Court Opinion

ID: 9643908
Source: CourtListenerOpinion
Date Created: 2023-08-22 20:43:25.073141+00
Date Added: 2024-06-11T12:28:22.490805
License: Public Domain

EVAN A. EVANS, Circuit Judge
(dissenting) .
Plaintiff is a publie.utility, supplying water and fire protection to the city and residents of Ashland, a municipality located in the northern part of Wisconsin, on Lake Superior. Believing that its rates were inadequate, plaintiff applied to the Railroad Commission of Wisconsin for an increase. After a full hearing the Railroad Commission increased by $4,000 per year 'the hydrant rental charges, but otherwise made no change.
Alleging that the rates thus fixed are confiscatory, plaintiff seeks an injunction to restrain the commission and the Attorney General from interfering with its installation of the proposed charges, which, it asserts, are reasonable. The hearing upon the application for the temporary injunction was upon the pleadings and affidavits. Attached to the complaint was the report of the commission, a statement of existing and proposed rates, and in the affidavits supporting or opposing tho application appear many facts, all more or less relevant upon the issue of value.
Generally speaking, the application is based upon the alleged failure of the commission to give plaintiff a fair valuation of its property, though other and less important criticisms are made. The statement of facts will be made largely upon the theory that error in valuation is the basis of attack. The history of the utility may be Hound in the report of the commission, which we assume is supported by evidence. This report is too long to be copied, and the salient facts only will bo taken therefrom.
The hydrant rental which the city was required to pay under the old rates was $25,-000 per year. This was increased to $29,-000 per year. The meter rates in force were 12 cents for the first 12,500 cubic feet, 8 cents for the next 37,500 cubic feet, and 6 cents for all over 50,000 cubic feet, per month. The proposed rates are "22% cents for the first 12,500 cubic feet, 15 cents for the next 37,500 cubic feet, and 12% cents for the next 50,000 cubic, feet.
Comparing the existing rates in Ashland with rates of 21 other cities of like character and rendering like service, in the state of Wisconsin, it appears that the average consumer in said 21 cities paid $1.684 for 2,-000 gallons, whereas in Ashland the charge was $3.48. If he used 5,000 gallons, the consumer’s charge was $1.87 in the 21 cities, and $4.20 in Ashland. If he used 10,000 gallons, the consumer paid $2.895 in the said 21 cities, and $5.40 in Ashland. Similar statistics showed that for firo protection Ashland paid $2.218 per capita, while the average charge for firo protection in the state of Wisconsin was $0.998. The proposed rates would make the charge to the consumer on meter basis a little more than four times the average rate paid in the state of Wisconsin for like services.
A table showing revenues and expenses for the years 1923, 1922, 1923, and six months of 1924 appears; the total revenues being $88,502.76, $89,250.14, $89,605.57, and $44,-598.51. Tho total expenses for these 3% years were $49,884.98, $48,721.99, $49,257.-43, and $26,110.55. The greatest net revenue was obtained in the year 1922, $40,-528.15. The commission, however, took the year 1923, which showed a net revenue of $40,348.14, as the basis of its estimates.
*940The company was organized in 1891, and certain stock was promptly issued to promoters without consideration. Speaking of this improper corporate financing the commission said: “The city contends, and apparently with good cause, that this amount represents excess payments made to the firm of Wheeler & Parks for services rendered by it on a contract made in October, 1891. .The' tangible services represented by the firm had been computed by the city’s representatives at about $40,000, and the intangible services at about $10,000, leaving the’ balance of $199,000, which was paid to the company in the form of stock as being unearned.”
The book value of the plant on December '31, 1924, was $756,128.11. The sum of $149,000 should be deducted therefrom. Using its experience and knowledge respecting the life of depreciable property, the commission found: “Computations of the composite life of the depreciable property indicate that it is not less than 55 years, which on a 4 per cent, sinking fund basis would require an annual allowance for depreciation of .52 per eent. of'the value‘of the depreciable property.” The utility insists that this is too small.
