118 Cal. 556 | Cal. | 1897
Lead Opinion
The plaintiff is a corporation engaged in the business of .supplying water to the city of San Diego and its inhabitants. In February, 1890, the common council of the city passed an ordinance fixing the water rates for the year beginning July 1, 1890. In May, 1890, the plaintiff brought this action against the city, the common council, the mayor, and the individual members of the council, to annul this ordinance and enjoin its enforcement. The complaint alleged in substance that the entire revenue which plaintiff could receive during the year in question, under the rates so fixed, would be insufficient to pay its operating expenses and fixed charges for that year,j( and would, therefore, ’afford no reward whatever to plaintiff for furnishing the water, and that the ordinance would deprive plaintiff of its property without process of law and without compensation. It was also alleged that, hy reason of certain fraudulent practices on the part of the council, the plaintiff was deprived of a fair opportunity to be heard before the council, and prevented from properly presenting its side of the ease. The action was tried after the expiration of the year in question, and a judgment was entered declaring the ordinance to be void, and setting the same aside. From this judgment, and from an order denying their motion for a new trial, the defendants appeal.
The findings of the court were in substance: That the prop
The court also found certain facts concerning the proceedings of the common council and its committee in investigating the subject matter, which will be noticed hereafter.
These findings are assailed as being in some particulars unsupported by the evidence; and many questions of law have been ably argued by numerous counsel. Some of these questions, though highly interesting and important, are not necessarily involved in this appeal, and we shall therefore not notice them; but we will, so far as space will permit, consider each of the other points made.
1. It is contended by defendants that, under article XIY of the constitution of this state, a court has no power, in the absence of fraud, to hold such an ordinance invalid merely because the court finds the rates fixed thereby to be unjust and unreasonable.
We shall not attempt in this opinion to review the many cases on this subject. It is sufficient to say that the supreme court of the United States (whose decisions on this matter are controlling) has repeatedly decided that the power of the state to fix and regulate the rates of compensation to be charged by persons and corporations in charge of certain public utilities is so limited by the constitution of the United States that it cannot be exercised to such an extent as to require any such person or
But appellants contend that in any event the court could do no more in reviewing the action of the common council than to say whether there was or was not evidence produced before that body sufficient to sustain its conclusions; and that the court was not at liberty to determine the question upon other and perhaps new evidence not produced before the council, nor to substitute its judgment as to the reasonableness of the rates for the judgment of that body. In this contention we think that counsel entirely misconceives the nature of the functions respectively exercised under our constitution by the rate-fixing body and by the courts. Whether the fixing of rates by the council be called a legislative, a judicial, or an administrative act, it is certainly not an adversary judicial proceeding such as, under the constitution, will conclude private rights. It is a proceeding on the part of the government to which neither the water company nor the rate payers are parties, conducted without notice to them, and without any right on their part to effectually intervene. Such a proceeding cannot operate to divest private rights; and, though the supreme court of the United States holds it to be a legitimate exorcise of governmental powers, that court also holds that when it is carried so far as to deprive anyone of his property without just compensation it is an unlawful exercise of such power, and simply void. The function of the courts is merely to ascertain whether the power has been carried beyond the constitutional limits so fixed; and, if such be found to be the case, to declare the acts of the council void. They do not sit as appellate tribunals to review tbe correctness of the council’s determination, nor need they know anything about the evidence on which that body has acted. All that they have to consider is, whether, in a given case, the result of the councils ac
¾. On tbe otber band, tbe plaintiff contends that section 1 of article XIV of tbe constitution of this state is opposed to tbe constitution of tbe United States, in that it operates to deprive the water company of its property without due process of law. It is argued that no provision for the fixing of water rates by the tribunal thereby created can be valid without notice to those whose rights are to he affected, and an opportunity to them to appear and defend, tbe right to which must be given by tbe constitution itself. Tbat no such notice or bearing is provided for must be admitted; but tbe consequence contended for does not follow.
