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Public Utility Property 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. A reading of the prevailing and dissenting opinions of the Supreme Court from the time of Smyth v. Ames to the present day, in my opinion, will demonstrate that the above-quoted rule did not create certainty in the fixing of rates but tended to create confusion. The most cutting criticisms of this rule are to be found in the many vigorous dissenting opinions rendered by vari­ous justices of the Supreme Court. Efforts to Interpret and A p p ly the Standards of Smyth v. Ames T he rule having been prescribed, regulatory bodies and the lower courts were placed in the position of conforming' to the standards laid down in that rule. So in 1913 the Supreme Court, in Simpson v. Shep­ard, 230 U. S. 352, 433-435, 454-461, 57 L. ed. 1511, 1555-1556, 1564-1566, commonly referred to as the Minne­sota Rate cases, held that the basis of calculation in arriving at the valu­ation of the property of a public utility is the fair value of the prop­erty used for the convenience of the public, and cited with approval Smyth v. Ames. It was there pointed out that the ascertainment of value is not controlled by artificial rules, that 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 (page 434). The Court conceded that the rate­making power is a legislative power and necessarily implies a range of legislative discretion. The Court con­ceded that it did not sit as a board of revision to substitute its judgment for that of the legislature or of the lawfully constituted commission to which the legislature had delegated its rate-making powers (page 433). Impliedly, the Court followed the so-called eminent domain rule and enforced the Smyth v. Ames rule. While the Court announced that the fair value of the property of a public utility is the criterion, it also held that as applied to land the fair aver­age market value of similar land in the vicinity should be the standard (page 455). Differences and Difficulties as to Valuing Land Devoted to Public Uses There may be some technical differ­ence in the rule of fair value and the particular rule applied to the valuation of land in this case. This is said because some courts and com­missions have made a distinction be­tween land and other property owned by a public utility in apply­ing valuation rules and formulae. It is nothing unusual for a regulatory body to value property other than land on a cost basis and value land on a fair market value basis. In order to understand the princi­ple of land valuation laid down in Simpson v. Shepard, one must consid­er the background and historical set­ting applicable to the controversy in­volved. The ruling in question was designed to protect the public against exorbitant costs incurred by rail­roads in acquiring land. The record in that case shows that railroads had acquired land at exorbitant prices by private purchase and were seeking to place such costs in the rate base. The Court sought by its ruling to protect the public from being saddled with these exorbitant land costs incurred by the railroads. The Court held that valuing land at fair average market value wo t Id protect the pub­lic and at the same time set a valua­tion concerning which a public util­ity could not lawfully complain. It was there pointed out that a railroad company could exercise the power of condemnation and thus avoid ex­orbitant costs in acquiring land. Ap­parently, the Court did not consider, or at least did not reflect, the prudent investment principle put forward by Justices Brandeis and Holmes in their concurring opinion in Missouri ex rel. Southwestern Bell Telephone Co. v. Public Service Commission of Missouri, 262 U. S. 276, 289, 67 L. ed. 981, 985, decided in 1923. The Court in the Simpson case very properly observed that it would be unfair to require the rate payer to be subjected to a penalty that flows from imprudent investments made by a public utility (page 454). The Court observed also that, if the property of a public utility had a fair value in excess of the cost to the public utility of that particular property, justice required that the utility receive the benefit by recog­nizing the fair value instead of the cost. At first blush, this latter view would seem to be a logical corollary of the view that the rate payer should not be penalized by having saddled upon him exorbitant costs incurred by a utility in the acquisition of property. It must be remembered that the Court in the Simpson case was dealing specifically with the at­tempt by the railroads to obtain rec­ognition, for rate-fixing purposes, of exorbitant costs incurred by them in acquiring land. No question was there presented of property of a val­ue in excess of what the property had cost the railroads. The question for decision had to do with excessive cost over reason­able value, and the Court decided that such excessive cost could not be placed upon the backs of the rate-payers. I.ater on, we will refer more specifically to the prudent in- * vestment principle of valuation put forward by Justices Brandeis and Holmes. I will concede that any cost formula used in valuing property of a public utility must necessarily be qualified by the re­quirement that the cost must be reasonable. Particularly as applied to land, the Court in the Simpson case devised the rule there laid down to overcome an unfair situation, as applied to the ratepayer, which could have been overcome more rationally, in my opinion, by adopting the prudent investment theory, with the implied qualifica­tion that the cost of the land must be reasonable and, if not reasonable, be revised to a reasonable figure be­fore being recognized in the rate base. Obviously, if cost of property should be taken for valuation pur­poses, without any qualification, one 1 0 9 8 American Bar Association Journal