Full opinion text
McDERMOTT, Circuit Judge. The Secretary of Agriculture, pursuant to the Packers and Stockyards Act of 1921 (7 USCA § 181 et seq.), entered into an inquiry into the lawfulness and reasonableness of the charges made by the Denver Union Stock Yard Company for services rendered by it to its patrons. Pursuant to notice, extensive hearings were held before an examiner, the record of those hearings consisting of 2,023 pages, together with 82 exhibits. On July 28, 1931, Hon. R. W. Dunlap, Acting Secretary of Agriculture, entered the order which is under attack in this litigation, accompanied by carefully prepared and comprehensive findings of fact. By this order, the yardage charges imposed by the petitioner were substantially reduced. Prior to its effective date, the petitioner filed this suit to set aside and permanently enjoin the enforcement of said .order. Issues were joined,'and the cause came on for hearing before a three judge court as required by section 316 of the Packers and Stockyards Act (7 USC 217 [7 USCA § 217]). The only evidence offered was the record made before the Secretary of Agriculture. The bill alleges that its existing rates were not unreasonable; that the finding of the Secretary to that effect is without support in the evidence, and that the Secretary was therefore without power to establish any rate; that the Secretary is without statutory power to value the properties of the petitioner, or to determine the reasonableness of a return upon that value; that the notice .is insufficient;' that, in determining the reasonableness of the return, the Secretary erred- in many respects; that by reason thereof the petitioner has been deprived of its property without due process of law. Scope of Review. The parties are in disagreement as to the scope of this judicial review, the petitioner contending that it is the duty of this court to try the ease de novo, and to exercise our independent judgment upon all of the questions of fact submitted to the Secretary for his determination. The respondent, on the contrary, contends that our review is limited to the question of whether the Secretary acted within the scope of his statutory powers, and as to whether there is substantial evidence to support the findings of the Secretary. Section 316 of the act (7 USCA § 217) provides that provisions of the Interstate Commerce Commission “are made applicable to the jurisdiction, powers, and duties of the Secretary in enforcing the provisions of this title, and to any person subject to the provisions of this title.” Stafford v. Wallace, 258 U. S. 495, 512, 42 S. Ct. 397, 66 L. Ed. 735, 33 A. L. R. 229; Tagg Bros, v. United States, 280 U. S. 420, 443, 50 S. Ct. 220, 74 L. Ed. 524. The authorities cited by the parties may perhaps be reconciled, if the ground of the attack upon the order is considered. An order of the Secretary may be attacked in court on either one of two grounds, or both. (a) The attack may be based upon the ground that an order “rests upon an erroneous rule of law, Interstate Commerce Commission v. Diffenbaugh, 222 U. S. 42, 32 S. Ct. 22, 56 L. Ed. 83, or is based upon a finding made without evidence, Chicago Junction Case, 264 U. S. 258, 263, 44 S. Ct. 317, 68 L. Ed. 667, or upon evidence which clearly does not support it, Interstate Commerce Commission v. Union Pacific R. R. Co., 222 U. S. 541, 547, 32 S. Ct. 108, 56 L. Ed. 308; New England Divisions Case, 261 U. S. 184, 203, 43 S. Ct. 270, 67 L. Ed. 605; Colorado v. United States, 271 U. S. 153, 166, 46 S. Ct. 452, 70 L. Ed. 878.” Tagg Bros. v. United States, 280 U. S. 420, 442, 50 S. Ct. 220, 225, 74 L. Ed. 524. Such an attack must be determined upon the record of the proceedings before the Secretary, and it is not competent for a court to receive additional evidence. (b) Or an order may be attacked upon the ground that it deprives the petitioner of its property without duo process of law. Where the attack is made upon constitutional grounds, a court is required to exercise its independent judgment as to both law and facts. United Railways v. West, 280 U. S. 234, 50 S. Ct. 123, 74 L. Ed. 390; Lehigh Valley R. R. v. Commissioners, 278 U. S. 24, 26, 49 S. Ct. 69, 73 L. Ed. 161, 62 A. L. R. 805; Chicago, B. & Q. R. R. v. Osborne, 265 U. S. 14, 44 S. Ct. 431, 68 L. Ed. 878; Bluefield Co. v. Pub. Serv. Comm., 262 U. S. 679, 683, 43 S. Ct. 675, 67 L. Ed. 1176; Georgia Ry. v. R. R. Comm., 262 U. S. 625, 43 S. Ct. 680, 67 L. Ed. 1144; Ohio Valley Co. v. Ben Avon Borough, 253 U. S. 287, 289, 40 S. Ct. 527, 64 L. Ed. 908; Lincoln Gas Co. v. Lincoln, 223 U. S. 349, 32 S. Ct. 271, 56 L. Ed. 466. In Crowell v. Benson, 52 S. Ct. 285, 296, 76 L. Ed.- Chief Justice Hughes, speaking-for a majority of the eo-urt, said: “In cases brought to enforce constitutional rights, the judicial power of the United States necessarily extends to the independent determination of all questions, both of fact and law, necessary to the performance of that supreme function. The case of confiscation is illustrative, the ultimate conclusion almost invariably depending upon the decisions of questions of fact. This court has held the owner to be entitled to ‘a fair opportunity for submitting that issue to a judicial tribunal for determination upon its own independent judgment as to both law and facts.’ ” Constitutional rights may he as successfully and as seriously invaded by mistakes of fact as by mistakes of law. When a citizen asserts that the rights guaranteed him by the Constitution have been invaded, the responsibility rests upon the courts to hear him, and he cannot be denied a hearing on the ground that his claim rests upon a question of fact. Where such a claim is made, the petitioner is entitled to present all of the material facts. After hearing him) it may be determined that the notice and hearing which ho has had before an administrative tribunal complied with the essentials of due process. Den ex dem. Murray v. Hoboken Land & Improvement Co., 18 How. 272, 15 L. Ed. 372; United States v. Ju Toy, 198 U. S. 253, 263, 25 S. Ct. 644, 49 L. Ed. 1040. But in the case at bar we are not dealing with an administrative hearing of matters judicial in nature, the determination of rights on existing facts. We are dealing with an exercise of legislative power. The petitioner has had no hearing, before any tribunal, as to whether the legislative order of the Secretary invades its rights. We are compelled, therefore, to hear the evidence and to decide for ourselves whether the order of the Secretary deprives petitioner of its property without due process of law (Const. Amend. 14). However, there is a presumption that the findings of the Secretary are correct. Banton v. Belt Line Ry., 268 U. S. 413, 422, 45 S. Ct. 534, 69 L. Ed. 1020. In Cotting v. Kansas City Stock Yards Co., 183 U. S. 79, 91, 22 S. Ct. 30, 35, 46 L. Ed. 92, Mr. Justice Brewer said: “It [the Supreme Court] has also ruled that the determination of the legislature is to be presumed to be just, and must be upheld unless it clearly appears to result in enforcing unreasonable and unjust rates.” See, also, Cambridge Electric Light Co. v. Atwill (D. C.) 25 F.