24 Cal. 2d 378 | Cal. | 1944
The Railroad Commission on its own motion ordered" an investigation into the reasonableness of the rates and the sufficiency and adequacy of the service rendered by Market Street Railway Company in San Francisco. After hearings the commission filed its opinion and order reducing the rate of base cash fare for transportation of passengers in the city from seven to six centsl The company petitioned for a rehearing which was denied. The matter is here, on its petition for a review pursuant to section 67 of the Public Utilities Act [Stats. 1915, p. 115, as amended; Deering’s Gen. Laws, 1937, Act 6386].
The petitioner attacks the proceedings and order as a depri
I
On the first, the procedural question, the company claims that it was denied due process by a failure of notice that it was being charged with the maintenance of unreasonable rates; that the issue of unreasonableness of rates was not framed during the course of the hearing; that the commission introduced no evidence of unreasonableness of the prevailing rate, and that the company was not afforded an opportunity to present evidence on the issue.
The petitioner does not claim that it did not receive a copy of the “Order Instituting Investigation,’’ which was mailed to it. That order notified the company that “the commission, believing that public interest demands an inquiry into the reasonableness of the rates, as well as the sufficiency and adequacy of the service rendered by the Market Street Railway Company,” would institute an investigation upon its own motion “into the reasonableness of the rates, charges, classifications, rules and regulations” of the company, “and also into the reasonableness, sufficiency and adequacy of the operations, service and facilities of said company.” The 10th day of May, 1943, was set as the time for the commencement of the public hearings. Notice of the time of hearing was also sent to other public utilities, and public and civic bodies and officers, including the California Street Cable Railroad Co., the Mayor and the Board of Supervisors of the City and County of San Francisco, the' Department of Public Works, the Board of Public Utilities, the City Attorney, the San Francisco Chamber of Commerce, the Office of Defense Transportation, and others. Hearings were conducted on May 10, July 15, and September 15, 1943. Thirty-three exhibits were introduced, consisting of reports and documents bearing on income and revenues, studies and reports of value, analyses of profit and loss accounts, operative expenses, statistical studies in passenger revenue and car and bus hours, as well as studies in operative equipment, traffic checks, results of operation, charges and revisions in operative practices, and comparative rate and operation analyses of Market Street Railway and the Municipal Railway of San Francisco. Certain voluminous annual and monthly reports in addition were by stipulation deemed to be before the coni
Thus, the company had the required notice of hearing on the question of reasonableness of the rates and full opportunity at the hearings to present any further evidence on the rate issue, had it chosen to do so. The notice and the course of the hearings were adequate to inform the company that the reasonableness of the present rate was under investigation. The discussion on this phase of the review may be concluded by stating that the various studies, reports and other statistical data, including the record in prior rate proceedings, together with the exhaustive investigation into the present state of the properties and the adequacy and value of the service, must be deemed to have had a direct bearing on the rate issue. The fact that the financial and rate base studies were required to be produced by the commission as a part of the record was sufficient to give to the company ample warning that the commission was seriously proceeding into an investigation of the reasonableness of the existing rate. In fact Mr. Kahn’s testimony clearly indicated that he so understood the purpose
II
The opinion of the commission gives the essential background. The year 1852 saw the first omnibus service in San Francisco; 1860 the first street railway; and 1873 the first cable line. The cable was more suited to the hilly terrain and some of the horsecar lines were converted to the cable method of operation. In 1893 Market Street Railway Company was incorporated and took over eleven of seventeen independent street car lines.
By city charter amendments ratified by the electors in 1902, provisions were enacted for municipal acquisition of public utilities. (Stats. 1903, pp. 586 et seq.) Privately owned street railways were permitted to hold franchises for not to exceed twenty-five years, whereupon tracks and overhead construction should revert to the city without cost.
In 1912 the first municipal line was placed in operation. Municipal railway expansion proceeded rapidly in order to serve the traffic during the Panama Pacific International Exposition in 1915. The city built lines of extension parallel with some of the Market Street Bailway lines.
