Source: https://supreme.justia.com/cases/federal/us/289/287/
Timestamp: 2019-04-24 15:52:04+00:00

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Los Angeles Gas & Electric Corp. v.
1. The legislative discretion implied in the ratemaking power embraces the methods of reaching the legislative determination as well as the determination itself. P. 289 U. S. 304.
to revise the legislative process, but is confined to the constitutional question, whether the rates fixed are confiscatory. P. 289 U. S. 304.
3. Upon that question, the party complaining has the burden of proof, and the Court may not interfere unless the confiscation is clearly established. P. 289 U. S. 305.
4. In determining whether a public utility has been deprived of a fair return for the service rendered the public in the use of its property, the basis of calculation is the fair value of the property -- that is, its reasonable value at the time it is being used for the public. P. 289 U. S. 305.
5. The judicial ascertainment of values for the purpose of deciding whether rates are confiscatory is not a matter of formula, but there must be a reasonable judgment having its basis in a proper consideration of all relevant facts. P. 289 U. S. 306.
6. The actual cost of the property is a relevant fact, but not an exclusive or final test. P. 289 U. S. 306.
7. The time and circumstances of the outlay and the effect of altered conditions demand consideration. P. 289 U. S. 306.
8. Even when cost is revised so as to reflect what may be deemed to have been invested prudently and in good faith, the investment may embrace property no longer used and useful for the public good. P. 289 U. S. 306.
9. The reasonable cost of an efficient public utility system is good evidence of its value at the time of construction. P. 289 U. S. 306.
10. Such actual cost will continue fairly well to measure the amount to be attributed to the physical elements of the property so long as there is no change in the level of applicable prices. P. 289 U. S. 306.
11. When such change in the price level has occurred, actual experience in the construction and development of the property, especially in a recent period, may be an important check on extravagant estimates. P. 289 U. S. 306.
12. In order to determine present value, the cost of reproducing the property is a relevant fact. P. 289 U. S. 307.
13. This Court has not decided that the cost of reproduction furnishes an exclusive test. P. 289 U. S. 307.
14. The Court has emphasized the danger in resting conclusions upon estimates of a conjectural nature. P. 289 U. S. 307.
15. The weight to be given to actual cost, to historical cost and to cost of reproduction new is to be determined on the facts of the particular case. P. 289 U. S. 308.
6. Judicial notice taken of the high level of prices of labor and materials prevailing not only from 1917, as an incident of the War, but also in 1922 and 1923, and that there was no "substantial general decline" in such prices from that time to 1926. P. 289 U. S. 308.
17. The Court finds no warrant for concluding that, since 1917, when the gas plant here in question was first valued by the state commission, there has been any change in prices of labor and materials making it unfair, in fixing rates for the future, to take the historical cost found by the Commission, as evidence of the value of the company's structural property at the time of the rate order, it clearly appearing that the prices of labor and materials reflected in the historical cost were higher than those obtaining during the later period to which the prescribed rates apply. P. 289 U. S. 309.
18. A difference between the Commission and the company as to the amounts to be added for overheads in estimating historical cost becomes immaterial in this case, since the company's higher estimate of that cost is less than the amount taken by the Commission on the basis of fair value as an undepreciated rate base. P. 289 U. S. 309.
19. In estimating cost of reproduction, items for financing and for promoters' remuneration, which are merely conjectural, should not be included. P. 289 U. S. 310.
20. Plant facilities that have become unnecessary are not included in estimating cost of reproduction as a base for future rates. P. 289 U. S. 311.
21. The determination of present value is not an end in itself, but is to afford ground for a prediction of future values upon which to determine valid future rates. P. 289 U. S. 311.
22. Estimates of present value, taken as the cost of reproduction as of December 31, 1929, based upon average prices from 1926 to 1929, furnished no dependable criterion of values in the succeeding years, because of the serious decline of prices which the country was facing in a depression amounting to a change of economic level. P. 289 U. S. 311.
23. "Going value" is included in the base in determining whether rates are confiscatory, but not "goodwill." P. 313.
24. The concept of "going value" is not to be used to escape rate-fixing authority, but, on the other hand, that authority is not entitled to treat a living organism as nothing more than bare bones. P. 289 U. S. 313.
longer needed in the business but including allowances for interest, organization expenses, franchise, land values, overhead, etc., the excess may be assigned to "going value," although not so described in terms by the Commission making the valuation. P. 289 U. S. 316.
26. An allowance for "going concern" value will not be adjudged so insufficient as to result in confiscation where the evidence offered to prove its insufficiency is highly uncertain and speculative. P. 289 U. S. 317.
27. Principles governing the calculation of fair rate of return restated. P. 289 U. S. 319.
28. Considering the financial history of the company, its relations and opportunities, and the general situation with regard to investments, the Court cannot say that 7% return is confiscatory in this case. P. 289 U. S. 319.
29. The Court finds no reason to disturb the finding in this case as to revenue and expenses, the former depending largely upon probable future temperatures (influencing the consumption of gas for heating) and the latter upon the sufficiency of the depreciation annuity allowed by the Commission. P. 289 U. S. 320.
Appeal from a decree of the District Court, constituted of three judges, which dismissed the bill in a suit by the appellant gas company to enjoin the defendant state commission and officers from enforcing new gas rates, which it attacked as confiscatory.
of three judges, granted an interlocutory injunction and on final hearing dismissed the bill. 58 F.2d 256. The company appeals.
Under the Commission's order of 1928, the gas rates were estimated to yield a return slightly in excess of 7.5 percent. 32 C.R.C. 379, 386. Concluding that these rates actually yielded a much higher return, the Commission reduced the rates by the order now under review. It was intended to effect a reduction of 9 percent in gross revenue. 35 C.R.C. pp. 463, 469. The reduction amounted to about $1,300,000 in gross revenue and about $1,080,000 in net revenue.
