252 F. 979 | N.D. Cal. | 1918
For more than 60 years last past the Spring Valley Water Company, a California corporation, and its predecessors in interest, have been engaged in the public service of supplying the city of San Francisco and its inhabitants with water for domestic and other purposes. To enable it to discharge the duties thus assumed, the company has acquired lands and water rights, and has constructed dams, reservoirs, pipe lines, and the usual facilities for conserving, impounding, conducting, and delivering the water thus supplied. Section 1 of article 14 of the state Constitution provides as follows;
“The use of all water now appropriated, or that may hereafter he appropriated, for sale, rental, or distribution, is hereby declared to be a public use, and subject to the regulation and control of the state, in the manner to be prescribed by law: Provided, that the rates or compensation to be collected by any person, company, or corporation in this state for the use of water supplied to any city and county, or city, or town, or the inhabitants thereof, shall be fixed, annually, by the board of supervisors, or city and county, or city, or*980 town council, or other governing body of such city and county, or city, or town, by ordinance or otherwise, in the manner that other ordinances or legislative acts or resolutions are passed by such body, and shall continue in force for one year and no longer. Such ordinances or resolutions shall be passed in the month of February of each year, and take effect on the first day of July thereafter.”
Pursuant to this constitutional requirement the board of supervisors of the city and county of San Francisco, iñ the month of February, 1907, passed an ordinance fixing the rates or compensation to- be charged by the plaintiff for the use of water for the year commencing' on the 1st day of July, 1907; and ending on the 30th day of June, 1908; and in the month. of February of each succeeding year thereafter, until and including the year 1914, a similar ordinance was passed fixing the rates or compensation to be charged for the use of water for the ensuing year. Soon after the passage of the ordinance of February, 1907, the plaintiff instituted suit No. 14,275 in the Circuit ■Court of the United States for the Northern District of California to restrain the city and county of San Francisco and the board of supervisors from enforcing the rates or compensation fixed by the ordinance, invoking the jurisdiction of that court on the ground that the rates or compensation thus fixed were noncompensatory, and that the ordinance took the property of the plaintiff for a public use without making just compensation therefor, and deprived the plaintiff of its property with-cut due process of law, in violation of the Fifth and Fourteenth Articles of Amendment to the Constitution of the United States. ’ Similar suits were instituted in the same court, and in the United States District Court, which succeeded to its jurisdiction in 1912, to enjoin the ■enforcement of the rates or compensation fixed by the ordinances passed in the ensuing years for the like reason. After the issues were made up the several cases were referred to the standing master by consent of parties, with directions to take the testimony and report his findings and conclusions to the court. The testimony has been taken, the master’s report has been filed, exceptions to the report have been saved, and the case is now before the court for final disposition.
In Knoxville v. Knoxville Water Co., 212 U. S. 1, 7, 29 Sup. Ct. 148, 150 (53 L. Ed. 371), the court said:
“At the threshold of the consideration of the case the attitude of this •court to the facts found below should be defined. Here are findings of fact by a master, confirmed by the court. The company contends that under these circumstances the findings are conclusive in this court, unless they are without support in the evidence or were made under the influence of erroneous views of the law. We need not stop to consider what the effect of such findings would be in an ordinary suit in equity. The purpose of this suit is to arrest*981 file operation of a law on the ground that it is void and of no effect. It happens -<hat in this particular case it is not an act of the Legislature that is attacked, but an ordinance of a municipality. Nevertheless the function of rate making is purely legislative in its character, and this is true whether it is exercised directly by the Legislature itself or by some subordinate or administrative body, to whom the power of fixing rates in detail has been delegated. 1’he completed act derives its authority from the Legislature and must be regarded as an exercise of the legislative power. * * * There can be at this day no doubt, on the one hand, that the courts on constitutional grounds may exercise tho power of refusing to enforce legislation, nor, on the other hand, that that power ought to be exercised only in the dearest cases. The constilulional invalidity should be manifest, and, where that invalidity rests upon disputed questions of fact, the invalidating facts must be proved to the satisfaction of the court. In view of tho character of the judicial power invoked in such cases, it is not tolerable that its exercise should rest securely upon the findings,of a master, even though they be confirmed by the trial court. The power is best safeguarded against abuse by preserving to this court complete freedom in dealing with the facte of each ease. Nothing less vhan this is demanded by the respect due from the judicial to tho legislative authority. It must not be understood that the findings of a master, confirmed by the trial court, are without weight, or that they will not, as a practical cuestión, sometimos be regarded as conclusive. All that is intended to be said te that in cases of this character this court will not fetter its discretion or judgment by any artificial rules as to the weight of the master’s findings, however useful and well settled these rules may ho in oi-dinary litigation. We approach the discussion of the facts in this spirit.”