United Eailroads became unable to pay the interest on its bonded indebtedness and in 1921 its properties were acquired by the bondholders under foreclosure sale and were in turn sold to Market Street Bailway Company. The twenty-five year franchise limitation was not enforced. Pursuant to section 131 of the city charter (Stats. 1931, p. 3052), the company surrendered its franchises and was granted a twenty-five year permit to continue operations subject to the right of the city to acquire the properties upon paying the fair value of the operative properties exclusive of going concern value or other intangible elements. In 1925 the company began placing motor buses in operation and by December, 1942 it had 125 buses in service.
The competitive factor induced by the continuing expansion of the municipal railway system became a constantly increasing threat to the operational and financial integrity of the company. The Market Street Bailway Company came under the jurisdiction of the Bailroad Commission, while the municipal lines remained subject to the regulation and supervision of the city. The municipality retained a five-cent fare even though the system was operated with a deficit. Market Street Bailway’s original franchises included a five-cent fare clause.
In 1937 Market Street Eailway applied to the Bailroad Commission for an increase of the fare to seven cents. The application was granted to the extent of permitting a two-cent transfer charge. At that time the company was admittedly not seeking the increase on the basis of a fair return on its investment, but sought merely to meet $1,000,000 additional annual operating expense due to increased taxes and labor costs. (Dec. No. 29889, 40 C.B.C. 525.) In its opinion in that proceeding the commission said: “It is clear from this record that operation under any reasonable fare struc
In 1938 the company made a supplemental application for an increase.to a seven-cent fare on a showing that revenues had declined and that further increased operating expenses were imminent due to higher labor costs. The commission granted the application to the extent of permitting a seven-cent fare, four tokens for twenty-five cents. Again the commission noted that the company was not seeking the new rate on the basis of a fair return on its investment. (Dec. No. 30849, 41 C.R.C. 349, 351.)
The city of San Francisco granted franchises to bus companies for operation on a ten-cent fare in direct competition with the company, but refrained from granting any such franchises which would compete with the municipal lines. The company attempted to effect economies by installing one-man operation in its electrically operated cars, but that practice was discontinued when the federal courts upheld a San Francisco city ordinance forbidding one-man operation of street cars. (San Francisco v. Market Street Railway Co., 98 F.2d 628, 305 U.S. 657 [59 S.Ct. 357, 83 L.Ed. 426], 306 U.S. 667 [59 S.Ct. 460, 83 L.Ed. 1062].) The company had attempted to abandon unprofitable lines, but had been unable to obtain permission from the city to do so.
Consequently in the same year (1938)' the company made a second supplemental application for a straight seven-cent basic fare. The showing was that as a result of the increase in fares in a twelve-month period more than 10,000,000 passengers had been diverted to the municipal lines, and the
The straight seven-cent basic fare has continued until the present time. The hoped for results, however, did not immediately materialize, even with the stimulation afforded by the holding of the Golden Gate International Exposition in 1939-1940. Compared with the year 1936, the last year under the five-eent fare, the 1941 traffic and revenue reached the lowest ebb, showing a falling off of 64,056,000, or 42 peh cent, in revenue passengers, and $1,426,282, or 19 per cent, in passenger revenue. The figures show a decline of 39 per cent in revenue as compared to the maximum revenue year of 1925. The state of the operative properties and the adequacy of the service continued to decline. The company became unable to discharge its franchise obligations for roadbed maintenance and the city was attempting to collect $1,691,162.76' claimed as arrears.
After the entry of this country into the present world war in 1941, and upon the stepped-up production of war materials, an abnormal increase in traffic occurred resulting in increased revenue, accompanied, however, by a further marked deterioration in the operative properties and in the service to the public.
The commission examined the condition of the properties and the adequacy of the service in relation to the prevailing rates for transportation. It found evidence of long-time neglect, deterioration, mismanagement, indifference to urgent public need, and other causes productive of poor service, not
The record makes it apparent, and the commission recognized, that in the past competition was the factor which prevented the company from reaping financial benefit from any rate structure; that heretofore the private automobile has given the railways competition; that that source of competition is partially eliminated during the period of rubber and gasoline shortage; that the increased traffic due to war activities will not last, and that as soon as transportation conditions return to normal the company will again be handicapped by a seven-cent fare against the competition of the Municipal Railway and the automobile; and that under any rate structure the condition of the company will grow even worse than at the former low level unless the service is greatly improved. It is also disclosed that while prior to the war the five-cent fare produced a greater gross and net annual revenue than any fare in excess of five cents, a five-cent fare structure will not realize any net return to the company under a competitive system of operation.