In the first place there is nothing in the pleadings or evidence in this case to show that any water rights or property of plaintiff used in furnishing the water in question were acquired before the adoption of tbe present constitution. On tbe contrary, we think it substantially appears tbat they were all acquired since that time. We are unable to perceive why the people of this state in adopting tbat constitution had not tbe right to declare tbat all water not then reduced to private ownership should thereafter remain public, and tbat thereafter every person undertaking the business of supplying cities or towns or their inhabitants with water should do so upon the condition that the rates to be charged therefor should be conclusively fixed by the state. Such a business is so far public in its very nature that the state might lawfully forbid its exercise by any private individual, and, a forti-ori, might impose such conditions and restrictions upon its exercise as might be thought proper. If, then, that section of tbe constitution could be construed as rendering the decision of the council absolutely final and conclusive, plaintiff, at least, • could not be heard to complain. If it chose, with tbat section in force, to enter upon that business, it was bound to submit to the conditions thereby imposed.
But we think that tbe true construction of that section is such that it is not open to the constitutional objection urged, even if raised by one who at the time of its adoption was engaged in that business. It obviously was not the intention of
According to this construction, the rules announced under the first head in this opinion are applicable. If the council has fixed rates so palpably unreasonable and unjust as to amount to a taking of plaintiff’s property without just compensation, it has so far exceeded the powers conferred upon it, and the court is competent to afford redress.
3. This brings us, then, to the question whether the findings support the judgment. They show that the total receipts of the plaintiff from the rates fixed by the council would be and were insufficient to pay plaintiff’s actual and necessary operating expenses, together with the interest on so much of its bonded indebtedness as was necessarily and properly expended by it in the construction of its plant, necessarily and actually used for the supplying of the. water here in question—indeed, [would fall short more than $11,000 of paying those charges. No circumstances requiring such a loss were found, and the finding that these actual charges were necessarily and properly incurred in the legitimate exercise of the business of furnishing water to the city negative the existence of any such circumstances. It is clear that under the rule laid down by the supreme court of the United States in Reagan v. Farmers’ Loan
It is apparent that the water company does not own the water which it collects and supplies, or the plant which it uses to collect and distribute that water, in the same sense in which a man is said to own his house or his farm. By the very nature of the use to which it is applied, the company has devoted that property to a public use. Having once undertaken ti> perform that public duty, it must continue to perform it, and must carry on its business under tire lawful regulations of the government. In effect the state may be said to have appropriated the water and the plant to public use. For that appropriation it is bound to make just compensation, and it has provided for such compensation by requiring the municipal authorities to fix just and reasonable rates at which the water is to be furnished to and .received by the consumers. Since the state has “taken” the use$ of this property, it is bound to provide a just compensation for that use, and article XIY of the constitution must be construed as providing for that just compensation.
The question of what is just compensation in such a case is, we think, in all respects analogous to the question which arises in every ease of appropriation under the power of eminent domain; and it may be reduced to the formula that the public must pay the actual value of that which it appropriates to the public use. In determining such value three, and we believe only three, methods are possible: 1. Either by ascertaining what the property could be sold for (its market value); or 2. By ascertaining what it would cost to replace it; or 3. By ascertaining the revenue it is capable of producing. In cases like the present,
The second method is entirely inapplicable to property of this kind. The construction of municipal waterworks is a matter of growth. It is necessary in. common prudence, on the one hand, to construct the works of such capacity as to satisfy the needs of the growing city, not only at the moment, but within the near future; and, on the other hand, not to extend them so much as to cast an unnecessary burden on the stockholders, or the present consumers. As such works are a necessity to the city, they must keep pace with, and to some extent anticipate, its growth. When constructed they stimulate to that extent the progress of the city, and tend, like all conveniences, to lower the general cost of production of all things. It results that at least the first water system in any city occupies the position of a pioneer. At any expense the works must be constructed, and usually no reward can be realized by the constructors until some time has elapsed. In the mean time, as the city grows, in part by reason of this very supply of water, the facility of constructing works of all kinds is increased, and the cost of such construction diminished. It would, therefore, be highly unjust to permit the consumers to avail themselves of the plea that at the present time similar works could be constructed at a less cost, as a pretext for reducing the rates to be paid for the water. The reduced expense, if it be reduced, is due in part at least to the very fact that the city has been provided at the cost of the water company with increased facilities for doing business.
But it is said that those who enter upon any business enterprise undertake the risk of being undersold by those who, coming later into the field, have the advantage of a cheapening of construction. But this is not an ordinary business enterprise.
