§ 786. Attitude of courts and commissions contrasted. The general tendency of the state commissions has been to be quite conservative in fixing fair value for rate purposes but quite liberal in fixing the fair rate of return upon such valuation. On the contrary the courts have in general been liberal in fixing fair value but have been conservative as regards the rate of return. This arises doubtless from two reasons. First, the courts are always ready to defend property rights and the valuation seems to be more directly connected with the prevention of confiscation than does the rate of return. Second, the courts have not been clear as to just how far they should go in regard to the rate of return. Some of the earlier decisions merely indicated that the company should be allowed to earn some return. In Smyth v. Ames, decided in 1898, the Supreme Court for the first time clearly laid down the rule that what the company was entitled to was a fair return. on the fair value of its property. There still remained considerable uncertainty as to whether the fair return required by the constitution was to be measured by the same standards as the fair return that would satisfy the best standards of public policy in the encouragement of public service enterprises. Doubtless the state commissions have for the most part deemed it necessary for them to take this latter view point while the courts for the most part have not thought it proper to consider the effect of a given rate of return on the future development of public utility enterprises, but merely to conserve investments already made.

§ 787. Distinction between fair return in an administrative and judicial sense.

In Columbus Railway and Light Company v. City of Columbus 11 the special master in his report clearly dis

11 Columbus Railway and Light Company v. City of Columbus, no. 1206,

tinguishes between what is a reasonable return judicially considered and what is a reasonable return in an administrative or public policy sense (see §743). In Louisville and Nashville Railroad Company v. Siler, 186 Fed. 176, 189, decided January 9, 1911, the court says:

What may be a reasonable rate or return, as a matter of legal policy, having due regard to encouraging the investment of capital in railroad enterprises is one question; but when the inquiry becomes a judicial problem, to be considered as involving the taking or not taking of the railroad's property, it is essentially a different question. The law makers, dealing with the legislative problem, might think that in successful business years a maximum return, for example, of 10% upon the investment would be reasonable. The courts, dealing with the judicial problem, are affected by locality and attending risks and circumstances involved in the particular case, and apparently insist upon only a miminum return to the owner of property devoted to public use which will be reasonable (say, for example, 6%) upon the properly computed investment.

§ 788. Same distinction upheld by California Supreme Court, 1911.

The same view is expressed in a more extreme form in the case of Contra Costa Water Co. v. City of Oakland, 159 Cal. 323, 113 Pac. 668, decided January 19, 1911, Supreme Court of California. This case involves the validity of water rates fixed by the City of Oakland. The decision of the court was favorable to the city. In regard to rate of return the court says (at page 671):

Upon the record we were compelled to assume that the ordinance would give a net return to the stockholders, after payment of all expenses, including taxes, and with sufficient allow

in equity, Circuit Court of the U. S., S. D. of Ohio, E. D., Report of Special Master T. P. Linn, June 8, 1906.

ance for annual depreciation of the value of the property, of 4.682 per cent. per annum. The trial court has not in terms found that this percentage is unreasonable, but, in view of the nature and purpose of this proceeding, the finding that a fair return to plaintiff is 7 per cent. on the value of its plant, involves, by necessary implication, a finding that any lesser rate of return is unreasonable. As to this return (4.682 per cent.), we said that while we were not to be understood as intimating that such a return would be considered by us a full and fair return under all the circumstances, were we engaged in the exercise of the function of fixing rates, we did not believe that upon the record before us a court would be warranted in holding it to be beyond the power of a legislative body to fix, in other words, that upon the record before us we could not hold that the rates fixed were confiscatory. We see no reason for modifying our expression of views in this regard. This conclusion does not involve any contradiction of the proposition, earnestly advanced by respondent, that the question whether the percentage of return allowed by a rate-fixing ordinance is reasonable or unreasonable is one of fact, to be determined in the first instance, like other questions of fact, by the trial court, upon the evidence given in the particular case. In the effort to determine whether a given rate is or is not confiscatory, two elements must necessarily be inquired into. First, the court must ascertain the value of the property upon which the plaintiff is entitled to seek a return, and, second, it must determine what is the percentage of return to which the plaintiff is entitled upon such value. In order to say whether or not a given scale of charges will take property without just compensation, it is as essential to know what is a fair ratio of return upon property devoted to the use in question as it is to know what amount or value of property is so devoted. The range of judicial investigation must be as wide in case of the one element as in that of the other. If the rates fixed yield less than the lowest percentage of profit which is ordinarily obtained in the locality upon equally safe and permanent investments in enterprises of a kindred character the regulation is as clearly confiscatory as if no return at all is provided upon a portion of the property