Attempts had been made to have the city of San Francisco acquire the Market Street Railway. Transportation surveys and property appraisals had been prepared and negotiations carried on over a long period of years. At the general election of November 3, 1942, the electorate of San Francisco rejected a proposed revenue bond issue to raise $7,950,000, the price theretofore settled upon at which the company would sell its properties to the city. A similar proposition at the same figure was again submitted and again rejected at a special election held April 20, 1943.
The commission rejected the company’s book figures of cost and depreciation and selected the offered price, $7,950,000, as the value of the utility and rate base for the purpose of computing the return to the company under various rate structures. It concluded that operation under a six-cent fare, after deduction from gross passenger revenue of operating expenses, depreciation and taxes, would produce a net return of slightly more than six per cent on the rate base of $7,950,000. It computed that a seven-eent fare, allowing an increase in operating expenses to $7,940,000, including $750,000 for depreciation and $590,000 for taxes, would yield annual net operating revenues of $760,000, a return of 9.6 per cent on the rate base. Figuring the return from a seveneent fare on a depreciation allowance of $500,000, which is the amount the company‘had been charging off annually, the percentage would be 12.7. The commission found both these rates of return excessive and unjustified by the present service. Its computation under a five-cent fare, with a depreciation allowance of $500,000, indicated a deficit of $1,153,000. On a six-cent basic fare it estimated annual gross revenue at $8,500,000, operating expenses, depreciation and taxes at $8,000,000, leaving a net operating income of $500,000,
No contention is urged that a six per cent return on the investment is not adequate, under present conditions, to attract capital and keep a utility in a solvent condition. The question is whether the record clearly establishes that the selection of the figure of $7,950,000 as the rate base will result in confiscation of the company’s property.
The commission rejected all other figures and selected the offered price as that most truly representative of the value of the company’s properties. It said that “the only available indication in this record of the present value of the company’s properties used and useful in the public service is the resolution of the company’s Board of Directors, passed on March 25, 1943.” The resolution (Exhibit 9) reads as follows:
“Sale of the Operative Properties of the Market Street Railway Company to the City and County of San Francisco. The President advised the Board that he had agreed with the Mayor and other city officials, as well as the Board of Supervisors, to sell the operative properties of Market Street Railway Company to the City and County of San Francisco for the sum of $7,950,000.00 cash, which was the same amount agreed upon for the sale of the operative properties when a charter amendment for the purpose of raising such sum by a revenue bond issue was submitted to and rejected by the qualified electors of the City and County of San Francisco at the general election on November 3rd, 1942. The President stated further that a similar charter amendment, with several changes therein, for the purpose of raising the sum agreed upon for the sale of the operative properties of the Market Street Railway Company to the City and County of San Francisco by a revenue bond issue would be submitted to the qualified electors of the City and County of San Francisco at a special election to be held on April 20,
“Whereupon, on Motion of Director Fay, duly seconded by Director Scott, the following resolution was adopted.
“Resolved, that the actions of the President in negotiating the sale of and agreeing to sell the operative properties of the Market Street Railway Company to the City and County of San Francisco for the sum of $7,950,000.00 cash be, and the same hereby are, ratified, approved and confirmed; and it is
“Further Resolved, that the officers of the Market Street Railway Company be and they are hereby authorized and directed to perform all necessary and proper acts in order to carry out and complete the sale of the operative properties of the Market Street Railway to the City and County of San Francisco for the sum of $7,950,000 cash.”
The commission adopted the price stated in the offer as the “present fair market value,” without the necessity of expressing an “opinion on the reasonableness of the figure of $7,950,000 as an exact measure of the present fair value of the company’s operative property in its present depreciated physical and service condition, with its past earning record and its prospective future under the competitive transportation situation obtaining in San Francisco. ’ ’ The petitioner contends that the ultimate figure adopted by the principals for the sale of the property to the city and therefore by the commission as the present fair market value was based on a capitalization of earnings; that the commission should have proceeded on a consideration of depreciated reproduction cost and historical cost, in accord with the holding of the Supreme Court of the United States in Smyth v. Ames, 169 U.S. 466 [18 S.Ct. 418, 42 L.Ed. 819], and other cases.
