Amicus Curiae Brief — St. L. & O'Fallon R. Co. v. United States
Supreme Court brief1929
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cen me s&s» &
Nos, 131, 132.
THE ST. LOUIS & O’FALLON RAILWAY COMPANY,
| and MANUFACTURERS’ RY. CO.,
Appellants,
va.
THE UNITED STATES OF AMERICA, and
THE INTERSTATE COMMERCE COMMISSION,
Appellees.
THE UNITED STATES OF AMERICA, and
THE INTERSTATE COMMERCE COMMISSION,
Appellants,
va,
THE ST LOUIS & O’FALLON RAILWAY |
COMPANY, and MANUFACTURERS’ RY. CO.,
Appellees.
SUBJECT INDEX.
PAGE
NE he ee em 8 RD oe st eT oe 1
Summary of Argument ......... EN AL AALS ee 1. 2
RISE CEO ie ee Ee, Cee 14
Panr ]
THE INSRPARABLE PROBLEM OF KATE REGULATION 4ND VALUE
REGULATION,
Point #
The valuation issue should not be isolated from the
issue of rate regulation... Li, peg! 14
All values are relative and cannot be stated with
out answering the questions:
Waeeey es WR Pr ei 15
ee COO EET oie ee rao ekek 15
Value under what conditions? ..... —
There is no one ‘‘true value" possessed Dh any
thing ped oa eS as ;
The value ef puble utility property is determined
bey the obligation to serve at reasonable rates. 1Y
The valuation of public utility property is an exer.
cise of the legislative power of rate regulation ms 0]
If judraal acthon gave utility properties a fixed
value by compelling the use of a judicial for
mula of valuation, the legislative power of
rate regulation would be destroved......... 23
Point 4
A careful analveis of the legal and economic con-
cepts of “property and ‘‘value’’ will clarify
the problem.
ii
PAGE
(a) **Property’’ is the dominion over
things possessed--a bundle of rights
—Wwhich is conferred by law........ a4
The source of property rights is the law-making
DEE “us cece cshbahk thes bebavenvsN cake wesee's ~b
(b) The value of property is the power to
command a price, which depends upon
the property rights conferred upon
an owner by law... caukns Wieeke
ie) The property of a publie utility owner
is not an absolute dominion, but one
qualified by public service obligations
(ad) The value of public utility property
is limited by the owner's limited
power to command a price ee
Point 5.
Therefore, the legisiative power of rate-revulation
must include the power of value regulation. .
An interpretation of Smyth vs. Ames
The ‘depreciated dollar’’ claim
Point 6.
The Supreme Court has consistently maintained:
(a) That the rate making power is legis
lative
ib) That there is no formula for finding
the value of a public utulity property
Paar I.
THE UNDERLUING INSD BR IN & VALUATION CASR.
Point 7.
The underlying iseue is) What is a fair price for
the public service rendered! a5
The ethical standards of regulation must be con.
sidered
Is the highest possible proe a fair proce!
SNP RRA ONLI PIE NT IE IE II APNE ND
iii
PAGE
The carriers are seeking to charge ‘‘ what the traffic
PS obs 6 tas ec Rhea tee 57
The cost of the service is a measure of the fair
price .. io nu ene ae les heh eRe bee En os . 59
legislative Power to Determine Public Poliey.... 68
Point &.
The question for judicial review is: Has a monop-
oly price or a confiscatory price been estab.
lished? pada’ are ee ss eae a
Definitions of a monopoly price and a confiscatory
price ..... Wats baa Wea 5.0 o's weds 65
A monopoly price ~ seites 68
A confiscatory price Tr T |< vene eden 69
A fair competitive price |. eo oe cree
Pant IIT,
THE LEGISLATIVE STANDARDS FORK RATE REGULATION AND VALUE
REGULATION,
Point 9.
Congress has authorized and directed the Inter.
state Commerce Commission to regulate rates
and values ey be ea
~)
to
Point 10.
The legislative power has provided no formula for
establishing reasonable rates or reasonable
Values, but required the Commission to exer-
cise a reasonable judgment based on adequate
information peeeenVessbecbavsce we
Pant IV
THE DRCISIVE ISSUE IN THE PRESENT CASE.
Point 11.
The reasonable judgment exercised by the Com.
mission has been based on the princi le of
fair competitive prices for services rendered. 8&1
iv
Structural elements of value...............-
ee oR bo rene ae 2
The judgment of the Commission may be tested by
considering :
(a) Whether traffic continues to move in
reasonable volume; and investments
continue to flow at reasonable rates
of reterm ....... ee Pe ae aS
ib) Whether the owners would have un
dertaken to furnish the service volun
tarily for the price which has been
fixed = 6s bee 4]
Point 12.
The Supreme Court does not sit as a board of re
Vision to substitute its judgement for that of
the Commission “4
Point 13.
The carriers are claiming that a property value
exists unaffected bey their obligation to serve
at a fair price oH
Point 14.
The carriers are contending that their property
has a ‘‘true value’? which must be determined
by giving dom nant consideration te a theo
retical cost of reproduction at pre sent prices
97
Point 15.
No property has any “true value’’; and ‘‘eosts”’
only furnish evidence of a fair price for the
service rendered
Reproduction costs are evidence of the highest pos
sible prices—monopoly prices 1
has
Point 16.
By claiming an absolute Value the carters are ask
ing the court to fix property values by formula
and thereby to fix rates +A 107
eos RENE ILE LOIS IPE LTE AGING AIOE? —
—
Point 17. PAGE
The carriers are asking the court to establish a fiat
value, which is a monopoly value, for public
utility property ..........6. cee e ee eee eee 107
Point 18.
The contentions of the carriers are based on false
concepts of ‘value’? and ‘property’, repudi-
ated by authoritative economists and jurists... 107
A comment upon MeArdle vs. Indianapolis Water
Company Cas bAcls abe k geen senaes .. Le
Point 19.
The carriers have not been deprived of any prop-
erty right to charge a fair price for services
rendered, or of any property value based on
such a property right .* Perey
An ‘earnest conflict of serious opinion” concern.
ing the wisdom of legislative action does not
bring a question of legislative poliey within
the scope of judicial inquiry ineeea een ie 115
The administrative powers of the Commission... 128
127
Appendix A iy ; Lsctck Vibe ees
Illustrative Instances in which Legislatures have
Diminished the Bundle of Rights called
“Property by Laws whieh have been Upheld
in the Courts
Appendix B - TT or ... 162
Limitations Upon Carrier Property Rights Spe-
cifically Imposed by the Interstate Commerce
Act.
Appendix C . *y- 164
Sections loa and 19a of the Interstate Commerce
Act.
Co ee oe ee) : —— unc
PES Re
— a rr PADI ERLE
Qi mag Eero ener ree ,
Taste or Cases Crrep.
PAGE
Aiken v. Boston ete. R. R. Co., 51 N. H. 504. .00...... 26
Ames v. Union Pacific Ry. Co., 64 Fed. 164........... 100
Bank of Columbia v. Okely, 4 Wheat. (UL S.) 235. ..31,119
Banton v. Belt Line Railway Co., 268 U.S. 418... 22
Bicek v. Mirah, 256 U. BS. 135..............:. .. .25, 26, 32
Bluetield Water Works ete. Co, v. Pub. Serv. Comm.,
262 U. S. 679.... ree Be Bo
Board of Commissioners v. res, 232 Pac. 834... 27
Boston Chamber of Commerce vo Boston, 217 UL S188 15
Boyd v. U.S, 116 US. 616... Se 1, PA Ae 115
Braceville Coal Co. v. a ge 26
Brush Flee. Co. v. ce «3k & See 9}
Calder v. Bull, 3 Dall, S.) 386 are Gab Mh eas 27
California v. Central I’. “4 ee; £ & eae ae
Cedar ee Gas Light Co. «. Cedar — 223 U.
O55 . a te Ce ee be wa hve 0. 9
Chines. ete., R. R vy. Ander rson, 22 it & sare as
Chicago, ete, Ro Rov. Transberger, 258 v 8. 67 3M
Chicago, Burlington & Quiney RR. . MeGuire,
ong U.S. 349. 63,110,111
,~R&Q. R. R. Co. v. een 218 &. eee
C.C.& St. L. Ry. Co. v. Backus, 154 U.S. 439. 16,34
Chicago, Milwaukee & St. P. Ry. Co. v. Minnesota, 154
” §. 418 i 5 RO
Cohens v. Virginia, 6 Wheat. (U.S) 264 113
Commonwealth vo Alger, 7 Cush (Mase) 53 JS
Cotting v. Kansas City Stock Yards Co., ISS ULS. 79 67
Crattwell v. Lwe, 17 Ves. Jr. 335 29
Darnell vo Fadwards, 244 U.S. 561 a
Darton Goose Creek RR Ca vi US 263 U.S. 456. .
1, 73. 74. ‘ h, “6. so. ma iz
Des Moines Ges Co. vy. City of Des Moines, 238 U.
A a. 105
Eaton v B.C. & Me RR, aT N. H. 306.. 25
_—
vii
PAGE
Esselstyn v. Holmes, 42 Mont. 507................... 30
Fletcher Co. v. Int. Assn. of Mach., 55 Atl. 1077...... 30
Ue D, POMNNE, Tes Ws BEDS cass bocca eV beens vee a's 29
Georgia Ry. and Power Co. v. R. R, Commission, 262
Ee oS ace ee ee 50, 51
Harper v. Stanbrough, 2 La. Ann. 377................ 29
Hitehman Coal Co. v. Mitehell, 245 U.S, 229. i ae
Hudson County Water Co. v. MeCarter, 209 U. Ss. 349. 71
Illinois Cent. R. R. Co. v. Commissioners, 161 Tl 247... 26
Illinois Central R. R. Co. v. 1. C. C., 206 U.S. 441.2... 95
International Harvester Co. v. Kentucky, 234 U. S.
SE, 40s datas i oan anbs-+cdan dened sdonue rite
International News Service v. Assoc. Press, 248 U.
BN Gc chink kaie yah ca neice ied tuk che ees oka ¢1.98
Inte rstate C ommerce indiana v. 1. C. R. R. Co., 215
EE IR nah A Se AB Ne a ge RE aye 63
Interstate Commerce Commission v. Union Pacifie R.
ee A ee
Jersey City Printing Co. v. Cassidy, 683 N. J. Eq. 759... 30
Kawananakoa v. Polybank, 205 U.S. 349........... 98, 30
la Belle Iron Works v. U.S... 256 U.S. 377... .... . 120
Lineoln Gas & Flec. Co. v. Lincoln, 250 U.S. 256... |... 91
L. & N. R. R. Co, v. Central Stockyards Co., 212 U.S.
132 FEU Eb de4de Coin eta t ORAK Cia Dae e kee s 32
Louisville v. ¢ eal rland T. & T. Co., 225 U.S. 430... 91
Louisville & Nashville R. R. Co. v. Garrett, 231 U.S.
Sar a ee ioe Clee pe ee Ue ea 49
Low v. Rees Printing Co., 41 Ne = a Se 26
McArdle v. Indianapolis Water Co., 272 U.S. 400. .112.114
McCulloch v. Maryland, 4 Wheat. (U. S.) 316........ 63
McCullom v. Smith, 19 Tenn. 372... hiv, eae ”
Minnesota Rate Cases, 230 U.S. 392...0.....0......
Setlonh decal 15, 16, 36, 49, 50, 51, 65, 84, 94, 105
Munescte & St. L. Ry. Co. v. Minneapolis, 186 U.S.
SE Gia Saas i hada ee i hes eee .100,117
hcaaesl ex rel, Southwestern Bell Tel. . v. Public
ee SO TE Wa ls 8 Sacks c2sceeventetecss 53
Ste Soth te OE
viii
PAGE
Missouri Pacifie Ry. Co. v. Humes, 115 U.S. 512...... 38
Monongahela Nav. Co. v. U.S., 148 US. 312... .. .16,34
Munn v. Hiinois, 4 UL S. 118 aoe o6 lee
Ohio Valley Water Company v. Ben Avon Borough,
253 U. S. 287 seeeeElane ca cee ee 2)
Omnia Commercial Co. v. United States, 261 US. 502. 31
Pacific Gas & Flee. Co. v. City and County of San Fran
eciseo, JOS US, 408 oi ae fy)
Pacifie Gas & Elec. Co. v. Police Court, 251 U.S. 22 ts
Peik v. C.& NW. Rv. 94 «UL S. 164 116
People v. City of Chicago, 321 1 466 63
Prentis v. Atlantic Coast Line Co., 211 U. 8. 210 112
Pullen vo Commissioners, 65 N.C. 361 41
Railroad Commission Cases, 116 Uo S. 207 116
Rev v. Lwon, 2 T R788 a“
Roberson v. Rochester Folding Box Co. 171 N YO538) 0
San Diego Land and Town Co v. Jasper, 989 US 439 100
San Diego Land and Town Co. v National City, 174
U. 8. 7% 31,41, 1%
Smyth vo Ames, 199 TS. 466
1%, 8, 40, 41, 42. 43, 48, 51, 99, 117, 118, 119
Sperry & Hutehinson Co. vo Rhodes, 220 oS wr a
Springfield ete Co. vy. Allen, 40.N. Yo osu m
St Louis v Hill, 116 Mo 427 *
Standard O}F Co wv Southern Pacific Co, 268 US
146 th, 0, 113
Stanisians County vo San Joaquin, ete, Co, W2ULS8
ma) | 1m)
State Utilities Commission vo Springfield Gas Co, 291
It 20 wh
Tavior v. Beckham, 178 U.S 548, 580 123
Terminal RoR. Awan. s Inited States, 226 US 17 wt
Terns and Pacifie RO Ko Cov Interstate Commerce
Commission, 162 0S. 197 / a
Thompson v Androscoggin Improvement Co, 4N A
Transcontinental vo Emmerson, 298 I!) 34 *
& ODA PLR ELLIE EPP LE
—
ix
PAGE
United States v. Steffens, 100 U.S. 82............... 2k
United States v. Terminal R. R. Assoe., 224 US. 383... 38
Van Horn v. Dorrence, 2 Dall, (UL S.) 304.......... 27
astern meee Came. Beeb. ©. OLB, nics cc cece nic ewes 57, 88
Willeox v. Consolidated Gas Co., 212 UL S.19.0...... 53,91
Wynehamer v, People, 13 N. Y. 378................ 25, 26
Taste oy Srarures Crrep,
Interstate Commerce Act, See, 15 (1)..00...... ee |
Interstate Commerce Act, Sec. ba (2). . 9.47. 48, 72,77, 96
Interstate Commerce Act, See. 15a (4)... . . » «Dp bay OH
Interstate Conumerce Act, See. lou (6) ah Ee 9
Printed in Appendix C
Interstate Commerce Act, Sev. 19a » + edd ta
Printed in Appendix C.
Trxrnooks anp Excycroremias Crrep.
23 Amer.-Fug. Enc. of Law, p. 261................-- 2
2 Austin, ‘‘Lectures on Jurisprudence’’, S17, Sees.
1051.6 Sn Lene “jie 5 alah ,25, 28
Bauer, American Economie Review, Vol. 14, No. 2, p.
262 eee
Bentham, Theory of Laewistation’’, Ch. Vill }'. eae. Js
1 Blackstone, Commentaries, 138 Rea . > sae ae
Bonbright, ‘*The Problem of Judicial Valuation’, Co
lumbia Law Review (Mav, 1927) 17,18
Bonbright, ‘The Eeonomie Merits of Original Cost and
Reproduction Cost’’, Harvard Law Review, March,
1928, 58, G22 70
Cooley, ‘Constitutional Limitations ’', 7th Ed. p. 511.28, 31
Ely, **Keonomies'’, Book 2, p. 172 a6
**Monopolies and Trusts” 69
Property and Contract "’, poo9 ps)
Franklin, Benjamin‘ Writings’’, Vol. X, (Smyth's
Ed), p. 59 ' iets = tw
x
PAGE
Gray, ‘‘ Nature and Source of Law"’, Sees, 34-53... ... 28
Hale, The ‘Physical Value’? Fallacy in Rate Cases,
30 Yale Law Journal, 710.. cates 10]
Hobbes, ** Leviathan’’, Part 2, Ch. 18, p. 1) a
Hobhouse, ‘* Property, Its Duties and Rights’, (1922) 0 2s
Holland, ‘*Jurisprudence’’, 11th Ed., 51 to 56 >»
Huxley, **Method and Results”, Pp 190.... ps
Jhering, ‘Spirit of the Roman Law’’, See. 60 Os
® Kent’s Commentaries, 340 28
Kirshman, ‘‘The Principle of Competitive Cost) in
Public Utility Valuation’’, 35 Yale Law Journal, 805 56
Laughlin, “The Elements of Politieal Feonomv’’, pp.
; 1}
79-77. . mS |
Locke, ** Treatise on Civil Government’, See. 50 es
Macleod, ‘*Elements of Feonomies’’, Vol. I, pp. 141,
143 . Fy Kn)
Marshall, ‘Principles of FReonomics”’ Rook 4 : Chee
7, See. 6 4.