(2d) 485, and cases therein cited. This evidentiary rule is a branch of the accepted doctrine that legislative acts will not he held to be unconstitutional unless they are clearly so. This legal presumption is strengthened in this case by the fact that the report of the Secretary bears internal evidence of the careful investigation made' by him, and his disposition to be fair. The Notice. The petitioner contends that, under the notice served, the Secretary was powerless to inquire , as to the reasonableness of yardage charges, but was limited to an inquiry into the reasonableness of charges made for feed. The notice recited' that a hearing would be had “upon the reasonableness and lawfulness of the rates and charges as provided for by said Tariff No. 2, as amended by Supplements Nos. 1 and 2.” The supplements dealt with charges for feed. Tariff No. 2, referred to in the notice, concerns yardage charges, and on its face the notice is ample to advise the petitioner that an inquiry would be' made into yardage charges. The argument of petitioner is that.the yardage charges contained in tariff No. 2, were identical with' the yardage charges contained in tariff No. 1, which had been published many years before'; that therefore tariff No. 2 made no change as to yardage charges. The petitioner contends that the only section which authorizes the Secretary to institute an inquiry into the “lawfulness” of a rate is section 306 (7 USC 207 [7 USCA § 207]), and that that section deals exclusively with new or changed rates; that, the rates in tariff No. 2 being neither, the Secretary is without the power to inquire as to ■their lawfulness. Section 310 (7 USC 211 [7 USCA § 211]) gives the Secretary power either on his own initiative or upon complaint to prescribe a just and reasonable rate for services, upon a finding that existing rates are “unjust, unreasonable, or discriminatory.” The power, of the Secretary under this section is ample, and is not confined to new or changed rates. The (objection that this section does not use the word “lawfulness,” while the notice does contain such word, is hypercritical in the extreme. No surprise is claimed, and no further mention need be made of the matter, other than to suggest that the notice is sufficient if the word “lawfulness” is treated as surplusage. The power of the Secretary to inquire at any time into the reasonableness of existing charges, either upon complaint or upon his own initiative, is conferred by the statute in express terms, and has been sustained by the courts. Tagg Bros. v. United States, 280 U. S. 420, 50 S. Ct. 220, 74 L. Ed. 524. The Power of the Secretary. The petitioner further contends that the power of the Secretary to establish a reasonable rate does not confer upon him the power to value the properties of the petitioner, nor to take into account, at least as a dominant factor, the return upon the value of such property. The petitioner- supports this contention by excerpts from the opinion of Judge Brewer in Cotting v. Kansas City Stock Yards Co., supra, in which the learned justice stated that rates to be charged by stockyard companies for their services were not to be measured by the same rules that govern in the consideration of rates exacted by those utilities which exercise the power of eminent domain and discharge a purely public service. The decision of the court in that ease was upon an entirely different ground, and six of the justices declined to join in that part of the opinion relied on by the petitioner. The petitioner further supports this contention by reference to the order made by the Secretary of Agriculture, as to the stockyards rates at St. Paul, Minn. The Secretary there held that he was not required to hold a rate unreasonable because it yielded more than a given percentage of return upon the value of the property involved; that the act did not treat financial success as an evil, nor seek to prevent it; that, while the cost of rendering the service may be a large, or even a controlling factor in determining the reasonableness of rates, consideration should be given to other factors. The burden of the petitioner’s complaint is that the order, of the Secretary deprives it of a fair return upon its property. Undoubtedly it is the duty of the Secretary, in fixing a rate, to avoid confiscation.' Conceding that the Secretary of Agriculture has the power to consider many elements in arriving at a ’reasonable rate, it is nevertheless his duty to see to it that the rate fixed does not confiscate the property of the petitioner. ’ Just how the Secretary can discharge that duty without a valuation of the property of petitioner is not clear. It is urged that the statute does not in express terms authorize the Secretary to ascertain the valuation of properties used and useful in the public service; many persuasive authorities are cited to the proposition that such power as is here conferred should not rest upon implication. But the conclusion does ' not follow. The power is conferred upon the Secretary to establish reasonable rates. No rate is reasonable which is confiscatory. The Secretary eannot determine what rate is reasonable until he has first determined whether it would result in' confiscation. He ean-not determine the question of confiscation without a valuation of the properties of the petitioner. The reliance upon the order of the Secretary of Agriculture in. the St. Paul case indicates a confusion of legislative and judicial functions. When Secretary Javdinc issued his order in the St. Paul ease, he was exercising legislative power. In the exercise of such power, Secretary Jardine was well within his rights in giving consideration to various factors; the value of the service rendered, competition, rates exacted by other yards in comparable situations, and the other considerations suggested by Justice Brewer in the Cotting Case. But this court does not exercise legislative power. This court exhausts its power when it determines the validity of the order made. Our power of review is limited to an inquiry into the question of whether the order made is within the power granted hy the statute, whether the order was made after notice and upon substantial evidence, and whether, it is confiscatory of the petitioner’s property. Petitioner urges that the “value of the service” is the test of reasonableness. If the rate exceeds the value of the service, there will be no patrons. The argument of petitioner comes to the proposition that it is entitled to charge all that the trafile will bear. But the object of regulation is to prevent an essential industry from exacting an unreasonable charge for its services, even though the patron would prefer to pay the charge exacted rather than do without the service. A reasonable rate lies somewhere within a field which has the value of a service as one extreme, and confiscation as the other. A reasonable rate must at least be sufficient to pay a fair return on property devoted to the public use, with proper allowance for deterioration and obsolescence, and -which must allow for the hazards involved in the particular business. If such a rate is allowed, new capital will bo attracted from the security of bonds, and the necessary public service can be continued. We conclude that it was not only the right, but the duty, of the Secretary, in passing upon the reasonableness of the rates, to determine whether such rates were confiscatory of the property of the petitioner. Value of! Real Estate. It is earnestly and vigorously contended that the Secretary erred in arriving at the valuation of the real estate of the petitioner. The evidence upon this question involved the usual conflict in expert evidence, and a reading of the record leaves the same confusion that generally