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Baldwin v. Seelig, Inc., decided March 4, 1935. The court there held unconstitutional the application of the New York Milk Control Act to milk brought in from outside the State and bottled within the State for sale there. In holding the "original package” test inapplicable, Mr. Justice Cardozo wrote: “In brief, the test of the original package is not an ultimate principle. It is an illustration of a principle. Penn Gas Co. y. Public Service Commission, 225 N. Y. 397, 403. It marks a convenient boundary and one sufficiently precise save in exceptional conditions. What is ultimate is the principle that one State in its dealings with another may not place itself in a position of economic isolation. Formulas and catchwords are subordinate to this overmastering requirement. Neither the power to tax nor the police power may be used by the State of destination with the aim and effect of establishing an economic barrier against competition with the products of another State or the labor of its residents." This decision shows that even as applied to State legislation, the “original package” rule may not be invoked to uphold a State in placing burdens upon interstate commerce. As applied to Federal legislation, there is no place whatever for the rule. Its use, as stated by Mr. Justice Cardozo, has always been to mark the limit of the power of the States. It has never been applied as a restriction upon Federal action.
THE DUE-PROCESS CLAUSE
When it is shown that the provisions of the bill fall within the power of Congress to regulate interstate commerce there remains the question whether any of its provisions deprive the utilities of their liberty or property without due process of law in violation of the fifth amendment to the Constitution. On this issue no distinction need be drawn between cases involving Federal statutes and those passing upon State legislation, for the due-process clause in the fourteenth amendment is identical with that of the fifth, and each clause imposes a like limitation upon the legislative action to which it applies. See Nebbia v. New York, 291 U. S. 502, 525.
The discussion may start from the premise that the industry here involved is one of a public-utility character, completely subject to public regulation. This premise need not be supported by a discussion of the various tests of what makes a business one "affected with a public interest. Certainly the distribution of electricity has been regarded as in that category since the inception of the business. The production of electricity for this ultimate distribution to the consumer and the intermediate processes of transmission and sale to distributing companies have an obvious, direct, and vital relation to distribution. Whenever the question has arisen in the interpretation of State statutes companies engaged in the sale of electricity and gas at wholesale for resale by public-utility companies have been held to be subje t to the duties of those engaged in a public-utility business. North Carolina P. S. Co. v. Southern Power Co., 282 Fed. 837; Salisbury & S. R. Co. v. Southern Power Co., 179 N. C. 18; Southern Oklahoma Power Co. v. Corporation Commission., 96 Okla. 53; Peoples Natural Gas Co. v. Public Service Commission, 79 Pa. Super Ct. 560. In half the States specific commission approval must be secured before any electric transmission lines may be built. Bonbright Utility Regulation Chart (revision of 1930). Furthermore, most if not all of the Companies affected by the present bill are undoubtedly organized as publicutility companies under the laws of the States which created them. Most, if not all of them, have made use of the power of eminent domain and could not have built their lines if they did not have that power. They have in the traditional sense dedicated their property to the performance of a public service.
To place a business in the public-utility category, however, it is not essential that an express dedication to puglic use be established. “Property does become clothed with a public interest when used in a manner to make it of public consequence, and affect the community at large” (Munn. v. Illinois, 94 U. S. 113, 126. See also Van Dyke v. Goary, 244 U. S. 39; Chicago Board of Trade v. Olsen, 262 U. S. 1; Nebbia v. New York, 291 U. S. 502). Certainly, the small grocer in the Nebbia case, who unsuccessfully challenged the validity of a law fixing the price at which he might sell milk, would have been very much surprised to learn that he had made such dedication of his business as to constitute a voluntary submission to public regulation. The opinion of the majority in that case contains a lengthy discussion showing just what was held in the leading case of Munn v. Ilinois. Mr. Justice Roberts points out that Munn and Scott held no franchise from the State. “They owned the property wpon which their elevator was situated and conducted their business as private citizens. No doubt they felt at liberty to deal with whom they pleased and on such terms as they might deem just to themselves.” Nevertheless, the decision in the Munn case upheld the validity of a statute which fixed the price at which they might serve. Van Dyke v. Geary also furnishes a typical illustration of a business undertaken as a purely private one under individual ownership without any thought of dedication to the use of all. Organized to furnish water supply in a small town, it became subject to the rate-making powers of a public-service commission under a subsequently enacted utility law.