Mill, ‘* Political Economy'', Vol. HT, p. 3... 37
Pound, ‘An Introduction to the Philosophy of Law’
pp. 4, 224 . Shear
Raleigh, ‘‘Outline of the Law of Property’, po 1 Ra
Ritchie, *‘Natural Rights’’, p. 234 pL
6 Ruling Case Law, 241 %
2 Raoling Case Law, 37 *
Smith, ‘‘Personal Property’, 58 rf
Stimeon, ‘Public Law Making", Ch. 7 as
Taft, Chief Justice, Response to Resolutions on Janu
ary 16, 1922, 250 US) Appendix TI 25, 124
Tanang, Principles of Feonemice’’, Volo 1, p. 115
33, 115
Van Hise, ‘Concentration and Control’, 84, 86 na
| aa Ses Re Oe ot er caer
IN THE
Supreme Court of the United States
Ovrenek Team, A. D. 1928
Nos. 13], 132.
eee
THE ST. LOUIS & O'FALLON RAILWAY COMPANY,
and MANUFACTURERS’ RY. CO.,,
Appellants,
Vs,
THE UNITED STATES OF AMERICA, and
THE INTERSTATE COMMERCE COMMISSION,
Appellees.
THE UNITED STATES OF AMERICA, and
THE INTERSTATE COMMERCE COMMISSION,
Appellants,
ve.
THE ST. LOUIS & ©’ FALLON RAIL'VAY
COMPANY, and MANUFACTURERS’ RY. CO.,
Appellees.
BRIEF IN BEHALF OF THE NATIONAL CONFER.
ENCE ON VALUATION OF AMERICAN RAIL.
ROADS, AS AMICUS CURIAE.
STATEMENT.
There are two reasons for offering this brief.
1. The principal issue in this case is one of extraordi-
nary public concern.
It ix: How shall radroad property be valued for rate.
making purposes, under the provisions of the Interstate
Commeree Act.
2 The official representatives of the public interest seem
constrained to adopt one theory of the law and to discard
an alternative (but inconsistent) theory, which is supported
Be Py
2
by equally impressive authority aad which would sustain
with equal force the action of the Interstate Commerce
Commission, which is under attack.
It would be unfortunate in this momentous proceeding
to have neo argument whatsoever presented to the court
upon principles which might be held decisive of the main
question here propounded.
Alternative Theories of the Law
It appears to be the position of counsel for the carriers
and for the government that the valuation of private prop
erty as the basis for public regulation i» ultimately a judi-
cia] function; that such property has a value, independent
of legislative action, which will be ascertained correctly if
an administrative commission will follow the valuation
rules laid down in the courts. The respective arguments
follow: that the Interstate Commission has discovered (or
failed to discover) this independent value of the carrier's
property, by following (or failing to follow) the judicial
rules, and that, therefore, its valuation should be sustained
for should be set aside) There is some show of authority
to justify counsel on beth sides in shayang the issues along
the lines indicated.
On the other hand, there is equally good authority for
urging that the valuation of private property as the basis
for public regulation i ultimately a legislative function:
that ‘‘property’’ has ne absolute, inevitable ‘‘value,”’
which exists independent of legislative action. There is
good authorty for urging that the value of property is
determined, not only by the play of economic forces, but
also by the laws which grant, regulate and prohibit that
private dominion over things pronscnmed, which i defined
in the law as ‘property. In the heht of these legal and
econemic prince ples, it becomes evident that a regulatory
commission is not directed to ascertain what the value of
fc WORE elit
3
public utility property ts (a question usually answered by
the stock exchange); but that such a commission has the
duty of determining what the value of the property should
be.
It will be conceded that if the value of property devoted
to pubhe service were an independent fact, to be ascer-
then it might be necessary for the court now to decide
whether such a fact had been correctly ascertained. But
if it be conceded, also, that public regulation of public
acrvice enterprises necessarily Increases and diminishes
the values of properties thus dedicated to public use, then
the court is nef now called upon to decide whether the com-
mission has correctly ascertained an independent fact. On
the contrary, it is the contention of present counsel that
the court is now called upon to decide this question: Did
the Interstate Commerce Commission administer reason-
ably a public policy properly defined by Congress, when
the Commission determined what value showd be given
to the present carrier property in order that the objects of
public regulation might be accomplished?
In behalf of the public interests represented in the Na-
tonal Conference on Valuation, its counsel seeks this op-
portunity to demonstrate:
(a) That the Interstate Commerce Commission might
have placed a lower valuation upon the O'Fallon property
under the present law, or under more explheit legislative
directions, enacted within constitutional limitations;
ih) That, in giving ‘‘due consideration to all the ele-
ments of value recognized by the law of the land for rate-
making purposes,’ the Commission gave such generous
weight to private interests in railroad property (in com-
parison with the weight given to public interests), that
tained as one would find the weight of a bushel of wheat,
4
these private interests have no reasonable ground for com-
plaint, although the rate-paying public might well pro-
test.
It should be evident that the present brief will neither
duplicate nor merely extend the briefs filed for the United
States and for the Interstate Commerce Commission, but
that it will raise additional Issues, deemed worthy of con.
sideration because the arguments here presented are sup-
ported by many opinions of the Supreme Court and by the
writings of legal and economic authorities of the highest
rank.
It is submitted that, when a litigant seeks to have the
legislative power of rate-making transferred to the courts,
it is fitting for the proponents of legislative power to ask
the court to consider primarily, not the wisdom, but the
constitutional validity of the exercise of the judicial power
which is invoked.
The opinions of the statutory three judge court, which
sustain the order of the Commission, are reported in 22 F
(2nd) 980. (RL, 125-140-148.)
gs Orrylanin ah es telN
| RPL EEE AES
SUMMARY OF ARGUMENT.
nee
PART I.
THE INSEPARABLE PROBLEM OF RATE REGU.
LATION AND VALUE REGULATION.
1. The valuation issue should not be isolated from the
issue of rate regulation, If a public utility property can-
not be valued in such a manner as to insure reasonable
rates, then the conceded power of rate regulation is de-
stroved, The power to require reasonable rates compre-
hends the power to prevent unreasonable profits. To di-
minish profits, that might be made, is to diminish values,
that might be obtained. Therefore, the process of rate
regulation requires that the owners of a public utility prop-
erty shall be deprived of a part of its potential value.
Argument, p. 14.
“
- Between the maximum property valuation, which
would be the basis for, and the result of the highest feas-
ible rates, and the minimum property valuation which
would be the basis for, and the result of, the lowest feasible
rates, hes the lepisintive field of rate regulation, The val-
ation of a public utility property within these limits, as a
basix for rate making, ix an exercise of the legislative
power of rate regulation within the range of legislative
discretion—and js mof subject to yudicial review.
Argument, p. 20.
6
3. In order to justify judicial invasion of the field of
legislative discretion the carriers are seeking to isolate
the valuation issue from the issue of rate regulation. They
are asking the courts to give utility properties a fixed value
by compelling the use of a judicial formula of valuation,
All property values are the joint product of economic and
political forces. They depend upon mghts conferred and
protected by laws. Tf judicial action establishes a public
utility property value which cannot be changed by legis.
lative action, the legislative power of rate regulation is
destroyed.
Argument, p. 23.
4. A careful analysis of the legal and economic concepts
of ‘property’ and ‘‘ value’ wall clarify the problem.
Argument, p. 24.
ia) “‘Property os the dominion over things pos
sessed——a ‘bundle of rights''——which i» conferred by
law.
Argument, p. 24.
ib) The ‘'value’’ of property is the ‘power to com
mand a price" for things possonsecd, which depends
upon the power whic h the owner can exercise over his
meacesions—that is, upon the ‘property’ which has
wen conferred upon bam by law
Argument, p. 33.
~~ OGRE LOLA LEME PIII ERE NEL ES —
7
,
(c) The *tproperty’’ of a public utility owner is not
an absolute dominion, but one qualified by the public
service obligations which he has assumed. Among
these obligations is the duty to charge only ‘‘ reason-
able rates’’ for the use of the things which he has de-
voted to public service,
Argument, p. 37.
(d) Thus the ‘‘value’’ of his ‘‘property’’ is de-
pendent upon the inescapable fact that his property
(his ‘‘bundle of rights’’ conferred by law) includes
only a limited ** power to command a price’’. He can
only command a price which the legislative power es-
tablishes as ‘‘reasonable’’. The power to establish
‘reasonable rates’? necessarily il he the power to
establish a ‘‘reasonable value’’ for the property used.
Argument, p. 39.
5 Therefore the legislative power of rate regulation
must include the power of value regulation. If a law fixing
a formula for the finding of value were written in the
courts, the result would be the absolute destruction of a
vital, far reaching legislative power, by the substitution of
judicial authority for legislative authority in rate-making.
Argument, p. 39.
Supreme Court has consistently maintained—
that the rate making power is legislative ;
that there is no formula for finding the value
of a public utility property.
Argument, p. 49.
PART II.
THE UNDERLYING ISSUE IN A VALUATION CASE.
7. The underlying issue in a valuation case, as in any
rate-regulation case is; What is a fair price for the public
service rendered?!
Argument, p. 52.
& The sole question to be presented for judicial review
is: Has a ‘‘monopoly price’’ or a ‘‘confiscatory price’’ been
established!
Argument, p. 64.
(a) A ‘monopoly price’’, as here defined, is one
clearly exceeding any price obtainable by sellers under
fair competitive conditions.
Argument, p. 65.
(b) A ‘‘confiscatory price’’, as here defined, is one
clearly leas than any price obtainable by buyers under
fair competitive conditions
Argument, p. 65.
See ee : TIPE ALIEN ATI NN PE AE EE IME —
PART III.
THE LEGISLATIVE STANDARDS FOR RATE REGU-
LATION AND VALUE REGULATION.
9, In its exercise of the legislative power of rate-making
Congress, in the Interstate Commerce Act, has authorized
and directed the Interstate Commerce Commission
Argument, p. 72.
(a) ‘*To determine and prescribe what will be the
just and reasonable’ rates. (See. 15 (1) )
(b) To ‘‘establish or adjust such rates’’ so as to
provide a ‘‘fair return upon the aggregate value’’ of
railway property. (See. 15a (2) )
(c) To enforce a trusteeship imposed on every indi-
vidual railroad in regard to net income exceeding the
‘fair return’? upon the value of its individual prop-
erty. (See. 15a (6) )
(d) To determine the aggregate value through its
individual valuations ‘‘ascertained’’ through ‘‘its in-
vestigation under Section 19a"’, giving ‘‘due considera-
tion to all the elements of value recognized by the law
of the land for rate-making purposes.’’ (Sec. 15a (4).)
fg eR PP ORT IS REE POI ROLY AALS, LE I LY
10
10. The legislative power thus provided no formula for
fixing reasonable rates, but required its administrative
agent to obtain a vast amount of information, to consider it
and to report it, so that the basis for its conclusions might
be known. A mere reading of the Interstate Commerce
Act will demonstrate the impossibility of establishing ‘*rea-
sonable rates’? by any formula or—by the same token—
the impossibility of establishing the ‘‘value”’ of railway
property by any formula, ‘*A reasonable judgment having
its basis in a proper consideration of all relevant facts’’—
is clearly all that ix possible. Such a judgment has been
exercised by the Commission.
Argument, p. 78.
PART IV.
THE DECISIVE ISSUE IN THE PRESENT CASE,
11. This “reasonable jadgment"’ has been based on the
principle that competitive prices should be high enough to
support generously the credit of carriers whose securities
represent prudent investment, se that the existing facilities
may be maintained efficiently and further investments may
he induced-—and not unreasonably higher than the prices
which would have resulted if the public had undertaken to
furnish the service or to compete fairly with private enter.
prise.
Argument, p. 81.
(a) It would seem to be conclusive proof that rates
have been fixed within the range of legislative discre
tion (between a monopoly price and a confiscatory
price) if experience shows that the traffic continues
to move in a reasonable volume and that additional
investments continue to flow into the public service at
reasonable rates of return.
Argument, p. 88.
C- SFOS EL SAME PLM EEL ELD RAL RE ELIE LEI LE OVE ELLE SD ATES. RATER
11
(b) If rates or values established are attacked as
‘‘confiscatory’’, before an adequate experience has
been had to demonstrate their effect, the court is called
upon to decide (upon the record) that the owners of
the property involved would not have undertaken to
furnish this service, and would not now continue to
furnish it, voluntarily, for the price which has been
fixed.
Argument, p. 91.
12. This reasonable judgment has been exercised within
a ‘range of legislative diseretion’’ by a ‘‘tribunal appoint-
ed by law and informed by experience’’, and the Supreme
Court has held that it does not sit ‘tas a board of revision
to substitute our judgment for that of the legislature, or of
the Commission lawfully constituted by it, as to matters
’
within the province of either.’
Argument, p. 94.
13. But, in the present case, the carriers are seeking to
avoid all discussion of a fair price for the service, by claim-
ing that a property value exists independent of, and not to
be affected by, their obligation to serve at a fair price.
Argument, p. 96.
14. The carriers contend that their property has a ‘‘true
value which is the economic equivalent of the property’’,
which value ‘‘must be determined’’ by giving ‘‘dominant
consideration’ to a theoretical cost of reproduction at
“present prices’.
Argument, p. 97.
12
15. No property has any independent, or ‘‘true’’, value
—or any ‘‘economic equivalent’’—which is measured by
reproduction cost or any other cost. Earning power—
not cost—is the measure of value; as the Supreme Court
has always held. Costs only firnish evidence of what would
be a ‘fair price’’ for the service to recompense the seller
for his outlays. Reproduction costs are only evidence of
the highest possible prices—evidence of monopoly prices.
Argument, p. 98.
16. Through the device of claiming that an absolute
value inheres in their possessions, the carriers are in fact
asking the court to establish a formula for fixing the value
of their property; and thereby to establish a formula for
fixing rates; and thereby to take away from the legislative
branch of the government all substance of its constitutional
power to fix rates, in order that only a fair price shall be
charged for public services
Argument, p. 107.
17. The carriers are asking the court (actually but not
candidly) to establish a fiat value for all public utility prop
erties at the amount of their theoretical reproduction cost
to substitute a judicial formula for legislative discre
tion--to transfer the legislative power of rate making from
the legislatures to the courts; and by judicial action to es-
tablish monopoly values for these properties as the basis
for a constitutional night to charge monopoly prices.
Argument, p. 107.
BBO POOR DERE ER NORE ELLIE PI HEY: FANS JE HM REL LINHA TE See
13
18. The contentions of the carriers are based on (1) a
false economic concept of ‘‘value’’, which the court is
asked to adopt against the protests of all authoritative
economists; and (2) a false juristic concept of ‘‘ property’,
which the court is asked to adopt in repudiation of its own
opinions and the concensus of legal commentators,
Argument, p. 107.
1%. It is respectfully submitted that in the present case
the carriers have not been deprived of any property right
to charge a fair price for services rendered, or of any prop-
erty value based on such a property mght; that the rates,
the earning power and the resultant value of the property
of the carriers were established by the Interstate Commerce
Commission, in & conservative exercise of the legislative
power of rate regulation, well within the limits of the range
of legislative discretion; all in conformity with the laws
and the Constitution of the United States.
Argument, p. 114.
14
ARGUMENT .*
PART I
THE INSEPARABLE PROBLEM OF RATE RkAil
LATION AND VALUE REGULATION,
Point I.
The valuation issue should not be :solated from the issue
of rate regulation. If a public utility property cannot
be valued in such a manner as to insure reasonable rates,
then the conceded power of rate regulation is destroyed
The power to require reasonable rates comprehends the
power to prevent unreasonable profits. To diminish
profits, that might be made, 1s to diminish values, that
might be obtained. Therefore, the process of rate regu.
lation requires that the owners of a public utility prop
erty shall be deprived of a part of its potential value
The «ffert tas smal ate thes ‘ al pat sest) tmetie from the prolyl ft
of 1 shhis tatalits rewulatiot at aniv serve ta trbone mre thy
Gcrevel stl Peers Cel : : - «ti banged eitind ¢ . ; .
terrelmitiemia: ger egteie marisa jive WE rrtist pores inde he
huyage fast elefertninit ge tive “Vv mitie ” af tiPesqee rts che ‘ ateal '
retablie tise The use of the wond ‘value’’ seems unfort
fiate etre: Bn of the pteigecte mtiaet that We Te me eking to fhr ;
an cromome fact, when we are in truth seeking fo compro
mise economic claims incapable of a purely mathematical
fixation. the conflicting claims of seller and buyer concern
ng a fair price for a servicer But the word “value ’’ may
*italive it whations threaghout this trief are cure uniets of ber
wiee imdiicated
Coaunes! for the ratiraad in their briefs Im the lower court conetantir
demanded that the ccmpiniesion ehogid be 4 peowted to Gnd the tree va'ee
which le the economic eqeliraient of the property implying (thet the
veoperty hal an ateeiute ‘vaice which eheaul4 not be afoctet br govern
mental regulation af ite earning power Thue the entire ergument is
ebipged 6 an eromemic fallacy that wi!) fot feemt
nee
| eas SIRT ne
15
aid us to arrive at a just basis for rate regulation if we
realize at the outset that all ‘‘values’’ are relative and that
no *Value’’ can ever be stated except after considering and
answering the questions: Value, to whom! Value, for
whatf Value, under what conditions?
Value, to whom”?
It has been Jong settled that in a condemnation case, it
is the value to the owner (of property taken) and not the
value to the purchaser, which must be determined: because
“the question is, What has the owner lost’ Not, What has
the taker gained !"’ Boston Chamber of Commerce v. Bos.
fon, 217 UL S. S80, 195.
