St. Louis & O’fallon Ry. Co., 279 U.S. 461 (1929)

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Author: Justice McReynolds

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St. Louis & O’fallon Ry. Co., 279 U.S. 461 (1929)

MR. JUSTICE McREYNOLDS delivered the opinion of the Court.

These are cross-appeals from the final decree of the District Court, Eastern Missouri, three judges sitting, in a suit to annul an Interstate Commerce Commission order, dated February 15, 1927, which directed St. Louis & O’Fallon Railway Company to place in a reserve fund one-half of its determined excess income for the years 1920 (ten months), 1921, 1922, and 1923 (that is, half of the sum by which the net railway operating income for each of those years exceeded 6 percent of the ascertained value of property devoted to public service), and to pay to the Commission the remaining one-half, with 6 percent interest, beginning four months after termination of the year -- i.e., May 1, 1921, 1922, 1923, and 1924.

Section 15a, added to the Interstate Commerce Act by Transportation Act 1920, contains nineteen paragraphs. Of those specially important here, 1, 2, 3, 5, 7, and 8 are copied in the margin;* 4 and 6 follow:

(4). . . For the purposes of this §, such aggregate value of the property of the carriers shall be determined by the Commission from time to time and as often as may be necessary. The Commission may utilize the results of its investigation under § 19a of this Act, insofar as deemed by it available, and shall give due consideration to all the elements of value recognized by the law of the land for ratemaking purposes, and shall give to the property investment account of the carriers only that consideration which under such law it is entitled to in establishing values for ratemaking purposes. Whenever, pursuant to § 19a of this Act, the value of the railway property of any carrier held for and used in the service of transportation has been finally ascertained, the value so ascertained shall be deemed by the Commission to be the value thereof for the purpose of determining such aggregate value.

(6) . . . If, under the provisions of this section, any carrier receives for any year a net railway operating income in excess of 6 percentum of the value of the railway property held for and used by it in the service of transportation, one-half of such excess shall be placed in a reserve fund established and maintained by such carrier, and the remaining one-half thereof shall, within the first four months following the close of the period for which such computation is made, be recoverable by and paid to the Commission for the purpose of establishing and maintaining a general railroad contingent fund as hereinafter described. For the purposes of this paragraph, the value of the railroad property and the net railway operating income of a group of carriers which the Commission finds are under common control and management and are operated as a single system shall be computed for the system as a whole, irrespective of the separate ownership and accounting returns of the various parts of such system. In the case of any carrier which has accepted the provisions of § 209 of this amendatory Act the provisions of this paragraph shall not be applicable to the income for any period prior to September 1, 1920. The value of such railway property shall be determined by the Commission in the manner provided in paragraph (4).

After an investigation instituted under § 15a, May 14, 1924, for the purpose of determining incomes received by St. Louis & O’Fallon Railway Company (the O’Fallon) and Manufacturers’ Railway Company (the Manufacturers’), asserted to be parts of one system, for the years 1920-1923, the Commission found: (1) Although the stock of both corporations was mostly owned by the Adolph Busch estate, and their principal officers were the same, they were not carriers operated under common control and management as a single system within paragraph 6. (2) The Manufacturers’ had received no excess operating income. (3) The value of the O’Fallon’s property devoted to public service in 1920 (ten months) was $856,065; in 1921, $875,360; in 1922, $978,874; in 1923, $997,236, and during each of those years, it received net operative income exceeding 6 percent upon the stated valuation.

The above-described recapture order followed.

The cause is properly here under the Judicial Code, as amended by Act of February 13, 1925 (U.S.C., Title 28, § 345):

Sec. 238. A direct review by the Supreme Court of an interlocutory or final judgment or decree of a district court may be had where it is so provided in the following Acts or parts of Acts, and not otherwise:

* * * *

(4) So much of "An Act making appropriations to supply urgent deficiencies in appropriations for the fiscal year 1913, and for other purposes," approved October 22, 1913, as relates to review of interlocutory and final judgments and decrees in suits to enforce, suspend, or set aside orders of the Interstate Commerce Commission other than for the payment of money. . . .