1. The Commission's Valuations. -- In determining the rate base, the Commission made two sorts of valuations of the gas properties for the year 1930 -- one of $60,704,000 on the basis of "historical cost," and the other of $65,500,000 on the basis of "fair value." The Commission estimated that the return to the company on the former basis would be 7.7 percent and, on the latter, 7 percent. 35 C.R.C. p. 464.
be included for engineering and superintendence, legal expenses, injuries and damages, insurance, taxes, interest during construction, and contingencies. The general instructions of the Commission as to classification of fixed capital accounts provided that such overheads should be assigned or apportioned to particular accounts, so that each item of property should bear its proper share, and a considerable range of discretion in making allocations rested with the company. 35 C.R.C. p. 451. The company had availed itself of this opportunity, and the average charge on the company's books for these costs from 1913 to 1929 was about 6 percent of the direct labor and material charges. The Commission's engineers were of the opinion that 11.25 percent might reasonably have been charged to capital, and, on that basis, the total historical cost of fixed property would have been raised from $58,842,187 to $61,019,662. The company's engineers estimated that 14.48 percent should be allowed for these overheads, bringing that historical cost up to $63,413,246. The Commission stated that its conclusions had been reached upon the assumption that the company's allocations in reporting additions and betterments were properly made, and that the effect of the long continued practice of the company was that it had been allowed under the rate orders, in the form of operating expenses, the items which it now claims should have been added to capital. The Commission thought that the company was not in a position to raise the question. The Commission recognized an exception in the item of interest during construction which, when not charged to capital, had been charged to income accounts and did not go into operating expenses, and accordingly there was included in the Commission's finding of historical cost an additional allowance, for that interest, of $155,000 which the Commission deemed to be fair. 35 C.R.C. 451-453.
No deduction was made from the total historical cost for the investment in the generating plant and equipment which the Commission found were being rendered unnecessary by the introduction of natural gas. In order to meet the rapidly increasing demand, the gas manufacturing plant had been greatly expanded, until, in 1924, the company had a plant of $98,500,000 cubic feet daily capacity. The book value of this plant was approximately $10,000,000, and the amount included therefor in the company's estimate of historical cost was approximately $10,500,000. Since April, 1927, on account of the supply of natural gas, the company has not manufactured gas except on one occasion, on March 13, 1928, when, in anticipation of a shortage, a certain amount (569,000 cubic feet) was manufactured, which constituted but nine-tenths of 1 percent of the gas sent out on that day. The Commission found that the evidence convincingly established "the existence of a natural gas supply adequate for years to come." But, as the investment in the manufacturing plant had been made prudently and in good faith, it was included by the Commission in the estimate of the historical cost of the company's gas properties.
In that estimate, as thus made, nothing was deducted for depreciation and nothing was added for going concern value.
$3,000,000 in the valuation of the physical property. [Footnote 4] In its estimate, the company included overheads at 24.27 percent, or a total of $14,990,278. On that basis, the value of the physical property was estimated by the company, without depreciation, at $76,754,919. [Footnote 5] This included $12, 134,665 as the "reproduction value of the standby manufacturing facilities," above mentioned. The company's witness testified before the Commission (in 1930) [Footnote 6] that, in his estimate of reproduction cos,t he had "attempted to obtain prices that would be reasonably stable and might prevail over the next three years;" that the prices used were "very close to the average of those which prevailed for a 3-year period prior to January 1, 1930;" and while, in his opinion, there was "a temporary slump in prices," he did not think it probable that there would be "any substantial change within the next two or three years."
In arriving at its total estimate of reproduction cost new, the company added to its valuation of its physical property the items of "Cost of financing, $5,921,470," "Promoters' remuneration, $2,500,000," and "Going concern value, $9,228,667." These items the Commission did not allow. The items of "cost of financing" and "promoters' profits" were rejected as "too hypothetical and far removed from actuality to properly find lodgment in a rate base." The company's claim for "going concern" value was based upon expert testimony which the Commission regarded as involving unacceptable theories and assumptions. 35 C.R.C. pp. 459, 460.
Depreciation. -- The company estimated $3,470,326 for accrued depreciation. The Commission found that this was too little, and that the accrued depreciation was not less than $7,650,000. The Commission stated that this amount was reached after a careful and detailed study involving a physical inspection of the property and analysis of the company's records. Id., p. 461.
here involved as a going property with business attached, giving full effect to the current level of prices and allowing for any intangible elements of value not fully cared for in the usual and current operating expense allowances, but excluding various built up claims of value incident to a reproduction of the property under an assumed reconstruction program as too uncertain and hypothetical to enter into a rate base figure did not for the year 1928, using round figures, exceed $65,500,000, and for the year 1929 $64,000,000, and for the year 1930 does not exceed $65,500,000, which figures, for the purposes hereof, are spoken of as rate base."
These amounts included the allowances (supra, p. 263) for additions and betterments (for 1930) and for working capital, materials and supplies. Id., pp. 461, 462.
Although the accrued depreciation was thus treated by the Commission as deductible, in order to arrive at fair value, the Commission thought that operating results under the fair value theory could best be shown by using an undepreciated rate base. The result is that the Commission allowed for the year 1930, as a basis for its calculation of return, a valuation of $65,500,000 without deduction for depreciation. Id., p. 462.
"on the assumption that temperature conditions in the future will be normal and that business conditions will approximate those of the year 1930 and that the gross revenue of 1931 with normal temperatures will not be less than that of 1930."
a temperature reserve to which should be credited the amount by which the net earnings of its gas department for the year 1931 should be in excess of a stated sum. This plan was not accepted.
3. Decision of the District Court. -- The company brought this suit in December, 1930, attacking the findings of the Commission as to both rate base and return. The company alleged that the fair value of its gas properties exceeded $95,000,000; that its gross and net revenues were overestimated by the Commission; that, under the rates prescribed, the company would have earned, for the twelve months ending October 31, 1930, but 4.25 percent upon the fair value which it claimed, and that the temporary optional rates, for which the Commission's order provided, would also yield less than a fair return and were equally invalid. Upon the motion for interlocutory injunction, the entire record before the Commission was received in evidence, together with additional affidavits, and upon the same evidence the parties submitted the cause for final determination.
While the District Court did not make specific findings of values, revenue, expense, and rate of return, the court reviewed the findings of the Commission and the evidence and held that the Commission's valuations were reasonable and that the prescribed rates permitted a reasonable return. Two opinions were delivered, one for the majority of the court and a concurring opinion by the Circuit Judge, in which the contentions of the company were examined.
company sustain the Commission in its statement that the plaintiff's securities are capable of being marketed at moderate interest rates, and that it will continue to grow."