In both State and Federal cases there is abundant authority that a requirement to furnish service of a particular kind may be imposed consistently with the rights of the utility under the due process clause. (Atlantic Coast Line R. Co. v. North Carolina Corp. Comm., 206 U. S. 1; Missouri Pacific R. Co. v. Kansas, 216 U. S. 262; New York & Queens Gas Co. v. 11cCall, 245 U. S. 345; Woodharen Gas Light Co. v. Public Service Comm., 269 U. S. 244; United Fuel Gas Co. F. R. Comm., 278 U. S. 300.) Within certain limits (compare Northern Pacific R. Co. v. North Dakota, 236 U. S. 585, 595) a particular service may be required although it can only be conducted at a loss. (Atlantic Coast Line R. Co. v. North Carolina Corp. Comm., 206 U. S. 1, 25; Missouri Pacific R. Co. v. Kansas, 216 U. S. 262, 277; Puget Sound T. L. & R. Co. v. Reynolds, 244 U. S. 574.)
There are several decisions upholding Federal regulation of a public-utility character of businesses which were unregulated at their inception, but which became “affected by a public use of a national character and subject to national regulation." (Stafford v. Wallace, 258 U. S. 495, 516; Chicago Board of Trade v. Olson, 262 U. S. 1, 41.) In United States v. Ohio Oil Co. (234 U. S. 548), the Supreme Court upheld the constitutionality of an act declaring companies engaged in the transportation of oil by means of interstate pipe lines to be common carriers, and requiring them to transport oil for all requesting their services. The statute was passed in order to abolish the practice by which oil companies having a monopoly of pipe-line facilities required independent producers to sell them their oil in order to have it transported. While Mr. Justice Holmes declared that the companies were already common carriers in everything but form and that the “statute practically means no more than that they must give up requiring a sale to themselves before carrying the oil that they now receive", it is significant that legally the companies affected were not public utilities at all until the statute made them so. If anything, the present case is stronger than that of the pipe-line companies, for companies owning electric transmission lines are organized as public-utility companies and many do transmit energy for other companies at the present time. The oil companies, on the other hand, had persistently refused to carry any oil but their own. They intended to use their lines only to carry oil to which they had acquired title through purchase from the producer. The broad implication of the decision was pointed out in the dissenting opinion of Mr. Justice McKenna, who contended that the use of the pipe lines had not been extended voluntarily to others and that this was a case "where the use was compelled, and by the use so compelled, regulation was justified." This consideration was unavailing with the rest of the Court, for Mr. Justice McKenna was alone in his dissent.
A further example of the imposition of a duty to perform a service which has not been extended voluntarily is found in Chicago Board of Trade v. Olson (262 U. S. 1), upholding the constitutionality of the Grain Futures Act, Among other points, the grain exchange challenged specifically the provision in the act requiring it to admit to membership cooperative associations of producers. Far from undertaking to serve such organizations, the board of trade had a rule barring from membership any association which returned its profits to its members. It was claimed that the provision making this rule illegal would impair the value of membership on the board of trade and so take the property of its members without due process of law. The Supreme Court replied that, "the incidental effect which such reasonable rules may have, if any, in lowering the value of memberships, does not constitute a taking, but is only a reasonable regulation in the exercise of a police power of the national Government."
