Lincoln Gas & Electric Light Co. v. City of Lincoln

| U.S. Circuit Court for the District of Nebraska | Apr 6, 1909

W. H. MUNGER, District Judge.

Complainant is a corporation organized under the laws of the state of Nebraska, owns and operates a gas plant in the city of Lincoln, Neb., and furnishes to its patrons gas for lighting, heating, and power purposes.- The city of Lincoln, in March, 1872, granted unto the Lincoln Gas Company, a corporation, organized under the laws of the state of Nebraska, a franchise granting the use of the streets, lanes, and alleys in the city, for the purpose of constructing and maintaining a gas plant, and said Lincoln Gas Company constructed a gas plant, of which the complainant, about the year 1901, became the owner. In November, 1906, the city council of the city of Lincoln passed an ordinance, providing that no gas company should charge, exact, demand, or collect, from any consumer, for gas manufactured or sold in said city, more than the sum of $1 net per 1000 cubic feet, which ordinance provided certain penalties for its violation, said ordinance to take effect and be in force from and after December 1, 1906. In December, 1906, said city council also passed an ordinance imposing an occupation tax upon all gas companies manufacturing and furnishing gas to the inhabitants of the city of Lincoln of 2½ per cent, upon the gross receipts of said company, said ordinance to take effect January 1, 1907. This action is brought to enjoin the enforcement of said ordinances, the jurisdiction of this court being invoked upon the ground of a federal question, in that the rate of $1 for each 1000 cubic feet of gas will deprive complainant of its property without just compensation, in violation of the provisions of the Constitution of the United States. The ordinance imposing an occupation tax is alleged to be unconstitutional in that it violates the provisions of section 6, art. 9, of the Constitution of the state of Nebraska, which requires that such a tax shall be uniform upon persons and property, it being alleged that the Lincoln Traction Company operates and maintains an electric lighting plant and furnishes to the city and its inhabitants electricity for light, heat, and power purposes.

A large amount of testimony has been taken for the purpose of determining the value of complainant’s gas plant, and the reasonable expense for operating the same. In determining for what amount the plant could be reconstructed I have accepted in the main the testimony of complainant’s witnesses as being the most satisfactory, and I find that the plant could be reconstructed for the following sums:

Goal gas apparatus. $ 80,605 00

Water gas apparatus. 20,278 00

Mains in dirt streets. 90,578 00

Mains in paved streets. 130,027 00

Gas services, etc. 107,106 82

Gas meters in use. 30,282 90

Meter connections. 6,304 00

Piping for gas ranges. 16,500 00

$496,681 72

Engineering expenses (2½ per cent.) 12,417 04

Real estate. 4,000 00

Present value of buildings.. 24.643 00

Contingent expenses in construction 25,000 00

Cost of organizing company. 3,000 00

$565,741 76

While the evidence as to the depreciation is somewhat vague and indefinite, I think, upon the items aggregating said $496,681.72 there should be deducted for depreciation 10 per cent., amounting to the sum of $49,688.17, making the total present valuation ox the plant $516,073.59; but it is apparent that, for the successful and economical operation of the plant, a certain amount of working capital is required. This amount I find to be $50,000, making the total value of complainant’s investment, upon which it is entitled to a reasonable return, $566,073.59. _ '

_ While it is true the testimony shows that the complainant has not such working capital but has purchased upon credit the supplies necessary to operate, yet I think that, in determining what is a reasonable compensation, a working capital should be considered.

I do not allow anything as the value of complainant’s franchise. It does not appear from the allegations of the bill or proofs that anything was paid to the city for the franchise; the city simply' granted to complainant, without compensation, the right to use the public streets and alleys for the purpose of constructing and operating its plant. This was a mere right and privilege to complainant and did not involve the expenditure of money. While it is true a franchise is a property right, which will protect complainant in its use of the streets and alleys for the purposes expressed, yet it involves no investment of money, complainant’s investment being in its tangible property under authority of the- franchise, and . the public ought not to be taxed for a privilege which it has voluntarily granted.

I do not think there is anything in the case of Willcox v. Consolidated Gas Co., 212 U.S. 19" court="SCOTUS" date_filed="1909-01-04" href="https://app.midpage.ai/document/willcox-v-consolidated-gas-co-96937?utm_source=webapp" opinion_id="96937">212 U. S. 19, 29 Sup. Ct. 192, 53 L. Ed. 382" court="SCOTUS" date_filed="1909-01-04" href="https://app.midpage.ai/document/willcox-v-consolidated-gas-co-96937?utm_source=webapp" opinion_id="96937">53 L. Ed. 382, which conflicts with this view. In that case the legislative enactment providing for consolidation of various companies expressly required that a value should be given to the franchise of the respective companies. For that reason the court, sustained the value of the franchise thus fixed, but refused to recognize any increased value accruing during subsequent years by reason of the large increase in the tangible property from extension, etc. Whether a rate of $1 per thousand for gas would furnish an adequate return upon the investment of $566,073.59 would depend, of course, upon the net receipts which could be applied in dividends. The net receipts of the company for the year 1907 were $73,851.83 — this on the basis of the company’s charge of $1.20 .per thousand. A reduction of 20 cents per thousand, as required by the ordinance, would have reduced the receipts, upon the amount of gas sold in 1907, in the sum of $35,873.26, thus reducing the profit to $37,978.57. ' .