Nor would it, on the other hand, be just to the consumers to require them to pay an enhanced price for the water, on the ground that it would now cost more to construct similar works. Such a contingency may well happen; but to allow an increase of rates for such reason would be to allow the water company to make a profit, not as a reward for its expenditures and services, but for the fortuitous occurrence of a rise in the price of materials or labor. The law does not intend that this business shall be a speculation in which the water company or the consumers shall respectively win or lose upon the casting of a die, or upon the equally unpredictable fluctuations of the markets. For the money which the company has expended for the public benefit it is to receive a reasonable, and no more than a reasonable, reward. It is to be paid according to what it has done, and not according to what others might conceivably do. In effect, the bargain between the company and the public was made when the works were constructed: and this matter is to be determined according to the state of things at that time.
We must then have recourse to the third standard of value—■ the revenue which the property is capable of producing. At the first blush there might seem to be a difficulty in applying this standard, for the revenue received by the company will be absolutely controlled by the rates fixed, and no revenue can be collected except upon rates so fixed. This difficulty has led one of the counsel in this case, in a singularly able and ingenious argument, to contend that the rates must be so fixed as to enable the company to obtain precisely the revenue which it would realize if the rates were not regulated by the public at all. To this proposition we cannot assent. The whole history of mu-
Wbat that standard is, as applied to tire present case, we think not difficult of ascertainment. As we have said, it is not the water or the distributing works which the company may be said to own, and the value of which is to be ascertained. They were acquired and contributed for the use of the public; the public may be said to be the real owner, and the company only the agent of the public to administer their use. What the company has parted with, what the public has acquired, is the money reasonably and properly expended by the company in acquiring its property and constructing its works. The state has taken the use of that money, and it is for that use that it must provide just compensation. What revenue money is capable of producing is a question of fact, and, theoretically at least, susceptible of more or less exact ascertainment. Regard must be had to the nature of the investment, the risk attendant upon it, and the public demand for the product of the enterprise. It would not, of course, be reasonable to allow the company a profit equal to tbe greatest rate of interest realized upon any kind of investment, nor, on the other hand, to compel it to accept the lowest rate of remuneration which capital ever obtains. Comparison must be made between tbis business and other kinds of business involving a similar degree of risk, and all the surrounding circumstances must be considered. An important circumstance will always be the rate of interest at which money can be borrowed for investment in such a business; and, where the business appears to be honestly and prudently conducted, the rate which the company would be compelled to pay for borrowed money will furnish a safe, though not always con-
This being so, the existence of the bonded indebtedness on which so much stress has been laid, and which has seemed to present so difficult a problem in some of the cases, must be disregarded. That fact, indeed, it seems to us, can never be important, except as entitling the holders of the bonds, as parties in interest, to be heard in actions like the present. Evidently, no distinction can be made between those who construct the works with their own money and those who do so with money borrowed from others. In either case the money actually invested is the basic criterion of the revenue to be allowed.
It follows that we cannot say that the finding of the court below, that the rates fixed by the city council were less than what was reasonable, is unsupported by tbe evidence. After deducting current expense for the year—$40,000—from the revenue received—$65,788.65—there would be left bnt $25,788.65 —or bnt little more than three and óne-third per cent upon $750,000, the actual cost of the works; while the evidence shows that the company was compelled to pay a much higher rate upon money which it appears to have fairly borrowed. It is true that the evidence is not as full and satisfactory on this question as it should be, doubtless owing to tbe fact that the rules governing this inquiry were not clearly apprehended by tbe counsel who tried the case. Bnt as no attempt was made to show that the rate of interest paid by the company was above the lowest market rate, and as the prudence and economy of the management were not successfully impeached, we cannot say that the court below was not justified in tbe conclusion to which it arrived on this question.
Bnt it is contended that the power of the court is at most to inquire whether some reward will be provided by the rates fixed and that if some reward, however small, is so provided, the court cannot interfere. We have been referred to dicta in some of the
It should, of course, be said that it does not follow that in every case the company will be entitled to credit for all of its current expenditures, or to receive a compensation based on the entire cost of its works. Reckless and unnecessary expenditures, not legitimately incurred in the actual collection and distribution of the water furnished, or in the acquisition, construction, or preservation of so much of the plant as is necessary for that purpose, cannot be allowed. Nor can the investment on which the company is entitled to base its compensation be held to include property not now actually employed in collecting or distributing the water now being supplied, however useful it may have been in 'the past, or may yet be in the future. It is the money reasonably and properly expended in each year in collecting and distributing the water which constitutes the current expenses which may be allowed; and it is the money reasonably and properly expended in the acquisition and construction of the works actually and properly in use for that purpose, which constitutes the investment on which the compensa^ lion is to be computed. The amounts stated in the findings in this case are found to be of that character.