But at has been long settled also that in rate regulation
its the value to the purchaser (of services rendered) which
must be detertnined, because the publicis entitled to demand
“that ne more be exaeted from it for use of a publie high
Way than the services rendered by it (the company) are
reasonably worth.’ Smyth v. Ames, 169 US. 466: Minne-
sotn Rate Cases, 280 US. 552
The impossibility of ascertaining a value without an-
swering the question: Value. to whom’? is made clear in
the opinion delivered in Boston Chamber of Commerce v
Boston, supra, where itis held:
“But the Constitution does not require a disregard
at the state of the title It does not require a parce]
of land to be valued as an unencumbered whole. It
merely requires that an owner of property taken should
he pad for what is taken from him. It deals with
petsoms, not with tracts of land" (jy. 195).
Value, for what”
Karning yrower determines “'value’’ for Purposes of con
demwation or taratiom.
In valuing a bridge company’s property ina condemmna
from ense it was held that the earnings of this publie utility
Loe am
16
*“*‘must enter into and largely determine the matter of
value
Monongahela Nav. Co. v. U.S... 148 U.S. 312, 319.
In a railroad farefion cause, it was held that the value of
property results from and varies with the profitableness
of its use; and that ‘tthere is no peeumary value outside of
that which results from such use.’*
CoC Co €& St. L. Ry Ce. v. Backus, UA U.S. 439,
495)
Bat in a rote regulates case, it was held that value was
not—and could not he determined by actual earning power;
because ‘'the value of the use, as measured by return, can-
not be made the ertterion when the retarn itself is in ques
tron
Minnesota Rate Cases, 290 U.S. 352, 461.
Value, under what conditions?
Citations of authority are hard!y newled to demonstrate
that all property values degend upon conditions that affect
earning power Let us assume that the A-B Company has
been earning 2) per cent on an investment of $1,000,000
and that tts servier is then dapleate!d by a competitor whe
cuts prices, thereby reducing the profits of the original
enterprise to 5 per cent The value of the A-B properts
would be affeetedd by the changed conditions Let us for
ther assume that the A.B Company is a public utility. [>
not the value of its property affected by ite pabhe service
obligations? Maw not rates he required that are reason
ably comparable to the charges for which the public could
supply the aame service and make a reasonable return on
ite invewtment®? Must the public actually engaged in com
petition, in order to rexiuce unreasonable rates and to fir
reasonable ‘‘valuves"’ for pubhe utslity properties? Or, is
public regulation intended as a substitute for competi:
_
17
tion and based upon the theory that, when monopoly is
tolerated, or authorized, competitive rates can be estab-
lished by law! Can it be questioned that these conditions,
under which public utility properties actually exist, must
be given ‘‘due consideration’’ as *‘elements of value’’ in
placing a ‘‘value’’ on these properties as a basis for public
regulation!
Just because these questions—and so many of the ‘‘ele-
ments of value’’--are blandly ignored in the arguments of
public utility counsel (and apparently given no considera-
tion In many Judicial opinions), it seems desirable, even if
not necessary, to begin this argument with a restatement
of the principal purpose of public utility regulation, and
with an insistence that the valuation issue should not be
isdlated from the major problem in which it arises.
The distinction, at least, between rate-making value
and market value, even though it is sometimes recog-
mized in judicial opinions, is far from adequately recog-
nized. Yet itus a distinction which underlies the whole
theory of public utility regulation, a theory which is
based on the principle that certain enterprises, called
pubhe utilitues, should not be allowed to charge what-
ever prices they might be able to charge if their power
to coeree customers by means of the bargaining process
were not to be limuted. In view of the fact that the
market values of public service enterprises are simply
a capitalization of the expected carnings that follow
the exercise of the property owner's coercive powers,
they enannot properly be used as the basis of a rate con-
trol which is designed, not alone to observe, but to
limit, these powers. It is the recognition of this fun-
damental difference between valuation ax a measure
and valuation as a modifier of market forces that has
caused many writers on public regulation to put valu-
ation for rate making in a place by itself and to dis-
Unguish between this ‘value’ whieh cannot properly
mean market value. and other judicial values, such as
value for taxation, for damages, or for condemnation
which, it is assumed, do properly mean market value."’
Bonbnght.—"' The Problem of Judicial Valuation.”’
Columbia Law Review, May, 1927.
BR eson cw escens . + SEEN
St ae Is
—
18
The attempt to isolate the valuation of a public utility
property for rate-making purposes from the problem of
rate-regulation fails, not only because it leaves out of con-
sideration a most influential ‘‘element of value,"" but also
because it leaves the value to be determined in an economic
vacuum. The valuator is asked to find the value of the
property, not to its actual owner, but the value to any
owner. No such value exists in fact. The valuator is asked
to determine the value, not for rafe making purposes, but
for aay purpose. No such value exists in fact. The valu
ator is asked to determine the value, not under stated con-
ditions, but under awy combtions. Ne such value exists in
fact.
Economists bave long since agreed Ubat there is no ‘true
Value’’ possessed by anything as an ‘‘abiding intrinsic
worth’’. As expressed by a writer in the Columbia Law
Review, Volume J7, page 624:
** The ‘value’ of a thing ix always its value for the par
ticular purpose, and in the particular conthiet, in hand
at the tume of valuation. Henee there is no necessary
relation between any given Value and cost, for cost was
promoted and met by punt interests which may or may
net carry over inte the present sifuation without
change The only ‘true value’ for the present will be
the one which best resolves conflicting imfterests in terms
of a stable adjustment. So far a» the interests change,
the ‘true value’ selution Likewise reqaires change. On
may recall here the fact that back in the period of fall
ing prices the railroads were accused of urging that
true value for purposes of rate making Was sVvnony
mous with histerteal, rather than with reproduction
cost.”
Realtting pounantly that no coonomist will support the
long, diseteditedd notion that there is such a thing as one
“true value'’, counsel for the carriers have been led to the
assertion, in briefs in the lower court, that ‘‘for the last
three centuries the economic theonmets have been anable to
agree among themneelves upon a theory of value" Hut the
LER ALBA NEIRE SIMI BIE P IT ESR ARDEA
19
primary meaning of pecuniary value, universally accepted
by economists, is the “‘power to command a price,’’ or, in
other words, an ‘‘exchange ratio’’; and counsel for the car-
riers are seeking judicial support of the irrational propo-
sitien that things in themselves have a ‘true value’’, inde-
pendent of the factors determining the owner's **power to
command a price’, or independent of the factors determin.
ing the ratio at which one commodit’ under designated con-
ditiens, will exchange for another.
It is impossible even to discuss a method of fixing a value
in an cconeme vacuum. Therefore, counsel for the ear-
riers, While claiming that they desire to have the court lay
down the rules for finding the one ‘true value’ (whieh is
supposed to exist for anybody, for any purposes, under any
conditions), are in reality seeking to have the court lay
dewn the rules for finding a value which can exist only as
the “‘value’’ of his property fo a monopolist, used by him
as the Imasis for fixing the highest possible prices for buyers
who are compelled to buy! (See Point 15, enfra.)
It may be conceded that if there were no legislative power
of rate-regulation capable of reducing the power of the
pabhie utility owner to command a price, he might be able
to renlive substantially the ‘value’? whieh is now claimed
as the one ‘true value’. The reason hy he cannot realize
such wa ‘'value'’, that ix, the reason why he has no such
“pewer to command a price’’, ix because the legislative
power of rate-regulation exists,
Therefore. from the beginning to the end of this argu.
Went, ios hecessary to combat the effort of the carriers
to iwolate the valuation issue from the rate-regulation issue.
It is necessary to continue to insist that the value of pub.
lic utility property is determined by and must be made
responsive to the obligation to serve at reasonable rates.
In order to prevent this attempted isolation of the valua
Yon IssUC, We must insist that no value can be stated for
20
any property, unless it be ‘stated as a value to a particular
owner, for particular purposes, under particular conditions,
A value cannot be stated for a public utility property as a
part of the process of rate regulation, without stating it as:
(1) a value to owners who are subject to the obligations of
public service; (2) a value for rate-making purposes, Which
must be consistent with, and determined by the law that
public utility rates must be reasonable; and, therefore, (3)
a Value arrived at by taking into consideration the incon.
sistent and contheting private interests of sellers and buy,
ers, Which must be compromised in order to deal fairly
with all private interests and to arrive at that balancing of
private imterests which is called, ‘‘the pubhe interest’’.
Point 2.
Between the maximum property valuation which would be
the basis for and the result of the highest feasible rates,
and the minimum property valuation which would be the
basis for and the result of the lowest feasible rates, lies
the legislative field of rate-regulation. The valuation of
a public utility property within this field, as a basis for
rate-making, is an exercise of the legislative power of
rate regulation, within the range of legislative discretion
—and is not subject to judicial review.
There are certain cconomie limitations upon rate regu
lation which cannot be disregarded Rates might be fixed
so high as to stop the use af the service, or 80 low as to
stop the furmushing of the service, Legislative action te
compel either result would not be the regulation of pubhe
serview, but ite destruction | and misguided efforts in this
direction might well be restrained bw the courts on the
ground of the constitutional limitations upon legislative
power
But. the legislative power with which we are here con
cerned has been exerted only to compel the charging of
CRA URN NE MTNA LAURER NET ESPNS SHY HENS ve m ANDEAN TTA _—
21
‘reasonable rates'’. So the question presented is only one
as to whether the Interstate Commerce Commission has
acted in conformity with its delegated authority. In view
of the conflicting interests of the sellers and buyers of any
service, itis clear that there must be a considerable margin
between those rates which would be most satisfactory to the
sellers, producing the maximum value for their property,
and rates which would be most satisfactory to the buyers,
producing the cheapest efficient service for their use. There
must be a considerable margin between rates which would
be so unsatisfactory to sellers that they would cease to
make further investments and seek to be relieved of public
service Obligations, and rates which would be so unsatis-
factory to buyers that they would cease to use the service,
In and bevond the twilight zone between unreasonable
rates and extortionate rates, a court in exercising judicial
power may find it necessary to exercise its ‘independent
judgment as to both law and facts;"’ and the same judicial
review may be required in and beyond the twilight zone
between unreasonably low rates and confiscatory rates.
This, we understand to be the doctrine announced in the
much discussed case entitled Ohio Valley Water Company
Vv. Ben Aton Borough, 253 U.S. 287. Thus we find, at each
end of the field of legislative power in rate regulation, a
zone of unoertainty, wherein, in one case the independent
judgment of the court upon the facts may cause it to set
aside a commission order, although in another case, upon
only slightly different facts, a similar order may be sus-
tained,
The point we desire to make now is that there tu an
assured teld of legislative discretion (which hes between
the vones of uneeriainty Which may be called unreasonably
high and unreasonably low rates) wherein legislative power
is exercised through an administrative commission whose
acts within this field are not subject to judicial review. Yet
ERIN ARE Rs Owe, Se 2 ‘ ‘ ERIE IN SERPS NYY DAT RPE SL ea
there must be a considerable margin for difference of opin-
jon as to what are ‘‘reasonable rates’’, so that within this
same assured field of legislative discretion values differing
in large amounts might be fixed for the same property by
different commissions, or by the same commission under
different circumstances. Banton vy. Belt Line Railway Co,
268 U.S. 415.
To give short, specific examples: (1) Different real
estate appraisers of equal experience and impartialty will
differ widely as to the values of the same real estate in a
large city. (2) The same appraiser may place different
values upon the same real estate before and after the pas-
sage of a toning ordinance, or the enactment of some other
legal restriction upon the uses of real estate. (5) Rea!
estate peculiarly valuable for a railroad passenger terminal
may lose some of that value through the growth of motor
bus transportation and the consequent decline of local pas-
senger business. This last example indicates the interde-
pendence of rates and values. It may be impossible to
charge former local passenger rates in competition with
motor bus transporation or private automobile transporta.
tion. The decline of business, or its diminished profitable.
ness, will reduce both the values of property peculiarly
adapted to the business and the prices which can be charged
and obtained for the service
At this stage of the argument, it is only our purpose to
emphasize the fact that there ts a field of legislative power
within which there mast be a legisiative discretion in the
fixing of values for rate making purposes. The effort of
counsel for the carriers to establish a judicial rule of
valuation, so that a ‘‘value"’ must be fixed at a specific
amount, whereby ‘‘reasonable rates’’ must also be fixed
at a specific amount, is in reality an effort to substitute a
judicial rule for the ‘' reasonable jadement"’ of legislative
agente within the field of legislative discretion.
SUSAR ALTE NIE IEG TPT ILE RRS eee LE
Mane
23
Point 3.
In order to justify judicial invasion of the field of legisla-
tive discretion the carriers are seeking to isolate the valu-
ation issue from the issue of rate regulation. They are
asking the courts to give utility properties a fixed value
by compelling the use of a judicia] formula of valuation.
All property values are the joint product of economic and
political forces. They depend upon rights conferred and
protected by laws. If judicial action establishes a public
utility property value which cannot be changed by legis-
lative action, the legislative power of rate regulation is
destroyed.
The judicial formula of valuation which the carriers are
seeking to have established is that the present value of
public utility property is always to be found by estimating
the reproduction cost of the identical property at present
prices! The field of judgment left to the Commission is
only a limited Judgement in the weighing of evidence as to
the amount of this reproduction cost, including the weighing
of evidence as to what are the current or anticipated prices
which should be applied. If such a formula were laid down,
there would be an end of the legislative power of rate-
regulation. If property devoted to publie service (which
has no inevitable value) must be green an absolute value,
bearing a fixed relation to cost, then the charge for the use
of such property becomes practically a fixed charge: and the
determination of reasonable rates is no longer an exercise
of legislative judgment, wherein the interests of the public
may receive due consideration. Rate regulation is made an
artitrary process for determining what the public must
pay for public services, regardless of what the service is
“The true value that te the economic equivalent of the property.
murt te ascertained in a way to determine the worth ax of the time of
the controversy, that is, the then present value This requires that
efective and dominant consideration be given to the then present prices.”
Reply Nrief for Carriers in the District Court, p 12
24
‘‘reasonably worth’’ to the public. Thereby, in the per-
ennial economic conflict between private sellers and public
buyers, the inherent legislative power to protect public buy-
ers is destroyed.
If property had an absolute value, an ‘abiding, intrin-
sic worth’’, there would be a justification for the establish
ment, by judicial rule, of a method whereby such a value
must be ascertained. But since no property, whether used
in private or public service, has any such absolute value,
the effort to establish a judicial formula is simply an effort
to have the courts give to public utility property this spe-
cial **value’’
power of government, would be clearly an exercise of legis.
an act which, so far as it may be within the
lative power. The inevitable effect of such an exercise of
judicial power would |e to destroy the substance of the
legislative power of rate regulation, which, to be effective,
must include the power of value regulation.
Since the entire argument of counsel for the carriers
depends upon the assertion that there is one ‘‘true value”,
one “economic equivalent of property’'’, which can be ascer-
tained by applying appropriate reproduction cost prices to
an inventory of physical objects, it becomes necessary to
return to fundamentals and to ask the court to consider the
nature of the legal and economic coneepts of ** property"
and ‘‘value’’.
Point 4.
A careful analysis of the legal and economic concepts of
‘‘property’’ and ‘‘value’’ will clarify the problem.
(a) Property is the dominion over things possessed
—# ‘‘bundle of rights’’ conferred by law.
The greatest confusion is brought into any determina-
tion of the value of property rights by the common assump-
tion that what i« being valued ix a physical object, when in
fact things do not have pecuniary values «themselves; and
. eR IRENE IN UPI tek erm OOS
25
pecuniary values are found only in the rights of persons
to use things, which rights are conferred and protected by
law. These rights are the substance of an owner’s
‘*property’’.
**There can be no conception of property aside from
its control and use and upon its use depends its
value. Branson v. Bush, 251 U.S. 182, 187."’
Block vy. Hirsh, 256 U.S. 135, 165 (dissenting opin-
ion).
‘In its proper use the term property applies only
to the rights of the owner in the thing possessed.”’
Amer.-Eng. Ene. of Law, Vol. 23, p. 261.
2 Austin, Jurisprudence, Sees. 1051, 1056.
Macleod, Elements of Economics, Vol. 1, pp. 141,
143.
Raleigh, Outline of the Law of Property, p. 1.
perty, |
‘The term property (although in common parlance
frequently applied to a tract of land or a chattel) in
its legal signification means only the rights of the
owner in relation to it. It denotes a right * ° °
over a determinate thing. Property is the right of
any person to possess, use, enjoy, and dispose of a
thing.’’
Wynchamer v. People, 13 N.Y. 378.
1 Blackstone, Com., 138.
2 Austin, Jurisprudence, 817; cited in Eaton v.
B.C. d M. R. R., infra.
**All that makes this property of any value is the
aggregation of rights or qualities which the law an-
nexes as incident to the ownership of it."’
Eaton v. B.C. & M. R.R., 51 N. H. 504.
‘Private property includes rights more or less nu-
merous. Far from being a simple thing it is complex
and has been called by law text-book writers a ‘bundle
of rights’.
Fly, Property and Contract, p. 59.
