192 F. 193 | U.S. Circuit Court for the Southern District of Iowa | 1911
This is a case involving the validity of an ordinance of the city of Des Moines, fixing water rates. , The Water Company filed "a bill in equity to enjoin the enforcement of that ordinance, alleging that the same is invalid, because tniremunerative as to the fates thus fixed, as well as for, other reasons, to be noticed in this opinion. It is now more than three years since the passage of this ordinance. This case illustrates the evils in connection with the fixing of rates by municipalities to govern public utility corporations. Neither party is properly chargeable with any dereliction, and yet the fact remains that by the time this case is decided by an Appellate Court at least four years will have elapsed from the passage of the ordinance until the matter, is put at rest by the courts. It is utterly impossible for a court to hear all cases similar to this, which requires from one to three months to hear the evidence, after the issues are formed. If this court were to do nothing else, it could not personally hear all such cases. The Supreme Court of the United States has said that the seemly and orderly way to determine these matters is to refer them to a master in chancery, to take the evidence and make reports on which the courts can act.
In the face of these long delays and the tremendous expense attending the hearings, it is apparent some other method must be devised to determine the matters as to some of these public utilities. One of these schemes has been validated by the decision of the Supreme Court of Iowa in the case of Halsey v. City of Belle Plaine, 128 Iowa, 467, 104 N. W. 494, in which the law is now said to be that cities.can constitutionally go in debt at least three times the amount that they could incur until that case was decided, in the year 1905. The state Constitution provides that no municipality shall create an indebtedness of more than 5 per centum of the valuation of the property within the city limits. Until the case just noted was decided, this 5 per centum of valid indebtedness was limited to 5 per centum of the
The Iowa Legislature has enacted a statute, chapter 45, Raws of the Thirty-Third General Assembly (1909), which provides for the condemnation and taking over of waterworks, and the city, as a city, becomes the owner of such plants. The value thereof is ascertained by three district judges, designated by the Supreme Court of the state, and the owners of the plant are compelled to part with the ownership upon receiving the value thereof from the city. Under the construction of the Iowa Constitution above referred to, the city can go into debt to raise the money and become the owner. The city can borrow the money at a less rate of interest than can a private corporation. When the city becomes the owner of the plant, all these litigations will he at an end. It may be that the people will not he better served, but the wranglings and disputes will be between the city officers and the people. If proper service is not given, the people can only complain of their own officers. It may be that property owners will pay more for their water, including their share of interest, than they would pay to a private corporation. But this will be largely compensated, when counting the expenses of litigation, and the unending quarrels that follow the present method of having private corporations to operate waterworks plants. It may be that the waterworks company will not be able to receive all of their investments back. But, considering the limitation on their franchises, and the difficulties now encountered to get money with which to build waterworks plants, it is better that they charge off their losses and bring present methods to a conclusion.
The present expensive chaos should be brought to an end. It is known by all informed men that city councils necessarily adopt rates with but little or no investigation as to what rates ought to be fixed. The result is that we have ordinances fixing rates based upon but little intelligent effort for the ascertainment of the facts. Some of the states, like New York, Massachusetts, and Wisconsin, have state commissions of competent men, who give public hearings, and who do nothing behind doors, nor in secrecy — a commission with no member interested as a taxpayer of the city, and with no member subject to influences other than the ascertainment of the truth and the facts. Rates are thus fixed with which most fair-minded people are ready to acquiesce. It is strange that we have no such legislation and no such commissions in Iowa.
JOither of the foregoing suggestions would largely cure present evils. But the existing situation is such that city councils have the lawful right to fix rates, provided, always, that such rates are reasonable. And when the rate is thus fixed by a city council, the waterworks cor
The master makes some findings in favor of the city, but on the whole case his findings are adverse to the city. The ordinance in question is assailed by the waterworks company as being invalid, because it requires statements under oath as to the real estate owned by it, the number of miles of main pipes, number of fire hydrants, the cost of the system, as well as many other things.
As I view this matter, an expression of an opinion on my part would be dictum, and it would throw no light upon the real question at :ssue
The great and substantial question of fact, in this case, is as to the value of the plant. What a plant cost originally is not the measure of value that courts must look to, to determine the validity or invalidity of rates. The value of stocks and bonds is no test, for obvious reasons, and mere theorists only, at the present day, insist upon such as the valuation. Practical men know that it is not the test. There can be no true test, other than the physical valuation, and to such physical valuation there may be added certain other items.