In Smyth v. Ames, after stating that the basis of all calculations as to the reasonableness of rates must be the fair value of the property being used for the convenience of the public, the Supreme Court proceeded to lay down the essential matters for consideration in ascertaining that value, (p. 546.) “And in order to ascertain that value the original cost of con
Subsequent decisions emphasized the necessity for finding fair value by weighing all the elements prescribed in Smyth v. Ames. Notably in Minnesota Rate Cases, 230 U.S. 352, at 434 [33 S.Ct. 729, 57 L.Ed. 1511], the Supreme Court said that there must be a “reasonable judgment having its basis in a proper consideration of all relevant facts”, repeating the language quoted from Smyth v. Ames. The emphasis progressed to the extent that in many eases, if one factor or element, particularly that of reproduction cost new, had not received consideration in arriving at “present fair value, ’ ’ it was determined that the constitutional due process requirement had been violated. (Southwestern Bell Tel. Co. v. Public Service Com., 262 U.S. 276 [43 S.Ct. 544, 67 L.Ed. 981]; Bluefield etc. Co. v. Public Service Com., 262 U.S. 679 [43 S.Ct. 675, 67 L.Ed. 1176] ; McCardle v. Indianapolis Water Co., 272 U.S. 400 [47 S.Ct. 144, 71 L.Ed. 316]; United Railways & Elec. Co. v. West, 280 U.S. 234 [50 S.Ct. 123, 74 L.Ed. 390]; cf. Pacific Gas & Elec. Co. v. San Francisco, 265 U.S. 403 [44 S.Ct. 537, 68 L.Ed. 1075]; Los Angeles Gas & Elec. Co. v. Railroad Com., 289 U.S. 287 [53 S.Ct. 637, 77 L.Ed. 1180]; Railroad Com. of Cal. v. Pacific Gas & Elec. Co., 302 U.S. 388 [58 S.Ct. 334, 82 L.Ed. 319].) Thus due process was deemed not to have been observed if it was shown that the regulatory body, in evaluating the plant or operative properties for rate purposes, had not considered depreciated reproduction cost as well as book cost, actual (sometimes called original or historical) cost, capitalization, etc. Since calculations under each formula led to widely dif
In Georgia Ry. & P. Co. v. Railroad Com., 262 U.S. 625 [43 S.Ct. 680, 67 L.Ed. 1144], decided less than three weeks later, Justice Brandéis writing the majority opinion distinguished the Southwestern Bell Tel. Co. case. The court decided that the commission was not bound to slavish adherence to reproduction cost new in a case where the evidence showed that it gave consideration to that element, the dissenters seeking to apply the Southwestern Bell decision. On the same day the court also decided Bluefield etc. Co. v. Public Service Com., 262 U.S. 679 [43 S.Ct. 675, 67 L.Ed. 1176], wherein reproduction costs had not received consideration and the court reversed, following the Southwestern Bell case, Justice Brandéis disagreeing with the grounds of reversal.
In the case of McCardle v. Indianapolis Water Co., 272 U.S. 400, 408 [47 S.Ct. 144, 71 L.Ed. 316], the court required a further step, namely, that the future as well as the present must be regarded; that present value could not be determined without an honest and intelligent forecast as to probable price and wage levels, probable yield over operating expenses, etc., during a reasonable period in the immediate future.
In 1933 the Supreme Court obviously began to anticipate a departure from adherence to Smyth v. Ames. In the case of Los Angeles Gas & Elec. Co. v. Railroad Com., 289 U.S. 287 [53 S.Ct. 637, 77 L.Ed. 1180], the court in effect upheld the California commission which, in making a rate reduction
In April, 1934, the Supreme Court upheld the commission’s order prescribing rates for telephone service in the case of Lindheimer v. Illinois Bell Tel. Co., 292 U.S. 151 [54 S.Ct. 658, 78 L.Ed. 1182]. It rejected the company’s claim that the rates were grossly confiscatory because not based on estimates of original or book cost and reproduction cost new; for, to recognize the claim, it stated, would be to sanction “a large increase over the rates which have enabled it to operate with outstanding success. Elaborate calculations which are at war with realities are of no avail.”
