Smyth vs. Ames, US Supreme Court 1898

Does It Still Apply?

It was certainly a long time ago. And it’s a bit of a story about how a Supreme Court decision having to do with railroads wound up having a lot to do with the proper operation of public utilities, particularly electric companies.

The fact is that the decision in this case led to the basic organization format for all American public utilities. The case itself was concerned with Supreme Court voiding a Nebraska railroad law, finding that it violated the Fourteenth Amendment to the United States Constitution in that it takes property without due process of law.

Nebraska tried to control the rates of the railroads without regard to the fact that such control could make it impossible for railroad to be able to afford to stay in business.

The portion of the Court’s decision that impacted on the public utility electric service companies was that the utilities were guaranteed a rate of return based on the company’s “Rate Base.” That term is defined as “all things used and usable necessary to provide the service to the public.”

The rate of return in each industry was left to the public utility commissions in the various states which held public hearings prior to the establishment or change in the utility’s rate base from time to time. Consumers, through various associations, often had much to say at the hearings and had considerable impact on their commission’s findings. (See Owner’s Committee on Electric Rates in New York)

All of this worked well in the public interest until the late 1990s when the practice that came to be known as deregulation came into being. It was felt that competition in the supply of electricity would benefit consumers and so suppliers from outside the various franchised areas were allowed to bring in power at “lower” rates.

Trouble was, and is, these rates are not as clearly subject to regulation because they were – Deregulated. And naturally a large number of potential suppliers entered the marketplace.
The upshot is that it appears that Smyth vs. Ames hasn’t carried over to the deregulated marketplace. On the other hand, it seems the market has been controlling itself – as capital markets are supposed to do. Deregulated rates, where no cap exists, has seen costs rise anywhere from 13% to 55% - and yes, the customer can go back to the original regulated supplier. However, sometimes there’s a charge for “going home.”

There will certainly be more on this subject as time goes by and once again, it will require an organization of ratepayers to go to work