is left in the wake of such evidence. The petitioner employed three qualified rea.1 estate dealers, who made an independent investigation of the properties, and arrived at a valuation of each of tlie tracts after consultation. The Secretary called one witness, a man of the very highest standing, of unquestioned integrity, and of long experience. There was evidence of sales of real estate in the general vicinity, within comparatively recent periods, which tends to support the finding of the Secretary. It is vigorously contended that such properties were not as valuable as the properties of the petitioner. It is likewise contended that the witnesses for the Secretary did not give proper weight to certain factors, just as it is contended that the witnesses for the petitioner gave weight to factors that should not he considered. It would unduly extend this opinion, and serve no useful purpose, to discuss these respective contentions in detail. It will suffice to say that we have read the abstract of the evidence upon this point, and, while it is unquestionably true that the evidence would have justified a considerably larger valuation, we are not prepared to say that the Secretary’s finding in this respect is clearly erroneous. We are not satisfied that the witness for the government adopted a theory in opposition to the rules laid down in the Minnesota Rate Gases, 230 U. S. 352, 445, 33 S. Ct. 729, 57 L. Ed. 1511, 48 L. R. A. (N. S.) 1151, Ann. Cas. 1916A, 18. Value of Structures. In the valuation of structures, the Secretary determined the present value of the structures, and not the investment therein. In arriving at the present value, he received evidence as to the cost of reproduction as of the time of the inquiry, and applied to that figure the then per cent, condition of the properly. The fairness of the inquiry is demonstrated by the fact that the reproduction figures of the government engineer correspond almost exactly with those of the engineer for the petitioner. The only substantial difference between the figures of the two engineers on general overheads concerned the item of interest during construction. The government engineer allowed no interest on the value of the real estate during the construction period, but the Secretary did allow such item, in accordance with the evidence of the engineer for the peti•tioner. There was also a difference between the engineers as to the probable period of construction. The Secretary’s finding of the reproduction cost of the structures is as follows : Totals of materials and labor. .$2,393,796.00 Omissions and contingencies... 97,551.00 Engineering and superintendence ..................... 102,429.00 Legal Expense...............■ 20,486.00 General Office................ 40,972.00 Liability Insurance......... 21,616.00 Taxes during construction..... 34,050.00 Interest during construction (7% on property other than land for one-half construction period).......... 77,221.00 Interest on land (7% on value of used and useful land for one year)........ 40,991.00 Total reproductions new cost of respondent’s used and useful structures and equipment.. .$2,829', 112.00 Promotion Expense. The petitioner contends that to these sums should be added an item of $26,790 for “initial promotion”; $18,982.65 for “organization” and $160,-721.95 for “assembling capital.” There is no evidence that any sum was expended with respect to any of these items. Galveston Elec. Co. v. Galveston, 258 U. S. 388, 397, 42 S. Ct. 351, 355, 66 L. Ed. 678. The argument is predicated upon the proposition that, if it became necessary to rebuild the plants now, it would be necessary to employ the services of promoters, and to allow for certain discounts in the sale of ■ bonds or stock. That it is entirely proper for a rate-making body to make some allowance for such probable costs is entirely clear. An examination of the cases discloses that such allowance is frequently made and sustained by the courts. Whether it is confiscatory to make no allowance therefor is more troublesome. In Brooklyn Borough Gas Co. v. Prendergast (D. C.) 16 F.(2d) 615, a three judge court set aside a rate order and approved a master’s report which held such allowance must be made. In Ben Avon Borough v. Ohio Valley Co., 260 Pa. 289, 103 A. 744, the Superior Court was reversed because it held that the Commission erred in declining to make such an allowance. .The Supreme Court reversed the Pennsylvania court. Id., 253 U. S. 287, 40 S. Ct. 527, 64 L. Ed. 908. Thereupon, the Superior Court again made the allowance, and it was affirmed. Id., 271 Pa. 346, 114 A. 369. See, also, Montana, W. & S. R. Co. v. Morley (D. C.) 198 F. 991. Ohio Utilities Co. v. Pub. Utilities Comm., 267 U. S. 359, 45 S. Ct. 259, 69 L. Ed. 656, held that preliminary legal and organization expenses must be allowed; but these are covered in the item of $20,486 in our ease. On the other hand, • in the Galveston Case, supra, it was said: “The other item included by the master in determining base value, but disallowed by the court, is $67,078 for brokerage fees. There is no evidence that any sum was in fact paid as brokerage, and there was included, as above shown, the sum of $73,281' for organization and business management in calculating the historical reproduction cost. The finding of the master rests upon testimony that bankers customarily get, in some form, compensation equal to 4 per cent, on the money procured by them for such enterprises. But compensation for bankers’ services is often paid in the lessened price at which they take the company’s securities, and is thus represented in the higher rate of interest or dividend paid on the money actually received by the company as capital. The reason given by the master for including the allowance for an assumed brokerage fee, is that a brokerage fee is ‘a normal incident of large industrial investments and has not been amortized,’ sinee ‘the record shows that the plant has been operated at a loss.’ If base value were to be fixed by the money expended, brokerage fees actually paid might with propriety be included, as are taxes paid pending construction. But as the base value considered is the present value, that value must be measured by money; and the customary cost of obtaining the money is immaterial. We cannot say that the court erred in refusing to include in base value an allowance for hypothetical broker’s fees.” This seems to be an authority directly in point; moreover, it appears to us to be the sound rule. It must be remembered that the problem before the Secretary is the ascertainment of present value; that, while the estimate as to reproduction cost new Is an aid in the ascertainment of present value, it is not in itself the end that is sought. These promotion expenses are predicated' upon the assumption that in 1930 no stockyards existed; that it was necessary to rebuild them from the ground up as of that date; and upon the further assumption that no one is available who is willing and able to invest his money in the enterprise. It is-quite as fair to assume that this theoretical plant, built in 3930, is constructed by a phantom man with mythical cash, which would make it unnecessary to allow an additional value on account of an apocryphal commission paid on hypothetical bonds. Per Cent. Condition. After arriving at the reproduction cost new of the properties, the Secretary found that the properties were in 83.8 per cent, condition. Here again there