West Ohio Gas Co. v. Public Utilities Com., 294 U.S. 63 [55 S.Ct. 316, 79 L.Ed. 761] (January 1935), reiterated the
Nevertheless, less than six months later, in West v. Chesapeake & Potomac Tel. Co., 295 U.S. 662 [55 S.Ct. 894, 79 L.Ed. 1640] (June 1935), the court affirmed a decree enjoining the commission from enforcing prescribed rates because of the method employed to ascertain value, namely, by the use of price trend indices, rather than on the ground that the rate was -confiscatory.
In April, 1936, in St. Joseph Stock Yards Co. v. United States, 298 U.S. 38, 53 [56 S.Ct. 720, 80 L.Ed. 1033], the majority of the court again reviewed the distinctive functions of commission and court, saying that the ‘ ‘ judicial duty to exercise an independent judgment does not require or justify disregard of the weight which may properly attach to findings upon hearing and evidence . . . Judicial judgment may be none the less appropriately independent because informed and aided by the sifting procedure of an expert legislative agency ... We have said that ‘in a question of rate-making there is a strong presumption in favor of the conclusions reached by an experienced administrative body after a full hearing’ . . . The established principle which guides the court in the exercise of its judgment on the entire case is that the complaining party carries the burden of making a convincing showing and that the court will not interfere with the exercise of the ratemaking power unless confiscation is clearly established ...”
In Railroad Commission of Cal. v. Pacific Gas & Elec. Co., 302 U.S. 388 [58 S.Ct. 334, 82 L.Ed. 319], the court, reemphasizing the principle from Los Angeles Gas & Elec. Co. v. Railroad Com., Lindheimer v. Illinois Bell Tel. Co., West Ohio Gas Co. v. Public Utilities Com., and other cases, re
Then in Federal Power Com. v. Natural Gas Pipeline Co., 315 U.S. 575 [62 S.Ct. 736, 86 L.Ed. 1037] (March, 1942), the court again appeared to approve nonadherence to the rule of Smyth v. Ames by utility commissions. It upheld an interim order of rate reduction by the Federal Power Commission, acting under the Natural Gas Act of 1938, 52 Stat. 821, 15 U.S.C. sec. 717, which required that rates and charges for transportation and sale of gas in interstate commerce should be “just and reasonable.” The gas company sought to have $8,500,000 claimed going concern value included in the rate base. In upholding the commission the court said: (p. 586) “The Constitution does not bind rate-making bodies to the service of any single formula or combination of formulas. Agencies to whom this legislative power has been delegated are free, within the ambit of their statutory authority, to make the pragmatic adjustment which may be called for by particular circumstances. Once a fair hearing has been given, proper findings made and other statutory requirements satisfied, the courts cannot intervene in the absence of a clear showing that the limits of due process have been overstepped. If the commission’s order, as applied to the facts before it and viewed in its entirety, produces no arbitrary result, our inquiry is at an end.”