The Act of October 22, 1913 (38 Stat. 219, 220), transferred to district courts the jurisdiction granted to the Commerce Court by Act of June 18, 1920 (36 Stat. 539), and provided for review by this Court of causes embraced therein. The jurisdiction for the Commerce Court included:

First. All cases for the enforcement, otherwise than by adjudication and collection of a forfeiture or penalty or by infliction of criminal punishment, of any order of the Interstate Commerce Commission other than for the payment of money.

Second. Cases brought to enjoin, set aside, annul, or suspend in whole or in part any order of the Interstate Commerce Commission. . . .

Paragraph (4), § 238, applies to all those causes formerly cognizable by the Commerce Court and reviewable here. The words "other than for the payment of money" were taken from clause first, Act of 1910, above quoted, and, as there, they delimit the trial court’s jurisdiction. They do not inhibit review here of any cause formerly cognizable by the Commerce Court. Moreover, the order under consideration was not merely for payment of money, and the proceeding below was to set aside, not to enforce it.

Wisconsin Railroad Commission v. Chicago, Burlington & Quincy R. Co., 257 U.S. 563, and Dayton-GooseCreek Railway Co. v. United States, 263 U.S. 456, point out the general purpose of the Transportation Act 1920, and uphold the validity of § 15a.

The Manufacturers’ is a switching road with 30 miles of track within St. Louis, Missouri. The O’Fallon -- a coal-carrying road -- has 9 miles of main line, all in Illinois, and this connects with the Terminal Railroad at East St. Louis. Through the latter, deliveries are made to sundry points in St. Louis, some of which are on the Manufacturers’ line.

The distance between the railroad of the O’Fallon and the railroad of the Manufacturers’ is about 12 miles, and all communication by rail between the two properties is effected over the tracks of the Terminal, including a bridge over the Mississippi River.

Both the Commission and the district court held that the record failed to show these two roads were under common control and management and operated as a single system within the meaning of paragraph 6. We accept their conclusion.

The Commission directed the O’Fallon to pay 6 percent interest on the recaptured one-half of its ascertained excess net railway operating income beginning four months from the end of the year during which the excess accrued (paragraph 6). The district court rightly ruled that, as the carrier made bona fide denial of any excess under circumstances sufficient to justify a contest, no interest should have been imposed for any time prior to the final order. Not until then could the carrier know what, if anything, it should pay.

Also, we think the district court rightly rejected the claim that excess earnings were not recapturable unless and until the Commission had fixed a general level of rates intended to yield fair return upon the aggregate value of carrier property, either as a whole or in some prescribed rate or territorial group. Congress, of course, realized that final valuations would require prodigious expenditure of time and effort, but the language concerning recapture indicates that prompt action was expected. Practical application of paragraphs 5 and 6 does not necessarily depend upon prior compliance with paragraphs 2 and 3. The Act should be construed so as to carry out the legislative purpose. The proviso of paragraph 3 prescribing action to be taken during two years beginning March 1, 1920, and the clause of paragraph 6 excepting the income of certain roads prior to September 1, 1920, are hardly compatible with this claim by the carrier.

Paragraph 4, § 15a, directs that, in determining values of railway property for purposes of recapture, the Commission

shall give due consideration to all the elements of value recognized by the law of the land for ratemaking purposes, and shall give to the property investment account of the carriers only that consideration which under such law it is entitled to in establishing values for ratemaking purposes.

This is an express command, and the carrier has clear right to demand compliance therewith. United States ex rel. Kansas City Southern Railway Co. v. Interstate Commerce Commission, 252 U.S. 178.

"The elements of value recognized by the law of the land for ratemaking purposes" have been pointed out many times by this Court. Smyth v. Ames, 169 U.S. 466; Willcox v. Consolidated Gas Co., 212 U.S. 19; Minnesota Rate Case, 230 U.S. 352; Southwestern Bell Telephone Co. v. Public Service Commission, 262 U.S. 276; Bluefield Water Works & Improvement Co. v. Public Service Commission, 262 U.S. 679; McCardle v. Indianapolis Water Co., 272 U.S. 400. Among them is the present cost of construction of reproduction.