58 F.2d 256, 259. The court found that the Commission "was very liberal in its treatment of certain items of property;" that, "since 1924," the company has served natural gas, "which is plentiful in the numerous oil fields in Southern California;" that "there is no evidence which destroys the Commission's conclusion that the supply of natural gas will be abundant and constant;" that the Commission had found, in effect, that "at least two of the artificial gas manufacturing plants" were no longer needed, and might well be retired; that nevertheless the Commission had included them in its valuation "as a live necessary part of the operative property;" and that, had these plants been eliminated, "the fair value base would have been reduced by approximately $3,000,000." Id.
"that the current price level cost of plaintiff's gas properties used and useful in the public service applying prices prevailing December 15, 1930, including land market value as of December 31, 1929, and excluding difficulty factor, [Footnote 10] is $60,009,099, undepreciated;"
"the variations in price levels during the year 1930 do not constitute a permanent change in price levels and prices will for a reasonable period in the future be on a higher level than existed on December 15, 1930, and will, on the average over the next few years, approximate the prices used by him in his estimate of labor cost new reflected in the value of $95,767,351 shown in the affidavit filed herein on December 23, 1930."
items hereinafter referred to, was one which essentially represented the investment cost at the present time, of all the operative property and its connected incidentals."
"the large amounts claimed by the company for cost of financing, $5,921,470; promoters' remuneration, $2,500,000; cost of attaching business (going concern value) $9,228,667; added 'difficulty' costs, $580,195, . . . were properly rejected as for their total amounts."
The court observed that the matter of accrued depreciation, which had not been deducted from the fair value base as used by the Commission, was important as affecting the annuity allowance to be considered in arriving at prospective income. The amount allowed by the Commission as depreciation annuity was $1,072,000, while the company claimed that it should be not less than $2,344,744. The court noted the inconsistency of this claim, when the company asserted that the total accrued depreciation affecting its property was only $3,470,326. The court concluded that the allowances for depreciation annuities which had been made prior to the rate hearing under review were excessive, and were not controlling, that depreciation was a matter not capable of definite ascertainment, and that it had not been shown that the Commission had not exercised a reasonable judgment. Id., p. 261.
"We may note that the winter of 1931-32 in the City of Los Angeles, as it has thus far progressed at the end of January, has been one of the coldest in many years. And so, the rule of assumed average temperatures seems to be the only reasonable one to adopt. During unusually mild winters, the utility service will earn less than was estimated to be allowed to it, and, in colder winters, will earn more."
The action of the Commission was also approved with respect to the allowances for materials and supplies and for working capital.
"that the values for plaintiff's property as fixed and determined by the defendant Railroad Commission are the reasonable values thereof; that the rates fixed are such as to render a reasonable return on such values and that said rates are therefore not confiscatory,"
and the court adopted, "as representing its further findings," the opinion filed by the two District Judges. The Circuit Judge concurred in the decree, referring to his concurring opinion for the findings of fact upon which his action was based.
of the result reached, but the judicial function does not go beyond the decision of the constitutional question. That question is whether the rates as fixed are confiscatory. And, upon that question, the complainant has the burden of proof, and the court may not interfere with the exercise of the state's authority unless confiscation is clearly established.
that the judicial ascertainment of value for the purpose of deciding whether rates are confiscatory "is not a matter of formulas, but there must be a reasonable judgment, having its basis in a proper consideration of all relevant facts." Minnesota Rate Cases, 230 U. S. 352, 230 U. S. 434; Georgia Railway & Power Co. v. Railroad Commission, 262 U. S. 625, 262 U. S. 630; Bluefield Water Works Co. v. Public Service Commission, 262 U. S. 679, 262 U. S. 690.
"such actual cost will continue fairly well to measure the amount to be attributed to the physical elements of the property so long as there is no change in the level of applicable prices."
McCardle v. Indianapolis Water Co., 272 U. S. 400, 272 U. S. 411. And, when such a change in the price level has occurred, actual experience in the construction and development of the property, especially experience in a recent period, may be an important check upon extravagant estimates.
"it is impossible to ascertain what will amount to a fair return upon properties devoted to public service without giving consideration to the cost of labor, supplies, etc. at the time the investigation is made. An honest and intelligent forecast of probable future values, made upon a view of all the relevant circumstances, is essential. If the highly important element of present costs is wholly disregarded, such a forecast becomes impossible."
this is true of asserted value as of other facts."
The weight to be given to actual cost, to historical cost, and to cost of reproduction new is to be determined in the light of the facts of the particular case. McCardle v. Indianapolis Water Co., supra.
5. In determining the weight to be ascribed in the instant case to historical cost as shown by the evidence, the outstanding fact is that the development of the property had, for the most part, taken place in a recent period. We agree with the court below that no ground is shown for assailing the valuation placed upon the company's property by the Commission in 1917, in its first decision (13 C.R.C. p. 724) and which appears to have been accepted by the company as a starting point in later rate investigations. See 16 C.R.C. p. 481 (1919); 20 C.R.C. p. 96 (1921). The rate base fixed in 1917 was approximately $13,000,000. From that time, the cost of additions and betterments was under constant supervision and was established by the company's records under the accounting regulations of the Commission. From 1917 to 1919, there was but little change, the company's estimate of capital and the rate base as fixed by the Commission for 1919 being under $14,000,000. 16 C.R.C. pp. 481, 482. Thus, the additions and betterments which brought the historical cost of the fixed property (with land at current values) up to $58,842,187, as found by the Commission at the end of 1929, took place in the ten preceding years and approximately two-thirds of the latter amount appears to have been the cost of additions and betterments after January 1, 1922, as the rate base taken at that time was approximately $20,000,000. 20 C.R.C. pp. 97, 98. We have had occasion to take judicial notice of the high level of prices of labor and materials prevailing not only from 1917, as incident to the war, but also in 1922 and 1923, and that there was no "substantial general decline"
in such prices from that time to 1926. [Footnote 12] See Lincoln Gas Co. v. Lincoln, 250 U. S. 256, 250 U. S. 268; Galveston Electric Co. v. Galveston, 258 U. S. 388, 258 U. S. 402; McCardle v. Indianapolis Water Co., supra, p. 272 U. S. 412. During these years, the historical cost of the company's fixed property increased by additions and betterments to over $52,000,000. 29 C.R.C. p. 181. There can be no question that the cost of additions and betterments from 1926 -- in the period just preceding the Commission's order under review -- was good evidence of their value at that time. And, so far as prices of labor and materials are concerned, we find no warrant for a conclusion that there had been any change in levels during the years that intervened from the first valuation in 1917 which made it unfair to the company, in fixing rates for the future, to take the historical cost as found by the Commission as evidence of the value of the company's structural property at the time of the rate order. On the contrary, it clearly appears that, by reason of the downward trend, the prices for labor and materials, which were reflected in that historical cost were higher than those which obtained during the later period to which the prescribed rates apply.