It is claimed that the evidence does not justify the finding that $750,000 had been actually expended in the purchase and construction of the plant. On this subject the evidence is extremely unsatisfactory. Apart from estimates testified to by engineers, the only evidence of the cost was the books of the company, which placed the amount at $735,000. Of this sum defendants object to items amounting to about $127,000, viz., an alleged duplicate of the entry of $13,932, an alleged overcharge of $25,000 in the real estate account, and the sum of $88,000 alleged to be the cost of certain works abandoned and not in use. On these questions we have had little or no assistance from counsel fox respondent, and our examination of the evidence has failed to satisfy us on any one of them. The books, or those portions of them brought up in the transcript, require much explanation, which has not been furnished us. In fact, the case appears to have been tried largely on a wrong theory, the greater portion of the evidence consisting of the testimony of expert witnesses as to the value of the property. This is at the best an unsatisfactory way of determining the question of actual cost (for which purpose only could it be admissible), and should not be resorted to when better evidence can be obtained. As against the company, at least, its books furnish better evidence on this subject, and cannot be disregarded. These books certainly show the cost to have been less than $750,000, though we are unable to determine the precise amount properly shown by them; and the evidence clearly discloses that portions of the plant included in that cost are not now in use, if, indeed, they have not been totally abandoned. We think, therefore, that this finding is not justified by the evidence. On this and kindred matters not only is the burden of proof on the plaintiff, but it is bound to establish them by the most clear and satisfactory evidence, in order to overcome the presumption of the correctness of the action of the city council.
The finding that the expenses of the company for the year in question were $40,000 is also attacked. The books of the company put the amount at $44,255.30. Of this amount appellants object to items of about $5,000 as unnecessary and improper, and object particularly to an item of $12,800, being an un
With regard to the question of the depreciation of the plant by use, it is sufficient to say that ordinary repairs should be charged to current expense, that substantial reconstruction or replacement should be charged to the construction account, and that depreciation should not otherwise be considered. It is doubtless difficult in many eases to properly discriminate between current and ordinary repairs and such repairs as amount in effect to new construction Such difficulties, when they arise, must be solved by the application of the principles on which ordinary business enterprises are conducted.
It may be added that when, as appears to have been the case in this instance, portions of the company’s expenses are specifically repaid by the consumers, such expenses should be eliminated from the computation. This will apply at least to the ‘Taps” put in for private consumers.
5. Among other things, the court below made the following finding:
“10. That the taking of evidence as to the value of the plaintiff’s plant and the rates that should be fixed by the common council of said city, during the month of February, 1890, for the year commencing July 1, 1890, was by said common council delegated to a joint committee consisting of three members from the board of delegates and three members from the board of aldermen of said common council. That said joint committee*575 proceeded' to and did take evidence from tbe plaintiff and its officers and other witnesses for a number of days, and that on tbe twenty-first day of February, 1890, tbe plaintiff then being before said committee by its attorney, said attorney inquired of said committee whether other evidence would be taken, and announced that if other evidence would be taken he, the said attorney, desired to be present, and especially that if evidence was given by members of the board of public works of said city, or estimates were taken from said members of the value or cost of the plaintiff’s plant, that he, said attorney, desired to be present and examine said members of the board of public works as to the evidence given by them or the estimates furnished. That it was announced by one of said committee at that time, in the presence of the other members, that he did not know of any other evidence that was to be taken, which was not disputed by any other member of the committee. That there, at that time, and immediately following the demand of said attorney as aforesaid, the city engineer of said city, who was present, was privately and secretly informed that the committee desired to have him present at a meeting to he held the following day to give an estimate of. the value of said plant. That on the following day said committee met secretly, and without notifying the