"Just and Reasonable"

For 46 years, under repeated violent attacks, the Supreme Court has stoutly upheld the theory that the utilities might set their rates to the public on a basis known as "reproduction cost new."* On this plushy basis, which automatically kept rates high in good & bad times alike, the utilities waxed fat and great. Last week, amid dissents that had the black-robed Justices wrangling like lawyers, the Supreme Court finally shaved off the plush.

The precedent-smashing decision climaxed a drawn-out battle between the Hope Natural Gas Co. (subsidiary of Standard Oil of N.J. until a month ago) and the Federal Power Commission. In 1938 the cities of Akron and Cleveland touched off the fight with a demand that the Hope Co. cut its rates. When it refused, they appealed to FPC.

FPC had consistently endeavored to fix the companies' rates on the much-loved New Deal theory (from Brandeis) of "prudent investment."/- Accordingly, FPC j now set the rate base value of the com pany at $33,712,526, the return at 6-L-%, and ordered rates slashed from $5,801,171 to $2,191,314.

Pick a Formula. The company championed the court-tested theory of reproduction cost. On this it figured its value at $66,000,000, its fair return at 8%. The Circuit Court of Appeals set aside the FPC order because it was not based on reproduction cost.

But Justice William Orville Douglas, in the Supreme Court's majority opinion, pointed out that the Hope Co. had al ready paid in dividends almost seven times the cost of the original investment. Then he ruled: "The commission was not bound to the use of any single formula or combination of formulae in determining rates.

Under the statutory standard (the Natural Gas Act of 1938) of 'just and reasonable' it is the result reached, not the method employed, which is controlling. ... It is not the theory but the impact of the rate order which counts." To this, Justice Robert Houghwout Jackson dissented at length. He argued, in effect, that the "prudent investment" v. "reproduction cost new" utility debate did not even apply to the natural gas case at hand, and, with the concurrence of Justices Frankfurter and Reed, he retorted: "The Court sustains this [FPC] order as reasonable, but what makes it so, or what could possibly make it otherwise, I can not learn." The newest split in the Court had a special interest to the U.S. in general. It was now plain as a pikestaff that the Court can never be effectively packed. The seven "Roosevelt Judges" have repeatedly split seven ways from Sunday. More often than not Justices Frankfurter, Reed and Jackson line up with the pre-Roosevelt Roberts in a "conservative" minority; while pre-Roosevelt Stone sides with Hugo Black, Douglas, Murphy and Rutledge.

In the main the conflict is between the Black theory, which can be oversimplified as the intent of Congress should prevail as the will of the people, and the Frankfurter line, which is that courts and ad ministrative bodies (i.e., the law) are supreme. In this case the Black-Douglas line prevailed again, in that the Court dealt itself out as the final arbiter of an economic controversy, leaving the solution of such things to a due process of society.

Through the Wringer. Although the Court split sharply on how it had arrived at where it was, the meaning of its new position was plain. The decision gave FPC a free hand to set utility rates on any basis it wishes. The only guidepost is whether the rates are "just and reasonable." But the burden of proof is on the utilities.

Months ago, FPC started to put the $20,000,000,000 utility industry through the wringer, has already squeezed out some $380,000,000 in valuations. But with last week's decision there was little doubt that the wringer is beginning to roll on rates.

The 5% slash in the rates of the Hope Co. is a warning of how tight that squeeze may be.

*Under the reproduction cost theory, the value of a 4O-year-old plant, for example, is set at the cost of rebuilding the plant and reproducing its equipment at current wage and material levels, minus a percentage for depreciation. Thus, the net rise in prices over the last 40 years increases the present value, for rate purposes, whether or not any more money has been invested.

/-Under the prudent-investment theory, the worth of a plant is computed solely on the amount of money "wisely" invested. Ruled out is money FPC considers "unwisely" invested. The effect of this theory is to place the lowest possible valuation on a plant for rate-fixing purposes.

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