out being confiscatory. While a tribunal exercising the legislative function may not make a rate so low as to be violative of the constitutional restrictions and legal principles announced by courts of binding authority, such tribunal may not disregard its duty to exercise its "legislative discretion, the power to apply which, said Mr. Justice Moody, "is a delicate and dangerous function, and ought to be exercised with a keen sense of justice."-Knoxville v. Water Co., supra.

"Fair value" has been defined as "the reasonable value of the property at the time it is being used for the public.". San Diego Land Co. v. National City, supra.

This, excepting the fact that it fixes the time at which value is to be found, is more a restatement of the question than a definition of the term; "reasonable" being as inexact as "fair."

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In the leading and much-cited case of Smyth v. Ames, the court had for determination the legal question of whether or not a legislative act violated the constitutional rights of the carriers, and the opinion of the court must be understood as being limited by the question involved. The court held that the law demanded a "fair return on the fair value of the property used for the convenience of the public." What was the "fair value" and what would be a "fair return,' were mixed questions of law and "legislative discretion." The court determined only the legal question and found that "the act, if enforced, would have deprived each of the railroad companies. of the just compensation secured to them by the Constitution." (p. 547.) In reaching this determination, however, the court stated rules which should be considered in "all calculations as to the reasonableness of rates." (p. 546.) These rules must be followed by rate-making bodies. In ascertaining "value," the court held that consideration must be given to the following facts:

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(1) "The original cost of construction."

(2) "The amount expended in permanent improvements.' (3) "The amount and market value of its [the carrier's] bonds and stock."

(4) "The present as compared with the original cost of construction.”

(5)

"The probable earning capacity of the property under particular rates prescribed by statute."

(6) "The sum required to meet operating expenses. All these to be "given such weight as may be just and right in each case.” P. 547.

In the Minnesota Rate cases, ante, p. 433 of the opinion, the "legislative discretion" is distinguished from the judicial question: Has the state "overstepped the constitutional limit?" While the court in that case cited as correct "general principles" those announced in Smyth v. Ames (p. 434), Mr. Justice Hughes, who delivered the opinion of the court, said: "The ascertainment of 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 consideration of all relevant facts." (p. 434.) He then applied somewhat more restricted rules than those stated in Smyth v. Ames. In so doing, however, he was careful to state that he was considering "a judicial finding" (p. 451); that the "judicial power to declare legislative action invalid upon constitutional grounds is to be exercised only in clear cases" (p. 452); and "that we are concerned with a charge of confiscation of property" (p. 458). So the court held that the Minnesota rates had not been proven to be confiscatory, but it was not found that such rates were just and reasonable.

In Pennsylvania, the courts have authority, upon complaint, to determine whether or not existing rates are reasonable.270 In a Pennsylvania case,271 it was said: "The primary basis of any calculation as to the value of a water plant must be the money actually invested by the owners. If the earnings of the company have been used to improve the property, it is counted as so much more cash invested."

When the commodity shipped is natural gas, in fixing a basis for returns, the fact that the supply is diminishing must be considered; otherwise there is confiscation.272

270 Brymer v. Butler Water Co., 179 Pa. St. 331, 36 Atl. 249.

271 Wilkes-Barre v. Spring Brook Water Co., 4 Lack. Pa. Leg. News 367; The Transportation Act 1920,

Sec. 15a specifies other facts which must receive consideration.

272 Landon V. Public Utilities Com. of Kansas, 234 Fed. 152.

§ 47. When Does a Rate Violate Rights under the Fourteenth Amendment?-That "prescribing rates for the future is an act legislative, and not judicial, in kind" cannot be disputed,273 but whether or not a particular rate regulation takes property "without just compensation," is, at least in part, a question of law.

The legislative branch of the government must obey the Constitution, and it has long been established by the Supreme Court of the United States that when it is called upon to determine whether or not an act of the legislative branch shall be enforced, it can and must decide whether the passage of such act was authorized by the fundamental law of the Union. Just compensation is a flexible term; equally honest and equally competent men may materially disagree on this subject. Should the net income on the investment be 2, 3, 4, 5, 6, or 7 per cent.? If the legislature, or a board duly created and acting in a perfectly legal way, fixes a particular amount as the maximum income which shall be earned by a public carrier, shall the courts annul such action, if in the opinion of the particular judge or judges trying the case, the amount fixed is not a just and fair compensation? That the courts in a clear case where there can be little or no doubt that the compensation is inadequate, must act under their obligation to support and enforce the Constitution of the United States, and in such cases declare the rate prescribed illegal, will not, as has sometimes been intimated, make the Supreme Court of the United States the supreme legislative tribunal in this country. It must be a clear case to justify action by the courts, but, as said by Mr. Justice Moody in Knoxville Water case, supra:

"The courts, in clear cases, ought not to hesitate to arrest the operation of a confiscatory law, but they ought to refrain from interfering in cases of any other kind. Regulation of public service corporations, which perform their duties under conditions of necessary monopoly, will occur with greater and greater frequency as time goes on. It is a delicate and dangerous function, and ought to be exercised with a keen sense of

273 Louisville & N. R. Co. v. Garrett, 231 U. S. 298, 58 L. Ed. 229, 34 Sup. Ct. 48, and cases cited.

justice on the part of the regulating body, met by a frank disclosure on the part of the company to be regulated."