The master has made one finding that has been the subject of more discussion, perhaps, than any other item in the case. Ide finds that there are practically 38 miles of pipes that were laid in the streets at a time when the streets had not been paved, but that since the laying of those 38 miles of pipe the streets have been paved. To reproduce the same would require an expenditure of from $108,896, as admitted by the city, to $210,000, as claimed by the waterworks company, more than would be necessary to expend to lay such pipes in unpaved streets. Whatever the true sum is, the waterworks company claims such sum to be a part of the value of the plant. This proposition the city denies. Cut it is not pivotal in this case. Much can be said on each side of the question. This case seems to have been tried before the -master, by both parties, upon the reproduction theory; that is to say, what this plant would cost if it were blotted out of existence, and the city, or some other company, were to undertake to reproduce the plant, in such an event, as of course, the pipes must be laid under these 38 miles of 'paved streets at this additional cost. Looking at the question in that light, the question is, What would it cost to-day to reproduce the plant? and from which, to get at the value of the present plant, there would be deducted the value of depreciation, either by functional or physical depreciation. Looking' at the question from the other standpoint, the earning power is no greater, nor no less, in one case than in the other, and from that standpoint it is not material whether the streets are paved or unpaved. Much can be said that the true value of the property is measured by its earning power. But these figures as to extra cost of laying pipe under pavements can be eliminated, and the result in this case not changed.
•These rules apply with equal force to a waterworks system. It took a long time to build up the system. First, it had to get in touch with patrons, make contracts, install meters, and establish the business. During that period the capital stock was not earning what it should have earned. Now that it is a going concern, it is entitled to have these values considered, in arriving at the true valuation of the plant. Such reasoning is' indorsed by courts, both national and state Supreme Courts, and such conclusions are the result of sound reasoning. Such are the tests in all other vocations and business enterprises.
There can be no question but that some of these matters should be given consideration. The greater the hazard, the higher the rate of interest. A farmer who observes his contracts and pays his debts can get a loan at a low rate of interest by a mortgage on his farm. A man whose credit is not good, and who can only tender security of a doubtful character, must pay a high rate of interest. This has always been so, and always will remain so. The fact that the company’s charter may be revoked by-a forced sale, or that it may expire'
Taking into account the expenses of approximately $122,000 per year, the reduction proposed by the new ordinance would make the plant unremunerative to the extent that it is entitled to receive, considering the fair value of money in a state like Iowa. And, considering the hazards and liabilities, some of them certain and others contingent, and some of them destructive, an 8 per cent, return is moderate. But this proposed ordinance would allow nothing like 8 per cent.
All fair-minded people should readily agree, and the defendant city and its officers ought to agree, that reasonable returns should be allowed to not only these investments, but these dangers and hazards, which clearly are to be taken into account, under the authorities. Some of the leading cases which support the foregoing are the following: City of Omaha v. Omaha Water Company, 218 U. S. 180, 30 Sup. Ct. 615, 54 L. Ed. 991; National Waterworks Company v. Kansas City, 62 Fed. 853, 10 C. C. A. 653, 27 L. R. A. 827; Spring Valley Co. v. San Francisco (C. C.) 124 Fed. 574; Kennebec Water District v. City of Waterville, 97 Me. 185, 54 Atl. 6, 60 L. R. A. 856; Brunswick, etc., v. Maine Water Co., 99 Me. 371, 59 Atl. 537; Gloucester Water Co. v. City of Gloucester, 179 Mass. 365, 60 N. E. 977; Norwich Gas & Electric Co. v. City of Norwich, 76 Conn. 565, 57 Atl. 746; Galena Water Co. v. City of Galena, 74 Kan. 644, 87 Pac. 735; Newburyport Water Co. v. City of Newburyport, 168 Mass. 541, 47 N. E. 533; Town of Bristol v. Bristol Water Works, 23 R. I. 274, 49 Atl. 974; Willcox v. Consolidated Gas Co., 212 U. S. 19, 29 Sup. Ct. 192, 53 L. Ed. 382. The foregoing authorities sustain the foregoing holdings.
The exceptions, both of the city and of the waterworks company, are all overruled. The report of the master is confirmed, and there will be a decree enjoining the enforcment of the ordinance in question.