The' commission upheld the contention of the utility that the value of certain reservoirs should be included, notwithstanding they were oversized. Likewise the commission found in favor of the utility as to the value of that portion of an intake main extending into the lake beyond a point 800 feet from the shore. The city does not concede the correctness of these allowances.
After the utility .laid its mains, certain of the streets of the city of Ashland were paved. The utility contends that in determining present value the cost of laying the mains with paved streets should be considered, rather than the costs in unpaved streets. This item is not large.
The chief criticism, however, arises out of the alleged failure of the commission to give reproduction cost, that' consideration which it is claimed should be given it, in view of the decisions in the cases of Southwestern Bell Telephone Co. v. Public Service Commission, 262 U. S. 276, 43 S. Ct. 544, 67 L. Ed. 981, 31 A. L. R. 807, Bluefield Co. v. Public Service Commission, 262 U. S. 679, 43 S. Ct. 675, 67 L. Ed. 1176, and Georgia Ry. v. Railroad Commission, 262 U. S. 625, 43 S. Ct. 680, 67 L. Ed. 1144.
The commission had four appraisals submitted. The first — the one it accepted— proceeded upon the theory' of the so-called split inventory. The property inventoried (and there was ho' dispute in' respect to the property owned by the utility and devoted to public use) was divided into two classes: That which was in existence January 1, 1916; and all property added subsequent to such date. The value of the first class of property was determined by taking the average unit price of such articles for the ten years preceding January 1,.1916. The balance of the property was appraised at actual investment cost, as shown by the Company’s records. To this valuation was added 15 per cent.
The second appraisal was made by taking the average unit price of all articles for ten years, ending January 1, 1924. The third appraisal was made upon the same basis as the second, excepting the average unit price was for five years preceding January 1, 1924, instead of the ten years preceding 1924. The fourth appraisal was furnished by the company, 'and was obtained by taking the average unit price during December, 1923. .
The first appraisal produced a new valuation of $605,734, and a depreciated value of $516,007; the second, $884,169 new, and $757,178 depreciated; the third, $1,067,163 new, and $915,424 depreciated. The valuation'on the fourth basis was $1,057,450 new, and $948,540 depreciated. The commission allowed an additional. $15,000 for working capital.-
Plaintiff had on previous occasions made application to the commission for a modification of its rates, and its property had been previously valued. It alleges that in 1914 the valuation was fixed at $480,000; that between 1914 and 1919 increases in rates had been granted. It is inferable that such increases were due to increased cost of operation, rather than to an increase in valuation of the property.
The commission properly took the year 1923 as the test year. It was the last full year for which a report of revenues and expenses was obtainable. The net revenue for this year was less than for the year 1922, but larger than for the year 1921. The gross revenues for each of the three years and for the six' months of 1924 varied but slightly. The balance “for depreciation and return” for 1923 was $40,308.14. The commission reduced two of the expense items, one for coal and one for an overhead charge attributable to the Boston office. The commission said: “The net effect of the above adjustment is to increase the balance available for depreciation and return by $2,310.85, or $42,258.99 based on the year 1923.”
After giving its reasons for fixing .52 *941per cent, for depreciation, the commission continues: “On the basis of the value found in the valuation this would have amounted to $3,085, leaving $39f>74 available for retwrn upon the property.” The commission, added $-1,000 for hydrant rental charge, making a total of $43,574 available for return on investment.- Upon the basis of a 6 per cent, return, this would allow for a valuation of $720,000.
The question then arises: Does the showing made on this application disclose (a) a valuation in excess of $720,000; or (b) an error in finding that $13,674 is available for return on investment?
Some of these findings have been attacked by the utility, and others by the city. On this application for a temporary injunction we do not believe we are justified in disallowing the reduction made by the commission for the overhead charge in the Boston office, nor say that the reduction in the price of coal was unjustifiable. .Nor can we rejeet the commission’s finding as to the usability of the reservoirs or the intake pipe beyond 900 feet from the shore.
There is some merit in the utility’s contention that further readjustment should take place in the way of taxes, for with increased valuation comes increased assessments, and increased assessments are followed by increased taxes. A possible answer, however, lies in the fact that, if a reduced valuation is upheld, a reduced assessment will follow, and thereby a reduction in the taxes.