One of the best statements of the nature of property is
found in the classic opinion of Mr. Justice Doe, in Thomp-
26
f,
sow V. Androscoggin Improvement Company, 54 N. H. 545,
at 551, 552, 554 (1874), which has been quoted with ap-
proval by numerous courts:
Property in land must be considered, for many
purposes, not as an absolute, unrestricted dominion,
but as an aggregation of qualified privileges, limita.
tions which are prescribed by the equality of rights,
and a co-relation of rights and obligations, necessary
for the highest enjoyment of land, by the entire com.
munity of proprietors oe”
The soil is often called property * ° ° but the
proposition that the soil ix property conveys a very
imperfect idea of the namerous and variously limited
rights comprised in landed estate. And it is sometimes
necessary to remember that the name of property be
longs to some of the essentially proprietary rights
vested in the person called the owner of the soil. * * *
Property is taken when any of those proprietary rights
is taken of which property consists. Aromond v. Green
Bay, ete. Company, 31 Wis, 316, 385.""
Other forceful statements of the same doctrine, univer
sally recognized by the courts, may be found by reference
to the following selected authorities: Block v. Hersh, 256
U.S. 135, 155, 156 (1920): Transcontenental vo. Emmerson,
298 Tl. 394, 390 ef seq. (1921); Wonchamer v. People, 13
N. ¥. 378, 433 (1856). (** Whatever subverts his rights
in regard to (a chattel) annihilates his property in it’):
Tiimeonts Central Ro Ro Co. ¥. Commucssoners, 161 Til 247,
OM, 251 (1896). St) Lows vo Hell, 116 Me. S27 (1893): Low
v. Recs Pronteng Co, 41 Nebr. 127, 146 (184); Athen wv.
Bostom, etc. R. Ro Co, 51 N. HE 904 (1872); Springfield, etc
Company v. Allen, 43 N.Y. 380 (1871); Bracecille Coal (
v. People, 147 TL 66, 71 (189%), 6 ROC LL, 261; 22 BCL,
37.
The Source of Property Rights
Starting. therefore, with a realistic concept of property
as a bundle of rights, let us next consider briefly the source
of these rights. One of our heritages from the ‘‘natural
PPA PRIM LLL 20 CRAIC AIP EE OPN ee EE ee
27
rights’’ period of legal and political philosophy has been
a tendency in some circles to attempt to classify the rights
of property as natural and inalienable rights, not dependent
upon civil government. This is diseussed by Dean Pound
‘**An Introduction to the Philosophy of Law’’. (Page 204.)
Lawyers of romantic inclination have sometimes asserted
that the right of property is of divine origin. {For example,
Smith on Personal, Property, page 58 (1908). And Van
Horn v. Dorrence, 2 Dall. (U. S.) 304, 310 (1795).] But
the more realistic jurists now present a uniform front on
the subject, and agree that this ‘‘bundle of rights’’ called
“property '’, is created by the state—conferred by law. One
of the earliest statements of this fundamental truth is to
be found in the opinion of the United States Supreme Court
in Calder v. Bull, 3 Dall. (U.S.) 386, at 394 (1798), where
Mr. Justice Chase wrote:
“It seems to me, that the right of property, in its
ongin, could arise only from compact, express or im-
plied, and | think it is the better opinion, that the right
as well as the mode, or manner, of acquiring property,
and of alienating or transferring, inheriting, or trans-
mitting it, is conferred by society; it is regulated by
civil institution, and ix always subject to the rules pre-
seribed by positive law. When I say that a right is
vested in a citizen, | mean, that he has the power to do
certain actions; or to possess certain things, according
to the law of the land."’
In Jaternational News Service v. Associated Press, 248
U.S. 215, Mr. Justice Holmes, concurring, wrote:
**Property, a creation of law, does not arise from
value although exchangeable as a matter of law. Many
exchangeable values may be destroved intentionally
without compensation."’
In Pullen vo Comissioners, 66 SN. C. 361, at 363 (1872),
the court stated:
‘Property itself * * * is the creature of posi-
tive law. The legislative power declares what objects
in nature may be held as property."’
In Board of Commissioners v. Ryan, 232 Pac. 834 (Okla.
1925), the court's syllabus reads:
‘Property in all its forms is a creature of law."’
ATRIA ORME NETL IE ELE EST TE BEE ROE GIG IE ELIE SLE ELAM EPL SEES
28
Numerous other statements to the same effect are avail-
able from early times to the most recent advance sheets,
See: United States v. Steffens, 100 U.S. 82, 93
(1907): Commonwealth v. Alger, 7 Cush. (Mass.) 53,
84,85 (1851). In Publie Law Making, Ch. 7, Prof. F. J.
Stimson a distinguished lawver and teacher, states:
“That property is but the creature of law all English
jurists admit.”’ Cooley, Constitutional Limitations,
7th Ed. p. 511; 2 Rent’s Commentaries, 340.
Dean Pound has written that ‘‘ownership is a purely
legal conception having its origin in and depending on the
law’’, and this conception is that of all the jurists,
See: Pound, “An Introduction to the Philosophy
of Law,’ p, 224; 2 Austin, Lectures on Jurisprudence,
Sec. 731; Grav, Nature and Source of Law, Sees, 34.55
26-41-51-53; Holland on Jurisprudence, 11th Ed. 51
to 56; S7-88; Hobbes, Leviathan, Part 2, Ch. 18, p
137-238 (1651); Ritehie, Natural Rights, p. 234; Jher
ing, Spirit of the Roman Law, Sec. 6); Locke, Treatise
on Civil Government, Sec. 4); Huxley, Method and
Results, p. 190.
In his book on the Theory of Legislation, Ch. VITE, p. 111,
the great critic of the legal svsetem, Jeremy Bentham puts
the matter suecinetly:
“There is no such thing as natural property °°
It is entirely the work of lnw ° °° Property and
law are horn together and dic together He fore law's
were made there was no property; take away laws and
property ceases.""
Benjamin Franklin puts it similarly, Writings, Vol. X,
p. 59 (Smyth's ed.):
Private property therefore is a Creature of Soc
ety, and ix subject to the Calls of that Society, when
ever its Necessities shall require it, even to its Inst |
farthing."’
For a compact and authoritative exposition of *' The
Notion of Property’’ see “Property, its Duties and
Rights.”’ chapter on ‘‘The Historical Evolution of
Property,” by L. T. Hobhouse (1922).
LRT eR PN ee ee at a
—
29
It is not necessary to rely merely on opinions of courts,
concerning the source of property rights. Their decisions
reveal the same source, An interesting illustration in re-
cent times of the creation by law, through the Legislature,
of a new property right, a new stick added to the bundle
of rights, is furnished by the so-called ‘tright of privacy”’
cases. It was decided in Roberson v. Rochester Folding
Box Company, 171 N. Y. 538 (1902), that the rights in a
portrait of one who is the subject thereof, did not include
the right to control the unauthorized use of copies. The
Legislature of New York thereupon created such a property
right. A certain young woman found that her portrait was
being used for advertising purposes and brought suit under
the statute for an injunction and for damages, an action
predicated upon a property right which did not exist before
the statute. This statute was upheld as constitutional by
the United States Supreme Court in Sperry d& Hutchinson
Company Vv. Rhodes, 220 U.S. 502 (1911), Mr. Justice
Holmes stating that the law had the effeet of bringing this
property right into existence.
It is well known that at common law there is no property
right in a dead bedy'; and vet by statute it would be easily
possible for the State to create such a property right,
vesting it in a relative, for example. In fact, it was even
the law within the experience of men still living that one
human being could have property rights in another? The
source of such property rights was the law of the states.
It is not only the Legislatures which create legal rights:
they may be created by the courts themselves. For ex-
ample, there was a time not so far distant when the intan-
gible known as **good-will’’ was not regarded as a property
nght.* Now it is the merest commonplace to state that
“good-will’’ is one of the most valuable property rights
‘Blackstone's Commentaries, 429. Rea v Lynn, 2 T. R. 783 (1788);
Foster v. Foster, 220 8 W 2168 (Tex C 1920)
"Bee euch slave cases as MceCuliom v Smith, 19 Tenn. 342 (1888), and
Harper +. Blonbrowgh, 2 La Ann 377 (1847).
‘Hee for example. the statement of Lord Eldon in Crattwell v. Lye, 17
Vea Jr 356. at 346 (1810)
HSER EERIE NER EDT EY EON GE GEE MEO IEEE TELA BAY BA HOTT LEE
30
and in a few types of business it is almost the only property
right of value. In Esselstyn v. Holmes, 42 Mont. 507, 516
(1910), the court deseribed good-will as follows:
‘It is property capable of transfer and the owner
is entitled to the same protection in the exclusive en-
joyment of it as he is in that of his tangible posses
sions."’
The source of this well known property right is the law,
acting, in this instance, not through the Legislature, but
through the courts. Another illustration of present-day
importance is the creation by some courts of a new kind
of property right described as the right of an employer
to a ‘‘free flow of labor’’'
It has been necessary to demonstrate with some care that
property is a ‘bundle of rights’ conferred by law—rights
flowing from the exercise of sovereign power-—and to dem.
onstrate that property is not a natural, absolute right of
fixed extent, in order to help destroy the fallacious doctrine
that property can have a value independent of, and not
subject to modification by the exercise of legislative power.
Even a fixed property right could not have the same
value to all persons, for all purposes, and under all con-
ditions. Bat since the right to be valued is itself conferred
by law, it should be apparent that there cannot exist a
right of property and a resultant value of property con
trary to the will of the sovereign power which has created
the property and given it its value.
“There can be no legal right as against the authority
that makes the law upon which the right depends.”
Kawanonaloa * Polybask, 205 U.S. 349.
Therefore, we find that since the law is the source of
all property rights and resultant property values, the law.
makers can create or destroy, and increase or diminish the
Por « Ciecewion of thie newly created right. ave Jerecy City Printing
Company « Casvidy 02 N J By Th) (190T). Fictcker Company + Inter
eattions! Aseoctation of Machinists, SS AN) 1OTT IN J Bq. 1963). ané
Gitcehmen Coal Compony + Mitr heli, 245 U BR PPP, et B62 (1917)
Lehi NPL EERSTE OV ELST OREE THE PERE LE DP LEL LOE DL EL EIU
i ala
31
bundle of property rights, which owners can exercise; and
thereby the law-makers likewise can change the values of
such properties to their owners. Nor does the constitution
of the United States prevent the legislative power from
depriving men of property rights. The constitution merely
prohibits a deprivation ‘‘without due process of law’’, in
which is comprehended arbitrary action against individuals,
or the practical destruction of all recognized rights of
ownership under an excessive exertion of the so-called
“police power’. In a word, owners may not be deprived
of property rights by the ‘‘arbitrary exercise of the powers
of government unrestrained by the established principles
of private rights and distributive justice’’. (Bank of Col.
umlia v, Okelu, 4 Wheat. (U. S.) 235, 244.) The definition
of *‘due process of law’ just quoted has been approved
by the great constitutional lawyer, Judge Cooley in his com-
ment that ‘‘we have met in no judicial decision a statement
that embodies more tersely and accurately the correct
view'’. (Cooley, Constitutional Limitations, 7th Edition
(1903) page 505.) For a further discussion of the measure
of this constitutional limitation we refer to the Conclusion
Appendix A of this Brief, page 157.
Thus, while it is well-settled law that legislative power
may not deprive persons of property without due process
of law, or ‘withhold from the owners of private property
just compensation for its use’’, which ‘‘ would be a depriva-
tion of property without due process of law’’ (San Diego
Land and Town Company v. National City, 174 U. S. 739),
it is equally clear and well-settled that the ‘‘bundle of
rights’’, which constitute property, can be increased or
diminished by legislative power and thereby property
values can be likewise increased or diminished. (Omnia
Commercial Co. v. U.S. 261 U.S. 502.)
One of the most valuable of the sticks in the bundle of
property rights is the right of use. This right may be
entirely destroyed by statutes, such as those concerning
SREP S Sea EERE IEE RE OT LN RET ES MS EAA LAS ERS BIOGEN RE ea
7
32
liquer, gambling devices, obscene literature, adulterated
foods, etc., whereby a pre-existing right of use may be taken
away or rendered almost valueless. By the same token, the
regulation of use, by the laws governing the use of property
devoted to public service, must inevitably destroy some
property rights and values, while, at the same time, perhaps
giving other property rights and values. The imposition
of an affirmative duty vpon a railroad was described in an
opinion of the Supreme Court as ‘*taking its property in
a very effective sense’’. Yet the regulation was upheld
(L. d& N. Radroad Company v. Central Stockyards Com. |
pany, 222 U.S. 132, 145.) Many further examples of the
subtraction, addition and modification of property rights in
the exercise of legislative power in public utility regulation,
will he given under subsequent points. For the present we
may well sum up the discussion of the nature of property
and the effect of legislative action upon property rights and
values by quoting from an opinion of this court:
**The fact that tangible property is also visible tends
to give rigidity to our conception of our rights in it
that we do not attach to others less concretely clothed
But the netion that the former are exempt from leg.
islative modification required from time to time in civi-
lized life is contradicted not only by the doctrine of
eminent domain, under which what ia taken is paid
for, but by that of the polee power in its proper sense,
under which ga right» may be cut down and to
that extent taken without pay."
Block +. Hirsh, 26 US. 135.
As an appendix to this brief, we are printing a mass of
illustrative instances, on which legislators have diminished
the bundle of right« called ‘‘property’’ by laws which
have been upheld in the courts. The purpose of this ex
tensive review of authorities is to demonstrate that an abso.
lute right of property, and an absolute calue of property,
independent of, and not to be modified by, legislative action,
cannot be established by a judicial formula of valuation,
without the destruction of an essential legislative power
Panne oe Sal tira Ree SM
33
which always has been preserved and upheld by judicial
authority and which must be preserved and upheld, in ae-
cordance with constitutional limitations. (Appendix A.)
(b) gy el of property is the — to com-
mand a price’’ for things possessed, depends
upon the power which the owner can exercise over his
that is, upon the ‘‘property’’ which has
conferred upon him by law.
If there is an accurate understanding of the nature of
property, it must follow inevitably that no property can be
valued except after due consideration of the extent of that
power over the use of the things possessed which the par-
ticular owner is permitted to exercise, for particular pur-
poses, under particular conditions, by virtue of the par-
ticular rights conferred upon him by law.
There has been a wealth of discussion in legal and
economic literature, concerning methods of ascertaining
value, and concerning the nature of *'value’’, as a phtloso-
phical concept. But there is no diffeulty in stating what
,
“pecuniary value’’ ts. It is the ‘‘power to command a
price’’.
—that is, the purchasing power of a commodity in terms of
ather commodities, This value depends upon the profits,
present and anticipated, which the use of property may
To state such a value is to state an exchange ratio
bring to the owner and, therefore, depends wholly upon
the power of the owner to command a price for the use of
his property. The cconomists and the courts are in agree-
ment upon this conception of value:
‘The value of a commodity means in economics its
vower of commanding other commodities in exchange.
t means the rate at which the commodity exchanges
for others, * ° ° The value of a commodity thus
conceived is its value in exchange. This is very differ.
ent from its usefulness or utility or importance. In
every-day discourse we use the word ‘value’, sometimes
to indicate exchange value, sometimes to indicate utili-
ty or importance."’
Taussig, Vol. 1, page 115, Principles of Economics.
“a gy Teas eee eo gm Rs cere st pce CHP ROE RN RET mI a er ie ae ene a
34
‘In brief, exchange value is purchasing power; that
is, a commodity has more or less value as it may be
exchanged for more or less of other things. 7 9s
In order to have value an article must be: (1) one
which is transferable; (2) one for which we are will.
ing to undergo some sacrifice; (3) one capable of satis.
fying some desire.”’
Laughlin, The Elements of Political Economy,
pages 75.77.
“The value of property generally speaking is de.
termined by its productivencss, the profits which its
use brings to the owner."’
Monongahela Case, 148 U.S. 328.
‘But the value of property results from the use to
which it is put and varies with the profitableness of
that use, present and prospective, actual and antici.
pated. There is no pecuniary value outside of that
which results from such use."’
C GC. 6. & &. L. Ry. Co. ¥. Backus, 154 U_S. 439,
445
The foregoing opinions of the court are supported by
more recent opinions, In International Harvester Com-
pany v. Kentucky, 234 U.S. 216, the court was required
to construe a statute making it a crime to sell harvesters
at a price in excess of their ‘real value’’. The plaintiff
in error contended that the law provided no undei sss
able rule of conduct, for the reason that no one could tell
what the ‘‘real value’ of a harvester would be at a partica.
lar time. The answer to this question by the highest court of
Kentucky was that ‘‘real value’’ had been previously de-
clared, and was declared, to be ‘the market value under
fair competition and under pormal market conditions”
The Supreme Court of the United States reversed the
Kentucky judgments on the basis of an opinion precisely
in point in the present consideration of the contention of
counsel for the carriers that their property has one ‘‘true
value’. Mr. Justice Holmes wrote the opinion of the
. , os 5 . - >
Nak SO a aa CBE TERA MPT
~ i
35
court (two justices dissenting) which, after stating the
previously quoted definition of value by the Kentucky
Court, reads in part as follows :
‘*We have to consider whether, in application, this
is more than an illusory form of words, when, nine
years after it was incorporated, a combination invited
by the law is required to guess at its peril what its
product would have sold for if the combination had
not existed and nothing else violently affecting values
had occurred."’
After remarking ‘‘how impossible it is to think away the
principal facts of the case as it exists, and say what would
have been the price in an imaginary world’’, the opinion
continues :
‘Value is the effect in exchange of the relative so-
cial desire for compared objects expressed in terms
of a common denominator.