was a conflict between the engineers. Both engineers inspected the properties, and from their informed and skilled judgment made an estimate as to the present per cent, condition of the properties. The engineer for the petitioner estimated that the properties were in 95 per cent, condition. Mr. Henrici, the government engineer, is unquestionably a man of standing in his profession, and Ids evidence undoubtedly reflects his deliberate opinion. Both engineers followed the approved method of arriving at their conclusions. Wichita Gas Co. v. Public Service Commission, 126 Kan. 220, 268 P. 111. When it is considered that many of the structures are more than 40 years old, the Secretary’s finding in this respect appears to bo entirely fair. Going Concern Value. To these values, the Secretary added the sum of $ 1.43,000 for working capital, and the sum of $295,000 for going concern value. The petitioner contends that the Secretary should have allowed the sum of $807,000 for going concern value. The petitioner introduced the evidence of an engineer who undertook to compute going concern value from a number of assumptions. The engineer assumed that the stoekyards was completed, hut with no business attached. He then undertook to estimate what it would cost to procure ihe business which the stoekyards now enjoys. The engineer interviewed five men Cor the purpose of getting their opinion as to the number of years it would take to regain the business. These estimates ranged from 7 to 12 years. The engineer believed that these •estimates were too high, and started with the assumption that within five years the business would be attached. Upon these assumptions, ho computed the going concern value. This is buttressed by the evidence of certain witnesses that in the past certain -expenditures were made for advertising, and by donations ■ of land, which aggregate approximately the same amount. The Supreme Court of the United States in Galveston Elec. Co. v. Galveston, 258 U. S. 388, at page 395, 42 S. Ct. 351, 354, 66 L. Ed. 678, has said: “The fact that a utility may reach financial success only in time or not at all, is a reason for allowing a liberal return on the money invested in the enterprise; but it does not make past losses an element to ho considered in deciding what the base value is and whether the rate is confiscatory.” The government introduced no witness who gave his opinion as to going concern value; but the history and value of the stoekyards were before the Secretary, and from them he could form a judgment as to that value. líe was not hound to accept the opinion evidence offered. The Secretary recognized that there is a value to a going concern that is not reflected in the physical structures, and allowed approximately 10 per cent, of the physical values. That such a value exists, which should be recognized, is abundantly settled. McCardle v. Indianapolis Co., 272 U. S. 400, 47 S. Ct. 144, 71 L. Ed. 316; Bluefield Co. v. Pub. Serv. Comm. 262 U. S. 679, 43 S. Ct. 675, 67 L. Ed. 1176; State of Missouri ex rel. Southwestern Bell Tel. Co. v. Pub. Serv. Comm., 262 U. S. 276, 43 S. Ct. 544, 67 L. Ed. 981, 31 A. L. R. 807; Denver v. Denver Union Water Co., 246 U. S. 178, 191, 192, 38 S. Ct. 278, 62 L. Ed. 649; Des Moines Gas Co. v. Des Moines, 238 U. S. 153, 165, 35 S. Ct. 811, 59 L. Ed. 1244; City of Omaha v. Omaha Water Co., 218 U. S. 180, 202, 203, 30 S. Ct. 615, 54 L. Ed. 991, 48 L. R. A. (N. S.) 1084; National Waterworks Co. v. Kansas City (C. C. A. 8) 62 F. 853, 865, 27 L. R. A. 827; Michigan Bell Telephone Co. v. Odell (D. C. Mich.) 45 F.(2d) 180, 185; Whittaker v. Brictson Mfg. Co. (C. C. A. 8) 43 F.(2d) 485; Illinois Bell Telephone Co. v. Moynihan (D. C. Ill.) 38 F.(2d) 77. The situation in the McCardle Case is almost exactly similar to the situation here presented. The engineers for the company made their estimate of going concern value. The engineer for the commission made no appraisal of such value. The commission allowed a going concern value of 9% per cent, of the values of the physical property. This finding was sustained, and in respect thereto the Supremo Court said, at page 415 of 272 U. S., 47 S. Ct. 144, 150: “The evidence is more than sufficient to sustain 9.5 per cent, for going value. And the reported cases showing amounts generally included by commissions and courts to cover intangible elements of value indicate that 10 per cent, of the value of the physical elements would be low when the impressive facts reported by the commission in this case are taken in•to account.” The Supreme Court of the United States has approved of allowances of going concern value, as indicated by the following table: Cost of Reproduction Amount allowed Por Going Concern Value Per cent, of Going Concern Value to cost of Reproduction Knoxville v. Water Co., 212 U. S. 1, 29 S. Ct. 148, 53 L. Ed. 371. $ 538,000 $ 60,000 11.1 Omaha v. Omaha Water Co., 218 U. S. 180, 30 S. Ct. 615, 54 L. Ed. 991, 48 L. R. A. (N. S.) 1084. 5,700,583 562,712 9.9 Denver v. Denver Union Water Co., 246 U. S. 178, 38 S. Ct. 278, 62 L. Ed. 649. 10,617,782 800,000 7.5 Georgia Railway v. R. R. Comm., 262 U. S. 625, 43 S. Ct. 680, 67 L. Ed. 1144. 6,250,000 441,629 8.4 Bluefleld Co. v. Pub. Serv. Comm., 262 U. S. 679, 686, 43 S. Ct. 676, 67 L. Ed. 1176. 324,428 32,442 10.0 McCardle v. Indianapolis Water Co., 272 U. S. 400, 47 S. Ct. 144, 71 L. Ed. 316. 14,904,000 1,366,000 9.17 There may be businesses in which it is possible to compute with some degree of accuracy this element of value; but, even if accurate computation is not possible, a value which actually exists should not be ignored because of the difficulty of its measurement. There is no rule by which the value of a leg or an arm can be accurately measured in dollars and cents, nor by which pain and suffering can be computed; yet triers of fact do evaluate such things. By the same token, difficulty of measurement should not amount to a denial of right. If the Secretary had not erroneously excluded certain properties, from the rate base, we would have no disposition to disturb the Secretary’s finding as to going concern value; since the rate base was quite apparently a factor in his finding of going concern value, an addition to the rate base would necessarily increase this value. Depreciation Deserve. The Secretary allowed $47,000 as an annual expense item for the purpose of establishing a depreciation reserve. The petitioner contends that he should have allowed at least $73,320 for such purpose. The petitioner’s engineer ascribed to certain of the properties a determinate life; estimated the length of that life; and calculated the depreciation reserve on a straight line basis, that is, he calculated the annual amount which, if collected each year of its estimated life, would equal the value of the property at the end of its estimated life, with no allowance for interest on the fund so created. The petitioner’s engineer ascribed to certain other property an indeterminate life, and estimated that it would require $15,000 a year to keep such property in condition to render service. The engineer and the accountant for the government were more liberal to the petitioner in estimating the life of the various properties involved, but adopted the sinking fund, or compound interest theory of depreeiation, by which they arrived at the conclusion that the sum of $42,014 a year, with interest accumulations, would create a fund sufficient to restore the