Court Opinion

ID: 9418533
Source: CourtListenerOpinion
Date Created: 2023-08-02 22:29:48.760725+00
Date Added: 2024-06-11T17:22:04.345864
License: Public Domain

Mr. Justice Brandéis,
dissenting.
These cases were tried together. Each challenges as confiscatory an ordinance of the City of San Francisco *417fixing, for a single year, the price to be charged for gas. The rule of Smyth v. Ames, 169 U. S. 466, was applied. The evidence, in condensed form, comes before us in a record of 943 pages. The master’s original and supplemental reports occupy 131 pages. The master and the court found the rates to' be compensatory. Three errors are assigned by the company which relate to depreciation. The facts applicable to the several years differ in part; but the same questions are presented in each. It will tend to clarity to discuss these with reference to the facts of No. 34, which involves the rate for the year beginning July 1, 1913.
First. The depreciation charge allowed for that year, for the plant as a whole, was $348,853. The company does not complain that this allowance is too small, if treated as an allowance for merely physical observed depreciation. Its claim is that an improved process, which had been introduced at the San Francisco works in 1912, resulted in a saving, during the year 1913-14, of $103,530 in oil and labor; that in 1913 it had become certain that this process would later render obsolete certain parts of the plant (called stations) which were in use throughout that year; and that, for the purpose of meeting this expected loss in capital through later abandonment of stations, the savings effected by the new process should have been charged against the earnings, and credited to a special depreciation reserve. If, as suggested below, the company’s contention is that only one-half of the savings should be credited to this special depreciation reserve, the action of the District Court on this ground is obviously free from objection. For, in fact, there was included in the year’s depreciation charge, for obsolescence of these stations, $64,-962, which is more than one-half of the year’s savings. But its claim here is that the whole of the savings of the year 1913-14 should have been so applied; and that, therefore, the balance thereof, namely,. $38,568, should *418also have been included in this special depreciation charge.1
The sum ($348,853) allowed as the depreciation charge for the year 1913-14 was nearly 3 per cent, of the then reproduction cost new of the whole plant, other than land. The master and the court found, as facts, that none of the plant was abandoned during that year; that the change in the process of manufacture was not revolutionary; that in view of the history of the art, such change or improvements, and resulting obsolescence of .parts of the plants, should have been foreseen; that, in fact, there had been accumulated, during the four years preceding 1912, as a general reserve for depreciation, the sum of $2,116,433.95; that this reserve had been charged off by the company to surplus in November, 1911; and that, but for this fact, it would have been available to meet the loss of capital which occurred later through the abandonment of stations.
This alleged error does not present any question of law. Whether more of the savings of the year 1913-14 due to the introduction of the new process should have been allowed as a special depreciation charge for the obsolescence then- known to be accruing, is clearly a question of fact. There is much conflict in the theories on which *419depreciation should be figured.2 There was doubt when the obsolescence would culminate and what would be its extent. There was conflict in the evidence as to the rate to be deemed a fair return. Whether a return of 7 per cent, is the proper test of a compensatory rate must, obviously, depend in part upon whether the return includes any of the risk of obsolescence.3 I cannot say that the master and the court erred in their conclusion of fact that, all things considered, the depreciation charge allowed was adequate. The same is true of the depreciation charges allowed for the years 1914 and 1915.4
*420Second. As an alternative to allowing a larger depreciation charge out of the year’s savings through the improved process and apparatus, the company urges that the rate-base should have been increased, by adding thereto the value of the right to use the new process at the San Francisco works.5 The court apparently adopted this view of the law. It ruled that the company was entitled to a return upon the then value (as part of the rate-base) of the right to use the inventions. It differed from the company only in the estimate of the value. The company’s experts declared that the value of this right might be ascertained by capitalizing the average annual savings expected to be effected thereby. So calculated, the value is $4,203,300. The court found specifically that it could not accept estimated savings as a measure of value; among other reasons, because the amount of savings was dependent in large measure upon the price of crude oil, and that this price fluctuates largely from time to time. It included in the rate-base for-1913-14 the value of the gas generators (at the Metropolitan plant) which had been reconstructed so as to embody the inventions; and found that there was in *421the record no evidence on which it could give to the right to use the inventions a greater value than was allowed. So far as concerns the year 1913-14, the question is, merely, whether on the evidence in the record the value of the reconstructed generators (including, of course, the right to use them) was too small.6 It appeared that for the right to use the inventions nothing was paid either during the year 1913-14 or during the year 1914-15; and that for the exclusive right to use them both in San Francisco and throughout a number of counties in nothem California, the company paid to the inventors, in November, 1915, $46,066.68. I cannot say that the master and the District Court erred in the finding of fact by which they valued this item for that year, or in the value assigned to the right in fixing the rate-base for either of the two following years.7 This alternative contention of the company presents, obviously, no question of law.