There is clear authority for the provisions of the present bill which require utilities to establish physical connections with the facilities of other cumpanies and to exchange energy with other companies. Railroad companies have unsuecessfully attacked orders requiring them to establish physical connections with other lines (Wisconsin, Minn., Pac. R. Co. v. Jacobsen, 179 U. S. 287; Michigan Cont. R. Co. v. Michigan Ry. Comm., 236 U. S. 615); to handle the loaded cars of other companies and interchange traffic (Grand Trunk R. Co. v. Michigan Ry. Comm., 231 U. S. 457; Chicago, Milwaukee & St. Paul R. Co. v. Iova, 233 '. S 334; Pennsylvania Co. v. United States, 236 U. S. 351), and to establish through
routes and joint rates with other companies (United States v. La. & P. R. Co., 234 U. S. 1; St. Louis S. W.R. Co. v. United States, 245 U. S. 136. The Louisiana case involved the so-called “tap lines” which were claimed not to be common carriers because they were built by lumber companies as private logging roads and most of the traffic was in the companies' own logs and lumber. It was pointed out that most of the railroads in the State originated as private carriers in this way. The argument, the court said, “loses sight of the principle that the extent to which a railroad is in fact used does not determine the fact whether it is or is not a common carrier. It is the right of the public to use the road's facilities and to demand service of it, rather than the extent of its business, which is the real criterion determinative of its character” (234 U. S. at 24). The court further pointed out that the roads had been organized as common carriers under State law, were so treated by the public authorities of the State, that they engaged in carrying for hire goods of others, were authorized to exercise the right of eminent domain and were treated as common carriers by the owners of connecting systems (234 U. S. at 26). The opinion is significant for its plain indication that the obligations of a business are to be determined by consideration of all the factors showing the way it is conducted and its public importance rather than by the original intention of those who enter upon it.
Under the Transportation Act the duty of two or more companies to cooperate in this way in public service is not confined to railroad companies. Express companies which use the railroads for their transportation service are equally subject to the provisions of the Act. The extent to which the duty to establish through routes may be constitutionally carried is most strikingly illustrated in a case sustaining an order of the Interstate Commerce Commission directing an express company to establish such routes with a competitor. The Act provides that a "carrier by railroad" shall not be required without its consent to embrace in a through route substantially less than the entire length of its railroad unless the inclusion of its entire line would make the through route unreasonably long as compared with an alternative route. The Supreme Court held that an express company is not a “carrier by railroad” within the meaning of this provision. It followed that the commission could order it to receive traffic for delivery by a competing company although the initial company itself offered complete service from the point of origin to the destination. The claim that the order was unconstitutional was dismissed in a sentence: “As the American has no absolute right to retain traffic which it originates, and as the provision authorizing the shipper to direct the routing is reasonable, the order does not violate any of its constitutional rights." (United States v. American Ry. Express Co., 265 U. S. 425, 437.)
The imposition upon public service companies of the duty to conduct joint operations of this kind plainly constitutes a much slighter interference with property rights than that involved in many of the cases upholding grants of the power of eminent domain to private companies engaged in businesses which the legislalative body has determined to be of public importance. (Clark v. Nash, 198 U. S. 361; Strickley v. Highland Gold Mining Co., 200 U. S. 527; Offield v. N. Y., N. H., & H. R. Co., 203 V. S. 372; Union Lime Co. v. Chicago & N. W. R. Co. 232 U. S. 211.)
Because most of the present power interchanges take place between companies in the same holding company system, the objection has been urged that the imposition of a duty to perform similar services for outside companies involves the utilities in an entirely different type of enterprise from that in which they are now engaged. The argument is really a rephrasing of the claim that voluntary dedication is the test of a company's obligations. It has been shown that this argument is entirely opposed by the decisions. Munn v. Illinois, and other cases cited, supra.
But on the narrow claim that services performed only for related companies may not be required on behalf of others, there is direct refutation in cases involving orders issued to railroad companies. Steam railroad companies which interchanged traffic with each other have been held chargeable with a discriminatory practice prohibited by the Interstate Commerce Act when they refused to conduct similar interchange with an electric railroad. (Chicago I. & L. R. Co. v. United States, 270 U. S. 287. See also Pennsylvania Co. v. United Siates, 236 U. $. 351.) In Louisville & N. R. Co. v. United States (238 U. S. 1), the company conducted switching operations on all business for another road of which it owned 70 percent of the stock. It switched for an independent company extept on products which were competitive with its business products. The Court held that its practice in refusing to the independent company the same arrangement that it made with the company it controlled was discriminatory and could be prohibited by order of the Interstate Commerce Commission. In Chicago, R. I. & P. R. Co. v. United States (274 U. S. 29), the Court construed the Interstate Commerce Act to authorize the Interstate Commerce Commission to require the establishment of joint rail and water rates that were lower than allrail rates, it rejected the company's contention that this duty could be imposed only when both the railroad and the water carrier are under common control.