properties as and when their usefulness terminated. The Interstate Commerce Commission has adopted the straight line basis for depreciation reserves in telephone and steam railroad companies. Dockets 14,700 and 15,000, decided July, 1931. The compound interest theory may work out substantial justice before it is necessary to use the fund to replace structures. As soon as it is used for that purpose, the utility has a new structure to take the place of the one that has worn out in the public service, but it no longer .has that part of the fund. In properties of age and varying life, the difficulties of computation are serious; it would seem that, if the utility was charged with the actual income, if any, arising from investment of funds in the reserve, it would answer the purpose. But we deem it unnecessary to enter into a discussion of the relative merits of the straight line as compared with the compound interest theory of figuring depreciation. The estimate of an engineer as to the probable life of a structure is only some evidence bearing upon the question of fact to be decided, and that is, What amount should be allowed as an operating charge to provide for the replacement of property which may become useless, either on account of physical deterioration or obsolescence? We do not; understand that such engineer’s estimates is the only evidence which it is competent for the trier of the facts to consider. In Smith v. Illinois Bell Tel. Co., 282 U. S. 133, 51 S. Ct. 65, 72, 75 L. Ed. 255, the Supreme Court of the United States held that “the experience of the Illinois Company * * * should afford a sound basis for judgment as to the amount which in fairness both to public and private interest should be allowed as an annual charge for depreciation.” In Gender, Paeschke & Frey Co. v. Commissioner (C. C. A. 7) 41 F.(2d) 308, 310, the Commissioner of Internal Reverme had allowed depreciation at the rate of 5 per cent., computed on the straight line basis. There was evidence that certain machines had been in use as long as 45 years, and wore still rendering proper service. Concerning this that court said: “Theoretically this is quite a safe procedure in the absence of better evidence; but in this particular case there were machines that had been in use as long as forty-five years and wore still rendering proper service, due to keeping them in good repair and promptly replacing all broken parts, and making such renewals as were necessary. This fact proves conclusively that no rule or rate can in all instances accurately measure depreciation. While it may form a safe basis for a prima facie case, it must give way to the facts in each particular case if those facts are presented and are inconsistent with the rate.” In addition to the evidence of the engineers, the Secretary had before him the fact that the cost of retirements and replacements of property during the preceding nine years had averaged $4,371 annually. True, the amount of property that is replaced in one or two years has no hearing on its probable life; but, whore the property is of varying ages and nature, an experience of nine year’s may have some evidentiary value. The Secretary had evidence that much of the property was susceptible of maintenance by minor repairs which were properly charged to expense rather than to capital. It appeared that the petitioner had, for a period of twelve years, set up on its books an average depreciation of about $45,000 a year. The Secretary made an allowance for an annual depreciation charge of $47,000 a year. Considering the fact that the Secretary found that this property, after a great many years of useful life, is still in 83.8 per cent, condition, and considering- the small amounts which had been actually expended thereon for replacements during the past nine years, we are of the opinion that the Secretary's allowance is supported by the evidence. Bate of Beturn. The Secretary found ihat 7y2 per cent, was a fair return. The petitioner introduced evidence that the capital structure of such a property as the petitioner’s would involve bonds, preferred stock, and common stock; and, by a compilation of the interest and dividend rates that would be necessary on a,ll securities, arrived at the conclusion that anything less than 10 per cent, on the full valuation would be an unreasonably low rate. This means that the common stock, carrying the risk of the entire investment, would receive much in excess of 10 per cent. But we do not think that the return upon properties used and useful should be increased or decreased because of the capital structure of a particular owner. ,We think the Secretary’s method of allowing a percentage upon the value of the property used and useful in the public business, without respect to the capital structure, is permissible. Otherwise the rates of two identical properties would vary accordingly as one owner had issued bonds or preferred stock and the other owner had not. It seems to us that a 7y2 per cent, return is a minimum. It must be remembered that no return at all is assured; the effect of the order is to grant permission to earn that sum, if the owner is able so to do. We have some doubt whether, as conditions are presently, capital could be attracted from investments which assure 5 or 6 per cent., backed by a large margin of safety, to an enterprise which offers only a permission to earn a maximum of 7% per cent. The history of the petitioner discloses considerable fluctuations in earning power from year to year. While we have doubt whether a permissive rate of 7y2 per cent, is sufficient to attract capital, it is, after all, a matter of opinion, and we resolve the doubt in favor of the Secretary’s finding’. The Secretary knows what a vital service these stockyards render to his particular charges, the farmers and the cattlemen; he knows the hardship that it would entail if they were deprived of the services of such institutions. The Secretary has no desire to strangle the petitioner, and, if doubt exists as to its ability to survive, he must have resolved those doubts in its favor. In any event, we are not disposed to hold fils order invalid on account of the rate of return. Complaint is also made because, in restating the expenses of the petitioner, the Secretary disallowed certain items paid as interest on bonds. This amount is provided for in the rate of return allowed upon the entire value of the properties of petitioner. This leaves for consideration three questions: (a) The exclusion of properties from the rate base; (b) charging to income, revenue which the Secretary held should be received from services rendered to traders or dealers; and (e) the propriety of predicating rates for the future upon the experience of a single year. Properties Excluded from the Bate Base. The Secretary excluded from the rate base certain properties which the petitioner acquired in good faith and in the exercise of sound business judgment, for the purposes of its business. By denying the petitioner a right to earn a return thereon, the Secretary has, as a practical matter, denied the petitioner the right to own them, for it is mathematically certain that, if the petitioner is not permitted to earn a return upon the value of such properties,. it cannot afford to keep them. Some one must pay the taxes on these properties, and some one must pay a return upon the investment, therein. If the petitioner is not permitted to earn sufficient funds from the