HARVARD

LAW REVIEW

VOL. XXXVIII

DECEMBER, 1924

No. 2

THE FUNCTIONS OF COURTS AND COMMISSIONS IN PUBLIC UTILITY RATE REGULATION.*

EVER

OVER since the states started to regulate the charges made by public utility companies, the actual function of rate fixing has been largely entrusted to administrative boards and commissions. The reasons which have prompted this bestowal of power upon the executive branch of the government were aptly set forth by the former Mr. Justice Hughes in an address before the New York State Bar Association in 19162 in which he said:

There have been constant manifestations of a deepening conviction of the impotency of Legislatures with respect to some of the most important departments of law-making. Complaints must be heard, expert investigations conducted, complex situations deliberately and impartially analyzed, and legislative rules intelligently adapted to a myriad of instances falling within a general class. It was not difficult to frame legislation establishing a general standard, but to translate an accepted principle into regulations wisely adapted to particular cases required an experienced body sitting continuously and removed as far as possible from blandishments and intrigues of politics. This administrative type is not essentially new in itself, but the extension of its use in State and Nation constitutes a new departure. . . . The ideal which has been presented in justification of these new agencies, and that which alone holds promise of benefit rather than of hurt to the community, is the ideal of special knowledge, flexibility, disin

* The writer acknowledges his indebtedness for many helpful suggestions to Professor Felix Frankfurter of the Harvard Law School.

1 See VANDERBLUE AND BURGESS, RAILROADS: RATES SERVICE MANAGEMENT, 5; BEALE AND WYMAN, RAILROAD RATE REGULATIONS, 2 ed., § 996.

2 Charles E. Hughes, “Some Aspects of the Development of American Law," 39 N. Y. STATE BAR ASSN. REP. 266, 269.

terestedness and sound judgment in applying broad legislative principles that are essential to the protection of the community, and of every useful activity affected, to the intricate situations created by expanding enterprise." 3

One of the pressing problems of today is that of the relation of these new administrative bodies to the older established organs of government particularly to the courts. Under our constitutional system the judiciary has always exercised the high prerogative of protecting the individual members of the state, whether natural persons or bodies corporate, from the acts of the legislative body which transgress the fundamental law, and against the acts of executive officers who exceed their constitutional or statutory powers. What then shall be the relation between the courts and these new bodies? If the public service commissions, because of the qualifications above attributed to them, are specially fitted to deal with rate fixing, and if they are created by the legislature for that particular task, it would seem that the courts with their multitudinous other duties should wisely give considerable weight to the decisions of such bodies, when called upon to review them; and, in truth, we find many expressions to this effect in the opinions of the judges. But under a system of government where the acts of the legislature and of the executive must accord with the requirements of a written constitution, it is always necessary that new systems and methods be tested by the fundamental law, and those which as res integrae

3 See also the remarks of Mr. William D. Guthrie, as president of that association in 1923: "Legislative bodies such as Congress or our state legislatures cannot act in these matters as intelligently and efficiently as a board or commission of practical experts familiar with the business to be controlled or regulated. The people must be protected against those who are engaged in business enterprises in which the public is interested and upon which the public must depend." It is fair to say that Mr. Guthrie adds that the owners of public utilities must also be protected by having accorded to them their "day in court." "Address of President," 46 ibid., 169, 187. See also VANDERBLUE AND BUrgess, op. cit., 14.

4 They have had "ascribed to them the strength due to the judgments of a tribunal appointed by law and informed by experience." Illinois Central R. R. v. Interstate Commerce Comm., 206 U. S. 441, 454 (1907). And "there is a strong presumption in favor of the conclusion reached by an experienced administrative body after a full hearing." Darnell v. Edwards, 244 U. S. 564, 569 (1917). See also United States v. L. & N. R. R., 235 U. S. 314, 320 (1914).

might seem expedient may have to be discarded because of an inconsistency with the requirements of that law.

The question of the relation of the courts to administrative rate fixing was presented to the Supreme Court of the United States in clear-cut fashion in the now quite well-known case of Ohio Valley Water Co. v. Ben Avon Borough. This case has received considerable attention from law writers,' and has been recognized as a leading one by the United States Supreme Court." It will serve as a good point of departure for the discussion of the problem which the writer wishes to present, namely, in what cases and to what extent it is necessary that judicial review be accorded the orders of commissions regulating rates of public utilities to avoid violation of the due process clause under the Fourteenth Amendment to the Federal Constitution. A review of the case seems desirable.

I

Acting under the provisions of the Public Service Company Law of Pennsylvania, certain boroughs in Pennsylvania, among

9

5 Much of the criticism directed against our courts is by those who do not realize that the failure to sustain new departures is not always because of the backwardness of the legal profession, but often is a necessary condition of any state that is limited in what it may accomplish in new departures by the more or less rigid lines of fundamental law. While the Constitution of the United States is a flexible instrument and does not forever impose the limitations of the past on the hopes of the future, it does contain some limitations, and of these the courts must take cognizance, or else be guilty of moral stultification. 6 253 U. S. 287 (1920).

