during the war the

property had been admittedly undermaintained; that the

expenditure was $64,108 in the calendar year 1919;

$80,322 in the fiscal year ending June 30, 1920, and $90,-

861.28 in the calendar year 1920. The court estimated

the proper charge for current maintenance at $70,000, and

allowed, in addition, a depreciation annuity of $45,245

(that is, 4 per cent. on property subject to depreciation)

to provide a fund out of which annual replacements and

renewals could be made. Thus the court allowed for the

year’s depreciation and maintenance $115,245, which is

nearly 14 per cent. of the historical reproduction value,

and about 10 per cent. of the assumed reproduction cost,

of the depreciable part of the system. The master al-

lowed $147,146.40 for maintenance and depreciation dur-

ing the year ending June 30, 1920. This larger figure was

arrived at, partly by charging as cost of maintenance the

full $80,322 expended during that year, and partly by in-

cluding as depreciable property expenditures for overhead

items which the court excluded. The proper annual

charge for maintenance is the amount normally required

for that purpose during the period; it is not necessarily

the amount actually expended within the year. Many

items included in the overhead cost of original construc-

GALVESTON ELEC. CO. v. GALVESTON. 399

388. Opinion of the Court.

tion may properly be excluded in calculating the amount

of the depreciation annuity. We cannot say that the court

erred in limiting the year’s maintenance and depreciation

allowances to an aggregate of $115,245.

The company asked to have allowed as a further charge

$29,500 a year on account of what it called deferred main-

tenance. The contention is that, during the war and two

years following, the company had deferred maintenance,

pursuant to a policy established at the express request of

the Government to the end that material and labor might

be released for war purposes; that to make good this de-

ferred maintenance would cost $197,000; and that in order

to amortize this amount an annual allowance from earn-

ings of $29,500 should be made for five years. This is an

attempt, in another form, to capitalize alleged past losses;

and the request was properly refused both by the master

and the court.

Third. The remaining item as to which the master and

the court differed relates to the income tax. The com-

pany assigns as error that the master allowed, but the

court disallowed, as a part of the operating expenses for

the year ending June 30, 1920, the sum of $16,254 paid by

the company during that year for federal income taxes.

The tax referred to is presumably that imposed by the

Act of February 24, 1919, c. 18, §§ 230-238, 40 Stat. 1057,

1075-1080, which for any year after 1918 is 10 per cent.

of the net income. In calculating whether the five-cent

fare will yield a proper return, it is necessary to deduct

from gross revenue the expenses and charges; and all

taxes which would be payable if a fair return were earned

are appropriate deductions. There is no difference in this

respect between state and federal taxes or between in-

come taxes and others. But the fact that it is the federal

corporate income tax for which deduction is made, must

be taken into consideration in determining what rate of

return shall be deemed fair. For under § 216 the stock-

DP eae

400 OCTOBER TERM, 1921.

Opinion of the Court. 258 U.S.

holder does not include in the income on which the nor-

mal federal tax is payable dividends received from the

corporation. This tax exemption is therefore, in effect,

part of the return on the invectment.*

It is thus clear that both in the year ending June 30,

1920, and in the calendar year 1920, the net earnings of

the system were less than 8 per cent. of its value, whether

the value be estimated on the basis of prudent investment

or on the basis of the reproduction cost actually adopted.

When the court rendered its decision the ordinance had

been tested for more than a year and a half—a period

ample in ordinary times to test the current effect of the

rate prescribed and to indicate its probable effect in the

near future. The times here involved were, however, in

a high degree abnormal. It did not follow that, because

the system had earned less than 8 per cent. in 1919 and

in 1920, it would earn less than 8 per cent. in 1921. A

rate ordinance invalid when adopted may later become

valid, just as an ordinance valid when made may become

invalid by change in conditions. Municipal Gas Co. v.

1 It is difficult to see how, on the facts presented, so large a sum as

$16,254 could have been paid on account of the year’s operation.

Indeed the court, in disallowing the item of federal income tax, de-

ducted not $16,254, but $8,008. Even this seems too large, for the

net earnings, without deduction of the $16,254 attributed to income

tax, for the year ending June 30, 1920, as found by the master, were

$66,503.60. From this, interest paid or accrued on indebtedness is

to be deducted before computing the net income on which the tax

is payable. A large part of the capital of utility companies is ordi-

narily represented by interest-bearing bonds and notes; and there is

evidence that such indebtedness of the appellant was “in the neigh-

borhood of $1,400,000.” The interest on this debt chargeable to the

railway system would be at least $50,000. There is further an ex-

emption from tax of $2,000 of the net income. So a 10 per cent. tax

on the balance would amount to less than $1,500.