only business which it has, to pay these carrying charges, then it cannot own them, for the stockholders cannot be expected to impair their capital investment on this account. These properties divide up into three classes., (a) Vacant Land Acquired for Expansion. The stockyards are favorably located with reference to railroads and highways, and with due regard to the olfactory senses of the residents of Denver. Packing houses and other business enterprises have grown up around it. The evidence is undisputed that during the 45 years of its history, while there have been cycles of good years and bad years, nevertheless there has been a general upward trend in the business. The evidence is likewise undisputed that the petitioner has about, if not quite, reached the limit of its present facilities. During the times of the peak load, the facilities are not now adequate. The directors of the petitioner undoubtedly realized that land must be acquired for expansion in the immediate future, and that such land must be adjacent to the presept plant, and that the amount of such adjacent and vacant land was limited; the directors further realized that the petitioner had no power 'of eminent domain, and .that, if they waited until the demand was absolute, they would be at the mercy of the owners; they realized further that, such vacant land might be improved-at any time by the owners; which would add greatly to the cost when the necessity became acute. In this situation, there can be no question but that it was sound business judgment, in the interest of the corporation and its patrons, to acquire this adjacent real estate while it was cheap and unimproved; and the Secretary has so found. To have waited until the adjacent property was improved, or until the owners could have taken advantage of its imperative need, would be to saddle upon the patrons an extravagant and unnecessary load. Confronted with this situation, the petitioner acquired at a reasonable price tracts of vacant ground, suitable for expansions that were reasonably deemed to be necessary reasonably soon. Plans had been prepared for construction on one tract of 19.825 acres and on another of 12.64 acres; other tracts had been acquired for material yards and to increase the facilities for trackage and railroad car storage. Without discussing the tracts excluded in detail, it is sufficient to say that the evidence discloses without dispute that all of them were acquired in good faith, and for the purposes of such expansion of its facilities as the directors believed to be reasonably imminent. The petitioner owned no other land available for expansion. The question of the right of the Secretary to exclude these properties from the rate base is, on this record,'a question of law. There is no doubt, as contended by ■ counsel for the respondents, that the Secretary has some power to decide how much additional land or property may be acquired for expansion purposes, and, if the directors acquire more property than.can reasonably be said to be necessary for the purposes of expansion for any reasonable period in the future, the Secretary has power to disallow it. But no 'such question is presented by this record. On the contrary, the Secretary has proceeded upon the theory that no land can be included in the rate base, unless it is in actual use. We quote from the Secretary’s findings: “If the respondent deems it the part of sound business management to hold land for possible future expansion, that policy is not questioned in this proceeding. When that land is brought into use as a result of the additional business the rates charged for services will then compensate the respondent for the use of the land upon its value as of the time it is brought into use.” We think the Secretary erred in this respect. The rule undoubtedly is and must be that the power to regulate rates does not confer upon the Secretary the power of management of tho affairs of the corporation. In providing for telephone facilities to a new addition, it is the part of wisdom to lay a cable that will provide services for customers that may reasonably he expected to bo attached in the future; in constructing office buildings, school buildings, and federal buildings, public authorities deliberately plan such buildings to accommodate the anticipated needs of the future. To do otherwise is to be short-sighted and wasteful. There is no rule of law that denies to the directors of a stockyards company or of a telephone company the right to use ordinary business judgment in the conduct of the affairs of the corporation. The rule of law adopted by the Secretary would deny to a telephone company the right to include in its rate base the value of any cable that was laid, unless every wire in the cable was in actual service; it would deny to an electric power company the right to include in the rate base the value of the power plant, unless it was being operated to its maximum capacity. Such a rule does not conform to sound business methods, nor to the rules of law as laid down by the courts. The report of the Special Committee of the American Society of Civil Engineers, dealing with the valuation of public utilities, states (volume 81, pp. 1341-1349): “Clearly it is a narrow construction of the law to claim, as has sometimes been done, that all property not actively in use at the time of the valuation should be excluded. A broader policy is desirable, both in the interests of tho owner of tho property and of the public. The property considered to he devoted to the public use, and therefore to he valued, should include, not only that in active use in the every-day operations, hut that which is properly and reasonably held in reserve to insure tho sufficiency and continuity of the service. “Recognizing that the erection of man-ufactories and other buildings, the opening of new streets, the laying- out of parks, and the making of other customary improvements in the neighborhood of public utilities, as well as increases in the value of adjoining property, will make the future acquisition of lands for the expanding needs of such public utilities difficult and expensive, if not impossible, it has been customary for public utilities to exercise foresight in the purchase of surplus land at crucial points, and in the opinion of the Committee it is in the interest of both the owner of the property and of the public that such land, purchased in good faith and held in reserve for future use, should ho included in the valuation, even though portions are for a time not in active use. “It is poor business judgment to build a gas plant, an electric plant, a railroad shop yard, or other like property, on land just sufficient to hold the buildings and other improvements immediately necessary, without reasonable provision for expansion. The history of all properties that have been built in response to reasonable demand for their services has been a history of growth, development, and expansion. Good business policy would provide for this expansion so far as it can be reasonably anticipated, and all property should bo included which is not in excess of a reasonable amount for development of the business over a reasonable period of time in advance of the valuation. Such a determination is not a matter of pure speculation. An investigation into the history of the growth, expansion of business, and expansion of physical property of the company, together with a consideration of existing