‘It is a fact, and generally is more or less easy to
ascertain. But what it would be with such increase of
a never extinguished competition as it might be guessed
would have existed had the combination not been made,
with exclusion of the actual effect of other abnormal
influences, and, it would seem, with exclusion also of
any increased efficiency in the machines, but with in-
clusion of the effect of the combination so far as it
was economically beneficial to itself and the commu-
nity, is a problem that no human ingenuity could
«solve, The reason is not the general uncertainties of
a jury trial, but that the elements necessary to deter-
mine the imaginary ideal are uncertain both in nature
and degree of effect to the acutest commercial mind.
The very community, the intensity of whose wish rela-
tively to its other competing desires determines the
price that it would give, has to be supposed differently
organized and subject to other influences than those
under which it acts. It is easy to put simple cases;
but the one before us is at least as complex as we
have supposed, and the law must be judged by it. In
our opinion it cannot stand."’
In Standard Ou Company v. Southern Pacific Company,
268 U.S. 146, the question presented to the court was the
SF ESRLGL Ie EP OETA DOL LYS EPR ET SO att STEELE EGO AEM RE REE
36
value of a steamship which had been lost after a collision.
Here clearly only a question of ‘‘market value’’ was pre-
sented, not a value for rate-making purposes, not the
value which property ought to have, but the value which
property actually had to an owner for purposes of sale
under existing market conditions. The opinion of the court
pointed out that where no market value could be estab-
lished through contemporaneous sales of like property, the
value might be taken as the sum ‘‘that in all probability
would result from fair negotiations between an owner
willing to sell and a purchaser willing to buy’. The opin-
ion held that ‘‘cost of reproduction as of the date of valua-
tion constitutes evidence properly to be considered in the
ascertainment of value’’, and then continued:
‘It is to be borne in mind that value is the thing to
be found and that neither cost of reproduction new, nor
that less depreciation is the measure or sole guide.
The ascertainment of value is not controlled by arti-
ficial rules."’
After quoting, with approval, the requirement for a
‘reasonable judgment’ laid down in the Minnesota Rate
Cases, supra, the opinion, by Mr. Justice Butler, quoted,
with evident approval, from an English case, as follows:
**But there is another matter infinitely more impor-
tant than this (referring to original cost less depre-
ciation) —known even to the most unlearned—the con-
stant change which takes place in the market. It is
the market price which the court looks to, and noth
ing else, as the value of the property. It is an old
saying, ‘The worth of a thing is the price it will
bring’.
Thus reviewing the established economic and legal con-
cept of value, we see that a pecuniary value, a value
which can be stated in terms of money, depends wholly
upon the owner's power to command a price. If the seller
commands the market (through a practical monop-
37
oly), he can command the highest possible, or whatever is
to him the most profitable, price. If the buyers command
the market (where there is intense competition) they can
command the lowest possible price, perhaps the least
profitable to the seller. As a result, the values of prop-
erty used must depend entirely upon market conditions
and depend upon the location of power to control the prices
for the use of property,
Long ago John Stuart Mill warned students of political
economy that value and prices are determined by competi-
tion alone, and stated:
‘‘In so far only as they are thus determined can
they be reduced to any assignable law.’’
Political Economy, Volume III, Page 3.
Therefore, it becomes apparent that when the force of
competition ho longer operates as a regulator of values and
prices, When prices are regulated by governmental action,
there is wo cconomac law which operates to fix ‘‘ reasonable
rates’’ or to establish ‘*reasonable values’’ for property,
unless the rate-making authority adopts, as a principle of
regulation, some competitive principle, so as to exert po-
iiftecal law in the direction of the economic law that would
operate under such assumed conditions,
(c) The ‘‘property’’ of a public utility owner is not an
absolute dominion, but one q ed by the public
service obligations which he has assumed. Among
these obligations is the duty to charge nee hg
sonable rates’' for the use of the things ch he
has devoted to public service.
The limited dominion which a public utility owner can ex-
ercise over his possessions, the diminished number of sticks
in his **bundle of rights,’’ is exemplified in the mass of
cases cited in Appendix A, to which we have previously re-
ferred. In addition to these cases attention should be called
to the limitations specifically imposed on carrier property
PORK ENNELY te a eset SOE AREER TTR Le RIERA CUT YX, MR PARR SA
PNP 2
38
rights by the Interstate Commerce Act, which are summar.
ized in Appendix B.
To assert that a railroad corporation has the same un-
qualified dominion over a terminal station, yards, engines
and cars—that a private corporation has over its factory
would be to assert an obvious untruth. There would be
precisely the same untruth in the assertion that the ‘* prop-
erty’ of the railroad corporation and the manufacturing
corporation is the same private property. Therefore it can-
not be rationally asserted that these different properties
have the same values, or even that their different values
can be ascertained by assuming contrary to fact that their
owners have the same rights of dominion over the things
they possess. Obligations imposed by law are direct inter-
ferences with that exclusive control which is the very es-
sence of ‘‘property’’ and the foundation of property
‘‘values."’ International News Service v. Associated Press,
248 U.S. 215.
This court has repeatedly recognized that property values
are diminished by obligations, such as those listed in Ap-
pendices A and B and has sustained the validity of such
diminutions. For example:
Railroads may be required to share terminals.
U. Ss. - Te rminal Radroad Assoc ialion, U4 U, S.
383.
Railroads may be required to fence rights of way.
Missount Pacific Railway v. Humes, WS US. 512.
Railroads may be required to destroy weeds, to supply
drainage for surface water, to sprinkle streets.
Che ugu, ete., Radroad v. Anderson, 242 U.S. ZnS.
Chicago, etc., Radroad vy. Transberger, 238 U.S. 67.
Pacific Gas d Electrve Co. v. Polwe Court, 251 U.
S. 22.
PARE IL ORI ECO TY ADP OA
39
The obligation to charge only ‘‘reasonable rates’”’ is an
exceedingly radical diminution of property value—but it
has been sustained for centuries.
(d) Thus the ‘‘value’’ of his ‘‘property’’ is dependent
ly inescapable fact that his property (his
7 of rights’’ conferred by law) only
eae she pe Gao eee a
only command a p ve power
establishes as ‘‘reasonable.’’ Theo to estab-
lish ‘‘reasonable rates’’ seccenasti, tatntion the
power to estublish a ‘‘reasonable value’’ for the
property used.
The legislative power, in limiting the owner’s ‘power to
command a price’’ has not deprived the owner of property,
but has merely determined, in an exercise of legislative
authority, the extent of the dominion which the owners of
public utility property shall be permitted to exercise over
things possessed. The legislative power has determined
that a public utility owner’s ‘‘property’’ shall not include
the power to command the prices most satisfactory to him;
and therefore has determined that his property shall not
have the ‘‘value’’ most satisfactory to him.
Point 5.
Therefore the legislative power of rate regulation must
include the power of value regulation. If a law fixing a
formula for the finding of value were written in the courts,
the result would be the absolute destruction of a vital, far-
reaching legislative power, by the substitution of judicial
authority for legislative authority in rate making.
Ever since the opinion was handed down in Smyth vy,
Ames, there has been a persistent effort to obtain in the
court the establishment of a judicial formula for finding
the ‘‘fair value of the property’’, which the court held
40
should be the basis of fixing reasonable rates.'| The court
stated that in order to ascertain ‘‘that value’’ consid-
eration should be given to numerous irreconcilable and in-
harmonious factors such as original cost and present cost
of construction, amount and market value of bonds and
stocks and probable earning capacity of the property and
undefined ‘‘other matters’’. The subsequent controversies
over valuation and rate regulation have been waged be-
tween interests seeking to have ‘‘dominant consideration”
given to one particular factor. In other words, the effort
has been to change a judicial opinion as to matters which
should be taken into ‘‘consideration,’’ in the exercise of a
reasonable legislative judgment, to a judicial formula pre-
seribing rules which would practically control the exercise
of the legislative judgment.
In the meantime jurists and economists have criticised
the Smyth vo Ames opinion because the court had appar.
ently put the cart before the horse and held that ‘‘ value”
should be ascertained as the basis for earning power when
it is a perfectly obvious and inescapable economic fact that
‘value’ is the result of earning power. Yet if the opinion
of the court had announced that reasonable rates should be
fixed upon such a basis that as a result the owner would be
able to realize a reasonable value in the use of his property,
“We bold. however that the tusis of a alcuistions as to the ree
somableness of rates to te charged ty « corperation maintaining a high
way under legisiative sanction must be the fair value of the property
being aeod by It for the convenience of the public And in order to
ascertain that value, the original cost of construction, the amount es:
pended In permanent Improvements the amoant and market value of {te
teode and stack, the present as compared with the original cost of con
struction, the probable earning capacity of the property under particular
rates prescribed by statute and the sum required fo meet operating es
penecs, are all matters for consideration. and are to be given such weight
as may be just and right in each case We do not may that there may
pot be other mattere to be regarded in estimating the value of the prop
erty What the company te entitied to ack 's @ fair return upon the value
of that which it emplore for the pallic convenience On the other hand
what the public te entitled to demand fs that no more be exacted from it
for the use of the public bighwar than the services rendered by it are
reasonably worth” Amyfs « Ames 169 1 BH 466 546
BER OGRE EE LINER ts
41
criticism could not have gone to the length of stating that
the rule of Smyth v. Ames is *‘legally and economically un-
sound’’. Any objection would have been confined to a pro-
test that the court had not prescribed any test for what it
would regard as a ‘‘reasonable value”’.
An Interpretation of Smyth v. Ames.
It seems clear, however, upon a review of the preceding
and succeeding cases, that the opinion in Smyth v. Ames
was intended to mean that the result of reasonable rates
should be to establish a reasonable value for the property.
This is evidenced by the fact that the same justice who
wrote the opinion in Smyth v. Ames shortly thereafter, in
writing the opinion in San Diego Land and Town Com-
pany Vv. Natwnal City, 174 U.S. 739, stated that “the rights
of the public would be ignored if rates for the transporta-
tion of persons or property on a railroad are exacted with-
out reference to the fair value of the property used for
the public or the fair value of the service rendered’’. Later
in the same opinion he stated explicitly that the company
was entitled to a ‘‘fair return upon the reasonable value of
the property at the time it is being used for the public’.
In the thirty vears since the opinion of Smuth v. Ames
was written, the Supreme Court has steadfastly resisted
every pressure to establish a judicial formula for valuation.
whereby a Commission would be required to fix reasonable
rates upon the hasis of a fiat value of property, withont
compromising the conflicting interests of owner and user
of property by exercising a legislative discretion to deter.
mine what are reasonable values for properties and reason
able prices for services. In the oft quoted opinion in
Smyth v. Ames, the court clearly intended to lav down the
law that rates should not be determined solely according
to certain formulated interests of the buyers or sellers of
—_ CLLR SINS ott OR
Reet xt: poe sin " 2 :
9
~-
service, but should be determined after consideration of
the conflicting and varying factors of value upon which are
based the conflicting and varying claims of parties in eco-
nomic conflict.
The various ‘‘matters for consideration,’? which are
stated, are to be ‘‘given such weight as may be just and
right in each ease,"’ * * * and there may be ‘other
matters to be regarded.’’ The court clearly anticipates not
merely the exercise of discretion in individual cases, but
also the gradual formulation of principles based on experi.
ence in rate regulation, in the course of which there must
be a constant balancing and compromising of *‘what the
company (the seller) is entitled to ask" and **what the pub.
lie (the buver) is entitled to demand.’ If we regard the
‘*rule’’ of Smyth vo Ames as a rule of evidence--not as a
rule of decision—it becomes somewhat useful instead of
wholly confusing. To describe the evidence which can be
(or must be) considered by a jury requires a deseription of
evidentiary facts that are in conflict. But to write a formula
for decision requires a weighing of evidentiary facts and
the elimination of conflict. The conflicting factors stated
and not resolved in the opmmen in Smyth». Ames show that
a rule of evidence —not a rule of decision —-was intended.
Let ux consider, for example, the factors of orginal cost
and reproduction cost. In a time of declining prices in a
competitive market, the seller will urge that he must be
recompensed for cost of production; and the buyer will urge
that he could produce the same goods or services today ata
lower cost. The market price resulting will be more or less
of a compromise of these claums, with a tendency for prices
to be fixed at cost of production, because, as Alfred Mar
shall, dean of the English economists, writes, ‘Coast of re.
production exerts little direct influence on value, save when
parchasers can conveniently wait for the production of new
supplies."" Principles of Eoonumics (1907), Book 5, Chap
OSTEO PLE LEE WILE ES I
43
7, Sec. 6. On the other hand, suppose prices are rising. The
seller's argument will be that he is entitled to sell the goods
at what it would cost to produce them today, and the buyer’s
argument will be that the seller should be satisfied with a
fair profit based on what it actually cost the seller to pro-
duce the goods.
It will be noted that today sellers of transportation serv-
ice are seeking to have prices based upon reproduction
cost, although thirty vears ago they were seeking to have
prices based on original cost. Their claims are not
grounded upon faith in a particular economic theory or
reverence for abiding principles of justice, but upon a rec-
ognition of immediate self-interest. It may be urged that
the buyers of transportation service also have shifted
ground in the last thirty vears on the basis of immediate
self-interest. But the establishment of a policy of gov-
ernment should not be based upon the immediate interests
of either sellers or buyers. In writing the so-called rule of
Smyth v. Ames, the Supreme Court declined to hold that
rates should be fixed upon dominant consideration of the
interest of the buyers. !t declined to hold that in a time of
falling prices, reproduction cost alone should be used to
measure the rate base. The court did hold that original
cost and reproduction cost and many other elements of
value should be given consideration, so that a ‘‘fair value”’
might be established for property used for public service.
Following the same logic, in recent years the Supreme
Court has repeatedly declined to hold that rates should be
fixed upon dominant consideration of the interest of the
sellers. In other words, after a period of rising prices it is
held— just as it was thirty vears ago after a period of fall.
ing prices—-that reproduction cost alone shall not be used
to measure the rate base.
The Interstate Commerce Commission (and any rate-
making public bedy) is required to take a long view of the
Beep terme aysremrey 28 «tay SUAS TNS PETS IS Stig P BEELER IPMS lil a NP aaa
4H
interests of sellers and buyers, in order to see, not merely
how to satisfy the immediate interest of one or both
groups, or how to work out a temporary compromise of the
conflicting interests, but in order to see how to provide a
reasonably permanent basis for compromising the conflict.
ing interests. Standards of fairness that will persist are es
sential, For this reason the Conunission has been compelled
to give greater weight to the actual cost of production,
shown by the money invested in the property than to the
theoretical cost of dupheating the property, This is because
cost of duplication could only be used as a rate base on a
time of rising prices and could wof be used cn a time of
declining prees, A railroad property is built up through
contributions of capital, which must be represented by se
eurities; and these securities must be maintained at ap
proximately par, in order to sustain the credit absolutely
required for the continuing expansion and improvement of
facilities. If the property in which the capital has been
invested is valued for rate-making purposes at not less
than the amount of investment, it is at least possthle to sus.
tain the credit of the enterprise. Om the other hand, if the
property is valued at fess than the amount actually invested
and represented by outstanding securities, it will be om
posmble to sustain adequately the credit of the enterprise
If reproduction cost, in a time of rissa prices, is utilized
as a rate hase, not only will market valnes of securities rep
resenting actual investment be inflated. but sarpluses will
he earned, which may he used (and have heen used) as the
hasi«s for additional stock ja«nes (lan the expanded hor
rowing power will provide the basis for floating additional
bonds. But, if a period of declimmng prices follows, a lower
rate base, founded on reproduction cost, cannot be estab
lished by the regulatory commission without impairing the
eredit which the previous actions of the Commission have
LAELIA IEA ER BEEN, ea are Rs aw
45
built up, and which must be sustained in order to promote
the most efficient public service.
Therefore, a regulatory commission knows that a repro-
duction cost factor, utilized in favor of the interests of the
sellers today, simply cannot be utilized reciprocally in the
interest of the buyers tomorrow, Thereby, it is evident
that to give dominant weight to this factor is to adopt for
regulation today a principle which cannot be applied to
regulation tomorrow.
On the other hand, when the Commission considers the
factor of the money investment necessary to build up the
existing properties, the Commission knows that. if. that
money has heen prudently expended and if outstanding
securities represent the investment prudently made, then
rates which provide a fair return upon that investment will
sustain the credit of the company in a time of either rising
prices, or falling prices. Merely by shifting the amount of
the fair return to meet the current rates for money, the
Commission will be able to sustain the credit of the enter.
prise. If prices fall and it is urged that the properties
could be duplicated for less than the amount of money in-
vested in them, public policy in favor of protecting invest-
ment and sustaining the credit of public service enterprises
will prevent any actual duplication and will justify the
charging of rates necessary to preserve the valnes of out-
standing securities in order to give investors a reasonable
return and to sustain credit so that the service may be im
proved and extended. [Certainly the judicial authority
would tread firmer ground in protecting an actual market
value of securities representing investment than in pro-
tecting a theoretical monopoly value which investors never
have realized and never will realize without the aid of spe.
cial legislation. ]
On the other hand, in a time of rising prices, although a
stable rate base might deny to the owners of securities a
% eis COPMIE REL E TOPO REE MES, TERRA RET RETIN OR ES YE RS
WRB Reg BRS PEO REE OTS TNL, ORR RER ss
“I
46
temporary speculative profit, they would have little cause
to complain of rates sufficient to give them an income equal
to the current fair return upon similar investments, and a
market value of one hundred cents on the dollar in the case
of the sale of securities, Therefore, from the standpoint
of seeking a principle of rate-regulation which can be ap-
plied permanently, regardless of shifting price levels, a
regulatory commission is compelled to accept the fact that
investment is a far more useful factor than reproduction
cost, in stabilizing security values, in sustaining credit, and
in doing equal justice to sellers and buyers at all times
There is, of course, still left open to the sellers the ‘‘de
preciated dollar’? argument—-a claim of little benefit: to
bondholders and, therefore, simply a claim that railroad
stockholders should be given an economic security not pos
sessed by any other class of investors in the nation,
The ‘‘Depreciated Dollar’’ Claim.