Finally in Federal Power Commission v. Hope Natural Gas Company, decided January 3, 1944, the court freed commissions from the necessity of following Smyth v. Ames. There the commission reduced gas rates. In testing the value of the utility property, it had omitted an item of $17,000,000 expended for drilling operations in an unregulated period of the utility’s operations, and which in the same period had been recouped from earnings by having been charged off to operating expenses. The court rejected the contentions that the rate base should reflect the reproduction cost and trended original cost, and that the well drilling costs of $17,000,000 should have been included in the rate base. It said: “Rate-
“We held in Federal Power Commission v. Natural Gas Pipeline Co., supra, that the Commission was not bound to the use of any single formula or combination of formulae in determining rates. Its rate-making function, moreover, involves the making of ‘pragmatic adjustments’: Id., p. 586. And when the Commission’s order is challenged in the courts, the question is whether that order ‘viewed in its entirety’ meets the requirements of the Act. Id., p. 586. Under the statutory standard of ‘just and reasonable’ it is the result reached and not the method employed which is controlling. Cf. Los Angeles Gas & Electric Corp. v. Railroad Commission, 289 U.S. 287, 304-305, 314 [53 S.Ct. 637, 77 L.Ed. 1180]; West Ohio Gas Co. v. Commission (No. 1), 294 U.S. 63, 70 [55 S.Ct. 316, 79 L.Ed. 761]; West v. Chesapeake & Potomac Tel. Co., 295 U.S. 662, 692-693 [55 S.Ct. 894, 79 L.Ed. 1640] (dissenting opinion). It is not theory but the impact of the rate order which counts. If the total effect of the rate order cannot be said to be unjust and unreasonable, judicial inquiry under the Act is at an end. The fact that the method employed to reach that result may contain infirmities is not then important. Moreover, the Commission’s order does not become suspect by reason of the fact that it is challenged. It is the product of expert judgment which carries a presumption of validity. And he who would upset the rate order under the Act carries the heavy burden of making a convincing showing that it is invalid because it is unjust and unreasonable in its consequences . . . The conditions under which more or less might be allowed are not important here. Nor is it important to this case to determine the various permissible ways in which any rate base on which the return is computed might be arrived at. For we are of the
The petitioner contends that the cases of Federal Power Com. v. Natural Gas Pipeline Co. and Federal Power Com. v. Hope Natural Gas Co. are inapplicable because they involved the commodity gas, as distinguished from the use of common carrier property. The petitioner does not contend, however, that the rate base theory of public utility valuation is not applicable in the present case. That theory of evaluating public utility property as determinative of the question of confiscation was adopted by the commissions, and assumed by the court to be proper, in the cited cases. It follows that the holdings of the Supreme Court in those cases may be considered in a case involving common carriers. Therefore those cases, particularly the Supreme Court’s decision in the Hope Natural Gas Company case, permits unreasonableness to be shown, not by the method employed to formulate a rate base, but by the fact that the “end result” of the commission’s order interferes with the company’s successful operation, its financial integrity, its ability to maintain credit and attract capital, and to compensate investors for risks assumed—in short, fails to provide a return sufficient to induce the utility enterprise to “perform completely and efficiently its functions for the public.” The Supreme Court refrained from endorsing a particular method of valuation to arrive at the result of reasonableness, but left commissions free to follow Smyth v. Ames, or to select one or more of the heretofore recognized criteria or a different method, which, even if irregular, would not invalidate an order unless unreasonableness were clearly established. Thus responsibility for rate fixing, insofar as the law permits and requires, is placed with the commission, and unless its action is clearly shown to be confiscatory the courts will not interfere.
Section 32 of the Public Utilities Act (Stats. 1915, p. 115, as amended; Deering’s Gen. Laws, 1937, Act 6386), empowers the California commission, after a hearing had upon its own motion or upon complaint, to make findings on the rea
Section 67 of the Public Utilities Act provides for a review by this court for the purpose of having the lawfulness of the order and decision of the commission inquired into. That section restricts the review to a determination of whether the commission has regularly pursued its authority, including a determination of whether the order or decision under review violates any right of the petitioner under the Constitution of the United States or of the State of California. It further provides that the findings and conclusions of the commission on questions of fact shall be final and shall not be subject to review except as hereinafter noted, and that such questions of fact shall include ultimate facts and the findings and conclusions of the commission on reasonableness and discrimination. The exception to finality is that “in any proceeding wherein the validity of any order or decision is challenged on the ground that it violates any right of petitioner under the Constitution of the United States, the Supreme Court shall exercise an independent judgment on the law and the facts, and the findings or conclusions of the Commission material to the determination of said constitutional question shall not be final.” That section also gives the court power to enter judgment either affirming or setting aside the order or decision of the commission.