water company or its said attorney, and took the testimony of said city engineer and one Schuyler, a member of the board of public works of said city, and took from them their estimates of the value and cost of every part of the distributing system, pumps, wells, and other property of the plaintiff, not including its water rights, rights of way or real estate. That said meeting was held secretly in a hack room of the office of the city attorney, while all of the other meetings of the committee had been held publicly in the room of the board of aldermen, was beld on a legal holiday when the offices of the city in the City Hall were closed, and said meeting was held with the doors closed and locked. That the plaintiff had no notice or knowledge of said meeting or the taking of said evidence, and was not present either by its officers or its attorney or otherwise, and was given no opportunity to he present or investigate or cross-examine with reference to the evidence given and estimates furnished. That said estimates so furnished were largely less than the cost as proved or estimated by the evidence of the officers*576 of the plaintiff taken by said committee, and sworn statements furnished by its officers, and the estimates so furnished in the absence of the plaintiff were taken with but few exceptions, and as to small amounts, as the value and cost of said plant by said committee, and made the basis of their report, and of the rates fixed by them and subsequently adopted by the ordinance of the common council. That the report of said committee was made up and concluded on the twenty-fourth day of February, 1890, was presented to both houses of said common council on the evening of that day, and was then adopted by each of said bodies without change. That the attorney of the plaintiff appeared before each of said bodies and demanded that the plaintiff be allowed to offer evidence to said common council, with reference to the fixing of said rates, but his right to offer said evidence was denied, 'and no evidence was received or heard. That the evidence taken by the committee was taken down by a stenographer and transcribed, but was never read to or submitted to either board of said common council, but that the members of said committee, or some of them, stated their recollection of the evidence upon which their said report was based. That the ordinance mentioned in the complaint, fixing said rates, was passed and adopted by both of the bodies of said common council on the evening of the twenty-fifth day of February, 1890, without any further hearing, or opportunity to be heard, on the part of plaintiff.”
It is claimed that this finding is not altogether in accord with the evidence; but, though we find some verbal inaccuracies, we think that in all material particulars it is sufficiently supported.
It is plain that these facts show so much of unfairness in the investigation had by the common council as to’ overcome the presumption of the correctness of its decision. It was clearly the duty of the council to give to the water company, at least when requested to do so, a reasonable opportunity to be heard, not merely for the purpose of presenting its own evidence, but also of explaining or overcoming, if it could, evidence presented by others. The company, of course, could not claim as a right to be heard at any time it chose; but it certainly was entitled, upon reasonable request for that purpose, to be present when evidence was being produced before the council or its committee, or to be otherwise informed of that evidence and allowed to
A number of other points have been discussed by counsel, but they are all either covered by what has been said, or have been thereby rendered unimportant.
For the reasons above set forth, tbe judgment and order appealed from are reversed, and tbe cause remanded for a new trial.
Concurrence Opinion
concurring. The findings of fact made by the trial court which are deemed necessary to a consideration of tbe questions presented before us are as follows: 1. On tbe twenty-fourth day of February, 1890, and at tbe time the ordinance mentioned in plaintiff’s complaint was enacted by the common council of said city, tbe water plant and system of the plaintiff was of the value of $750,000; 8. The necessary operating expenses of plaintiff in conducting its property from July, 1890, to July, 1891, and the sum actually expended, was $40,-000; 3. Plaintiff was and is indebted upon its outstanding bonds regularly issued in .the sum of $1,000,000, bearing interest at five per cent per annum, of which sum $750,000 was necessarily expended iu the construction of the plant, and the interest upon which is $50,000 per annum; 4. The total receipts received under said ordinance from July 1, 1890, to July 1, 1891, amounted to $65,788,95, and no more; 5. The annual depreciation of plaintiff’s plant is three and one-third per cent per annum; 6. The rates as fixed by tbe ordinance for the year commencing July 1, 1890, were not just or reasonable, and were grossly oppressive, unjust, and unreasonable.