property at $61,019,662, instead of $58,842,187, allowed by the Commission. I t is unnecessary to review the contentions upon this point, as, if the valuation were made at the higher figure, while it would exceed the $60,704,000 found by the Commission as historical cost, it would still be under the amount of $65,500,000 which the Commission took, on the basis of fair value, as an undepreciated rate base.
of $12,134,665 was included in the company's estimate as the cost of reproducing this plant. Whatever may be said of the propriety of including this entire plant in a valuation based on historical cost, in the light of prudent investment, we perceive no reason for embracing unnecessary facilities in an estimate of cost of reproduction. In a new construction under present conditions, it does not appear that such an extensive manufacturing plant would be established, and the finding of the District Court is amply sustained that, if the manufacturing facilities no longer needed had been eliminated, the fair value base would have been reduced by about $3,000,000. With that deduction, the estimate of the Commission's engineer would be about $70,000,000, without allowance for depreciation.
We find it unnecessary, however, to consider the details of these estimates, for there is a fundamental objection to their acceptance as a basis for a finding of confiscation. The determination of present value is not an end in itself. Its purpose is to afford ground for prediction as to the future. It is to make possible an "intelligent forecast of probable future values" in order that the validity of rates for the future may be determined. "Estimates for tomorrow," the Court has said, "cannot ignore prices of today." Southwestern Bell Telephone Co. v. Public Service Commission, supra; Bluefield Water Works v. Public Service Commission, supra, p. 262 U. S. 691; St. Louis & O'Fallon Ry. Co. v. United States, supra. But we know that the estimates of present value, taken as the cost of reproduction as of December 31, 1929, based upon average prices from 1926 or 1927 to 1929, furnished no dependable criterion of values in the succeeding years. The country was facing a most serious decline in prices. It was entering upon a period of such depression as to constitute "a new experience to the present generation."
It was not the usual case of possible fluctuating conditions but of a changed economic level. Atchison, Topeka & Santa Fe Ry. Co. v. United States, 284 U. S. 248, 284 U. S. 260, 262. That an important change was in progress was shown by the evidence submitted on the application for interlocutory injunction in January, 1931, to which we have already referred. The Commission's witness then called attention to the downward trend of prices, estimating the cost of the property on the basis of prices prevailing December 15, 1930, and taking overhead at 6 percent at $60,009,099, as against $64,082,282 as of December 31, 1929, and $63,399,822 as of June 15, 1930. See supra, p. 6. The mistaken outlook of the company's expert witness is disclosed by his affidavit in reply, supporting his former estimate that, in his opinion, prices for the immediate future, and "for several years to come," would be "on the average higher than the present level and approximately at the 1929 level." It is apparent that the estimates of cost of reproduction new of 1929, or of 1930, upon which the company relies, afforded no secure foundation for prediction of future values, and the rate base as fixed by the Commission is not to be invalidated as involving confiscation by reason of these estimates which the course of events deprived of credit as trustworthy prophecies.
made its calculation of the company's return, under the rates prescribed, upon the rate base it fixed, undepreciated.
"element of value which inheres in the fixed and favorable consideration of customers, arising from an established and well known and well conducted business,"
just exercise of the regulatory power in fixing rates, and, on the other hand, that authority is not entitled to treat a living organism as nothing more than bare bones.
The principle as thus recognized and limited is obviously difficult of application. Cedar Rapids Gas Co. v. Cedar Rapids, supra. It does not give license to mere speculation; it calls for consideration of the history and circumstances of the particular enterprise, and attempts at precise definition have been avoided. It is necessary again, in this relation, to distinguish between the legislative and judicial functions. It is the appropriate task of the Commission to determine the value of the property affected by the rates it fixes, as that of an integrated, operating enterprise, and it is the function of the court in deciding whether rates are confiscatory not to lay down a formula, much less to prescribe an arbitrary allowance, but to examine the result of the legislative action in order to determine whether its total effect is to deny to the owner of the property a fair return for its use.
"expressly declared that his detailed valuation of the physical property and water rights included no increment because the property constituted an assembled and established plant, doing business and earning money,"
and that an examination of his elaborate report convinced the Court that this was true. And, in that case, the Court found that the return allowed by the ordinance in question was clearly confiscatory. In Lincoln Gas Co. v. Lincoln, supra, pp. 250 U. S. 267-268, the Court questioned the propriety of the master's treatment of going value, but, noting compensatory errors in favor of the complainant, could not conclude that the master was wrong in holding that the ordinance was not shown to be confiscatory. In Galveston Electric Co. v. Galveston, supra, the Court took occasion to say that the expressions in the Denver case and in the Lincoln case were not to be taken as modifying in any respect the rule declared in he Des Moines case as to the exclusion of goodwill. In Georgia Railway & Power Co. v. Railroad Commission, supra, the finding below as to going value was not disturbed. In Bluefield Water Works Co. v. Public Service Commission, supra, while 10 percent had been added for going value, the total result was a valuation which could not be sustained. In McCardle v. Indianapolis Water Co., supra, where the rates were held to be confiscatory, the Court found that the evidence was "more than sufficient to sustain 9.5 percent for going value" and that the Commission's engineer had made no appraisal of that element.
"the fair value of the property here involved as a going property with business attached, giving full effect to the current level of prices and allowing for any intangible elements of value not fully cared for in the usual and current operating expense."
