Smyth v. Ames

Smyth v. Ames, 169 U.S. 466, argued 5–7 Apr. 1897, decided 7 Mar. 1898 by vote of 9 to 0; Harlan for the Court. In Smyth v. Ames, the Supreme Court voided a schedule of railroad tariffs enacted by Nebraska and defined the constitutional limits of governmental power to set railroad and utility rates. The Court held that regulated industries were constitutionally entitled to earn a “fair return” on the “fair value” of the enterprise. Under the fair value rule a governmental authority was required to determine a “rate base,” which was the present value of the enterprise's assets, and to allow the enterprise to charge rates sufficient to earn a normal return on that value.

Smyth v. Ames was emblematic of the Court's protection of the free market economy in the late nineteenth century. Over time, the decision was criticized by jurists who objected to laissez‐faire constitutionalism. Critics claimed that the fair value rule was impractical because of the complex administrative proceedings required to determine the current value of utility assets as the rate base. Smyth's critics also claimed that the case was illogical because a utility's value is determined by its rates. Rates could not be set according to an enterprise's value since that value cannot be known until the rates are determined.

Despite these criticisms, the conservative Court steadfastly adhered to Smyth v. Ames, which set the constitutional limits of rate regulation until it was overruled in Federal Power Commission v. Hope Natural Gas Co. (1944).

Stephen A. Siegel