Owing to the fact that the case was not brought to trial in the lower court until the year had expired covered by the ordinance,
In tbe fixing of water rates by a city, as contemplated by tbe constitution, it is evident tbat tbe valuation of tbe plant is tbe basic element upon which tbe whole investigation rests. Tbe original cost of construction is simply an item to be considered in fixing the present valuation. It is a circumstance, strong or weak, entering into the final conclusion of tbe municipality upon tbe question. But as to tbe amount of tbe bonded indebtedness, or the amount of interest annually accruing thereon, we fail to see their materiality in determining tbe value of the plant, or tbe sum total of revenue to be raised from tbe sales of water. It is not a question in which rate payers are concerned, whether tbe water company has no outstanding indebtedness, or is floundering under a bonded debt which threatens to sink it at any moment. If tbe municipality is required to establish a scale of rates which will produce a revenue sufficient to pay interest upon outstanding bonds, this provision of tbe constitution would not only be a perpetual guaranty to the bondholders for tbe payment of their annual interest, but a constant incentive to additional issues of bonds. Such conditions were never contemplated by anybody. It is tbe duty of tbe municipality, when it has arrived at a determination as to tbe valuation of tbe plant, to determine tbe necessary outlay for tbe ensuing year; then to determine what would be a reasonable, just, and fair compensation to the company, based upon tbe valuation of tbe plant, and thereupon to fix a schedule of rates which will produce that sum of money. If there be outstanding bonds, tbe company may apply its income to the payment of interest thereon. If there be no outstanding bonds, this income may pass to tbe pockets of the stockholders in tbe shape of dividends declared. A municipality must fix a fair and just rate for tbe water, based upon tbe valuation of the plant, and when it has done this, its duty has been performed, and the revenue collected
Under and pursuant to constitutional authority (Const., art. XIY, sees. 1, 2), the legislature (Stats. 1881, p. 54) passed an act, by the terms of which it was made the duty of the board of supervisors, town council, board of aldermen, or other legislative body, of any city and county, city, or town, in the month of February of each year, to fix the rates -which shall be charged and collected by any person, association, company, or corporation for water furnished to any such city .and county, or city or town, or the inhabitants thereof. It is now contended by appellant that the authority to fix water rates, coming directly from the constitution to the municipality, the rates fixed under such authority have the same binding force and effect, and occupy the. same position as to the law and the courts, and should receive the same consideration as though fixed directly by the legislature, in the absence of the aforesaid constitutional provisions. Let it be conceded, still the claim is unsound that this action of the municipality is conclusive; it is neither above nor beyond the law, and a court of equity will reach out and review it whenever the facts so demand. The legislature itself has no right or power to legislate a man’s property away from him, and, beyond doubt, courts are vested with jurisdiction to declare all such attempts void, and will exercise that jurisdiction whenever the occasion presents itself.
The legislature of the state of Minnesota enacted that the rates for freights and fares fixed by the railroad commission of that state should be conclusively presumed to be reasonable. In Chicago etc. Ry. Co. v. Minnesota, 134 U. S. 418, this enactment was declared void, as depriving a person of his property without due process of law, the court saying: “If the company is deprived of the power of charging reasonable rates for the use of its property, and such deprivation takes place in the absence of an investigation by judicial machinery, it is deprived of the lawful úse of its. property, and thus in substance and effect of the property itself, without due process of law, and in violation of the constitution of the United States; and, in so far as it is thus deprived, while other persons are permitted to receive reasonable profits upon their invested capital, the company is deprived of the equal protection of the law.” Again, it is
In Spring Valley Water Works v. San Francisco, 82 Cal. 306, 16 Am. St. Rep. 116, an exact duplicate of the present question was before this court, and it is there said: “But the courts cannot, after the board has fully and fairly investigated and acted by fixing what it believes to be reasonable rates, step in and say its action shall be set aside and nullified because the courts, upon a similar investigation, have come to a different conclusion as to the reasonableness of the rates fixed. There must be ac
This court is not here to declare what are reasonable rates. Tbe constitution has vested that power and duty in tbe council of tbe city of San Diego, and tbe exercise of that power by tbe council cannot be questioned by tbe courts unless constitutional rights are violated. Tbe question is not, What rate would this court fix if tbe duty were cast upon it of fixing rates? but rather, Will the owners of tbe plant be deprived of constitutional rights by an enforcement of tbe order of tbe council fixing rates? If the rate fixed by a municipal council was twice too large, I know ■ not what jurisdiction of this court could be invoked to right tbe wrong. Hence, it is apparent that it is only in exceptional eases that an order fixing rates may be set aside by judicial decree.