conditions at each site, should easily determine the reasonableness of the inclusion. “In most of tho commission decisions stress is laid on the necessity of providing adequately for future needs in order that satisfactory service may be furnished continuously, and it is stated that it is not desirable in the general interest of consumers to discourage a reasonably liberal provision for the future. “It is the judgment of the Committee that there should not be a reduction in the valuation on account of excessive size or capacity, except when the excess is so great as to be clearly unreasonable and is the result of not using proper foresight. * * * If the opposite course is pursued, corporations may he deterred from making wise provision for the future, thereby increasing the hazard of the investor, probably increasing the ultimate cost by reason of premature retirement, duplication, or piecemeal construction, and hence ultimately increasing the cost of service to the public.” In Texas Midland Railroad Valuation Case, 75 I. C. C. 1, 161, it was held: “Any rule which would discourage railroads from exercising proper foresight in the purchase of lands which will be needed for terminal facilities in the future development of their properties would be most unfortunate, for it would not only tend to prevent the providing of the requisite facilities when necessary but would much increase the expense of those terminals when provided.” The authorities are in accord. It has been repeatedly held that “land not yet in use, but reasonably acquired for future use, may be allowed as part of the rate base.” Brooklyn Borough Gas Co. v. Prendergast (D. C. N. Y.) 16 F.(2d) 615, 626; Southern Bell Telephone & Telegraph Co. v. Railroad Comm. (D. C. S. C.) 5 F.(2d) 77; Consolidated Gas Co. of New York v. Newton (D. C. N. Y.) 267 F. 231; Whitten-Wilcox, Valuation Public Service Commission (2d Ed.) vol. 1, p. 805. In Pacific Telephone & Telegraph Co. v. Whitcomb (D. C. Wash.) 12 F.(2d) 279, 288, affirmed in Denney v. Pacific Telephone & Telegraph Co., 276 U. S. 97, 48 S. Ct. 223, 72 L. Ed. 483, it was held: “Utilities which are equal to its present requirenients may be grossly inadequate in the reasonably near future. Public service companies cannot wait until their facilities break down or 'prove unequal to the demands upon them before making needful additions and improvements. Business judgment must be employed to anticipate reasonable future needs and to make provision for them' in advance. This is essentially a matter of business management which may not be arbitrarily interfered with. There is nothing in the outlay to suggest dishonest, wasteful, or imprudent expenditure. The right of a public utility corporation honestly and in good faith to carry on its business and direct its-affairs must not be wrested from it under the guise of rate making. In the absence of evidence to the contrary, investments may reasonably be assumed to have been made in the exercise of reasonable judgment.” These cases do no more than to apply the rule long settled that the power to regulate rates does not confer the power to manage. In State of Missouri ex rel. Southwestern Bell Telephone Co. v. Pub. Serv. Comm., 262 U. S. 276, at page 288, 43 S. Ct. 544, 547, 67 L. Ed. 981, 31 A. L. R. 807, the Supreme Court said: “There is nothing to indicate bad faith. So far as appears, plaintiff in error’s board of directors has exercised a proper discretion about this matter requiring business judgment. It must never be forgotten that, while the state may regulate with a view to enforcing reasonable rates and charges, it is not the owner of the property of public utility companies, and is not clothed with the general power of manage-ment incident to ownership.” To the same effect see Banton v. Belt Line Ry., 268 U. S. 413, 421, 45 S. Ct. 534, 69 L. Ed. 1020; Chicago, M. & St. P. R. R. v. Wisconsin, 238 U. S. 491, 501, 35 S. Ct. 869, 59 L. Ed. 1423, L. R. A. 1916A, 1133; Northern Pac. Ry. v. North Dakota, 236 U. S. 585, 595, 35 S. Ct. 429, 59 L. Ed. 735, L. R. A. 1917F, 1148, Ann. Cas. 1916A, 1; Interstate Commerce Comm. v. Chicago G. W. Ry., 209 U. S. 108, 118, 28 S. Ct. 493, 52 L. Ed. 705. Opposed to this imposing array of authorities, counsel for the Secretary cite United Gas Co. v. Railroad Commission of Kentucky, 278 U. S. 300, 49 S. Ct. 150, 73 L. Ed. 390, and United Gas Co. v. Public Service Commission of West Virginia, 278 U. S. 322, 49 S. Ct. 157, 73 L. Ed. 402, affirming respectively (D. C.) 13 F.(2d) 510 and (D. C.) 14 F.(2d) 209. These cases involved gas rates. The West Virginia ease was an appeal from an order denying an interlocutory injunction, and the court said that sueh an order would- not be disturbed on appeal, unless plainly the result of an improvident exercise of judicial discretion. The Kentucky ease, however, was an appeal from a decision on the merits. The utility owned 68,900 acres of producing gas property, and, in addition thereto, owned leases on undeveloped and unexplored territory to the extent of 746,000 acres. The cost of all of sueh property was $6,732,920, and that value was allowed as a part of the rate base. The utility contended, however, that the reserve acreage of 746,000 acres should be included at a present valuation of about $30,000,000, and undertook -to prove that valuation by the estimate of engineers, which was based upon the assumption that gas would be found under sueh acreage in specific amounts, that there would be a market for it at a specific price, and that no law would be passed regulating the price at which it might be sold. The trial court held that there was no competent evidence of its present value. The Supreme Court of the United States affirmed the trial court in this respect. It will be observed, however, that the cost of this tremendous reserve acreage, of unexplored territory, was allowed in the rate base. In the West Virginia case, the trial court, in denying the interlocutory injunction, held that tlie 136,834 acres of proven territory was a sufficient reserve, and that the additional a.creage of unexplored territory should not be included in the rate base. The ease of San Diego Land & Town Co. v. Jasper, 189 U. S. 439, 23 S. Ct. 571, 574, 47 L. Ed. 892, is likewise not in point. The Supreme Court, in construing- the statute of California, said that it could hardly mean that a waterworks system constructed for 6,000 acres should have a. full return upon its value from 500, if those were all that it supplied, and in that connection the Supreme Court said: “If necessary to avoid that result, we should assume that only a proportionate part of the system was actually used and useful within the meaning of the statute.” In Spring Valley Waterworks v. City and County of San Francisco (C. C.) 192 F. 137, it appeared that the waterworks company had purchased all the potential reservoir sites and water rights within 50 miles of the city. The company undertook to include these in the rate base on the ground that they might be needed in fifty years. They were excluded largely on the ground that these rights -were acquired for the purposes of monopoly. In Consolidated Gas Co. v. City of New York (C. C.) 157 F. 849, vacant land was excluded because the court found that there was no intention on the part of the utility to use the extraordinarily valuable vacant land for the purposes of expanding its business. In that ease the rule is stated that vacant