Third. The reproduction cost new of the manufacturing and distributing plant, other than land, was found to be $12,794,008; the accrued depreciation, $1,518,390 *422(as of June 30, 1914). Thus, the property was found to be worth 88.1 per cent, of its then reproduction cost. The company contends that the accrued depreciation should have been set at $828,916.41; so that the plant was worth 93.7 per cent, of its then reproduction cost. The master employed the “ compound interest ” or “ modified sinking fund ” method of estimating. accrued depreciation. The plant is in part very old. The depreciation found is but a small percentage of the reproduction cost. The evidence bearing upon the amount to be deducted for accrued depreciation occupies 232 pages of the record. The discussion thereof in the master’s report occupies 39 pages. There was a conflict of evidence.
No question of law is presented by this assignment of error.8 The company’s objection is not to the particular method selected, but that, in applying it, the master included ás depreciation what is called theoretical inadequacy and obsolescence. Whether he did is a question of fact. The city denies that the reduction in value made by the master on account of accrued depreciation includes any sum representing expected loss through future abandonment of the stations. It is clear that, if any deduction was made on account of the probable abandonment of the stations, the obsolescence thus provided for was not theoretical. The new process had been introduced two years before the date as of which the valuation was made. On the facts then known, it was expected that the stations would have to be abandoned in the *423near future. Because it was to be expected (and was not theoretical) the company contended that to offset it more of the year’s savings should have been charged against the income of that year. I cannot say that the master and the court erred in their findings of fact as to the amount of accrued depreciation.
This litigation has already extended over eleven years. The record discloses that the cases were presented below by competent counsel with the aid of competent experts, and that they received careful consideration by an able master and an able trial judge. Counsel, master and court have throughout endeavored to apply the rule of Smyth v. Ames, 169 U. S. 466. It is not shown that the rule has, in any respect, been departed from. This Court harbors a doubt whether, in applying it, some injustice may not have been done to the company. Is it probable that a nearer approach to justice, as between the parties, will be attained by a continuation of the effort to apply the same rule? To me it seems that the doubt is inherent in the rule itself. It can be overcome only by substituting some, other rule for that found to be unworkable. Such other lies near at hand; and it is consistent with the Constitution.
It was settled by Knoxville v. Knoxville Water Co., 212 U. S. 1, that every public utility must, at its peril, provide an adequate amount to cover depreciation. A depreciation charge resembles a life insurance premium. The depreciation reserve, to which it is credited, supplies insurance for the plant against its inevitable decadence, as the life insurance reserve supplies the fund to meet the agreed value of the losjt human life. To determine what the amount of the annual life insurance premium should be is a much simpler task than to determine the proper depreciation charge. For life insurance is a cooperative undertaking. The premium to be fixed is not that required by the probable duration of the life of a *424single insured individual, but that required by the average expectancy of life of men or women of the given age. Moreover, for human lives, mortality tables have been constructed which embody the results of large experience and long study. By their use the required premium may be fixed with an approximation to accuracy. But, despite the relative simplicity of the problem, it was found that the variables leave so wide a margin for error that premiums fixed in accordance with mortality tables work serious injustice either to the insurer or to the insured. Although the purpose was to charge only the appropriate premium, the transaction resulted sometimes in bankruptcy of the insurer; sometimes in his securing profits which seemed extortionate; and, rarely, in his receiving only the intended fair compensation for the service rendered. Because every attempt to approximate more nearly the amount of required premium proved futile, justice was sought by another route. Ultimately, strictly mutual insurance was adopted. Under it, the premium charged is made clearly ample; and the part thereof which proves not to have been needed enures in some form to the benefit of him who paid it. Compare Penn Mutual Life Insurance Co. v. Lederer, 252 U. S. 523, 524, 525.
Legal science can solve the problem of the just depreciation charge for public utilities in a similar manner. Under the rule which fixes the rate base at the amount prudently invested, the inevitable errors incident to fixing the year’s depreciation charge do not result in injustice either to the utility or to the community. If, when plant must be replaced, the amount set aside for depreciation proves to have been inadequate, and investment of new capital is required, the utility is permitted to earn the annual cost of the new capital. If, on the other hand, the amount set aside for depreciation proves to have been excessive, the income from the surplus re*425serve operates as a credit to reduce the current capital charge which the rates must earn. If a new device is adopted which involves additional investment (to buy a new plant or a patent right) the company’s investment, on which the-return must be paid, is increased by that amount. If the new device does not involve new investment, but the innovation involves increased current payments (like royalties for use of a process) the additional disbursement is borne by the community as an operating expense. The cost of a scrapped plant is carried as part of the investment on which a return must be paid unless and until it has been retired, that is fully paid for, out of the depreciation reserve. Thus, justice both to the owners of the utility and to the public is assured.