"assumed a live active plant and affirmed that the ultimate total included all costs of attaching business as the same had accrued and been accounted for."
needed. Eliminating the latter amount, the margin in the rate base, as taken at fair value, over historical cost was about $7,796,000. If allowance be made for increased overheads, by taking them at 11.25 percent in figuring the cost of additions and betterments (instead of the 6 percent as allocated to capital by the company in its books), the allowance of which the company urges in the light of the testimony of the Commission's engineers, and if the difference of $2,177,765 be deducted, there would still remain $5,618,235 in the rate base over the historical cost as thus revised. As the historical cost of the far greater part of the fixed property appears to have been taken at price levels which were higher than those which have obtained in the period to which the prescribed rates are applicable, and cannot fairly be said to underestimate the value of the plant as of that period, this excess amount of over $5,500,000 can appropriately be assigned to elements of value which may not have been fully covered. The record affords no adequate basis for criticizing the allowance made by the Commission for materials and supplies and working capital, and thus he entire excess may be regarded as applicable to whatever intangible value the property had as a going concern. The fact that this margin in the rate base was not described as going value is unimportant if the rate base was in fact large enough to embrace that element.
"that a purchaser will ordinarily and reasonably pay for a property with established earnings, and on a stabilized operating basis approximately one year's gross revenue over and above the value of physical property."
This basis, the witness said, would indicate a going value of $15,801,208.21 "based on revenues for the year ended December 31, 1929." His second method was to take a percentage of the physical property, the witness stating that, in his opinion, a purchaser "would pay approximately 15 percent above the cost of reproduction because of the going value of a property so developed." This percentage produced a total of $10,638,005. The third method he called the "consumer method," which was based on a cost of not less than $25 per meter, and gave an aggregate of $8,886,700. The witness said that he had also given consideration to the fact that the company had "an exceptionally good history of growth, an established business, with satisfactory record of earnings and excellent future prospects." The witness alluded to the growth of Los Angeles and adjoining communities, and, considering all these factors, estimated the going value as of January 1, 1930 at $10,000,000.
securing the present business of the company. This was thus calculated to amount, from the second through the seventh year, inclusive, to $8,721,878. To this sum the witness added, as the estimated cost "of organizing property and personnel," $506,789, thus reaching the total of $9,228,667 which the company claims as going value. It is unnecessary to analyze the testimony of these witnesses, as it is obviously too conjectural to justify us in treating the failure to include their estimates as a sufficient basis for a finding of confiscation.
Our conclusion is that the company has failed to sustain its attack upon the rate base of $65,500,000.
"public utility is entitled to such rates as will permit it to earn a return on the value of the property which it employs for the convenience of the public equal to that generally being made at he same time and in the same general part of the country on investments in other business undertakings which are attended by corresponding risks and uncertainties; but it has no constitutional right to profits such as are realized or anticipated in highly profitable enterprises or speculative ventures."
"should be reasonably sufficient to assure competence in the financial soundness of the utility, and should be adequate, under efficient and economical management, to maintain and support its credit and enable it to raise the money necessary for the proper discharge of its public duties."
"a rate of return may be reasonable at one time and become too high or too low by changes affecting opportunities for investment, the money market, and business conditions generally."
the company, [Footnote 13] its relations and opportunities, and the general situation as to investments, we find it impossible to hold that a return of 7 percent is so low as to be confiscatory. Wabash Electric Co. v. Young, supra, p. 287 U. S. 502.
The question, then, is as to the estimates of revenue and expenses. The company complains that the Commission's estimate of revenue was too high. The problem largely concerns temperatures, and it is plain that the Commission was justified, in fixing rates which were to apply for a considerable period, in taking average temperatures. The District Court, with its special knowledge of local conditions, and speaking in April, 1932, held that the action of the Commission was fair. The Circuit Judge supplemented this finding of the majority by his holding that there was "nothing unreasonable in the estimate of returns by the Commission so far as temperature is concerned," and that there was "nothing to indicate that due consideration was not given to the possible effect of the depression upon the consumption of gas." 58 F.2d 256, 262, 286.
the light of experience would be excessive. Smith v. Illinois Bell Telephone Co., supra, p. 282 U. S. 158. The Commission was entitled to form its judgment, and the three judges in the court below were agreed in the view that the discretion of the Commission in this regard had not been unreasonably exercised. We see no reason to disturb this conclusion.
The few minor questions which remain do not require specific mention.
MR. JUSTICE VAN DEVANTER did not hear the argument and took no part in the consideration and decision of this case.
"On December 31, 1929, the Company had outstanding in the hands of the public $47,070,000 par value of bonds, $19,469,995 par value preferred stock, and $20,000,000 par value of common stock. Its depreciation reserve on that date was reported at $16,804,105.15. All of its common stock is owned by Pacific Lighting Corporation Since 1916, but $4,500,000 of this stock has been purchased for cash, $5,500,000, however, having been distributed to Pacific Lighting Corporation in the form of stock dividends, representing earnings left in the property. Dividends have been paid on its common stock of 7.20 percent per share ($100 par value) in 1916, 1917, and 1918; 7.4 percent in 1919; 8.4 percent in 1920, 1921 and 1922; 8.7 percent in 1923; 33.75 percent in 1924, included in which is 25 percent as a stock dividend of $2,500,000; 9 percent in 1925; 9.815 percent in 1926; 35.17 percent in 1927, which includes a stock dividend of 21.42 percent, or $3,000,000; 15 percent in 1928, and 17 percent in 1929. The Company's surplus has grown from $381,212.97 in 1916 to $4,176.663.09 in 1929, while its depreciation reserve increased from $3,804,383.36 to, as said above, $16,804,105.15."
See 16 C.R.C. 478, 482; 20 C.R.C. 93, 96; 29 C.R.C. 164, 181; 32 C.R.C. 379, 381.