But in Chicago, Milwaukee, etc., Ry. Co. v. Tompkins, 176 U. S. 167, 180, 20 Sup. Ct. 336, 341 (44 L. Ed. 417), the court said:
"We are all of opinion that a better practice is to refer the testimony to nome competent master, to make all needed computations, and find fully the facts. It is hardly necessary to observe that, In view of the difficulties and importance of such a caso, it is imperative that the most competent and reliable master, general or special, should be selected ; for it is not-a light matter to interfere with the legislation of a state in respect to tho prescribing of rates, nor a light matter to permit such legislation to wreck large property interests.”
This ruling was reaffirmed in Lincoln Gas Co. v. Lincoln, 223 U. S. 349, 362, 32 Sup. Ct. 271, 56 L. Ed. 466, and it must be presumed that the court had this rule in mind in ordering the reference, and the parties in consenting thereto.
In this case the master examined the lands, reservoirs, and properties of the company, viewed other lands used as' a basis of comparison for the purpose of fixing land values, heard the witnesses testify, observed their demeanor, and otherwise enjoyed opportunities for weighing and applying testimony which are denied to the court; and for that reason I must accept his finding as to the properties used and useful, and in general his findings on questions of laud values, construction cost, depreciation, and expense of maintenance and operation, because such findings are amply supported by the testimony. But where the findings are in the nature of conclusions from undisputed facts I will lie guided by my own conceptions of right and justice. In the light of these considerations I will refer, briefly as ma,y be, to. the findings relied on to support the conclusion of the master that the rates established by the board of supervisors for each of the several years in question are confiscatory and therefore void.
Lands in the city of San Francisco.$ 1.015,290 00
Merced watershed lands. 3,242,100 00 .
Peninsular watershed lands..... 2,027.649 00
Miscellaneous peninsular lands.. 27S.3S1 00
Alameda lands . 3,170.228 00
Rights of way. 250.000 00
Reservoir lands.s. 2.948,500 00
Water rights. 3,000,000 00
Structures, less depreciation. 18,737,000 00
Partially constructed Calaveras dam. 514,304 00
Inventory and working capital. 390.000 00
Going concern value. 3,400,000 00
Making a total of...$39,033,512 00
—which the master reduced to $39,000,000.
For reasons already stated, I adopt the finding of the master that all the above properties are used and useful. The finding is fully warranted by the testimony, and is further warranted, if not impelled, by the acts and conduct of the city and its representatives, extending over a period of years, in the matter of fixing rates, and in the condemnation suit instituted by the city to condemn the water system now in question. For the like reason I accept the valuations placed on the San Francisco lands, the Peninsular watershed lands, the Peninsular miscellaneous lands, the Alameda lands, the rights of way and structures, and the finding as to the necessary amount of working capital. The valuation placed on the reservoir lands seems somewhat fanciful and arbitrary, but I would not feel warranted in making a reduction that would make a difference in the final outcome of the case. The valuations placed on the other properties call for special consideration.