The provision authorizing the Commission to require companies to extend their interstate facilities finds full support in two cases in which gas companies were compelled by a State commission to make extensions of considerable size in a territory within which they held permissive, although not compulsory, franchises (New York & Queens Gas Co. v. McCall, 245 U. S. 345; New York ez rel Woodhaven Gas Light Co. v. Pub. Ser. Comm., 269 U. S. 244), and in numerous cases upholding Commission orders requiring railroad companies to extend their facilities (Minneapolis & St. L. R. Co. v. Minn., 193 U. S. 53; Chicago & N. R. Co. v. Ochs, 249_U. S. 416; Norfolk & Western Ry. Co. v. Public Ser. Comm., 265 U. S. 70). The most recent discussion of this power and its limitations is found in Interstate Commerce Commission v. Oregon-Washington R. & M. Co. (288 U. S. 14). There the Supreme Court held that the particular order under attack purported to require the construction of what was not merely an extension but a new line through territory which the company had not undertaken to serve. For this reason the order was held not to have been authorized by the Transportation Act. The opinion cites many cases in which State orders requiring extensions had been upheld, and impliedly asserts the constitutionality of the provision in question as the Court there interpreted it. The present bill uses language identical with that of the Transportation Act; its enactment would be a congressional adoption of the constitutional interpretation which the Supreme Court has given to this section.
With reference to the construction of new facilities there can be little question of the validity of the requirement that a certificate of convenience and necessity be secured before any new construction or alteration of existing interstate facilities may be undertaken. The Supreme Court has assumed the validity of a like provision in the Interstate Commerce Act (Railroad Comm. of California v. Southern Pacific Co., 264 U. S. 331), and has held that an attack on this requirement presents no substantial constititional question. (Gulf C. & S. F. R. Co. v. Texas & P. R. Co., 266 U. S. 588. See Texas & P. R. Co. v. Gulf C. & S. F. R. Co., 270 U. S. 266, 271.)
Insofar as the bill gives the commission complete supervision over the establishment of interstate physical connections between companies and the interchange of energy between them, it finds further support in the analogous provision of the Interstate Commerce Act under which the commission's permission must be secured before a connection can be made (Alabama & V. R. Co. v. Jackson & E. R. Co., 271 U. S. 244).
Under the due process clause as under the commerce clause the analogy of the cases under the Interstate Commerce Act is persuasive. The compulsory cuoperation in the public service secured by legislation of this type constitutes no more of an interference with the property interests of interstate electric companies than with those of railroad companies. The resulting public benefit is clearly comparable in character. In each case the consuming public receives the utility product, whether transportation or electric energy, at a lower price than would otherwise be possible. It also receives more dependable and more useful services than could have been secured through the action of one company alone. And in each case the rights of the companies affected are protected in the same way--by commission determination subject to court review.
Regarding the rate-making provisions of the title, the only issue under the due process clause which need be considered concerns the provision directing the Com. mission to fix such rates as will yield a fair return upon the "actual, legitimate, prudent cost of the property used and useful for the service in question." The economic arguments in support of that rate-base need not be reviewed here. They have been advanced by a number of the ablest writers on the subject. (See Henderson, Railway Valuation and the Courts, 33 Harv. L. Rev. 902, 1031; Hale, the “Physical Value” Fallacy in Rate Cases, 30 Yale L. J. 710; Richberg, A Permanent Basis for Rate Regulation, 31 Yale L. J. 263; Richberg, Value By Judicial Fiat, 40 Harv. L. Rev. 567; Gooddard, the Evolution of Cost Reproduetion as the Rate Base, 41 Harv. L. Rev. 564; Bonbright, the Economic Merits of Original Cost and Reproduction Cost, 41 Harv. L. Rev. 593; concurring opinion of Mr. Justice Brandeis in Southwestern Bell Telephone Co. v. Public Service Commission, 262 U. S. 276, 289.)