land, not used in the business, should not be included as a part of tlie rate base, “unless it is shown that its use will necessarily he required in the near future.” We conclude that the Secretary erred in excluding these tracts of ground from the rate base. The Secretary should make a finding as to the present value of such lands, and the taxes thereon should be included as a part of the operating expenses. (b) Railroad Right of Way. Railroad side tracks are indispensable to the operation of a stockyards. The petitioner, early in its history, acquired lands for right of way purposes, and constructed switch tracks thereon, and now owns the same. These were excluded by the Secretary on the ground that such tracks were not used as a part of the stockyards business, but as part of the business of transporting cattle. Tho statute defines stockyards services as services or facilities furnished in connection with the “marketing, feeding, watering, holding, delivery, shipment, weighing, or handling in commerce, of livestock.” (7 USCA § 201.) It is true that the railroad companies use these side tracks, pay for the use thereof, and pay the stockyards company for its services in unloading the cattle. It is likewise true that, until they are unloaded, the cattle are still in the custody of the railroad company, and that their transportation is not ended. This, however, does not answer the question. The Stockyards Act includes, among the purposes of the business, the shipment and handling of live stock in commerce. It is not claimed that the petitioner could require the railroad companies to build such side traeks, at their own expense, as the stockyards company might from time to time desire. The power conferred by the Interstate Commerce Act to require extensions of lines (49 USCA § 1 (21) does not extend to industrial side tracks (49 USCA § 1 (22) ; such power is not to be implied. Interstate Commerce Commission v. United States ex rel. Los Angeled, 280 U. S. 52, 50 S. Ct. 53, 74 L. Ed. 163; Western & Atlantic v. Public Comm., 267 U. S. 493, 45 S. Ct. 409, 69 L. Ed. 753. It is clear, however, that, if the stockyards company builds its own side tracks, the railroad companies may be required to furnish switching connections (49 USCA § 1 (9). Schlicher v. Director General, 62 I. C. C. 181, and Winters Metallic Paint Co. v. C., M. & St. P. Ry. Co., 16 I. C. C. 587. The petitioner had a right to construct and own its own side tracks, so that it might be assured that they were favorably located, and to avoid the delays and difficulties incident to some other method of handling the paramount problem of the prompt receipt and unloading of the live stock. There is convincing evidence in this record that it is to the marked advantage of stockyards companies to own the side tracks. The respondents freely concede that properly located side tracks are indispensable to the operation of petitioner’s business; no claim is made that, when these tracks were constructed or now, the railroads could have been required to construct thorn at their own expense. The sole reliance of the respondents is upon section 15 (5) of the Interstate Commerce Act (49 USCA), and the decisions applying it, which provide that railroad transportation ends only after the live stock is unloaded. Covington Stock-Yards Co. v. Keith, 139 U. S. 128, 11 S. Ct. 461, 35 L. Ed. 73. Respondents’ brief states the position of the Secretary as follows: “If the railroad leases property of a stockyards in order to gain access to pons, the transportation service nevertheless ends at the place where the livestock is loaded and unloaded. In other words, it is not the ownership of the land over which the spur track is constructed, or the legal obligation or absence of it to construct a spur track that determines whether such track is employed in stockyards or transportation service. It is rather the nature of the use.” There can be no doubt but that this track-age is used by the .railroads in the discharge of their public duties. There is likewise no doubt that petitioner owns it, and has a right to own it, as a part of its stockyards fa-, cilities. The respondents assume that the same property cannot be used for two purposes — that of transportation and market. We cannot agree with this assumption; the fact is that the proper location of side tracks is a part of the services of marketing. The trackage here is indispensable both to the transportation and the marketing of live stoek. It is in fact used and useful for both services. Since it is undisputed that the petitioner rightfully acquired this' trackage, in order better to discharge its responsibilities to its patrons, and that such trackage is in actual use, it seems unfair to deny it a return thereon because perforce it must be leased. To relegate it to such return as it may be able to secure by an agreement with its lessee is to deny its right to a fair return.' Such return as it does get should be restored to its income account. If the Secretary’s assumption is correct that stockyards service cannot commence until the railroad’s duty is completed, then the Secretary, to be consistent, should have eliminated from the income account of petitioner an item of $23,042.13 (net after labor expense) which the railroads paid petitioner for services in connection with loading and unloading cattle. But the Secretary did not eliminate this item. The dispute over trackage is therefore without substance, for this .item, plus the $10,585.74 rental, more than offsets a return on the trackage. (c) The Live Stoclc Show. The petitioner owns and maintains land and buildings for the purpose of an annual live stoek show, the -show being operated by the National Western Stock - Show Association, a separate corporation; the expenses of the show are borne by public subscriptions, but the stoek3rards company pays the taxes on the properties. The Secretary eliminated these properties from the rate base, saying: “Undoubtedly the livestock show is of educational value and of benefit to stock raisers, particularly to the raisers of pure bred livestock, but the extent to which it is generally beneficial to all of those who patronize-the Denver market is hypothetical.” Here again the evidence is undisputed. The Department of Agriculture is expending considerable sums of money in an effort-to induce cattlemen to raise a better grade of cattle. A pickup calf; or a grade steer,, will eat as much as a pure bred, but. it will not bring as much on the market. The primary object of live stoek shows is to convince the cattle raiser of the wisdom of raising the better grade stoek. The business of the petitioner is entirely dependent upon the live stoek business in its territory. If that business perishes, the petitioner will perish. If that business flourishes, the petitioner will flourish. It is axiomatic that the live stoek business will not flourish unless it is profitable. It will not be profitable unless better live stoek are raised. In bending its efforts toward furthering the success of the live stock business in its territory, the petitioner is furthering its own business. Here, again, to deny the petitioner the right to earn a return upon these properties, is to deny it the right to bear a part of the expense of this stoek show. Furthermore, the stoek show attracts buyers, and, the more buyers that are bidding, the better the prices that áre obtainable. It seems reasonable to assume that the better market