Talcing tbe findings of fact as tbey stand, tbe schedule of rates fixed by the city should not be disturbed. Tbe valuation of tbe plant is $750,000; tbe operating and current expenses are $40,-000. The revenue from tbe sale of water under tbe schedule of rates would be and actually was $65,000. This leaves a profit of $25,000 upon tbe investment. To be sure it is small, when we consider tbe amount of money invested. To be sure, it is not enough, and possibly not one-half tbe sum that could be earned if that amount of money was invested in other business undertakings, but with these things we have nothing to do. Those are matters passed upon by tbe city in tbe exercise of a discretion granted by tbe constitution, and its decision as to tbe reasonableness of tbe amount of revenue to be derived by the company from tbe rates is conclusive upon tbe courts. While this sum is not enough upon this character of investment, still it is three and one-lialf per cent, and such return is a substantial
Mr. Justice Brewer of the supreme court of the United States has probably given this question more thought and investigation than any other jurist in this country, and he says in Chicago etc. Ry. Co. v. Dey, 35 Fed. Rep. 866: “Counsel for complainant urge that the lowest rates the legislature may establish must be such as wall secure to the owners of the railroad property a profit on their investment at leasRequal to the lowest current rate of interest, say three per cent. Decisions of the supreme court seem to forbid such a limit to the power of the legislature in respect to that which they apparently recognize as a right of the owners of the railroad property to- some reward; and the right of judicial interference exists only when the schedule of rates established will fail to secure to the owners of the property some compensation or income from their investment. As to the amount of such compensation, if some compensation or reward is in fact secured, the legislature is the sole judge." Subsequently, the same question was again presented to him in Reagan v. Farmers’ Loan etc. Co., supra, and also in Ames v. Union Pac. Ry. Co., 64 Fed. Rep. 165, and in those cases neither he nor any other of the justices of the supreme court retreated or advanced from that position.
This balance of $25,000 is profit, unless it is swallowed up by the finding of the court that plaintiff’s plant suffered an annual depreciation of three and one-half per cent, and the conclusion of law therefrom that a percentage upon the investment to that amount should be added to the operating expenses before the point is reached where profit begins. We are satisfied that this finding 'has no support in the evidence, even conceding the conclusion of law drawn therefrom sound. In the first place, the evidence develops that there can be no general depreciation of this plant as a whole. There are | tunnels, wells, reservoirs, water rights and real estate, amounting to more than one-half of the valuation of the plant. There is no depreciation of these things; there is no wear and tear, no permanent and gradual destruction by use and age. Most of them stand as everlasting as the hills.
Upon an examination of the record we find these views fully corroborated in the evidence of the water company, given by one of its most important witnesses. He testified: “Where we took up one pipe line or a portion of it on the street, and put down another, if it was the same size pipe, to renew it we would charge it to expenses. If it was a different size we would charge the difference between them, the increased size, to construction. Where we sell pipe that we take up, we credit that to construction. If we have to renew any portion of the same size pipe, we charge it to expenses.”
This question has arisen incidentally in Union Pac. R. R. Co. v. United States, 99 U. S. 402, and also in Reagan v. Farmers’ Loan etc. Co., supra, but neither case looks the other way from the views we have expressed. When the question arises between the corporation upon the one side and its bondholders or stock-, holders upon the other, or when it arises upon a construction of a contract with the government, as in one of the eases just cited,
For the foregoing reasons I think the judgment and order should be reversed and the cause remanded.
Concurrence Opinion
concurring. I agree generally in the views expressed by Mr. Justice Garoutte. I do not comprehend how in this case the exercise of the power to regulate charges or to fix compensation for furnishing water is a taking within the meaning of section 14, article I, of the constitution. The waterworks were all constructed subsequent to tbe adoption of the constitution of 1879. Tbe city owns no waterworks. It is provided in section 19, article XI, of tbe constitution that any individual or company shall bave the use of the streets, fox laying down pipes and conduits and making connections therewith, so far as necessary for introducing into and supplying the city and the inhabitants with fresh water, “upon the condition that the municipal government shall have the right to regulate the charges
Article XIV is the complement to the section before quoted. It declares that the use of all water appropriated for sale or distribution is a public use, subject to the control of the state, and that in cities the “rates or compensation” shall be fixed annually by the governing body of such city, which rates shall continue in force for one year only, and, further, that any individual or company collecting water rates otherwise than as so established shall forfeit his or its franchise and works to the city.
There is here no taking under the power of eminent domain, nor in any other sense than is implied in every service rendered for hire.
There is, then, no obligation to remunerate water companies for investments made or to allow interest thereon, either upon first cost or present value. The obligation is to compensate for service rendered. What will constitute just compensation involves many considerations. Certainly, no allowance need be made for unnecessary expenditures, either in construction or management. Nor is the test always the cost to the companies. There is no limit to the number of companies which may bring water into a city. The franchise is freely offered to all in the constitution. If there are many companies, and thereby the cost of management is increased, this fact would not call for increased rates. The service is worth no more when rendered by ten companies than when one company furnishes all the water. Incidentally to the inquiry as to what is a fair compensation for the service, the governing board may well inquire into the cost which the company whose rates are to be regulated have incurred in bringing water to the city and in distributing it. But these matters are merely incidental and never determinative of the question.