What percentage on the amount invested in the public use the investors are entitled to receive must, of course, depend upon many considerations, some of which are stated in the Knoxville Water case and the New York Gas case. In the Knoxville case, where the proof indicated clearly that the earnings, after deducting two per cent. for depreciation, would net four per cent., the court held that confiscation had not been proved. In the Gas case, Mr. Justice Peckham, speaking for the court, said: "Taking all facts into consideration, we concur with the court below on this question, and think complainant is entitled to six per cent. on the fair value of its property devoted to the public use.

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The Circuit Judge, in the Minnesota Rate cases,274 held that a "net income of 7 per cent. per annum on the value of a railroad property ** is not more than the fair return to which a railroad company is entitled under the Fourteenth Amendment to the Constitution." The Supreme Court reversed the Circuit Judge on the ground that confiscation had not been shown, but did not determine what was a reasonable rate of return.

In discussing telephone rates, the Supreme Court declined to express an opinion as to whether or not 6 per cent. on the investment was confiscatory.275

In another case where the property of the corporation was fixed at a value higher than the cost and a return of 6 per cent. was fixed on such value, the Supreme Court refused to set aside the rate yielding such return. In this case, the question of the value of the franchise was discussed and Mr. Justice Holmes stated the difficulty of solving the problem in this language:276

"An adjustment of this sort under a power to regulate rates has to steer between Scylla and Charybdis. On the one

274 Shepard v. Northern Pac. Ry. Co., 184 Fed. 765, reversed, Simpson v. Shepard, 230 U. S. 352, 57 L. Ed. 1511, 33 Sup. Ct. 729.

275 Louisville, City of, V. Cumber

land Tel. & Tel. Co., 225 U. S. 430, 56 L. Ed. 1151, 32 Sup. Ct. 741.

276 Cedar Rapids Gas Co. v. Cedar Rapids, 223 U. S. 655, 56 L. Ed. 594, 32 Sup. Ct. 389.

side, if the franchise is taken to mean that the most profitable return that could be got, free from competition, is protected by the Fourteenth Amendment, then the power to regulate is null. On the other hand, if the power to regulate withdraws the protection of the Amendment altogether, then the property is nought. This is not a matter of economic theory, but of fair interpretation of a bargain. Neither extreme can have been meant. A midway between them must be hit." In the Des Moines Gas case,277 the court said:

"Nor do we think that there was error in refusing an injunction upon the conclusion reached that a return of 6 per cent. per annum on the valuation would not be confiscatory. This is especially true in view of the fact that the ordinance was attacked before there was opportunity to test its result by actual experience.'

None of these cases announces a general rule, and it is obvious that what would be reasonable in one case might be unjust in another. A railroad which must, from its very nature, be more or less of a monopoly would not be entitled to as large a return as a more hazardous business. All these questions are primarily questions of policy for the legislature, and it is only when the rate prescribed violates the constitutional requirement that courts may act. In the Transportation Act, 1920, Congress fixed the return of railroads for a short period thereafter and then authorized the Interstate Commerce Commission to ascertain and declare from time to time a fair percentage of return for such carriers.

In San Diego Land & Town Co. v. National City, it was said:278 "What the company is entitled to demand, in order that it may have just compensation, is a fair return upon the

277 Des Moines Gas Co. v. City of Des Moines, 238 U. S. 153, 59 L. Ed. 1244, 35 Sup. Ct. 811.

278 San Diego Land & Town Co. v. National city, 174 U. S. 739, 43 L. Ed. 1154, 19 Sup. Ct. 804. See also San Diego Land & Town Co. v. Jasper, 189 U. S. 439, 47 L. Ed. 892, 23 Sup. Ct. 571; Knoxville v. Knoxville Water Co., 212 U. S. 1, 53 L. Ed. 371, 29 Sup. Ct. 148; Wilcox v. Consolidated

Gas Co., 212 U. S. 19, 53 L. Ed. 382, 29 Sup. Ct. 192; Smyth v. Ames, 169 U. S. 466, 42 L. Ed. 819, 18 Sup. Ct. 418. And see Atlantic C. L. R. v. North Carolina Corp. Com., 206 U. S. 1, 26, 51 L. Ed. 933, 27 Sup. Ct. 585, when speaking of rate making the Chief Justice referred to the "flexible limit of judgment which belongs to the power to fix rates.'