Thirty years ago, Smyth v. Ames announced (p. 546):

We hold, however, that the basis of all calculations as to the reasonableness of rates to be charged by a corporation maintaining a highway under legislative sanction must be the fair value of the property being used by it for the convenience of the public. And in order to ascertain that value, the original cost of construction, the amount expended in permanent improvements, the amount and market value of its bonds and stock, the present as compared with the original cost of construction, the probable earning capacity of the property under particular rates prescribed by statute, and the sum required to meet operating expenses are all matters for consideration, and are to be given such weight as may be just and right in each case. We do not say that there may not be other matters to be regarded in estimating the value of the property. What the company is entitled to ask is a fair return upon the value of that which it employs for the public convenience. On the other hand, what the public is entitled to demand is that no more be exacted from it for the use of a public highway than the services rendered by it are reasonably worth.

In Southwestern Bell Telephone Co. v. Public Service Commission (p. 287), we said:

It is impossible to ascertain what will amount to a fair return upon properties devoted to public service without giving consideration to the cost of labor, supplies, etc. at the time the investigation is made. An honest and intelligent forecast of probable future values, made upon a view of all the relevant circumstances, is essential. If the highly important element of present costs is wholly disregarded, such a forecast becomes impossible. Estimates for tomorrow cannot ignore prices of today.

The doctrine above stated has been consistently adhered to by this Court.

The report of the Commission is long and argumentative. Much of it is devoted to general observations relative to the method and purpose of making valuations; many objections are urged to doctrine approved by us, and the superiority of another view is stoutly asserted. It carefully refrains from stating that any consideration whatever was given to present or reproduction costs in estimating the value of the carrier’s property. Four dissenting Commissioners declare that reproduction costs were not considered, and the report itself confirms their view. Two of the majority avow a like understanding of the course pursued.

The following from the dissenting opinion of Commissioner Hall, concurred in by three others, accurately describes the action of the Commission:

In order to determine the value of the O’Fallon property devoted to carrier service during the recapture periods, 10 months in the year 1920 and the years 1921, 1922, and 1923, we start with a valuation or inventory date of June 30, 1919. The units in existence on that date are known. Original cost of the entire property cannot be ascertained. As to the man-made units, we estimate the cost of reproducing them in their condition on that date, and, in so doing, apply to the units installed prior to June 30, 1914, the unit prices of 1914, representing a fairly consistent price level for the preceding 5 or 10 years. To like units, installed after June 30, 1914, and prior to June 30, 1919, we apply the same prices, but add a sum representing price increases on those units during that period. For the third period, from June 30, 1919, down to each recapture date, we abandon estimate and turn to recorded net cost of additions less retirements. On this composite, made up of estimated value for two periods and ascertained net cost for the third period, the majority base a conclusion as to value at recapture date of the man-made items. Land goes in at its current value as measured by that of neighboring lands.

Without summarizing the other processes, all clearly stated in the majority report, it will be observed that the ratemaking value arrived at for the successive recapture periods, as, for example, the year 1923, rests upon 1923 market value of lands; costs of other property installed since June 30, 1919; unit prices of 1914, enhanced by allowance for increased cost of units installed during June 30, 1914-1919; and, for the units installed prior to June 30, 1914, constituting by far the major part of the property, unit prices of 1914 without any enhancement whatever. As to this major part of the carrier’s property devoted to carrier purposes in 1923, no consideration is given to costs and prices then obtaining or to increase therein since 1914.

In the exercise of its proper function, this Court has declared the law of the land concerning valuations for ratemaking purposes. The Commission disregarded the approved rule, and has thereby failed to discharge the definite duty imposed by Congress. Unfortunately, proper heed was denied the timely admonition of the minority:

The function in this Commission is not to act as an arbiter in economics, but as an agency of Congress, to apply the law of the land to facts developed of record in matters committed by Congress to our jurisdiction.

The question on which the Commission divided is this: when seeking to ascertain the value of railroad property for recapture purposes, must it give consideration to current, or reproduction, costs? The weight to be accorded thereto is not the matter before us. No doubt there are some, perhaps many, railroads the ultimate value of which should be placed far below the sum necessary for reproduction. But Congress has directed that values shall be fixed upon a consideration of present costs along with all other pertinent facts, and this mandate must be obeyed.