Second. As to the value of water rights. The master found that these water rights had a value of $90,000 per million gallons daily for the years 1913-14 and 1914 — 15 and a somewhat lesser value for the earlier years. If the water supply owned and controlled by the plaintiff was drawn from a stream or other definite source, I am not prepared to say that this valuation is excessive or unsupported by the testimony. But the San Francisco water supply is peculiar in this respect. As said by the master:
“There is no need of detailed description of the works. Unlike other localities, where water is available in adequate quantities from nearby rivers or lakes, San Francisco must rely chiefly upon the collection and storage of the winter flood waters of distant streams, whose flow largely diminishes or disappears during our rainless summers. This has required, in addition to the usual engineering structures needed for the diversion and distribution of water, the provision of large areas for impounding reservoirs, surrounding watershed .lands to prevent habitation and its resulting pollution, and water rights to assure the ability to divert the water elsewhere.”
Under such circumstances, to allow the company the full value of watershed and storage reservoirs, and add thereto the value of the water when collected and stored, is to place a double burden on the rate payers. The plaintiff is undoubtedly entitled to the full value of its storage facilities, but in addition to this it is only entitled to the fair value of the water -rights in their natural state. And I am far from convinced that these winter flood waters flowing wildly to the bay and sea are worth $90,000 per million gallons daily, or even a small part of that sum. Of course all the water rights of the plaintiff are not of this character, but, making due allowance for its claims of every kind, I am of opinion that $1,500,000 should be deducted from the value of the water rights as found or fixed by the master.
Third. The next item is for construction cost of the Calaveras dam. The facts in relation to this partially constructed dam are these: Construction work commenced about 1910, or at least the first item of construction cost appears in the findings of the master for the year 1910-11. The master found that the dam should be completed some time during the present year or next year, unless construction work is delayed by the present war or other causes. When completed the
1910-11 .$113,000 00
1911-12 ........... 154,000 00
1912-13 .197,000 00
.1913-11 . 514,000 O'O
1914-15 ..... 672,000 00
These several items are made up of the cost of preliminary investigations, engineering, construction work, and interest. It is conceded that these several sums were actually expended, and that the construction of the dam is a necessary addition to the water system; but it is likewise conceded that for the years now in controversy the dam added nothing to the city water supply. For this latter reason the defendants contend that the money thus expended should he omitted from property values for rate-making purposes. The plaintiff is entitled to a reasonable return upon its invested capital, and whether it receives that return from time to time as money is expended in the acquisition of property or in the construction of works, or whether it receives a higher rate of return when the works are completed and in use, to malee up for interest and other charges during construction, is a matter of form rather than of substance. Perhaps the rule adopted by the master is the more equitable, because it obviates the necessity for any considerable increase in rates in any given year. The chief importance of the items, as I view them, is the bearing they have on the next item to be- considered by the court, namely, the going concern value. I will therefore allow the items to stand, stating, as I did in regard to reservoir values, that their omission will not change the final result.
Fourth. The next item is the going value, or going concern value, of the plant or system, fixed by the master at $3,400,000. Such value is defined by the Supreme Court in Des Moines Gas Co. v. Des Moines, 238 U. S. 153, 165, 35 Sup. Ct. 811, 815 (59 L. Ed. 1244), as the value which inheres in a plant where its business is established as distinguished from one which has yet to establish its business. In further discussing the question in that case the court said:
“That there Is an element of value in an assembled and established plant, doing business and earning money, over one not thus advanced, is self-evident. This element of value is a property right, and should be considered in determining the value of the property, upon which the owner has a right, to make a. fair return when the same is privately owned, although dedicated to public use. Each case must be controlled by its own circumstances, and the actual question here is: In view of the facts found, and. the method of valuation used by him, did the master sufficiently include this element in determining the value of the property of this company for rate-making purposes?