While the plant has been kept in a good state of preservation, needed repairs, etc., having been fully made, and chiefly charged to expense account, something should be allowed as a fund to be set apart for what is denominated a “Depreciation Fund.” This I find to be $8,000 per year, leaving the net sum applicable as dividends to stockholders the sum of $29,978.57, or 52 and a fraction mills on the dollar. This is on the assumption that the occupation tax of 2½ per cent, is invalid. The occupation tax of 2½ per cent, for the year 1907 would have amounted to $4,484.15.' This occupation tax I think invalid, as violating the Constitution of the state of Nebraska, requiring it to be uniform upon persons and property. In my judgment, an electric plant, which furnishes to the public light, heat,. and power should be classed the same as a gas plant, which furnishes to the public light, heat, and power. The fact that one furnishes the light, heat, and power by means of an electric current — the other by a current of gas — does not, in my judgment, justify a difference in classification. So far as the patrons are concerned, it is results that are sought for, and it is results which the respective parties furnish the public — results being light, heat, and power. See, as to classification, State v. Farmers’ & Merchants’ Irrigation Co., 59 Neb. 1" court="Neb." date_filed="1899-09-21" href="https://app.midpage.ai/document/state-ex-rel-dawson-county-v-farmers--merchants-irrigation-co-6653033?utm_source=webapp" opinion_id="6653033">59 Neb. 1, 80 N. W. 52; Rosenbloom v. State, 64 Neb. 342" court="Neb." date_filed="1902-04-02" href="https://app.midpage.ai/document/rosenbloom-v-state-6654403?utm_source=webapp" opinion_id="6654403">64 Neb. 342, 89 N. W. 1053, 57 L. R. A. 922. The ordinance imposing the occupation tax being, in my judgment, invalid, no deduction should be made from the net revenues for that purpose.

It is claimed that the ordinance reducing the price of gas to $1 per thousand fixes a flat rate to all consumers alike; that as to the smaller consumers, gas would be furnished at a loss; that, for this reason, the ordinance is invalid. If the total income derived from the rates prescribed by the ordinance will yield a reasonable return to complainant, upon its investment, I do not think it can complain. See Willcox v. Consolidated Gas Co., supra.

It appears from the evidence in- this case that complainant’s outstanding bonded indebtedness is $1,129,000, and that its stock is $2,-500,000. The stock and bonds are each grossly in excess of the value of complainant’s plant and grossly in excess of the cost of construction. Complainant’s construction account shows that the entire cost of the plant to June 30, 1907, was $603,278.14. The evidence shows that complainant and its predecessor, to obtain money with which to construct the plant, sold its bonds and stock at an enormous discount, and I do not think that, in determining the reasonableness of rates the amount thereof should be considered. While complainant, I think, is entitled to at least 6 per cent, upon the money invested, it does not appear that the reduced rate would not yield that sum. It is quite probable that the reduced rate would considerably increase the consumption of gas and thus increase complainant’s net profits. The record shows that in June, 1902, complainant voluntarily reduced its rates from approximately $1.50 per thousand to $1.20, and the amount of gas .consumed, and net profits resulting, considerably increased. The inquiry in cases of this character is not alone what has complainant theretofore earned, but it is what will be the effect of the ordinance reducing the rate upon the future net earnings of the company, and it devolves upon complainant to show not that the past rates have not produced a reasonable return, but that the rate prescribed by the ordinance will not in the future prodúce a reasonable return. The questions involved in this case, I think, have been recently disposed of by the Supreme Court in the cases of Knoxville v. Knoxville Water Co., 212 U.S. 1" court="SCOTUS" date_filed="1909-01-04" href="https://app.midpage.ai/document/city-of-knoxville-v-knoxville-water-co-96936?utm_source=webapp" opinion_id="96936">212 U. S. 1, 29 Sup. Ct. 148, 53 L. Ed. 371" court="SCOTUS" date_filed="1909-01-04" href="https://app.midpage.ai/document/city-of-knoxville-v-knoxville-water-co-96936?utm_source=webapp" opinion_id="96936">53 L. Ed. 371; Willcox v. Consolidated Gas Co., 212 U.S. 19" court="SCOTUS" date_filed="1909-01-04" href="https://app.midpage.ai/document/willcox-v-consolidated-gas-co-96937?utm_source=webapp" opinion_id="96937">212 U. S. 19, 29 Sup. Ct. 192, 53 L. Ed. 382" court="SCOTUS" date_filed="1909-01-04" href="https://app.midpage.ai/document/willcox-v-consolidated-gas-co-96937?utm_source=webapp" opinion_id="96937">53 L. Ed. 382; Railroad Commission of La. v. Cumberland Telegraph & Telephone Co. (decided February 23, 1909) 212 U.S. 414" court="SCOTUS" date_filed="1909-02-23" href="https://app.midpage.ai/document/railroad-commission-v-cumberland-telephone--telegraph-co-96966?utm_source=webapp" opinion_id="96966">212 U. S. 414, 29 Sup. Ct. 357, 53 L. Ed 577.

... The question'as to whether or not complainant’s franchise is.a perpetual one or has already ‘ terminated has been argued, but that question is riot properly involved in the case. The ordinance prescribing the rates’ to be charged, in effect, admits that complainant is properly’ occupying’ the streets and alleys,- and whether such occupancy, is-,by reason of a perpetual franchise or by sufferance is not involved in the proper determination. of this case.

For the reasons given, an injunction' will be awarded against the enforcement of the ordinance .imposing an-occupation’tax. The bill in all other respects' .will be dismissed without prejudice to the bringing of, a new action when it is shown, after compliance with the ordinance fixing-rates, that such rates will not yield-a reasonable return., to complainant.

Counsel for defendants will prepare the proper decree and' submit it-.,to counsel for complainant- before presenting to the court for signature. "