It was deemed unnecessary by the court below to determine whether the Commission obeyed the statutory direction touching valuations, since the order permitted the O’Fallon to retain an income great enough to negative any suggestion of actual confiscation. With this we cannot agree. Whether the Commission acted as directed by Congress was the fundamental question presented. If it did not, the action taken, being beyond the authority granted, was invalid. The only power to make any recapture order arose from the statute.

The judgment of the court below must be reversed. A decree will be entered here annulling the challenged order.

Reversed.

MR. JUSTICE BUTLER took no part in the consideration or determination of this cause.

*

Section 15a. (1) [this defines the terms employed].

(2) In the exercise of its power to prescribe just and reasonable rates, the Commission shall initiate, modify, establish or adjust such rates so that carriers as a whole (or as a whole in each of such rate groups or territories as the Commission may from time to time designate) will, under honest, efficient and economical management and reasonable expenditures for maintenance of way, structures and equipment, earn an aggregate annual net railway operating income equal, as nearly as may be, to a fair return upon the aggregate value of the railway property of such carriers held for and used in the service of transportation: Provided, That the Commission shall have reasonable latitude to modify or adjust any particular rate which it may find to be unjust or unreasonable, and to prescribe different rates for different sections of the county.

(3) The Commission shall from time to time determine and make public what percentage of such aggregate property value constitutes a fair return thereon, and such percentage shall be uniform for all rate groups or territories which may be designated by the Commission. In making such determination, it shall give due consideration, among other things, to the transportation needs of the country and the necessity (under honest, efficient and economical management of existing transportation facilities) of enlarging such facilities in order to provide the people of the United States with adequate transportation: Provided, That during the two years beginning March 1, 1920, the Commission shall takes as such fair return a sum equal to 5 1/2 percentum of such aggregate value, but may, in its discretion, add thereto a sum not exceeding one-half of one percentum of such aggregate value to make provision in whole or in part for improvements, betterments, or equipment, which, according to the accounting system prescribed by the Commission, are chargeable to capital account.

(5) Inasmuch as it is impossible (without regulation and control in the interest of the commerce of the United States considered as a whole) to establish uniform rates upon competitive traffic which will adequately sustain all the carriers which are engaged in such traffic and which are indispensable to the communities to which they render the service of transportation without enabling some of such carriers to receive a net railway operating income substantially and unreasonably in excess of a fair return upon the value of their railway property held for and used in the service of transportation, it is hereby declared that any carrier which receives such an income so in excess of a fair return shall hold such part of the excess, as hereinafter prescribed, as trustee for, and shall pay it to, the United States.

(7) For the purpose of paying dividends or interest on its stocks, bonds or other securities, or rent for leased roads, a carrier may draw from the reserve fund established and maintained by it under the provisions of this section to the extent that its net railway operating income for any year is less than a sum equal to 6 percentum of the value of the railway property held for and used by it in the service of transportation, determined as provided in paragraph (6), but such fund shall not be drawn upon for any other purpose.

(8) Such reserve fund need not be accumulated and maintained by any carrier beyond a sum equal to 5 percentum of the value of its railway property determined as herein provided, and when such fund is so accumulated and maintained the portion of its excess income which the carrier is permitted to retain under paragraph (6) may be used by it for any lawful purpose.

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Chicago: McReynolds, "McReynolds, J., Lead Opinion," St. Louis & O’fallon Ry. Co., 279 U.S. 461 (1929) in 279 U.S. 461 279 U.S. 479–279 U.S. 488. Original Sources, accessed October 3, 2022, http://www.originalsources.com/Document.aspx?DocID=KPNWYLBT4YWEP4S.

MLA: McReynolds. "McReynolds, J., Lead Opinion." St. Louis & O’fallon Ry. Co., 279 U.S. 461 (1929), in 279 U.S. 461, pp. 279 U.S. 479–279 U.S. 488. Original Sources. 3 Oct. 2022. http://www.originalsources.com/Document.aspx?DocID=KPNWYLBT4YWEP4S.

Harvard: McReynolds, 'McReynolds, J., Lead Opinion' in St. Louis & O’fallon Ry. Co., 279 U.S. 461 (1929). cited in 1929, 279 U.S. 461, pp.279 U.S. 479–279 U.S. 488. Original Sources, retrieved 3 October 2022, from http://www.originalsources.com/Document.aspx?DocID=KPNWYLBT4YWEP4S.