"Estimates of the historical cost of the structural property were made in this proceeding, both by the Company and by the Commission's Valuation Department. Excluding overheads, the Company reached a figure approximately $300,000 higher than the one obtained by taking the 1917 rate base as fixed by the Commission in its first decision and building upon that, while the Valuation Department of the Commission reached a figure approximately $300,000 lower than the one thus obtained. The fact that each of these estimates, independently reached by employing somewhat different methods and procedure, corresponded so closely to the historical cost figure as used and accepted by the Commission and by the Company as correct in the series of rate determinations running from 1917 to 1928, confirms its substantial accuracy. The figure used conforms to the accounting practice of the Company as to the bulk of its investment, which has increased from approximately $13,000,000 in 1917 to over $58,000,000 in 1929, the difference representing net additions and betterments during this period as inscribed in the Company's books and records. Mr. McAuliffe [the commission's appraiser] and the Company's land appraiser were surprisingly close in their results. In the few points of difference, Mr. McAuliffe's testimony was the more convincing."
The amount, exclusive of overheads, thus reached by the company was $62,596,422, and by the commission's engineer $59,413,008.
This is the total of items 2, 3, and 4 of the company's valuation of physical property, as shown in the company's exhibit and set forth in the commission's findings. 35 C.R.C. p. 456. This amount, with item 1 ($831,781) for "organization and franchises," make up the total of $77,586,700 claimed by the company as the reproduction cost new of its fixed property.
The hearing before the commission was completed on July 16, 1930, and its order was made on November 24, 1930.
This amount, with $427,406 allowed by the commission's engineer for "organization and franchises," makes the total of $73,637,542 as the reproduction cost new of the fixed property which was covered by the company's estimate of $77,586,700.
"of the increased labor costs that would be experienced in constructing the property under present physical conditions over those originally encountered, such as increased traffic difficulties and increased subterranean obstructions."
See Smyth v. Ames, 169 U. S. 466, 169 U. S. 547; San Diego Land & Town Co. v. National City, 174 U. S. 739, 174 U. S. 757; Willcox v. Consolidated Gas Co., 212 U. S. 19, 212 U. S. 41; Minnesota Rate Cases, 230 U. S. 352, 230 U. S. 434; Southwestern Bell Telephone Co. v. Public Service Commission, 262 U. S. 276, 262 U. S. 287; Georgia Railway & Power Co. v. Railroad Commission, 262 U. S. 625, 262 U. S. 631; Bluefield Water Works Co. v. Public Service Commission, 262 U. S. 679, 262 U. S. 690; Board of Commissioners v. New York Telephone C., 271 U. S. 23, 271 U. S. 31; McCardle v. Indianapolis Water Co., 272 U. S. 400, 272 U. S. 410; St. Louis & O'Fallon Ry. Co. v. United States, 279 U. S. 461, 279 U. S. 484-485.
See Bulletin on "Wholesale Prices," United States Department of Labor, February, 1933.
This is an important case. The amount at stake is great, and the principles involved are more important. The reduction made by the Commission when prescribing what it found to be reasonable rates, October, 1928, is not definitely shown. But the amount by which the rate of return was reduced indicates a probable reduction by more than a million per year. The net reduction made in November, 1930, by the order under consideration is more than one million per year. That is enough to yield a return of 7 percent on over $14,000,000. There is also involved more than $2,500,000 now held by the company subject to claims of customers that it be refunded to them if the order shall be sustained.
Commission based that increase on its finding that unit prices properly applicable to the prescribing of reasonable rates for the future are higher than were those actually paid throughout the years for the construction of the property. This increase amounted to $4,796,000, and it was found correct by the District Court and also in the concurring opinion below. But this Court excludes it, and holds to original cost. The amount involved in that item alone is more than enough to require reversal.
The Commission excluded from overhead expenditures actually made by the company the difference between 6 percent and 11.25 percent upon the ground that the company charged such difference to operating expenses, and not to capital. It refused to give any consideration to the findings of its own engineer that, in a proper estimate of the cost of reproduction as of the date of the inquiry, such overheads would exceed 22 percent. The company's estimate was about 24 percent. Each of these rulings is directly contrary to our decisions. Board of Comm'rs v. N.Y. Tel. Co., 271 U. S. 23, 271 U. S. 31; Southwestern Bell Tel. Co. v.Pub. Serv. Comm'n, 262 U. S. 276, 262 U. S. 287; Ohio Utilities Co. v. Commission, 267 U. S. 359, 267 U. S. 362; McCardle v. Indianapolis Water Co., 272 U. S. 400, 272 U. S. 408-410; St.L. & O'Fallon Ry. Co. v. United States, 279 U. S. 461, 279 U. S. 484-485. The District Court followed the Commission. This Court, in accordance with law settled by its own decisions, repudiates that method of treating overheads and adopts 11.25 percent. It refuses, as did the Commission and the lower court, to give any weight to admitted reproduction cost in respect of overhead expenditures.
the Commission included these plants as a "live necessary part of the operative property." [Footnote 2/2] But this Court excludes the item. Three million so thrown out is sufficient to require reversal. It was for the Commission to decide whether these plants are required properly to safeguard the public service. This Court should hesitate long before holding they are not. Seven percent on $3,000,000 so eliminated is $210,000, about 58 cents on each of the 385,000 meters, a small charge to insure readiness to serve.
The Commission refused to consider or allow anything for going value. Plaintiff's gas properties adequately serve a great and, before the present depression, a rapidly growing, demand. If permitted to charge reasonable rates, or those merely high enough to be nonconfiscatory, plaintiff will continue to be able to earn an ample rate of return upon the value of the property. Its charges for gas are low in comparison with those generally collected for like service. The record shows that, having regard to the effective thermal units in the natural gas that plaintiff has been furnishing in recent years, its rates are less than one-half those formerly collected by it. And, in absence of contrary showing and finding, its charges must be deemed to have been considered just and reasonable by the regulatory authorities of the state and by the public.
Unquestionably, and the opinion of this Court so implies, millions should be added to the cost figures applicable to the physical items in order to find the value of plaintiff's property, the amount protected by the Constitution. The ground on which the Commission excluded going value was that the cost of attaching the business was charged to operating expenses. The District Court followed the Commission. That being contrary to law, this Court repudiates the rulings of both and uses over $5,500,000 as going value. Its calculations to reach value produce a figure substantially the same as the Commission's "fair value" cost figure. But that was attained by the application of formula, a thing repeatedly condemned here. The Minnesota Rate Cases, 230 U. S. 352, 230 U. S. 434; Bluefield Co. v.Pub. Serv. Comm'n, 262 U. S. 679, 262 U. S. 690; McCardle v. Indianapolis Co., supra, p. 272 U. S. 410.