7 See Laurence Curtis, 2nd, "Judicial Review of Commission,” 34 HARV. L. REV. 862; E. F. Albertsworth, "Judicial Review of Administrative Action by the Federal Supreme Court," 35 HARV. L. REV. 127, 138; Cuthbert W. Pound, "The Judicial Power," 35 HARV. L. REV. 787, 791; Frederick Green, "The Ohio Valley Water Case," 4 ILL. L. Q. 44; Ernst Freund, "The Right to a Judicial Review in Rate Controversies," 27 W. Va. L. Q. 207; Thomas P. Hardman, "Judicial Review as a Requirement of Due Process in Rate Regulation," 30 YALE L. J. 681; Nathan Isaacs, "Judicial Review of Administrative Findings," 30 YALE L. J. 781. See also 69 U. OF PA. L. REV. 148.

8 See Bluefield Water Works v. Public Service Comm., 262 U. S. 679, 689 (1923); Dayton-Goose Creek Ry. v. United States, 263 U. S. 456, 486 (1924). See also Public Utilities Comm. v. Potomac Electric Power Co., 261 U. S. 428 (1923), where the Chief Justice refused to consider whether the case was applicable, the point not being directly involved.

91913 PA. LAWS, No. 854, as amended by 1915 PA. LAWS, No. 345.

them the Ben Avon Borough, filed complaint with the Public Service Commission to the effect that the rates of the Ohio Valley Water Company were excessive.10 In accordance with the statute several hearings were held, and so much evidence given by accountants and engineers on behalf of the complainants and of the company, that the printed record comprised more than two thousand pages. The commission established the value of the plant for rate-making purposes at $924,744,000, found the existing rates excessive, fixed a 7% return on the investment as a proper remuneration, and on this basis allowed the company a gross revenue of $135,167.

11

From this order the company appealed to the Superior Court," under the terms of the statute which provided that the court could reverse the commission when the order "is unreasonable or based upon incompetent evidence materially affecting the determination or order of the commission, or is otherwise not in conformity with law." The company contended that the commission had erred in placing too low a valuation on the plant and in not allowing sufficient gross return, with the result that "the combination of the valuation of appellant's property and the revenue allowed by the commission therefrom amounted to the confiscation of the property of the appellant." The dispute centered on a number of items, a brief consideration of which will explain the nature of the problem involved in the case. (1) The company owned land on an island in the Ohio River, on which it had sunk its wells. Although it had been purchased for $3900, the company contended that it should be valued at more than $245,000, since it was of unique value as a source of water supply. Engineers and geologists for the public testified that other lands similarly situated were just as available for this purpose. The commission allowed a valuation of $48,800. The court held this insufficient, intimating that at least $100,000 should be allowed. (2) The Ohio Valley Water Company had purchased from a competing company certain water mains parallel to those it already possessed. The commission found that these mains were useful in the public service only to one

10 2 PA. PUBLIC SERVICE COMM. REP. 723; 1917c P. U. R. 390.

11 Ben Avon Borough v. Ohio Valley Water Co., 68 Pa. Sup. Ct. 561 (1917).

third of their capacity, and accordingly valued them on that basis. The court held that the company was entitled to the full reproduction cost. (3) The commission in considering the several items in reproduction cost declined to allow any specific amount for "going concern value," as the evidence presented failed to show any definite sum that could be allotted to that item. The commission, however, stated that it would consider the item in fixing the "fair value" on which the rate should be figured. The court held that the commission had erred, and failed to consider going concern value at all. (4) On engineering costs and contingent expense the court affirmed the finding of the commission. (5) The commission allowed as part of the construction cost interest during a reasonable period for the building of the plant, which was fixed at eighteen months. The court was of the opinion that an additional year should have been allowed. (6) The commission declined to allot a brokerage charge for the disposal of securities, since the evidence showed that none had ever been incurred. The court held that a reasonable allowance should yet have been made. The result was that the case was remanded to the commission with orders to increase the valuation so as to accord with the court's opinion, and to reform the rate accordingly.

The commission and the complainants appealed to the Pennsylvania Supreme Court 12 on the ground that the Superior Court had exceeded the jurisdiction accorded to it by the statute, and had substituted its own judgment for that of the commission. The Supreme Court held that under the statute the duty of the reviewing court was "not to substitute its judgment as to rates or values for that of the commission" but merely to inquire "whether the order was a reasonable exercise of the discretion conferred upon the commission by the statute," and after an examination of the record decided that the Superior Court had erred, having performed the first, rather than the second, function. The rates as fixed by the commission were reëstablished.

The Water Company then brought the case to the United States Supreme Court, claiming in substance, (1) that the order

12 Ben Avon Boro. v. Ohio Valley Water Co., 260 Pa. St. 289, 103 Atl. 744 (1918).