It seems unnecessary here to review the many arguments
which have been presented aguinst the validity of the ‘de
preciated dollar’’ claim. It is dealt with in the report of
the Commission and presumably will be dealt with in other
briefs. It ix, however, peculiarly pertinent to the present
argument to point out that the depreciated dollar claim is
a claim for equitable consideration and not the claim of a
legal right, Millions of people bay life insurance policies
to protect those near and dear to them, when they them
selves, have gone They pay premiums in dollars saved by
personal eacrifice. If prices fall, their beneficiaries may
receive more than was sacrificed If prices rise, their
heneficiaries may receive much less than was sacrificed
Trust funds are bmilt op for private persons, donations are
made to universities, hospitals, churches and charities. In.
vestments for eoch purposes are made in bonds, bearing a
fixed interest, payable nitimately in dollars. In other words,
the noblest, moxt aneeclfish uses of money require reliance
npen a retorn in meaner for money invested.
, - . ns eeceenoeeeouiemnnnems a
? ve STE PEO RS AEA LENT PRINT OF EME TIRE Re
ee ee STE Uae ate 4
47
The great enterprises of the community rest upon bor-
rowed money; national, state and municipal bonds and
corporation bonds. The railways have been constructed
and extended largely by borrowed money. The imperative,
dominating need in the establishment of public policy,
whether in regulation of public utilities or otherwise, to
promote the security and comfort of the vast majority of
the people of the nation, is to insure the stability of money
returns from money investment,
To secure a stable purchasing power for money seems to
be an appropriate ideal for private or political action. So
far as such stablization can be reasonably accomplished,
it will eliminate the depreciated dollar issue. But in the
absence of effective stabilization, in the face of fluctuations
in purchasing power whereby benefits ebb and flow. be.
tween creditors and debtors, between buyers and sellers,
there ix no possible justifieation for the exercise of legis.
lative power to save one group of investors from losses
suffered by vastly larger and more important groups of
security holders. Let it be clearly understood that the ben-
efit to be hestowed upon the railroad stockholder cannot be
obtained except by imposing additional sacrifice upon those
who have not received the same special treatment. Bene
ficiaries of life insurance policies, the beneficiaries of trust
funds, the holders of public and private bonds, would all be
required, ont of their income having a diminished purchas.
ing power, to make up the loss of purchasing power suf.
fered by holders of railway stock.
There is no equity in the depreciated dollar argument. It
could have a sound basis only if it were necesary thus
fo increase the purchasing power of the stockholders divi-
dends, in order to sustain the credit of the enterprise. That
argument cannot be made because, ax previously shown, a
fair return upon investment fixed by current rates for
48
money will necessarily sustain the values of securities rep.
resenting investment and sustain the credit of the enter.
prise,
Let us consider another factor mentioned in Smyth y,
Ames and frequently derided as a basis for measuring
‘fair value’’. It is a factor which has a clear bearing
upon fair rates. This factor is ‘‘probable earning capac
itv’’. If a large amount of traffic can be carried over the
same rails, the property will produce a higher return from
a lower margin of profit, that is, out of lower rates, than
if a small amount of traffic is carried. Such an earning
capacity gives greater value to one private property than
is found in a similar property that may have cost as much,
but has not the same earning capacity. But in fixing rates
which must be the same rates for the same service, there
must be an averaging of the earning capacities of the rail
roads affected, so that in the aggregate they will earn fair
returns. Congress has so directed the Commission to fix
rates in Section Mia of the Interstate Commerce Act. (Dis.
cussed later in this brief under Point 9) Bat it is not here
contended by anv party that two lines of railroad, having
the same original or reproduction cost, should be given dif.
ferent values as a bmais for rate making because one has
a greater earning capacity than the other, Yet, according
to all standards for valuing property used in private bus.
hess, the two properties would hare different values, al.
though their actual cost of construction or theoretical cost
of reprextaction might be the same
It must be evident that the legislative power of rate regu.
lation becomes in operation a power of value regulation
Therefore, in determining what rates ought to be charged,
what rates are reasonable rates, the regulatory power must
determine what values are reasonable values to be realized
out of the use of property in public service. The moment
a formula is laid down whereby a regulatory commission is
49
deprived of the power of compromising the conflicting,
economie claims of buyers and sellers, and is required to
adopt a formula for determining the value of the seller’s
property and thereby the value of the service rendered to
the buyer, this vital and far reaching legislative power is
destroyed by substituting for the legislative discretion a
judicial discretion in determining how the conflicting eco-
nomic interests shall be compromised.
Point 6.
The Supreme Court has consistently maintained:
(a) That the rate making power is legislative.
(b) That there is no formula for finding the value
of a public utility property.
‘The rate making power is a legislative power and
nevessarily implies a range of legislative discretion."’
Minnesota Rate Cases, 230 U. 8. 352, 432
‘It is the province of the Legislature to make the
law; and when the Legislature or the body acting under
its authority establishes the rate to be thereafter
charged by the carrier, it is the duty of the courts
to enforce the rule of law so made unless the consti-
tional limits of the rate making power have been
transgressed. The rate making power necessarily im-
plies a range of legislative discretion; and so long
as the legislative action is within the proper sphere,
the courts are not entitled to interpose and upon their
own investigation of traffic conditions and transpor-
tation problems to substitute their judgment with re-
spect to the reasonableness of the rates for that of
the Legislature or of the railroad commission exercis-
ing its delegated power."’
Lowsedle & Nashville Railroad Co. v. Garrett,
231 U. S. 298,
**Rate making is no function of the courts; their
duty is to inquire concerning results, and uphold the
guaranties which inhibit the taking of private prop.
50
erty for public use without just compensation under
any guise.’’
Pacific Gas and Electric Co. v. City and County of
San Francisco, 265 U.S. 403.
The making of rates ix a legislative, and not a
judicial, function.”
Terminal Railroad Assn. v. U. S., 266 U.S. 17.
‘What the company is entitled to demand in order
that it may have just compensation is a fair return
upon the reasonable value of the property at the time
it is being used for the public. * ° * The ascertain.
ment 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 con-
sideration of all relevant facts."’
Minnesota Rate Cases, 280 U.S. 352, 434.
Georgia Ry. and Power Co. v. R. RB. Commusswon,
262 U.S. 625.
Standard Oil Co. x. Southern Pactfie Co., 268 US.
146.
In refusing to authorize the applieation of a formula, it
was held in the Georgia Power Case, just cited, that ‘*‘the
refusal of the Commission and of the lower court to hold
that for rate making purposes the physical properties of
a utility must be valued at the replacement cost leas depre-
ciation, was clearly correct.” Likewise, in the last case
cited, it was held that ‘‘neither cost of reproduction new,
or less depreciation, is the measure oF sole guide’ in find-
ing **value’’.
The statements just quoted are peculiarly important
because they are both followed by the quotation from the |
Minnesota Rate Cases, transcribed above. Furthermore, |
in the Georgia Case, the opinion of the court was accom
panied by one dissenting opinion in which Mr. Justice Me-
Kenna asserted that the problem of valuation was, in hist
opinion, ‘‘direct and simple—with no baffling element ip
it.’ He continued: ‘Tt was only to find the reproduction
_—
51
cost of the utility and this necessarily was constituted of
the cost of its materials and the cost of their fabrication,
less an estimate of depreciation from the new. These
costs and depreciations representing its value at the mo-
ment of time it was being regulated and being used by
the public, such moment being the time prescribed by the
law for the determination of its value—determination of
that upon which the rate for its use was to be based.’’
Thus it appears that in 1923 only one member of the
Supreme Court (now deceased) took the position that there
was a formula for finding the value of a public utility prop-
erty for rate making purposes. This formula he stated;
and it is precisely the same formula which counsel for the
carriers are now seeking to have the court adopt. But
the opinions of all the other members of the court have
squarely asserted that valuation is not a matter of formula,
but that there must be a ‘‘reasonable judgment having its
basis in a proper consideration of all relevant facts’’.
These relevant facts have been detailed in the familiar quo-
tation from Smyth v. Ames, which is repeated in the Min-
nrsota Rate Cases, supra, and in the Georgia Power Case,
supra, It is perfectly clear that these ‘‘relevant facts’’
are those necessary for consideration in determining what
are reasonable rates.
Thus, in substance, the court more than thirty years
after the decision in Smyth v. Ames is still refusing to an-
nounce that public utility properties must be given a value
to be determined by following a judicial rule—-a value
which would absolutely prevent the exercise of legislative
discretion in rate making. But the court has repeatedly de-
cided that rates and the resultant values of public utility
properties must be determined by the exercise of a reason-
able judgment, by the legislature or the commission law-
fully constituted by it to exercise such judgment. Minne-
sota Rate Cases, supra, p. 433.
RANT AONE EOP FUE EE IM SPL LOL G9 RISE NE AE AE RR RS re
52
PART II.
THE UNDERLYING ISSUE IN A VALUATION CASE.
Point 7.
The underlying issue in a valuation case, as in any rate
regulation case, is: What is a fair price for the public ser.
vice rendered’?
The general underlying issue which is involved in this
case is the ancient one of ‘‘the fair distribution of the re-
wards of industry.’’ The particular underlying issue which
must be decided is the equally ancient one of ‘‘the fair
price’’—the inevitable difference of opinion between the
seller and the buyer of a commodity or a service.
Naturally a seller desires to charge the highest possible
price (consistent with the largest aggregate profit) and a
buyer desires to pay the lowest possible price (consistent
with the largest aggregate service). When prices are de-
termined by private bargaining, the seller and buyer at.
tempt to justify their respective demands by ethical argu-
ments——since man is a moral, reasoning animal. But in the
end the dominance of the seller or the buyer is determined
by economic power, by the control of the market, sometimes
inadequately described as the law of supply and demand.
When the government takes upon itself the decision of
this ancient and not altogether honorable controversy, be-
tween the seller and the buyer, the ethical arguments gain
importance because modern government (or at least, let us
say, government under the Constitution of the United
States) rests on moral sanctions. Justice is to be estab.
lished, domestic tranquility insured and the general welfare
promoted.
EEN TLIO LL SAS
53
A commission is created to ascertain and to enforce the
charging of ‘‘just and reasonable’ rates. The ethical
standard is explicitly stated. The governmental power is
called into action primarily for the benefit of the users of
public utility service. But public power is not to be exerted
solely in behalf of one class of citizens, and ‘*just and rea-
sonable’? rates must be just and reasonable to the sellers
as well as to the buyers. Thus we find provided also the
requirement that there shall be a ‘‘fair’’ return to the sell-
ers upon the ‘‘fair’’ value of the property used for public
service. The ethical standard again is explicitly stated.
The following quotation contains a typical expression of
the ethical concept which dominates judicial opinions upon
rate regulation ;
‘There must be a fair return upon the reasonable
value of the property at the time it is being used for
the public.”’
Willcox v. Consolidated Gas Co., 212 U.S. 19, 41.
Missourt ex rel. Southwestern Bell Tel. Co. v. Pub-
lic Service Commission, 262 U. 8S. 276.
It may be pointed out that we are here considering what
may be called material ethies rather than spiritual ethics.
It is not necessary to state a moral code based upon meta-
physical conceptions of what is right and wrong, or good
or bad. The ethies involved are those of enlightened self-
interest, that is, immediate self-interest. If the buyer pays
induced to furnish,
extend and improve the service he desires. If the seller
charges more than a fair price buyers will not use the
less than a fair price, sellers will not be
ser-
Vice to its utmost capacity ; community prosperity will be
retarded ; buying power will be reduced.
The Ethical Standards of Regulation
It seems necessary to recall attention to the underlying
issue in public utility rate regulation and to the ethical
54
standards which it is the duty of a regulating commission
to enforce, because, in the arguments made in behalf of
both sellers and buyers before courts and commissions,
there is a constant confusion of appeals to ethical consider.
ations and assertions of arbitrary rights resting upon sup-
posed sovereign or economic law. There are claims that
governmental power must be exerted to enforce the alleged
rights of one party regardless of what is fair to the other
party, or that economic power must he permitted free exer.
cise regardless of what is fair to the party thus coerced.
It is respectfully submitted that, if a just decision is to be
rendered upon the ixsue now before this court, it is neces.
sary at the outset for the court to found its consideration
upon this proposition :
Every theory * * ° every argument * * ° every
claim of legal right * * * every assertion of economic
* * * must be tested by the standard of what is
fair to the other party.
A legal right to an excessive profit cannot be asserted
to prevent the Interstate Commerce Commission from ful-
filling its legal obligation to fix a ‘just and reasonable”
rate. The protection of an economic power to charge an
excessive selling price cannot be demanded from a Com
mission which is established for the very purpose of pre
venting such an abuse of economic power. The legal rights
and economic powers which may be found in private prop-
erty when devoted to private competitive enterprise cannot
be asserted as legal rights and economic powers of private
property when devoted to public service and subjected to
public regulation for the very purpose of preventing the
unjust exercise of legal nights and economic powers.
It is quite evident in reading the briefs he retofore sub
mitted by counsel for the carriers in this proceeding (whiek
follow the lines of arguments usually made by pubhe utility
lawyers to courts and commissions) that they are demand.
55
ing legal sanction for the highest possible selling price for
the service which they furnish, although the very purpose
of rate regulation by public authority is to prevent the
charging of such a price.
Is the Highest Possible Price a Fair Price?
The carriers claim: (1) that they should be reimbursed
in the rates for all operating costs including labor and
materials necessary to maintain their properties in good
operating condition; (2) that the rates should permit them
to accumulate the necessary depreciation reserves to re-
place large units which become inoperative or obsolete ;
(3) that they should be reimbursed for all taxes paid; and
(4) that, having been protected against any possible expen-
ditures ont of profits they should then receive, as net profits
out of the use of private property, a fair return upon the
present market values of all lands plus the reproduction
cost at present prices of all their physical properties (with-
out deducting any depreciation for expired service-life),
including in that reproduction cost a return on many un-
realizable, wholly theoretical ‘‘increases’’ in ‘‘value’’; and
a return on all imaginable intangibles such as *‘ going con-
cern value’’. Without pausing to criticise the absurd in-
flations of reproduction costs in the methods utilized by the
carriers” imaginative estimators, it should be pointed out
that on no conceivable theory could private property util-
ized in private competitive business earn regularly as large
profits as those claimed for the public utility owners.
When current prices will cover operating costs, mainte-
nance, taxes, depreciation and a ‘‘fair return’’ on all pos-
sible capital outlays (including the present cost of dupli-
eating the identical plant and business) there will be no
lack of competitors, where competition is possible. Such
prices clearly exceed the highest possible prices which can
be maintained in a competitive market, because competitive
56
prices will ordinarily produce much less, and cannot pro-
duce regularly so large a return on capital invested.
‘‘On account of this tendency of prices to equal the
expense of production, the expense of producing a unit
of a commodity is called its normal value.’’ Ely, Eco-
nomics, Book 2, p. 172 (1909).
‘*A competitive standard is a cost standard. Where
two or more producers are competing for the sale of
the same article, and that article is capable of bein
reproduced in unlimited quantities, the price will ten
to settle at the cost of production. This, however, is
not the cost to the marginal or high cost producers, as
is often erroneously imagined; it is the cost to the most
efficient producer who in time increases the volume and
reduces the price of his product to the extent that in-
efficient producers whose costs exceed the price are
driven to the wall. The result is that the least cost in
the long run becomes the standard of competitive cost,
and the public gets the service upon the best terms pos-
sible. It is this cost-of-service principle, that regula-
tion is striving to preserve.
° . * 2 .
‘*Regulation of public utilities in the United States
has as its deepest purpose the perpetuation of ideals
and standards attained in the field of natural competi-
tion. Any other presumption or conclusion would
ignore the fundamental principles of American indus-
trial development and place the purposes of law and
economics at variance."’
Kirshman, The Principle of Competitive Cost in
Public Utility Valuation, 35 Yale Law Journal
805.
Government regulation was established for the purpose
of deciding the age ald issue hetween the seller and the
buyer upon the ethical standard of a price that is ‘‘fair"’
to both. Yet the carriers are demanding that government
regulation, established primarily for the purpose of pro-
tecting the buyrr against the oppressions of a government
created monopoly, should now be utilized to insure so far
as possible to the seller the highest possthle selling price
which he can exact from the buyer. The price sought is
pe RES EDGR TI SEER
—
57
higher than any which can be maintained in a competitive
market—and therefore is a ‘‘monopoly price,’’ as herein-
after defined. This oppressive demand is presented in the
disguise of a ‘‘constitutional right’’.