actually employed. The ultimate issue is whether the ordinance deprives plaintiff of its property without just compensation, but, in order to answer this issue in the affirmative, the trial court must find, either in terms or impliedly, that the return allowed will give less than the lowest reasonable percentage of profit upon the actual value of the property devoted to the public use. In fixing upon such percentage, however, the court is not to act upon what it, as an original question, might think to be fair and reasonable, but is, rather, to determine what is the lowest percentage which could properly be thought by the rate-fixing body to be fair and reasonable. On this question, there must be a certain range of discretion which may be traversed by the city council without infringing upon constitutional rights. If the ordinance gives a rate of return which, although low, is not palpably unreasonable, the court is not to upset the action of the council because it may think a higher rate more appropriate. The presumption is in favor of the validity of the legislative determination, and the burden is on the party attacking the rate fixed to show its invalidity. Applying these principles, we held, in our former opinion, and now hold, that the evidence in this case did not warrant a finding that a net return of 4.682 per cent. was less than the lowest rate of return which the city council might fairly have determined to be just. We did not, and do not, intend to declare that this rate is, as matter of law, adequate or above the dividing line which separates lawful regulation from confiscation. The minimum rate of percentage justly returnable must, in any other case, or in another trial of this case, be determined upon the evidence introduced in the trial of the particular case. All this, we think, is, in effect, stated in the original opinion. We have here amplified the discussion in order to meet the fears, expressed by counsel petitioning for a rehearing, that our decision would be taken as announcing, as a rule of law applicable to all cases and under all circumstances, that a net return of 41⁄2 per cent. upon property devoted to a public use will not be regarded by the courts as confiscatory. As to all other questions, we adhere to the views expressed in the opinion.

§ 789. Federal court in San Francisco Water Rate Case, 1908. In Spring Valley Water Company v. San Francisco, 165 Fed. 667, decided October 7, 1908, District Judge Farrington apparently takes the ground that there is only one fair return and that that return can not be diminished in any degree without confiscation. As he fixes the fair return for the purposes of this case at 5% it seems probable that he is using the term in its constitutional sense and without relation to good public policy in the development of new enterprises. He says (at page 678):

Under the law the company is entitled to a just and reasonable compensation for the use of that portion of its property which is employed in collecting water and bringing it to the people of San Francisco. This just and reasonable compensation is property, and up to and including the full measure of . that which is just and reasonable it is the property of the complainant; it can not be taken, directly or indirectly, by the power of the state for public use without due process of law. To say that a body of rates which affords some compensation, but something less than a reasonable compensation, is not confiscatory, is simply to say that the Constitution protects a portion but not all of a man's property. If the Supervisors have the power, and it is their duty to prescribe just and reasonable rates, and the court has the power to decide whether such rates are reasonable, and to annul ordinances in which the rates prescribed are unjust and unreasonable, it must follow that "the court has no power," as Judge Morrow says in Spring Valley Waterworks v. San Francisco, infra, "to diminish the measure of what is just compensation in any degree."

§ 790. Responsibility of regulatory commissions.

The courts seem inclined to place at least some of the responsibility for securing a fair treatment of public service enterprises upon the state regulatory commissions and authorities. Justice Timlin in the majority opinion in Minneapolis, St. P. & S. S. M. R. Co. v. Railroad Com