All the elements entering into the question having been determined, opinions would still vary as to what would be fair compensation. The constitution has imposed upon the govern
There is much learning upon this subject in the law books, and a great variety of opinions, not to- say contrariety, can be found. I know of none which—the facts considered—need be deemed adverse to these views. If there were no such constitutional provisions, the case might be different.
I notice that section 19, article XI, applies only to cities which own no public works. Whether the privilege of using the streets or the right to distribute and sell water exists or can exist in cities which do own such works may be a question. If they do exist, there can be no doubt of the application of article XIV to persons or corporations selling water in such cities. In such eases could the city be compelled to take and pay for other works which only diminish the value of its own property?
Concurrence Opinion
concurring. I concur in the reversal of the judgment and order of the superior court. In finding the value as well as the cost of the plant the court included many items which were not proper to be considered for that purpose, and which are mentioned in the opinion of Mr. Justice Van Fleet as improperly constituting a part of the cost of the plant. While the cost of the plant may be properly considered as an element of evidence in ascertaining its value, I am clearly of opinion that it sho-uld not form the basis of estimating the revenue which the water company is entitled to receive. The value of the plant may change from year to year as materially as may the cost of operating the works, and there is good reason fox holding that
In designating the city council as the body to fix these rates the constitution has clearly indicated that they are not to be fixed by the courts. The water company has the right to protection by the judiciary from the enforcement of such rates as will deprive it of compensation for furnishing the water; but if the rates fixed by the council afford compensation to the water company, the question of the reasonableness of this compensation is a question of fact which is not open to review by the courts. If the courts are authorized to determine the amount of compensation which will be reasonable, the rates will be fixed by them, rather than by the city council; and, for the same reason, the city council, and not the courts, are authorized to determine whether the rates, to be reasonable, shall be fixed at such amount as will yield to the water company any definite rate of interest.
Even if it should be conceded that reasonable rates would be such as will yield to the water company a return equal to the lowest current rate of interest on the value of its property, it appears from the findings of the court that the rates fixed herein yielded a return of more than three per cent upon the value of the plant, and it is a matter of general notoriety that this is more than is on an average received by capitalists from permanent or fixed investments with the guaranty of the government as their security. What may be the lowest current rate of interest upon an investment depends upon so many circumstances that no particular rate can be predicated in advance of any particular investment, but it is in all instances a question of fact and not of law, and is not to be determined by the judiciary. After it has been determined by the city council, the judiciary are not authorized to set aside its determination on the ground that in its judgment it is too small, any more than it could set aside
Dissenting Opinion
dissenting. I think the judgment and order appealed from should be affirmed. In fixing water rates, it is the duty of the city council to provide for a just and reasonable compensation to the water company. Anything short of that is simple confiscation, and is not only a violation of constitutional rights but is an extremely short-sighted policy. Bates ought to be adjusted to the value of the service rendered, and this means that the water companies should be allowed to collect annually a gross income sufficient to pay current expenses, maintain the necessary plant in a state of efficiency, and declare a dividend to stockholders equal to at least the lowest current rates of interest, not on the par or market value of the stock, but on the actual value of the property necessarily used in providing and distributing the water to consumers.
To arrive at the actual value of the plant, water rights, real estate, etc., cost is an element to be considered, but is not conclusive. The plant may have cost too much, it may have been planned upon too liberal a scale, its construction may have been 'extravagantly managed, tire real estate and water rights may have cost less or more than their present value, and, therefore, cost will seldom represent the actual capital at present invested in the works, but such present value is the true basis upon which compensation, in the shape of dividends, is to be allowed.
As to current expenses, all operating expenses reasonably and properly incurred should be allowed, taxes should be allowed, and the cost of current repairs.
In addition to this, if there is any part of the plant, such as main pipes, etc., which at the end of a term of years—twenty years, for instance—will be so decayed and worn out as to require restoration, an annual allowance should be made for a sinking fund sufficient to replace such part of the plant when it is worn out.
In its findings and conclusions the superior court seems to have conformed to these views, and, making every allowance for any minor errors that may appear in the record, the evidence is amply sufficient to sustain every material finding, and the find