‘*‘What the Traffic Will Bear.’’
There should be no misunderstanding of the true nature
of the contentions of the carriers in this and similar pro-
ceedings. [It is submitted that the claim of one carrier in
one proceeding can be properly tested by considering the
aggregate effect of the consistent claims of all the carriers
in similar proceedings.| They are seeking to obtain the
right to charge ‘‘all the traffic will bear’’. This theory of
rate making has been advanced persistently by the car-
riers and other public utilities ever since government reg-
ulation began.’ The carriers generally admit (and admitted
specifically in the recent western rate case, 113 1. C. C. 3),
that af the moment the traffic will not bear the rates which
they claim they are entitled, as a matter of law, to charge.
The carriers are asserting a legal right to charge rates
vastly in excess of what the traffic will bear. Thereby, they
are laving the foundation for indefinite claims for increases
in the event that the traffic will stand the strain.
“What is clear is that the value of railroad property is no basis for
rate making An arbitrarily established 5%% on value, when found,
might well inflict gross injustice upon the shipper and put into the rail-
road treasuries a sum greater than the worth of the service rendered.
There have been many suggestions and many legislative attempts to fix
an arbitrary basis for rates by limiting earnings. Every single one of
these has failed The proper baste is just as clear today as it was thirty
years ago it is what the traffic will bear”
~Editorial, Wall Street Journal—Auguet 2, 1926.
“It in highly tmprotmtle that it would ever be possible to get the
railways to agree to seek an advance in rates sufficient to give a so-called
fair return on a reproduction cost valuation Their managers would
know that if they did so they would encounter the united opposition of
regulating commissions and shippers, and would arouse public sentiment
tore hostile than ever existed before Railway officers fully realize that
rates should be made not only in accordance with what the traffic will
bear, but aleo in accordance with what public sentiment will stand.”
83 Railway Age, 1147 (1927).
——__ ELE IR LAER CAA OE LEER TN CE OEE RE,
58
Is it not clear that the very fact that the railroads today
cannot charge the rates which they claim they are entitled
to charge (as a matter of legal right and as a matter of
economic right) shows that they do not possess the legal
and economic rights which they claim? They claim that the
‘value’ of their properties is equal to their reproduction
cost and therefore that reproduction cost estimates must
control the fixing of the amount of value. They themselves
insist that the word ‘‘value’’ is here used in its ‘ordinary
meaning’, which is ‘* pecuniary value’’ or ‘market value",
or in the terms of the economists, ‘‘value in exchange”.
Yet every such ‘‘value’’ is absolutely determined by ¢arn-
ing power and the carriers themselves must freely admit
that their properties do not have today the earning power
necessary to support the values claimed.
Let us suppose that an individual had built a factory in
1914 which cost him $1,000,000 and that the most he had
ever been able to make out of its operation was $40,000 a
year. Suppose he employed an engineer to make a theo.
retical estimate of the ‘‘reproduction cost’’ of his factory,
together with a large addition for the ‘going concern
value’ of his 4 per cent business, and thereby he arrived
at a reproduction cost new (without depreciation) of
$2,500,000. Would a bank lend him $1,000,000 at 5 per cent
on that security, knowing that the present net earnings
would fall short of paying the interest on the loan by $10,
000! Would any impartial judge fix the ‘‘valuc’’ of that
property at $2,500,0007
It will he the purpose of present counsel subsequent!)
to demonstrate that reproduction cost cannot be accepted
as the measure of ‘‘value’’ under any definition of the word
‘‘yalue’’. But for the moment it is desired merely to point
out that when counsel for the carriers admit that the traffic
will not produce the earning power necessary to substanti-
ate the pecuniary or market ‘‘value'’ which they claim as
ALOE DELS SN AIOLL LL PELE ELI EL LILLE AS BEETLE ER
_
59
the ‘value’ of their properties, they reveal in a white light
the fictitious nature of the entire ‘‘value’’ claim. They
themselves admit that in fixing ** just and reasonable’’ rates
the Commission ts not required to provide a fair return
upon the “‘value’’ which they claim. Thereby, they admit
that such a value does not e¢rist, either as a rate base or a
‘‘market value’’ or a ‘‘fair value’’ or any other kind of a
‘*‘value’’.
The Cost of Service—as a Measure of the Fair Price
If the establishment of a ‘‘fair value’’ for rate-making
purposes is recognized as one of the objectives of the rate
fixing process, instead of being regarded as a prerequisite
base, the question remains: How can a fair price be fixed
hefore the ‘‘fair value’’ of property used is fixed? The
method is clearly indieated) as soon as one realizes that,
where there is no legislative rate making, prices are always
fixed without a prior determination of value; and the same
factors that determine unregulated prices can be utilized
te fix regulated prices. These factors are (1) Cost; (2)
Profit; (3) Bargaining power.
Cosr.
Whether a seller furnishes goods or service his first con-
sideration in fixing a price is to get back his out-of-pocket
cost. Without argument it will be accepted that the seller
ought to get back this cost—although under stress of com-
petition the seller is not always able to do this. This cost
will include labor costs, material costs and capital costs—
actually paid out.
Prortr.
In addition to getting back his out-of-pocket costs, the
seller will desire to obtain a ‘‘profit,’’ within which term
we will include compensation for his own services and com-
——— MINI LAT TOL ONIN EL ARE SIE SEU ae EN Oe
60
pensation for the use of his own property. Despite much
discussion and many efforts to establish standards for fix-
ing a ‘‘reasonable compensation’’ for personal services or
for the use of property, we are left, in a competitive eco-
nomic system, with only one clear standard, which is; ‘‘mar-
ket value”’ in a ‘‘fair market’’—meaning a market in which
there is an even balance of bargaining power between
sellers and buyers. Since supplies and demands cannot
remain in perfect balance *‘market values’’ are constantly
changing and a ‘*fair market” is only an ideal, But *‘com-
petitive prices’? measure (within a considerable range of
variance) that margin of profit to the individual which is
commonly accepted as ‘reasonable’’ compensation for the
use of his services or his property.
Baraarnine Powen,
Since, therefore, we are forced to find in competition the
sole basis for determining what is a ‘‘fair price,"’ it Is clear
that an advantage of bargaining power will drive prices
either up toward ‘‘monopoly prices,’’ obtainable where
sellers dominate the market, or down toward ‘‘confiscatory
prices,”’ obtainable where buyers dominate the market. Be-
fore attempting the difficult task of defining these prices, in
a manner consistent with judicial opinions, let us point out
that there are two kinds of ‘‘cost’’ that both play a power-
ful part in determining the competitive price for a service—
the actual original cost of producing the service and the
present theoretical cost of duplicating the service. If the
buyers have the advantage of bargaining power, they will
drive prices down toward actual cost, toward the prices at
which supplies will diminish and prices will rise. If the
sellers have the advantage, they will drive prices up toward
present cost of duplication, toward the prices at which sup-
plies will increase and pr.ces will fall.
ee ae
61
Thus we see that, although one set of ‘‘costs’’ will pro-
vide no safe measure of ‘‘value,’’ consideration of both sets
of ‘‘costs’’ will help us to locate the field of ‘‘competitive
prices’’ and thereby to estimate what a ‘‘competitive value’’
would be. Thus reports of original and reproduction costs
will furnish factors useful for consideration in fixing a
“fair price.’’ With these costs of public service before us,
it becomes necessary to assume the existence of a continu-
ing competition in the furnishing of this service. This is
merely the assumption that there has been at all times a
balance of bargaining power between the sellers and users
of public service (which would prevent the sellers from
charging more than ‘‘fair prices’’). This assumption is
based on the public policy actually adopted, whereby, in-
stead of engaging in active competition with privately
owned utilities, in order to obtain competitive rates, the
legislative power has been exercised to give the public the
same protection through rate-regulation. This is the only
practical method (so far discovered) of encouraging pri-
vate interests to engage in public service and of protecting
public interests at the same time.
If the legislative power should be denied the right to fix
rates so as to compel public utility owners to charge no
more than ‘‘fair competitive prices’’ there would be a clear
duty imposed upon the legislative department to exercise
its undoubted power to engage in active competition.
‘*The power to construct or to authorize individuals
or corporations to construct national highways and
bridges from state to state is essential to the complete
control and regulation of interstate commerce."'
California v, Central P. R. Co., 127 U.S. 39. Ap-
proved in Dayton Goose Creck Railroad Com-
pany v. United States, 263 U.S. 456, 479,
No monopoly is so entrenched in property rights as to
make a competitive service impossible in this rapidly chang-
ing world. If the railroads of the United States could not
ae PIM EN INTE NRE, SONI ELS OLLI? ENTE IS ONAN
“7
62
be taken for public use without paying a compensation equal
to their ‘monopoly value,’’ based on the theoretical cost of
duplicating the identical properties—other means of com-
petition would not be lacking.
Already surfaced highways link together inore cities and
towns than are served by the steam railroads. The com-
mercial use of airplanes is in its infancy and the airways
are as yet not subject to private property rights. Engi-
neers have pointed out long ago the appalling waste of
energy in hauling a train weighing ten times the weight of
its passengers, in order to transport these persons by rail;
and have called attention to the fact that motor buses hau!
practically their own weight of passengers.
The legislative power is still adequate to compel common
earriers to charge fair competitive rates through creating
actual competition in service, without duplicating the tden
tical properties now used. But it is hardly to be assumed
that such means are necessary. It would require an ex-
traordinary change in the legal principles that have been
developed and maintained for centuries, to bring a ruling
that the legislative power of rate regulation is not sufficient
to insure the furnishing of public service at the same ‘rea
sonable rates’ that would be obtainable through the har
gaining power of actual, fair competition,
Nor is it to be expected that the exercise of legislative
judgment in fixing rates in the rather large field of com.
petitive prices will be subjected to judicial revision; be
cause, in the long run, the final decision must rest in the
legislative department. Having determined the prices at
which a fair competition can be maintained, the legislative
power, in protection of the public interest, must finally de
cide to enforce the charging of such ‘fair prices,”’ either
by the governmental power of rate regulation or by the
governmental power of competition. Such a determination
of public policy is a purely leguslatire act.
z MO Vat rok, ce Sas Sa ths Co saa nt Oa F ENF EAS RIN Th REE OLORE Y
63
Legislative Power to Determine Public Policy.
‘*Where the lawis * * *° calculated to effect any
of the objects entrusted to the Government, to under-
take here to inquire into the degree of its necessity
would be to pass the line which circumscribes the ju-
dicial department, and to tread on legislative ground.’’
Marshall, C. J., in McCulloch v. Maryland, 4 Wheat.
(U. 8S.) 316, 423.
‘‘Nor was the holding of the court final upon the
point of public policy. The legislature, provided it
acts within its constitutional authority, is the arbiter
of the public policy of the state.”’
C. RB. d Q. Railroad Co. v. McGuire, 219 U.S. 549,
565.
To the same effect is
Interstate Commerce Commission vo 1. C. R. R.,
215 U.S. 452, 470.
“The public policy of a State is to be found em-
bodied in its constitution, its statutes, and, when these
are silent on the subject, in the decisions of its courts.
The public policy of the State, when not fixed by the
constitution is not unalterable but varies upon any
given question with changing legislation thereon, and
any action which, in the absence of legislation thereon,
by the decisions of the courts has heen held contrary
to the publie policy of the State, is no longer contrary
to such public policy when such action is expressly
authorized by legislative enactment.”’
The People v. City of Chicago, 321 I. 466-475.
Does it not follow that legislative power exists to enforce
legislative policy? Therefore it should be clear that the field
of legislative power in rate making extends between monop-
aly prices and confiscatory prices, covering a wide range of
competitive prices, wherein the exercise of a ‘‘reasonable
judgment
is not subject to judicial review.
Point 8.
The sole question to be presented for judicial review is:
Has a ‘‘monopoly price’’ or a ‘‘confiscatory price’’ been
established?
The Interstate Commerce Commission has been author-
ized only to establish ‘‘ just and reasonable’’ rates. There-
fore, such unreasonable rates as might be charged (1) in the
absence of competition, or (2) in the presence of destrue.
tive competition, could not be established within the dele.
gated power. Thus only fair competitive prices are compre.
hended within the range of legislative discretion; and for
convenience and clarity of discussion we may be permitted
to define the field of discretion in rate-regulation as follows:
There is a central line where the bargaining powers of
sellers and buyers are evenly balanced, where competitive
conditions are ideal. From this line the field extends to
right and left into domains where sellers and buyers re-
spectively have an incrensing advantage in bargaining
power, until we reach a zone of uncertainty at each end of
the assured field of regulatory power. In these zones of
uncertainty the judicial power may, in the exercise of its
‘independent judgment,"’ determine: (1) that too great
**power to command a price’’ has been given to the sellers
and ‘‘monopoly prices’ have been fixed; or (2) that too
great ‘‘power to command a price’’ has been given to the
buyers and ‘‘confiscatory prices’’ have been fixed. Under
the standard of *‘reasonable rates’’ the owners of property,
used in public service, are entitled to realize ‘‘ reasonable
values’’ for such property. It follows that unfair competi-
tive prices will confer either a ‘‘monopoly value'’ or 4
*‘confiscatory value’’ upon the property used. Therefore,
we are justified in defining the field of judicial review as
z=
comprehending those ‘‘monopoly prices’’ or ‘‘confiscatory
prices’? that are clearly more or less than ‘‘fair competi-
tive prices.’’
(a) A ‘‘monopoly price,’’ as here defined, is one clearly
as any price obtainable by sellers under fair
competitive conditions.
(b) A ‘‘confiscatory price’’ as here defined, is one
clearly less than any price obtainable by buyers
under fair competitive conditions.
In order that the foregoing definitions may be serviceable
in the present discussion, it is necessary to emphasize that
the standard of ‘‘fair’’ competitive conditions must be also
defined and the word ‘‘clearly’’ must be liberally construed
—or there will be an unwarranted contraction of the field
of legislative discretion.
**It is fundamental that the judicial power to declare
legislative action invalid upon constitutional grounds
is to be exercised only in clear cases. The constitu-
tional invalidity must be manifest and if it rests upon
disputed questions of fact, the invalidating facts must
be proved."’
Minnesota Rate Cases, 230 U.S, 352, 452.
65
We are now faced with the necessity of describing with
some accuracy the field of fair competitive conditions so
that lines may be drawn between fair (competitive) prices
and either excessive (monopoly) prices or insufficient (con-
fiscatory) prices. A clear understanding of (1) what are
competitive conditions, (2) when they are ‘‘fair,’’ and (3)
what are fair competitive prices, is indispensable to a ra-
tonal criticism of rate-regulation. Under other social, po-
litical and economic systems there might be more easily
defined standards of ‘fair prices’’ and ‘‘fair values’? (al-
though we have no assurance that they would be better
standards). But we must face the fact that under actual
present conditions we have no standards of *‘fair prices’’
or ‘‘fair values’’ except the prices and values which
actually prevail in a ‘‘fair’’ market—which is a free market
where neither seller or buyers have any special advantage
in bargaining power.
The fact that actual ‘‘market value’’ is the only real
value which can be ascertained as an economic fact at a
particular time, has been recognized and clearly stated by
the economic and legal authorities (including the Supreme
Court) which are quoted in this brief under Point 4, b,
supra. There has been, however, comparatively little ju-
dicial discussion, in rate regulation cases, concerning what
are fair competitive conditions that create and maintain
a fair market. Yet ‘‘fair prices’’ and ‘‘fair values’’ can
not be found anywhere except in a fair market. If such
prices are to be established by law (instead of being fixed
in an actual market) the rate-making legislative power must
choose: either to create an actual market by establishing
actual competition, or to create the standard of a free and
fair market by assuming conditions of free and fair com.
petition.
Such a standard has been stated by the Supreme Court
of Illinois in the following language :
‘*Fixing rates by public authority may secure to
each individual the sienaieen of collective bargaining
by all in behalf of the whole body of consumers and
result in such a rate as might properly be supposed to
result from free competition, if free competition were
possible.’’
State Utilities Commission v. Springfield Gas Com-
pany (120), 201 TL, 208, 2s.
Is this standard of rate-regulation and value regulation
inconsistent with any principle announced, or any decision
made, by the Supreme Court of the United States? It is
useless to follow counsel for the carriers through all the
devious paths of argumentation whereby they seek to estab-
lish a legal right to charge unjust and unreasonable rates
It is unnecessary to comment upon quotations from judicial
—
67
opinions with which they seek legalistic justification for a
violation of their legal obligation to charge just and rea-
sonable rates. The question just stated still remains un-
answered.
It is only necessary to review the holdings of the Supreme
Court, from the decision in Munn y, Illinois down to date,
to demonstrate that this court has never held that rates for
public utility service must be based upon a valuation of
property that would compel the users to pay a monopoly
price or the highest possible price, or any price greater than
the reasonable worth of the service to the users. Such a
review appears in many recent opinions of this court and
need not be duplicated here. There have been written, how-
ever, many opinions of the court, denying that a. public
utility has a constitutional right to charge more than the
service is ‘reasonably worth’’ to the user; even though
(according to some opinions) ‘‘reasonable’’ rates to the
user may not always provide a ‘*reasonable’’ profit to the
seller, (See, for example, Cofting v. Kansas City Stock
Yards Company, 183 U.S. 79.) But there has been no de-
cision or opinion of the Supreme Court holding that rates
would not be ‘reasonable’? if they were fixed upon the
basis stated by the Supreme Court of Illinois in the opinion
just quoted.