It is argued, however, that the decisions in Smyth v. Ames (169 U. S. 466), and cases which have followed it, preclude the adoption of this rate base. The contention is inapplicable for two reasons. In the first place, the Court has never had occasion to pass upon the validity of consistent application of the prudent investment rule when adopted as a Congressional policy. It has repeatedly said that it places great weight upon the constitutional interpretations of the coordinate branches of the National Government, and that every doubt must be resolved in favor of the validity of congressional action (United States v. Gettysburg Electric R. Co., 160 U. S. 668, 680; Burtfield v. Stranahan, 192 U. S. 470, 492). In its past decisions, it has reviewed isolated rate orders supported by no such clear affirmation of national policy as that in the present title. Secondly, the most recent decisions of the Court mark a clear departure from the rule of Smyth v. Ames and furnish assurance that rate orders fixing the reasonable rate of return upon the prudent cost of the property would not be held invalid. This is what the California commission did in the order which was upheld in the Los Angeles Gas & Light Corp. v. Railroad Comm. of California (289 U. S. 287). Following that case, the Court in Lindheimer v. Illinois Bell Telephone Co. (292 U. S. 151), and Dayton Power & Light Co. v. Public Utilities Comm. (292 U. S. 290), adopted a method approach that cannot be reconciled with the earlie
Finding that the companies has flourished under the rates which they claimed to be confiscatory, that they had paid dividends regularly and built up reserves, the Court concluded that the rates could not be confiscatory despite findings by the trial court of the present value of the property and an inadequate return upon that value. This approach is flatly inconsistent with the traditional fair value rule (see Hale, the New Supreme Court Test of Confiscatory Rates, 10, Journal of Land and Public Utility Economics, 307). This judgment of the realities of the situation according to the test of the company's experience is precisely what the prudent investment rule requires.
Oswald RYAN, General Counsel Federal Power Commission.
DOZIER A. DEVANE,
Solicitor Federal Power Commission. APRIL 25, 1935.
MEMORANDUM IN SUPPORT OF THE CONSTITUTIONALITY OF PUBLIC-UTILITY
HOLDING COMPANY Bill This memorandum is concerned with the constitutional issues presented by the bill to establish Federal control and, subject to certain exceptions, ultimate elinination of public-utility holding companies.
The faetors making necessary national control public-utility holding companies are enumerated at the outset of the bill. Public-utility holding companies and their subsidiary companies are there declared to be affected with a national public interest in that their use of the mails and instrumentalities of interstate commerce has created many abuses which cannot be corrected by the States and call for Federal legislation. This section specifies both the uses made by holding companies of interstate commerce and the mails and the abuses to which the interstate business of these companies has given rise. It concludes with a declaration of policy stating the objectives of the act: To eliminate the specified abuses, to provide for the simplification of holding-company systems, and the elimination therefrom of properties not economically and geographically related, and at the end of 5 years to abolish holding companies.
The essentially interstate character of the principal holding company transactions and practices lies in the fact that their securities are widely distributed by means of the mails and instrumentalities of interstate commerce; that they continually make use of those channels of communication in the making and performance of contracts with their subsidiary companies; and that these controlled operating companies themselves engage in interstate commerce in gas and electricity on a large and growing scale. The evils that accompany these interstate activities cannot be corrected by State legislation. The sale of holding company securities has been completely unregulated by States having jurisdiction over the subsidiary public utility companies; these securities have been issued upon the basis of fictitious asset values and in anticipation of excessive revenues and paper profits at the expense of the underlying operating companies; absence of uniform accounts conceals the unsubstantial foundation of these security issues and makes it impossible for investors to secure the information necessary for an