In the record and briefs elsewhere the income tax is reckoned at

between $8,000 and $10,000, which is a proper figure if there be an

8 per cent. return on $1,626,061.

GALVESTON ELEC. CO. v. GALVESTON. 401

388. Opinion of the Court.

Public Service Commission, 225 N. Y. 89, 96. Compare

Willcox v. Consolidated Gas Co., 212 U.S. 19; Newton v.

Consolidated Gas Co., ante, 165.

The District Judge was obliged to form an opinion as

to the probable net earnings in the future. All relevant

facts, except as stated, and all applicable arguments were

fully and clearly presented by the parties and were care-

fully considered by the court. Although the District

Judge treated the master’s report as advisory merely,

he passed upon the numerous exceptions taken to the

master’s findings in order to indicate his view on the pre-

cise points raised. He allowed some exceptions and dis-

allowed others. Upon petition for rehearing further care-

ful consideration was given to the case. Views expressed

in the first opinion on some matters were modified; but

these changes did not call for any change in the decree.

The District Judge had before him some evidence not be-

fore the master; for the company’s expert was recalled and

testified both to the result of operations of later months in

which there was a large increase in travel and to the

heavy decline in prices which occurred after October.

Concerning actual facts there was substantially no con-

troversy. On the elements to be considered in determin-

ing whether the rate would be confiscatory no error was

made which could substantially affect the result. His de-

termination whether the prescribed rate would be confis-

catory was necessarily based largely on a prophecy, for

normal conditions had not been restored. He found that

gross revenues were steadily increasing; and that they

were larger under the five-cent fare than they had been

during the preceding year when the six-cent rate was in

effect. He was convinced that operating costs would de-

crease largely during the year. His two opinions show

that every element upon which his prophecy should be

based received careful consideration. We cannot say that

the evidence compelled a conviction that the rate would

402 OCTOBER TERM, 1921.

Opinion of the Court. 268 U.S.

prove inadequate. Compare San Diego Land & Town

Co. v. National City, 174 U.S. 739, 754. San Diego Land

& Town Co. v. Jasper, 189 U.S. 489; Knoxville v. Knoz-

ville Water Co., 212 U.S. 1, 17.

The occasion for the suit was solely the extraordinary

rise in prices incident to the war. There was no sugges-

tion that the action of the Board evidenced hostility to

the utility, or that the Board was arbitrary or hasty. It

had been theretofore considerate of the company’s rights

and needs. When prices rose rapidly in 1918, it raised the

fare limit to six cents, although the franchise ordinance

prescribed the five-cent fare. And this was before our

decision in San Antonio v. San Antonio Public Service

Co., 255 U.S. 547. Its reduction of the fare by ordinance

of June 5, 1919, was made after hearing, and was doubt-

less due to the conviction, shared by many, that, with the

cessation of hostilities and the negotiation of the Peace

Treaty, prices and operating cost would fall abruptly.

This prophecy, if such there was, proved false. But

nearly three years have elapsed since the Board adopted

the ordinance; and more than a year since entry of the

decree below. We know judicially that the period has, in

general, been one of continuous price recession, and that

the current rates of return on capital are much lower than

they then were.’ But we cannot know to what extent the

important changes occurring have affected either gross

revenues or the net return. There is no reason to believe

that the Board would not give full and fair consideration

to a proposed change in rate if application were now made

to it. And the District Judge stated in his opinion (272

Fed. 147), that the decree to be entered would be vacated

or amended in case it should later appear that the regu-

lating board declined such adjustment of rates as the ac-

1See Federal Reserve Bulletin, January, 1922, pp. 5, 79, 113;

February, 1922, pp. 156-7.

VIGLIOTTI v. PENNSYLVANIA. 403

388. Argument for Plaintiff in Error.

tual experience of the utility might show it entitled to;

and the decree was thereupon entered without prejudice.

The District Judge refused a temporary injunction and

did not exact a bond. Hence the only relief we can grant

is such as operates in futuro. Compare Duplex Printing

Press Co. v. Deering, 254 U.S. 443, 464. An injunction

should not issue now, unless conditions are such that the

prescribed rate is confiscatory. As by the reservation in

the decree appellant may secure protection against the

ordinance if under existing conditions the five-cent rate

appears to be inadequate, the decree should be affirmed.

Compare Lincoln Gas & Electric Light Co. v. Lincoln,

250 U. 8. 256, 268; Ex parte Lincoln Gas & Electric Light

Co., 256 U.S. 512; 257 U.S. 6.

Decree affirmed.