That part of section 67 which requires the independent judgment of the court on the law and the facts and withholds from the commission’s findings and conclusions finality on constitutional questions, was added by amendment in 1933. This court thereafter recognized that the amendment was responsive to language in certain United States Supreme Court decisions which indicated that the Legislature must provide the means whereby the courts should exercise an independent judgment on the law and the facts when federal constitutional questions were involved. (Southern California Edison Co. v. Railroad Com., 6 Cal.2d 737 [59 P.2d 808]; American Toll Bridge Co. v. Railroad Com., 12 Cal.2d 184 [83
In the present proceeding, as in the recent cases of Federal Power Com. v. Natural Gas Pipeline Co. and Federal Power Com. v. Hope Natural Gas Co., the standard for rate fixing is that of reasonableness. The petitioner herein must be charged with the burden of showing that the evidence does not support the commission’s finding of value, and that the reduced rate is unreasonable and will result in confiscation of its property. That burden is coupled with a strong presumption of the correctness of the findings and conclusions of the commission. Ordinarily a public utility is a monopoly and is not subject to the travail of competition. Because of its monopolistic character, public interest requires that it submit to regulation for the protection of the consumer, and the utility in return is entitled to protection of its investor interest. In the case of monopolistic utilities it is possible to say that regulation to accomplish the two-fold purpose may be a relatively simple matter. But here the commission was confronted with facts which are unusual
It cannot be said that under the facts of this case arbitrary action resulted merely from the commission’s rejection of book values and capitalization, its refusal to make precise estimates of actual deterioration, of going concern or other values, and its acceptance of the company’s offer of sale to the city made in a profitable period as the best evidence of the fair value of the utility in the present condition of its operative properties. The commission expressly refrained from considering whether the amount of the offer in relation to value under all the conditions was not too high. Furthermore, it appears that studies of valuation for sale purposes were also made by the city and by the commission, and only after such studies was a sale price selected which was deemed commensurate with the fair value of the property under existing conditions.
It is the real and not the nominal paper valuation that determines the amount of the investment on which the utility is entitled to a return. (See Pond, Public Utilities, Fourth ed., vol. 2, pp. 1117, 1118.) As said in Lindheimer v. Illinois Bell Tel. Co., 292 U.S. 151 [54 S.Ct. 658, 78 L.Ed. 1182], the “actual experience of the company is more convincing than tabulations of estimates . . . Elaborate calculations which are at war with realities are of no avail.” There is no fundamental or statutory law which will preclude the commission from evaluating a public utility in accordance with the actualities. So to proceed is not to take private property for public use without compensation. There is no denial of due process in rejecting conjectural and unsatisfactory estimates of value, or in treating the petitioner’s estimates- as without probative value. (Railroad Com. of Cal. v. Pacific G. & E. Co., 302 U.S. 388, 397-398 [58 S.Ct. 334, 82 L.Ed. 319].) As was said in Los Angeles Gas Co. v. Railroad Com., 289 U.S. 287, 306 [53 S.Ct. 637, 77 L.Ed.
The petitioner has not shown that the. results are not in accord with the realities. Both before the commission and in this court it contented itself merely with urging that the commission proceeded erroneously in selecting for rate making purposes the offer price of $7,950,000, because, so it claims, that figure was based on a capitalization of earnings. The petitioner made no offer or attempt to show that the value fixed by the commission did not represent either the true depreciated legitimate cost or the true depreciated actual cost. In Minnesota Rate Cases, 230 U.S. 352, 566 [33 S.Ct. 729, 57 L.Ed. 1151], it was said that “the company having assailed the constitutionality of the state acts and orders was bound to establish its case, and it was not entitled to rest on expressions of judgment when it had it. in its power to present accurate data which would permit the court to draw the right conclusion.” Since it is impossible to say in the light of the evidence in this proceeding that the figure selected by the commission does not bear a proper relation to the fair value of the utility under existing conditions, it must be concluded that the petitioner has not shown arbitrary action on the part of the commission in selecting the sale offer price as the rate base, or that the evidence does not support the commission’s finding that the figure selected represents at least fair value, if not more than that.