A careful reading of the three much-discussed eases, all in 262 U. S. — -Southwestern Bell Telephone Co. v. Public Service Commission, Bluefield Co. v. Public Service Commission, and Georgia Ry. v. R. R. Commission, supra — -leads to the conclusion that there was no intended conflict between the so-called Georgia Case and the Bluefield Co. Case. It is not our duty nor our privilege to attempt to stress or minimize what Justice McKenna pointed out in the dissenting opinion in the Georgia Railway Co. Case, nor to reconcile Mr. Justice Brandéis’ concurrence in the Bluefield Co. Case with the views by him stated in the Southwestern Bell Telephone Co. Case.
I conclude that, under the rule laid down by the three decisions, it was necessary for the commission, in determining value for rate-making purposes, to give consideration to present reproduction cost. Not only must the commission give consideration to it, hut such factor must find reflection in the finding of value. In other words, it is not a compliance with this rule for the commission to merely hear evidence upon present reproduction cost, and then disregard it entirely in making a finding on value. Nor can it be said that the rule is met if the commission receives evidence of reproduction cost, considers it, and allows a sum so small as to indicate clearly it was not complying with the spirit of the rule announced in these decisions.
The language used in the Georgia Railway Case, herewith quoted, doubtless accounts in large part for our failure to fully ■ agree. The court says:
“The lower court recognized that it must exercise an independent judgment in passing upon the evidence; and it gave careful consideration to replacement cost. But it likewise held that there was no rule which required that in valuing the physical property there must be ‘slavish adherence to cost of reproduction, less depreciation.’ It discussed the fact that since 1914 large sums had been expended annually on the plant; that part of this additional construction had been done at prices higher than those which prevailed at the time of the rate hearing; and it concluded that ‘averaging results, and remembering that values are * * * matters of opinion, * no constitutional wrong clearly appear.’ The refusal of the commission and of the lower court to hold that, for rate-making purposes, the physical properties of a utility must be valued at the replacement cost less depreciation was clearly correct.”
Further, the court said in the same ease:
“The question upon which this court divided in the Southwestern Bell Telephone Case, supra., is not involved here.”
While this language justified the commission in placing a value upon the property of the utility at a sum other than “the replacement cost less depreciation,” we differ as to the extent which the reproduction cost should enter as a factor in determining value. In this ease it is apparent that the commission, not only received evidence on reproduction cost, hut gave it due consideration and made allowance therefor.
The commission had the valuation which it had fixed in 1914, to wit, $480,000, and which valuation had been the basis for rate-making purposes for many , years. Apparently there was acquiescence in this valuation by the city, the utility, and the ratimaking body. The hook value of the company, as found by the commission, was approximately $606,000, not very much out of line with the 1914 valuation when the additions are considered.
*942Certain items (those installed since 1916) were valued at their cost price, which it is fair to assume was not far from present reproduction cost. The commission also found: “To the value thus arrived at the engineers added an amount representing 15 per cent, of the estimated cost of the property in service as of January OL, 1916, as one measure of the increase in value of that portion of the property installed prior to January 1, 1916, to which the Ashland Water Company is entitled for purposes of this ease.”
One question is, therefore, whether an allowance of a certain sum, or a definite per cent., as and for reproduction cost, is a compliance with the rule announced in the three eases heretofore referred to. To say that the court should give “due” or “substantial” or “reasonable” consideration to certain evidence disclosing present reproduction cost contributes nothing enlightening to the dis-. cussion; for we would still be dealing with mere words of general meaning. Likewise enlightenment cannot come from the use of the word “dominant,” as modifying factor.
More helpful would be the suggestion that the court follow the pronouncements made in analogous cases, such as condemnation suits. All factors pertinent and relevant to the issue of value should be given consideration by the fact-finding tribunal. It is for such' fact-finding tribunal to determine from all of the testimony the probative value of each factor. When the duly constituted trier of fact has considered all of the proper factors, and its verdict or finding reflects such fact, the finding cannot be assailed because a fixed sum or a certain percentage is allowed as the equivalent of a certain factor. Such action does not indicate arbitrariness, except in so far as any finding on a disputed issue of valpe is necessarily arbitrary.
