FEDERAL POWER COMMISSION v. HOPE NATURAL GAS COMPANY 320 U.S. 591 (1944)

In smyth v. ames (1898) the Supreme Court saddled state regulatory commissions with a specious due process rule for setting public utility rates. Forty-six years later the Justices repudiated the rule of a fair return on fair value. Prior to Hope, the Court relied primarily on original construction costs and reproduction costs as a means of determining property value.

Justice william o. douglas, speaking for a 5–3 Court, based rate regulation on the police power. Douglas declared: "In so far as the power to regulate involves the power to reduce net earnings, it must involve the power to destroy." He adhered to the recent trend of decisions which removed the Court from such determinations. Without mentioning Smyth, Douglas accorded regulatory commissions broad power to choose methods of evaluating property: "The Constitution does not bind rate-making bodies to the service of any single formula or combination of formulas." Henceforth, the determination of the reasonableness of a rate would be made by looking to the "end result" or "total effect." This pragmatic approach returned the burden of decision to the commissions because a rate order was "the product of expert judgment," carrying a presumption of validity. Even the dissenters did not feel bound to adhere to Smyth; they disagreed over the applicable statutory standard. In Hope, the Court eliminated judicial obstruction to effective administrative rate regulation.

David Gordon
(1986)