The petitioner has also failed to meet the burden east upon it to establish that the return on the rate base under the reduced fare will prevent the utility’s functioning adequately from the company or investor standpoint. The commission has the experience and the data at hand from which to cull the estimates of probable increase in traffic under a reduced fare and improved service, and of the probable future operating revenues, expenses, and other costs. This court will not disturb its findings on those disputed questions of fact. The company is now and for several years has been doing an abnormally increased traffic business with returns greatly in excess of its operating costs plus increased reserves for depreciation and taxes. It does not question
The foregoing discussion demonstrates that the interests of the investor have received constitutional protection by the action of the commission. Under rule by competition and the consequent great deterioration in its capital investment, the utility’s ability to attract capital has undoubtedly suffered. But this is not an element that can be controlled by the regulatory body beyond the possibility of insuring to the utility a fair return on the value of the capital investment when business is profitable. The fact that the utility has suffered deficits in the past does not justify excessive profits in.the future. (Los Angeles Gas & Elec. Co. v. Railroad Com., 289 U.S. 287, 313 [53 S.Ct. 637, 77 L.Ed. 1180]; Federal Power Com. v. Natural Gas Pipeline Co., 315 U.S. 575, 590 [62 S.Ct. 736, 86 L.Ed. 1037].) “When a busi
The record is also clear that the commission has not been arbitrary in acting for the protection of the public which is under compulsion to use the present depleted and inadequate service, or which may be expected to make use of an improved service. As the commision said in its opinion, “After making such allowance (for war time difficulties) the important question remains to what extent the ratepayer, under war conditions, should be compelled to pay the same or higher rates for an inadequate and inferior service while the utility enjoys abnormal profits.” It is unnecessary to consider whether the seven-cent fare would still be unreasonable were the petitioner performing a fully adequate and efficient service. The findings of inadequacy in the maintenance and service are supported by the evidence. The commission is empowered under the statute in fixing the fare to take into consideration the quality of the facilities and service. The commission decided that even in war time improvement was possible, and that the value of the improved service would be no more than six cents. The problem of the value of the service, and the correctness of the commission’s decision on the consumer interest, do not involve constitutional questions, so long as otherwise the investor or company interest has received adequate consideration by the commission. When the company interest has received constitutional protection, the findings of the commission on the consumer interest become final in the proceeding. The question involving that interest then'has been answered by the commission correctly pursuant to the statute and the authorities to the effect that the reasonableness of rates should not be considered apart from the adequacy of the service, and that the public should not be charged more than the service is reasonably worth. The statute is a legislative recognition of the public’s right to demand that consideration be given to the value of the service. (Covington & L. Turnpike R. Co. v. Sandford, 164 U.S. 578, 596 [17 S.Ct. 198, 41 L.Ed. 560]; Spring Valley Water Works v. San Francisco, 192 P. 137; see Article, Value of the Service as a Factor in Bate-Making, 32 Harv.L.Rev. 516.)
In the final analysis the question whether the right to just
The petitioner asserts some errors in the admission and consideration of statistical and other documentary evidence. It is not the function of the reviewing tribunal in these proceedings to set aside the legislative finding for mere errors of procedure not amounting to lack of due process. Its duty is to ascertain whether the legislative process has resulted in confiscation. (West v. Chesapeake & Potomac Tel. Co., 295 U.S. 662, 674 [55 S.Ct. 894, 79 L.Ed. 1640].)
The petitioner objects to the apparent indeterminate duration of the experimental period under the six-cent fare fixed by the commission. The commission still has jurisdiction and if from the monthly reports filed by the company during a reasonable experimental period it appears that the expected increase in passenger traffic on the utility’s system due to the reduction in fare and improvement in service does not materialize, the commission has the power to make appropriate adjustments. As the prescribed rate is .expressly stated to be tentative, there is no ground for assuming that the commission will reject an application to make such changes as experience may show to be necessary in order to produce the stipulated revenue. (Clark’s Ferry B. Co. v. Public Serv. Com., 291 U.S. 227, 241 [54 S.Ct. 427, 78 L.Ed. 767].)
The order is affirmed.
Gibson, C. J., Curtis, J., Edmonds, J., Carter, J., Traynor, J., and Schauer, J., concurred.
Petitioner’s application for a rehearing was denied July 27,1944.
Since this review proceeding was commenced and on May 16, 1944, the electorate of the city voted favorably on a proposition to acquire the operative properties of the company on a self-liquidating plan for $7,500,000.