Nor do we believe it can be fairly urged, or that this court
will have much patience with the contention, that, if the
private property of a public utility owner be given a value
which the owner might reasonably expect to reauize in a
state of free competition, nevertheless, the owner’s prop-
erty might thereby be ‘‘confiscated,”” or that he might be
deprived of a ** just compensation’’ measured by ‘‘the es-
tablished principles of private rights and distributive jus-
tiee.’”
Therefore, it is submitted that, if the Interstate Com-
merce Commission, acting under its delegated authority to
fix ‘‘reasonable”’ rates, has fixed such rates anywhere be-
tween monopoly prices and confiscatory prices (as here
defined) with the object of establishing what may be called
‘fair competitive prices,’’ the action of the Commission
has been taken safely within the limits of its delegated
power. if such ‘‘competitive prices’’ have been estab-
lished, then ‘‘competitive values’’ for property must have
been established also and the carriers cannot be heard to
complain that their properties have a much greater ‘‘true
value.’’ A greater value could only result from giving the
carriers a greater ‘‘power to command a price.’’ Such a
value could only result from assuming that the owners
ought to be subjected to less than free competition in the
furnishing of service. To make such an assumption would
be equivalent to granting the owners a partially monopo-
listic power, thus awarding them a monopolistic value for
their property based on a right conferred by law to charge
monopolistic prices.
A Monopoly Price
A **monopoly price’’ is not necessarily as high as an *‘ex-
tortionate price,"’ or a ‘‘hold-up price.'’ The owner of a
property right peculiarly necessary to a buyer may exact
an extortionate price. Bat such prices are obtained in indi-
vidual instances and rarely can be realized in a continuous
course of business. A monopoly cannot count on gouging
the public year after year by charging extortionate prices,
because eventually public or private competition will de
velop, in furnishing either the same service or a substitute
service. In addition to this threat of competition, there is
another natural limitation upon a permane:.t policy of ex-
tortionate prices. Quite commonly larger profits can be
made by selling greater quantities of goods, or more ser-
vices at a lower margin of profit, than can be made by sell-
ing smaller quantities for a greater margin of profit. There-
fore, a monopoly, wisely administered, will not charge ex-
tortionate prices, but will charge the highest possible price
consistent with the largest aggregate profit. Thus we may
expect a ‘‘monopoly price’’ to be a little less than the pres-
ent cost of duplicating the service (including a fair return
upon the necessary investment), because if the price equals
the present cost of duplicating the service, competition is
almost inevitable. This fact is emphasized in Van Hise on
Concentration and Control, pages 84-86, where the learned
author quotes with approval a similar analysis of ‘‘monop-
oly prices’’ by Ely in ‘* Monopolies and Trusts.’
A Confiscatory Price:
A ‘‘confiscatory price,’’ as here defined, is not as low as
a ‘‘cut-throat’’ price. Such prices, which are less than
cost of production and allow little or no profit to recom-
pense the owners of property used, may develop temporar-
ily where there is unregulated destructive competition. But
in a condition of fair competition, it may be assumed that
prices will not be reduced much below the level which will
provide a fair profit. Yet, what sellers will regard as a fair
profit depends largely upon current opportunities for in-
vestment and the returns obtainable on investment involv-
ing sunilar risks of loss and similar chances of gain.
In truth, competitive prices offer a wide range of possi-
bilities, rising to enormous speculative profits and sinking
to no profits at all. Vigorous criticism has been expressed
concerning the results of the competitive price system and
the unwisdom of attempting to regulate monopoly prices
70
upon the assumed basis of free competition.' This eriti-
cism, however, is based on the assumption that free com-
petition may produce anything from speculative profits to
loss of capital—which is true. There is, however, a range
of competitive prices which may be regarded as ‘‘fair’’
which lie between the excessive and insufficient prices which
we are defining now as ‘monopoly prices’? and **confis-
catory prices.”’
We have included within monopoly prices not only those
competitive prices which result from a complete control
of the market, but also those resulting from a partial con-
trol, in the interest of sellers. Likewise we must include
in our group of confiscatory prices, Hot only those which
result from a ruthless, destructive competition where sell-
ers are striving principally to avoid bankruptey in a market
controlled by buyers, but also those unsatisfactory prices
which result from a market partially controlled by buyers.
A Fair Competitive Price
Throughout this effort to define fair prices and fair com-
petitive conditions, it has been evident that it is impossible
to provide a formula or scientific test whereby accountants
and statisticians can take a mass of data and merely by a
series of computations produce figures representing fair
prices, Even where there ix active competition, a study of
"The attempt to carry over into the Geld of the large scale monopoly
the same price system that is assumed to prevail in the Geld of the
small competitive enterprise be heaad to result in a serious misfit One
reason why it ts « mieft i» that the competitive price system disregards
eo ruthiees!y the financial needs of the individeal producer To the low
cost prodecer, it yields profits far beyond the current rate of interest 08
invested cepital. to the bigh cost producer brings deficits that spell
bankruptcy and ruin As jong a6 competition is full and free. this
process hareh though K be to the anfortunate producer, may serve very
well the istorest of (he consumer For what matters it to him that aay
one pradecer is crippled so lone as be can turn to 8 more fortanate rivel
far his necessary serviews and commeditie’ Not so under monopoly
Nat so with « fellway that le alone ip eorving « community ~
fionbriaht. “The Keonemic Merits of Original Cost apd
Reproduction Cost”
Harvard Law Heview. March. 172% 693. 632
se ceciciaseal ca
—7—~V~“~”"
71
existing market prices must be qualified by a judgment as
to the fairness of competition, and the extent to which the
bargaining power of sellers or buyers may have been aided
by temporary, unfair conditions or by unjust use of political
or economic power, Like every ethical problem presented
for discussion and opinion, there must be taken into con-
sideration the balancing and compromising of conflicting
interests, the shifting currents of public and private inter-
ests, the necessities which arise from human weaknesses
and incapacities; and the uncertainties which thwart all
efforts to determine what are the ideal uses of human
strength and capacity.
‘*The boundary at which the conflicting interests
balance cannot be determined by any general formula in
advance, but points in the line, or helping to establish
it, are fixed by decisions that this or that concrete case
falls on the nearer or farther side.’’
Hudson County Water Co. v. McCarter, 209 U. 8.
349, 355.
It is seldom the ideally just, the mechanically perfect,
solution which can be sought as an immediate object of
political action. And so in the regulation of fair prices,
one of the most difficult problems that can be presented for
determination by officers of government, we have been
forced in this country to lay down by legislation, and to
support by judicial opinion, the vague standard of what is
“fair’’ and ‘‘reasonable’’; and to establish commissions
composed of men who may be expected to think and act
impartially upon intimate knowledge of the problems con-
fided to them, and to arrive at a reasonable judgment. Then
unless we permit a fair trial of the results it is practically
impossible ever to determine the reasonableness or unrea-
sonableness of the judgment exercised. The old human road
of trial and error seems unavoidable.
As previously pointed out, any effort to coerce this ad-
ministrative judgment, this exercise of legislative discre-
—
72
tion, by the establishment of formulas for the determination
of what is ‘‘fair’’ and ‘‘reasonable’’ is simply an effort to
destroy the substance of legislative power by denying to
the legislative department the power to determine what
property rights shall be conferred upon, and exercised by,
private persons engaged in furnishing public service, which
will be consistent with and not destructive of the public
interest.
It is submitted that in dealing with the problem of rate
regulation and value regulation which has been presented to
the Interstate Commerce Commission for its solution in con-
formity with legislative standards which have been ex,
pressed in general terms, the Commission has exercised
reasonably the legislative power delegated to it. To dem-
onstrate this, the precise legislative standards provided
must now be considered, and interpreted in the light of the
general standards of rate-regulation heretofore reviewed.
PART IIL.
THE LEGISLATIVE STANDARDS FOR RATE REGU.
LATION AND VALUE REGULATION,
Point 9.
In its exercise of the legislative power of rate-making Con.
gress, in the Interstate Commerce Act, has authorised
and directed the Interstate Commerce Commission:
(a) ‘To determine and prescribe what will be the
just and reasonable’’ rates. (Sec. 15 (1).)
(b) Se “NERD oF tpn ea EAS 80 a8 Be
vide a ‘‘fair return upon the
of railway property. (Sec. 15a (2).)
(c) 2.) imposed on every indi-
vidual railroad in regard to net income exceed
Mh ge a
(6).)
d) To determine the aggragute value throagh is
' individual valuations ‘‘ascertained’’ through
SMA
—
73
‘its investigation under Section 19a,’’ giving
‘‘due consideration to all the elements of value
recognized by the law of the land for rate-mak-
ing purposes.’’ (Sec. 15a (4).)
(Sections 15a and 19a are printed in full in Appendix C.)
There are two particulars in which the legislative action
of Congress providing for regulation of transportation
rates is to be distinguished from previous and customary
rate regulation.
First, the basis of rate fixing is not the value of an indi-
vidual property, but the ‘aggregate value’’ of many prop-
erties which are held in separate ownership.
Second, the rates fixed are expected to provide an exces-
sive return for some property, a part of which is to be
recaptured for public uses.
The effect of these unique factors in rate regulation is
to demonstrate conclusively that the purpose in valuing an
individual property is not to determine an absolute value,
but is merely to fix an amount which will represent the
value which the property should have for its owner in view
of his legal obligation to charge only just and reasonable
rates. Under the scheme of regulation adopted, a carrier
not only may earn and retain 6% of the ‘‘value’’ fixed for
its property, but it may earn much more; and it may retain
one-half the excess earnings which are held temporarily in a
reserve fund, which may be drawn upon to pay returns on
property values in the form of dividends or interest or
rent. But such reserve fund need not be maintained after
it reaches 5% of the ‘‘value’’ fixed.
It should be apparent that the carrier's concept of one
“true value"’ is wholly inapplicable to the methods provided
for fixing values and rates in the Transportation Act of
1920. In Dayton-Goose Creek Railroad Company v. United
States, 263 U. 8, 456, counsel for the carriers made the fol-
lowing claim, according to the opinion of the court:
“The value of property, it is argued, really depends
on the profit to be expected from its use and should
—_ MEINE LIE ee ap ee AO RO A NO OS
74
be calculated on the income from rates prevailing when
the law was passed, which must be presumed to have
been reasonable.’’
The court held that this argument was not open to the
carrier on the record because the carrier had not made the
issue before the Commission that the value reported by
it to the Commission was not the ‘‘true value."’ As a re-
sult, it was held:
‘*We cannot consider an issue of fact that was pri-
marily at least committed by the act to the Commission,
when the carrier has not invoked the decision of that
tribunal."’
Although the Supreme Court did not pass upon this
‘‘valne”’ claim of the carrier, it must be clear that the claim
could not have been sustained. If the *‘true value’’ of the
carrier property must be calculated ‘‘from rates prevail-
ing,”’ then no excess income could possibly be recaptured
and prevailing rates producing unjustifiable profits could
not be reduced. On the other hand, if existing rates were
insufficient for many carriers they could not be increased
because, by the same circuitous reasoning, these rates would
also provide a fair return on the value of the property
ascertained by capitalizing the net income under existing
rates.
But the claim of the carriers in the Dayton-Goose Creek
Case did emphasize one fact in conflict with the present
claims of the carriers, which is that ‘‘value’' in the ordinary
sense must depend upon earning power. Thereby, it is again
made evident that the value to be fixed by the Interstate
Commerce Commission is not the value that properties
have under existing rates, or might! have under rates which
could be charged, but the value which they ought to have
under reasonable rates.
The entire opinion in the Dayton-Goose Creek Case
illuminating in showing the many factors which must be
considered by the Interstate Commerce Commission in fixing
reasonable rates, in accordance with the existing law. Fur-
75
thermore, the opinion, in emphasizing that the carriers have
no constitutional right to expect such profits as may be
obtained from private enterprise, demonstrates clearly that
the carriers have no constitutional right to have their prop-
erties valued on the same basis as properties would be
valued when devoted to private business. Particularly it
should be clear that the carriers have no constitutional
right to have their properties valued on the basis of the
highest possible values which could be obtained for prop-
erties devoted to private business.
‘**The carrier owning and operating a railroad, how-
ever strong financially, however economical in its facil-
ities, or favorably situated as to traffic, is not entitled
as of constitutional right to more than a fair net oper-
ating income upon the value of its properties which are
being devoted to transportation. By investment in a
business dedicated to the public service, the owner must
recognize that as compared with investment in private
business he cannot expect either high or speculative
dividends, but that his obligation limits him to only
fair or reasonable profit.”
(Dayton-Goose Creek Opinion, p. 481.)
We would point out that the obligation limiting the own-
ers of public utility property ‘“‘to only fair or reasonable
profit’? has the inevitable result of limiting the values of
their properties to only ‘fair or reasonable’’ values.
The following further quotation from the Dayton-Goose
Creck Case is most pertinent:
**In the New England Divistons Case (Akron, C. & Y.
R. Co. v. United States), 261 U.S. 184, 67 L. Ed. 695,
43 Sup. Ct. Rep. 270, it was held that, under par. 418,
the Commission, in making division of joint rates be-
tween groups of carriers, might, in the public interest,
consult the financial needs of a weaker group in order
to maintain it in effective operation as part of an ade-
quate transportation system, and give it a greater share
of such rates, if the share of the other group was ade-
quate to avoid a confiscatory result.
‘In both cases it was pointed out that the Transpor-
tation Act adds a new and important object to previous
GROTON AT LOLOL SEL TIEN A OR
76
interstate commerce legislation, which was designed pri-
marily to prevent unreasonable or discriminatory rates
against persons and localities. The new Act seeks af.-
firmatively to build up a system of railways prepared
to handle promptly all the interstate traffic of the coun-
try. It aims to give the owners of the railways an
opportunity to earn enough to maintain their proper.
ties and equipment in such a state of efficiency that they
ean carry well this burden. To achieve this great pur-
pose it puts the railroad systems of the country more
completely than ever under the fostering guardianship
and control of the Commission, which is to supervise
their issue of securities, their car supply and distribu-
tion, their joint use of terminals, their construction of
new lines, their abandonment of old lines, and by a
proper division of joint rates, and by fixing adequate
rates for interstate commerce, and, in case of diserim.
ination, for intrastate commerce, to secure a fair re-
turn upon the properties of the carriers engaged.
“*Tt was insisted in the two cases referred to, and it is
insisted here, that the power to regulate interstate com.
merce is limited to the fixing of reasonable rates and
the prevention of those which are discriminatory, and
that, when these objects are attained, the power of
regulation is exhausted. This is too narrow a view of
the commerce clause. To regulate in the sense intended
ia to foster, protect and control the commerce with
appropriate regard to the welfare of those who are
immediately concerned, as well ax the public at large,
and to promote its growth and insure its safety."’ (p.
477.)
When Congress sought by the Transportation Act,
through the Interstate Commerce Commission, ‘‘to build
up a system of railways prepared to handle promptly all
the interstate traffic of the country,’’ Congress dealt with
the transportation system as a whole. As the court held
later in the same opinion (p. 479):
“If Congress may build railroads under the com-
merce clause, it may certainly exercise affirmative con-
trol over privately owned railroads to sec that such
railroads are equipped to perform, and do perform the
requisite public service.’
ml Lye phe tthe: RNY A RSL aar egw OTE Wat I ar fa se ete
NW SN a Nee Ge wt .
77
Thereby, in fixing rates, the Interstate Commerce Com-
mission could not avoid a constant comparison of the actual
privately owned system with a possible publicly owned Sys-
tem designed to render the same service. The Commission
could not avoid considering what rates would be necessary
to support such a publicly owned transportation system,
and in fixing reasonable rates the Commission would be
forced to conclude that reasonable rates for service under
private ownership could not greatly exceed such rates as
would be reasonable under public ownership.
The Commission might well find it necessary to allow a
larger rate of return for private capital than would be nec-
essary to recompense public capital. But on what theory
could the Commission assume that more capital would be
required to develop a privately owned system than would
be necessary to develop a publicly owned system?
Beyond this difference in rate of return what justifica-
tion would the Commission have for increasing rates for
privately owned roads above those which would be neces.
sary to support publicly owned railroads? © ‘rtainly pri-
vate enterprise does not claim that its operating expenses
are actually greater than those which would be incurred
by the government,
It seems therefore that the heart of regulation of rates
in conformity with the provisions of Section Ia is the pro-
vision for valuation. Individual properties are to be
valued but rates are to be based upon an aggregate valu-
ation, Inevitably rates so fixed will give different earn-
ing powers to the individual roads. Some will earn more
than the average fair return, some will earn less. The
aggregate valuation measures the rate basis, not by the
‘value’? of individual roads (in any ordinary definition
“market value’’), but by the value of a system of roads
which are not under common ownership, and thereby com-
prehends not the ‘‘value’’ to the individual owners, but the
PAR RL eet) He RENN, TIN MANLY ROE: PURO PT LR RP I a
PS ke TEA BSS '
78
value of the whole system as an instrument of public serv.
ice, which means essentially the value of the system to the
users. The primary standard for the Commission fixed by
the Transportation Act is to determine the reasonable
worth of the service to the users.
Point 10.
The ‘egislative power thus provided no formula for fixing
reasonable rates, but required its administrative agent
to obtain a vast amount of information, to consider it
and to report it, so
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