Commission's addition to original cost to get its "fair value" figure has any relation to going value. When, in confiscation cases, any going value exists, the amount justly attributable thereto must be ascertained and included. See, e.g., National Waterworks Co. v. Kansas City, 62 F. 853, 865; Omaha v. Omaha Water Co., 218 U. S. 180, 218 U. S. 202; Des Moines Gas Co. v. Des Moines, 238 U. S. 153, 238 U. S. 165; Denver v. Denver Union Water Co., 246 U. S. 178, 246 U. S. 192; Galveston Elec. Co. v. Galveston, 258 U. S. 388, 258 U. S. 396; McCardle v. Indianapolis Co., supra, p. 272 U. S. 414; People ex rel. Kings County L. Co. v. Willcox, 210 N.Y. 479, 486, 104 N.E. 911.
The rates should be set aside because arrived at by arbitrary methods condemned by our decisions.
attacked as confiscatory, the courts may inquire into the method by which the Commission's conclusion was reached, and that, if such rates are based upon property valuation or other essential fact that was arbitrarily arrived at or that is without support in the evidence, such rates will be set aside. Northern Pacific v. Dept. Public Works, 268 U. S. 39, 268 U. S. 42-45; Chicago, M., & St.P. Ry. Co. v.Pub. Util. Comm'n, 274 U. S. 344, 274 U. S. 351; St. Louis & O'Fallon R. Co. v. United States, supra, p. 279 U. S. 485. Cf. United States v. Abilene & So. Ry., 265 U. S. 274, 265 U. S. 288; Chicago Junction Case, 264 U. S. 258, 264 U. S. 263; Interstate Commerce Commission v. Union Pacific R. Co., 222 U. S. 541, 222 U. S. 547.
to be heard before three judges, the court of first instance shall find the facts specially and state separately its conclusions of law thereon, and its findings and conclusions shall be entered of record and, if an appeal is taken from the decree, shall be included by the clerk in the record which is certified to the appellate court under rules 75 and 76."
The command that the trial court "shall find the facts specially" means at least that the statement shall be definite, concise, and complete, as distinguished from discursive, argumentative, obscure, or fragmentary. Tax Commissioners v. Jackson, supra, p. 283 U. S. 533. The direction, "and state separately its conclusions of law thereon," shows that discussion of facts and law in the course of explanation, reasoning, or opinion to clarify or support the conclusion or judgment reached is not sufficient. The opinion filed in this case as a concurring one appears on its face to have been prepared for adoption by, and as the opinion of, the court. It was not accepted by either of the other judges; in any event, that opinion could not be considered a compliance with the rule. The rule was intended to make unnecessary analysis or extended examination for the ascertainment of the facts and propositions of law on which rest decrees of the courts of first instance. The opinion of the majority does not purport to "find the facts specially" or to "state separately its conclusions of law thereon."
The decree is not a compliance with the rule.
This is within the condemnation of our decisions. Railroad Commission v. Maxcy, supra; State Board of Tax Commissioners of Indiana v. Jackson, supra; Public Service Comm'n v. Northern Indiana Co., supra.
"While an application for an interlocutory injunction does not involve a final determination of the merits, it does involve the exercise of a sound judicial discretion. That discretion can be exercised only upon a determination, in the light of the issues and of the facts presented, whether the complainant has made, or has failed to make, such a showing of the gravity of his complaint as to warrant interlocutory relief. Thus, if the issue is confiscation, the complainant must make a factual showing of the probable confiscatory effect of the statute or order with such clarity and persuasiveness as to demonstrate the propriety in the interest of justice, and in order to prevent irreparable injury, of restraining the state's action until hearing upon the merits can be had. . . . The court should make the findings of fact and conclusions of law that are appropriate to the interlocutory proceeding."
aided by adequate brief and argument of counsel, to consider whether the temporary injunction was warranted by the facts shown in the record. We vacated the decree with costs against the utility, and remanded the case for findings and conclusions appropriate to a decision upon the application for an interlocutory injunction. And it is the purpose of this Court to promulgate a rule definitely requiring district courts to make special findings of fact in such cases.
The reasons for the enforcement of such a rule are stronger where final judgment is entered. The work done for the court by the writer of the opinion should not be undertaken here. Our rules do not permit adequate opportunity for presentation of such cases as upon trial de novo. Nor is the time that the Justices can give to preparation for and in our conferences sufficient to enable them to reach reasoned conclusions in respect of the bases or details of calculations, revisions, and determinations reflected by the elaborate opinion in this case.
We should follow Public Service Comm'n v. Wisconsin Tel. Co., vacate the decree, and remand the case for special findings. The district court should appoint a special master to hear the parties, make specific findings of fact, and state separately his conclusions of law and recommendation for a decree.
can be gathered from the opinion of this Court. The lack of definite findings in respect of essential facts is obvious, and it is likely that, if the district court had undertaken separately to state its conclusions of law, it would not have fallen into the errors sought to be corrected by the opinion here. Its decision was not announced until more than nine months after final submission of the case. This statement implies no adverse criticism, for it is often difficult for the judges, consistently with performance of their other duties, to give the time required for travel, full hearings, adequate conferences in advance of decision, and for preparation of draft opinions. The requirement that three judges shall participate undoubtedly increases the need for a special master.
then this Court need not go beyond its ordinary appellate duty of considering whether such facts justified the decree. We think this is one of those cases in which it is especially important that there should be a full and clear finding of the facts by the trial court. The questions are difficult, the interests are vast, and therefore the aid of the trial court should be had. The writer of this opinion appreciates the difficulties which attend a trial court in a case like this. In Smyth v. Ames, 169 U. S. 466, a similar case, he, as Circuit Justice presiding in the Circuit Court of Nebraska, undertook the work of examining the testimony, making computations, and finding the facts. It was very laborious, and took several weeks. It was a work which really ought to have been done by a master. . . . We are all of opinion that a better practice is to refer the testimony to some competent master to make all needed computations, and find fully the facts. It is hardly necessary to observe that, in view of the difficulties and importance of such a case, it is imperative that the most competent and reliable master, general or special, should be selected, for it is not a light matter to interfere with the legislation of a state in respect to the prescribing of rates, nor a light matter to permit such legislation to wreck large property interests."