There were unusual circumstances, which might have justified and perhaps required the commission to minimize the effect of the testimony showing reproduction cost. I think this evidence was sufficient to justify the commission in refusing to allow any large sum for present reproduction cost.
Not only had there been a valuation fixed by the commission and used as the rate-making basis for ten years, but the company’s books also showed a valuation very much less ■ than present reproduction cost. The last valuation was fixed in 1919, when prices had reached their peak. A previous valuation had been made in 1916. Certainly some weight should be given by the commission to previous appraisals that were satisfactory to both parties and acquiesced in for years.
Moreover, the conditions existing in Ash-land were exceptional and abnormal. The waterworks plant was originally constructed on the theory that Ashland was about to enjoy a boom and shortly become a city of perhaps 30,000 people. Instead of realizing this expectation, the state and national census show the city’s population to be constantly deereasing. From the affidavits presented it appears that many industries had withdrawn from the city, that plants had closed, that there was little market for property, that rentals had dropped, and that when sales were made the prices realized were far below reproduction cost. We are, of eouive, unable to say what influence, if any, these figures had upon the commission. It must be conceded, however, that plaintiff’s situation is quite unusual, and justifies the language of the court in the Georgia “Railway Case above quoted.
The service which plaintiff furnishes is not unusual or extraordinary. Located upon one of the Great Lakes, its problem has not been different from that of many other cities in the state of Wisconsin. Its present rate is already twice the rate charged in the other cities in Wisconsin similarly situated, rendering similar service, and, if the new rate is enforced, the individual consumers of Ashland will be compelled to pay four times as mueh as is ordinarily paid for such service in Wisconsin. Certainly consideration must be given these facts. Present reproduction cost cannot be the determining factor in valuation, if the base thus established becomes so high that the rates necessarily charged to produce a reasonable return are prohibitive or destructive. The due process clause of the Constitution does not require the commission to fix a rate that will be destructive of property within the municipality. In Covington, etc., Turnpike Co. v. Sandford, 164 U. S. 578, 17 S. Ct. 198, 41 L. Ed. 560, it is said:
“It cannot, be said that a corporation is entitled, as of right, and without reference to the interests of the public, to realize a given per cent, upon its capital stock. When the question arises whether the Legislature has exceeded its constitutional power in pre>seribing rates tq be charged by a corporation controlling a public highway, stockholders are not the only persons whose rights or interests are to be considered. The rights of the public are not to be ignored. It is alleged here that the rates prescribed are unreasonable and unjust to the company and *943its stockholders. But that involves an inquiry as to what is reasonable and just for the public. * * * The public cannot properly be subjected to unreasonable rates in order simply that stockholders may earn dividends.”
In San Diego Land & Town Co. v. Jasper, 189 U. S. 439, 23 S. Ct. 571, 47 L. Ed. 892, the court was, considering the reasonableness of water rates fixed by the supervisors of San Diego county. The court said:
"If a plant is built, as probably this was, for a larger area than it finds itself able to supply, or, apart from that, if it does not, as yet, have the customers contemplated, neither justice nor the Constitution requires that, say, two-thirds of the contemplated number should pay a full return. * * *
The statute of California no» doubt was contemplating the case of waterworks fully occupied wiihin the area which they intended to supply. It hardly can have meant that a. system constructed for six tho-usand acres should have a. full return upo»n its value from five hundred, if those» were all that it supplied. At all events we will not be the first to say so.”
It is fair to assume that water rentals would never be so» excessive as to drive an industry from a city. But water and water service in Wisconsin are recognized necessities, and the experience of other cities may well be considered in determining the weight to be accorded present reproduction cost.