 Iel this connection, the confiscatory character of the rate rests, according to the test applied, upon the allowance or disallowance of a much smaller sum. For master and court have found that the earnings of the year 1913-14 exceeded 7 per cent, upon the rate-base by more than $21,000. An additional allowance for depreciation of $17,000 would, therefore (even on the theory contended for by the company), have rendered the rate compensatory on a 7 per cent, basis. Moreover, a 6 per cent, rate was sustained in Stanislaus County v. San Joaquin & Kings River Canal & Irrigation Co., 192 U. S. 201 (1904); Knoxville v. Knoxville Water Co., 212 U. S. 1 (1909); and Cedar Rapids Gas Light Co. v. Cedar Rapids, 223 U. S. 655, 670 (1912).

 The -wide differences between engineers as to the proper method to be pursued is well known. See Southwestern Bell Telephone Co. v. Public Service Commission, 262 U. S. 276, 294.

 See Gerard C. Henderson “Railway Valuation and the Courts,” 33 Harv. L. Rev. 902, 916, 922, 923; John Bauer, “Valuation of Public Utility Properties,” 30 Pol. Sci. Q., 254, 275; R. S. Hale, “Physical Valuation of Public Utilities,” 45 Engineering Mag., 161, 163.

 Appellant contends here that, due to the new method of manufacture, property of which the reproduction cost was $844,355.74, would become obsolete; that the total depreciation allowance covering this property for the three years was only $275,096; and that the difference — called net loss to the appellant — should be amortized by applying the savings to be effected by the new method of manufacture. But the first abandonment of stations occurred at the end of June, 1915. The estimated loss on the Martin station, then abandoned, was $237,651. No further supersession occurred during the period of litigation. There was merely the prediction, made at the trial by the company’s experts, that the Independent station would be abandoned in December, 1918, and the Potrero plant in December, 1920.' Moreover, for the year 1914-15, the depreciation charge allowed was $372,680. Included in this amount is $68,198, directly attributable to loss caused by abandonments. The alleged savings from the new process for that period was $132,419. Thus, the amount allowed exceeded the one-half of the year’s saving, which was suggested below as the proper measure of the appropriate charge. The increase in depreciation charge contended for here is $64,221. But the earnings for this year exceeded 7 per cent, on the *420rate base by more than $89,000, leaving a difference more than sufficient to cover this claim. The year 1915-16 can be similarly disposed of. The depreciation charge allowed was $380,519. The alleged savings from the new process for that year were estimated at $258,557. The increase in depreciation charge contended for here is $208,319. But one-half of the year’s savings is $129,279; and the earnings for the year exceeded 7 per cent, on the rate base by $171,464.

 The process and apparatus had been invented by the company’s salaried engineers early in 1912. The cost of experiments were defrayed by it. The utility of the invention was proved in that year, at its expense, by reconstructing, during that year, two of its gas generators and making other changes in plant. In this way the company acquired an implied license to use the inventions. Wade v. Metcalf, 129 U. S. 202; Dable Grain Shovel Co. v. Flint, 137 U. S. 41. It did not acquire an express license until November 30, 1915; that is, shortly after the patent for the apparatus was granted.

 The question is not one of continuing importance to the parties. Its correctness depends upon the state of the particular record. Any defect in this record can be avoided in proceedings concerning the rates for any year after June 30, 1916; and since October 29, 1917, the gas rates for San Francisco are fixed, not by city officials, but by the State Railroad Commission.

 The year 191A-1915 presents no change in the situation from the preceding year. For 1915-16 the value of the two new Jones oil gas generators installed in the Potrero plant at a cost of $241,812.59 is included in the rate-base; and as the value of the right to use the inventions, the $46,066.68 paid. For this period, therefore, the question is merely whether on the evidence in the record the patents should have been valued at a sum in excess of $46,066.68. But for both years only a large undervaluation would-affect the result, as the master and the court found that during the year 1914^-1915 the prescribed rate would yield $89,446 in excess of a seven per cent, return on the rate-base, and for 1915-1916, an excess of $171,464.

 We have no occasion to undertake a legal delimitation of the function of a depreciation charge; or to define its legal relations to the depreciation reserves; or to determine whether the loss through the abandonment of a station in 1915 and that expected to result from later abandonments might be set off against the depreciation reserve accumulated shortly before the invention of the new process.