"The cause should have gone at the beginning to a skilled master, upon whose report specific errors could have been assigned and a ruling from the court obtained."
The case was remanded to the district court with instructions to refer it to a competent master with directions to report fully his findings upon all questions raised by either party, and with leave to both parties to take additional evidence.
1. There is no warrant for reversal here of the Commission and district court in respect of unit prices upon which they built up their "fair value" figure. If business conditions since the Commission made its order are deemed to affect that figure, we should remand with directions to the district court to find the facts. Atchison, T. & S.F. Ry. Co. v. United States, 284 U. S. 248, 284 U. S. 260-262.
in the original or historical cost figures. An appraisal of the item should be made on the basis of all the relevant facts.
3. There is no warrant for this Court's elimination from the agreed inventory of standby plants which were included by the Commission and District Court.
4. There has been no appraisal of going value. That element was arbitrarily excluded below. There is no rational foundation for the amount attributed to it here.
5. As the Commission's refusal to apply principles of valuation established by our decisions resulted in arbitrary undervaluations, the prescribed rates should on that ground be set aside.
6. The decree appealed from should be vacated, and the case remanded for compliance with Rule 70 1/2.
7. The District Court should refer the case to a special master to report in accordance with the practice followed in cases such as this.
MR. JUSTICE SUTHERLAND joins in this opinion.
"This Commission for many years, in the exercise of its jurisdiction to establish reasonable rates for utilities of this character, has fixed rates to yield upon the historical or actual cost of the property, taking land, however at current values and depreciation calculated on a sinking fund basis, a return somewhat in excess of the cost of the money invested in the property."
"For thirty-two years, the Supreme Court of the United States has consistently adhered to the controlling principles of valuation laid down by it. In spite of the fact that the pathway is now made reasonably clear by the decisions of the courts, some state commissions seem to be inclined to be a law unto themselves and persist in ignoring the law as laid down by the courts. The California Commission has, to all outward appearance, been one of these. It has clung ostensibly and theoretically to the historical rate base. In reality, it has given effect to the different elements mentioned by the federal courts including fair value including going value by allowing a rate return between 8 percent and 8 1/2 percent on historical cost if there be added to the historical rate base an amount between 10 percent and 12 1/2 percent, the rate base so obtained will approximate fair value including going value. So also, if there is deducted from 10 percent to 12 1/2 percent from a rate of return of 8 percent or 8 1/2 percent on an historical cost rate base, it is readily seen that there is an actual return varying from 7 percent to 7.75 percent upon fair value, including therein a reasonable amount for going value. With this arrangement our public utilities have been content. During the last two years, this Commission has shown a tendency to cut the rate return upon an historical rate base from between 8 percent and 8 1/2 percent to 7 percent, which reduced the rate of return upon a fair value base to 6.12 1/2 percent and 6.3 percent. This is confiscation, and not regulation."
"It is safe to say that in practically none, if any, of the cases in which there have been permanent injunctive orders issued by the federal courts, would actual confiscation have followed the Commission findings. This is stated not only from general knowledge of the facts, but from specific knowledge of the experience in California. A study of the court opinions indicates beyond reasonable doubt that, in practically every major rate case in the last seventeen years in that state, the findings of the Commission could not have withstood the test imposed by the federal tribunals."
Report Forty-Third Annual Convention 1931, pp. 180, 190.
"The Commission was very liberal in its treatment of certain items of property. The company, in its early operations, furnished artificial gas. Since 1924, it has served natural gas, which is plentiful in the numerous oil fields in Southern California. There is no evidence which discredits the Commission's conclusion that the supply of natural gas will be abundant and constant. The Commission found, in effect, that at least two of the artificial gas manufacturing plants of plaintiff were no longer needed, and might well be retired. Nevertheless, it included them in its valuation as a live, necessary part of the operative property. It appears that, had these plants been eliminated, the fair value base would have been reduced by approximately $3,000,000."
Knoxville v. Water Co., 212 U. S. 1; Willcox v. Consolidated Gas Co., 212 U. S. 19, 212 U. S. 24; Louisville v. Cumberland Tel. & Tel. Co., 225 U. S. 430. The Minnesota Rate Cases, 230 U. S. 352; Des Moines Gas Co. v. Des Moines, 238 U. S. 153; Denver v. Denver Union Water Co., 246 U. S. 178; Newton v. Consolidated Gas Co., 258 U. S. 165; Galveston Elec. Co. v. Galveston, 258 U. S. 388; Houston v. Southwestern Tel. Co., 259 U. S. 318; Brush Elec. Co. v. Galveston, 262 U. S. 443; Pacific Gas Co. v. San Francisco, 265 U. S. 403; Railroad Comm'n v. Duluth St. Ry. Co., 273 U. S. 625; Denney v. Pacific Tel. Co., 276 U. S. 97; Wabash Valley Elec. Co. v. Young, 287 U. S. 488. In Missouri Rate Cases, 230 U. S. 474, part of testimony was taken by master and part in open court.
None was appointed in: San Diego Land & Town Co. v. Jasper, 189 U. S. 439; Louisiana R. Comm'n v. Cumberland Tel. Co., 212 U. S. 414; Allen v. St. Louis, Iron Mt. & S. Ry., 230 U. S. 553 (at the urgent request of the parties, the court consented to try the case without the aid of a master. In re Arkansas Rate cases, 187 F. 290, 294); Darnell v. Edwards, 244 U. S. 564; McCardle v. Indianapolis Co., 272 U. S. 400; United Gas Co. v. R. Comm'n, 278 U. S. 300; Railroad Comm'n v. Los Angeles Ry. Corp., 280 U. S. 145; Smith v. Illinois Bell Tel. Co., 282 U. S. 133 (assigned for the taking of testimony to one of the three judges, Illinois Bell Tel. Co. v. Moynihan, 38 F.2d 77, 79).

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