The embarrassment which the courts will experience in applying any hard and fast rule is apparent. For example, if the pre&ent reproduction cost is taken as the sole factor in determining value, plaintiff would be entitled to a reasonable return on over $1,000,000. Upon such a valuation the present rate would be trebled, instead of doubled. In other words, plaintiff has not asked for a rate that its figures showed it was entitled to receive, if present reproduction cost were the sole factor in determining value. It asked merely for a valuation of $800,000, whereas under its Basis D, plus good will, it was entitled to a valuation of over $1,-000,000.
And if these results bo not sufficiently startling in their nature, let the possibility of future depopulation of Ashland be considered. If the depopulation which has been going on for 30 years increase — if one-half of the present population should leave» — the rates would be enormously increased. And if the rule be an unvarying one, we can continue the speculation until a condition would exist where the utility actually drove the citizens from the city.
Moreover, such a rule would in the long-run be as harmful to the utility as to the public; for, if valuation be determined solely or “dominantly” by reproduction co»st, what would prevent demoralization of the utility’s financing through frequently recurring readjustments, whenever panics or lesser industrial depressions suddenly lower prices? Where conditions are normal — that is to say, where the utility is e»njoying the usual nO'imal growth, and where the municipality is moving forward — it is natural to expect the commission to give greater weight to the evidence of present reproduction cost than it will where such evidence, if determinative of the issue of value, further depresses business.
Some dissimilarity in these computations and those made» by the commissio»n is due to differences in the rate of return allowed on the valuation. I am. of the opinion that a return of 6 per cent, is not eonflscato»rv under the» circumstances existing in the city of Ashland, where interest upon invested capital, particularly real estate, is low. The commission endeavored to fix a rate which would return 7% per cent, upon the valuation. Holding that a return of 6 per cent, does no»t constitute confiscation necessarily permits of a considerable difference in the base, the valuation of the property. For in an equation where the product is fixed, the multiplicand will vary necessarily as the multiplier varies. The rule which must govern us is stated in San Diego» Land & Town. Co., supra, as follows: “It is enough if we cannot say that it was impossible for a fair-minded board to come to the result which was reached.” And “the only question for us is whether it came to a right result.”
The finding of revenue available for return on investment is clearly sustained by the evidence. The rate of return necessary to avoid the charge of confiscation may also be accepted as well-nigh settled for Wisconsin. Certainly a return of 6 per cent, or better cannot he said to be eo»nfiseatory in that state., The co»mmission’s valuation may be exceeded by approximately $100,000, and still the» revenue necessary to produce a return of 6 per cent, provided. In other words, in addition to the 15 per cent, which the commission added to its Schedule A to take care of reproduction cost, there may be added another $100,000, and still the reve»nue would he sufficient to pay a 6 per cent, return upon such valuation.
Nor should we overlook the fact that we *944are disposing of an application for a temporary injunction. We are not passing finally upon the issues presented by the pleadings. The Wisconsin Railroad Commission occupies a position which entitles its findings to certain presumptions. We may assume that this commission is thoroughly familiar with the questions of operating cost, construction cost, and other questions entering into the experience of public utilities in the state of Wisconsin, including electric, gas, water, and street ear companies. It is likewise familiar with the history of the state and the development and growth of the cities therein.
Strong reasons, therefore, exist for our adopting its finding respecting cost of coal, allowance for overhead, the plant’s life expectancy, the required size of reservoirs, the distance intakes should run into the lake, etc. Moreover, its doors are always open for new applications, either on the part of the utility or the public. Its orders are, at most, only temporary.
Likewise this court, in passing upon an application for a temporary injunction, is merely disposing of the matter until full opportunity may be given to both parties to present oral testimony on the question of interest rates, coal prices, construction prices, etc. It is therefore my opinion that the application for an injunction should be denied.
If granted, however (and I understand the majority of the court are in favor of its allowance), another question arises: To permit the utility to put into effect that rate which will produce a 6 per cent, return up-, on a valuation far in excess of what it claims to be the fair valuation of its property would be inequitable. The allowance of any injunction, therefore, should be only upon condition that the rates which the utility may charge are fixed, and such injunction should be effective only until the Wisconsin Railroad Commission may again hear and determine the matter anew.