“Included in going value, as usually reckoned, is the investment necessary to organizing and establishing the business which is not embraced in the value of its actual physical property. In this case what may be called 1he inception cost of the enterprise entering into the establishing of a going concern had long since been incurred. The present company and its predecessors had*986 long carried on business in the city of Des Moines, under other ordinances, and at higher rates than the ordinance in question established. For aught that appears in this record, these expenses may have been already compensated in rates charged and collected under former ordinances. As we have said, every presumption is in favor of the legitimate exercise of the rate-making power, and it is not to be presumed, without proof, that a company is under the necessity of making up losses and expenditures incidental to the experimental stage of its business.”
It appears from the record that for a great many years last past the plaintiff has wisely anticipated its future needs, and has acquired property and rights long before there was an actual necessity therefor, and long before such property or rights were put in actual use. I also think it sufficiently appears that the value of the property and rights thus acquired was added to the value of the plant or system at the earliest opportunity, and that later rates were based thereon. At least there is nothing in the record to indicate the contrary. And the plaintiff now asserts the right to have the value of works under construction added to the value of the system, and to collect returns thereon, long before the works are actually completed or put in use, and we have a right to assume that the same course has been pursued in the past. For instance, in the case of the Calaveras dam, under the findings of the master the rates of the company will be based in part on money invested in the construction of the dam for many years before the dam is completed or put in use, and long before the rate payers derive any benefit, therefrom. In the light of this practice, is it just or proper to add another percentage to the cost of the dam when put in actual use on the theory that it is then a going concern? It may be urged that the present value of the plaintiff’s property does not depend upon past practices, and that such past practices cannot be taken into consideration, but, as said by the Supreme Court, every case is controlled by its own circumstances, and, under the circumstances disclosed by this record, I feel that past practices are a safer and more equitable guide than dogmatic theories and assumptions not justified by the record. No doubt the company has sustained losses by way of interest on investments in property and in construction work before receiving returns thereon, and probably losses in preliminary investigations and in establishing its business which have not been fully compensated for as operating expenses or otherwise; but, in view of all the circumstances, I deem the allowance of the master excessive, and deduct therefrom the sum of $2,000,000.
Fifth. Reference has already been made to the Pleasanton Ranch lands. For many years the company owned land in the vicinity of these lands, and pumped water for the system from the underlying' gravel. These pumping operations lowered the water table under adjoining lands to such an extent that some time prior to the year 1912 the company was threatened with litigation by adjoining landowners. To avoid injunction suits or actions for damages, or perhaps both, the company deemed it advisable to purchase the lands outright and did so about the latter year. It thus acquired approximately 4,500 acres of land, at a cost of approximately $1,500,000. The value of these lands was included by the master in the rating base, and to such
‘•When the Constitution provides for the fixing of rates or compensation, it means reasonable rates and just compensation. To fix such rates and compensation is the duty and within the jurisdiction of the board. To fix rates not reasonable or compensation not just is a plain violation of- its duty.
“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, apon a similar investiga lion, have come to a different conclusion as to the reasonableness of the rates fixed. There must be actual fraud in fixing the rates, or they must be so palpably and grossly unreasonable and unjust as to amount to the same thing.”
This language was quoted with approval by the Supreme Court in San Diego Land Co. v. National City, 174 U. S. 739, 750, 19 Sup. Ct. 804, 810 (43 L. Ed. 1154), and in the same case Mr. Justice Harlan said:
“But it should also be remembered that the judiciary ought not to interfere with the collection of rates established under legislative sanction, unless they are so plainly and palpably unreasonable as to make their enforcement equivalent to the taking of property for public use without such compensation as under all the circumstances is just both to the owner and to the public; that*988 is, judicial interference should never occur unless the case presents, clearly and beyond all doubt, such a flagrant attach upon the rights of property under the guise of regulations as to compel the court to say that the rates prescribed will necessarily have the effect to deny just compensation for private property taken for the public use.”
“It is not confiscation, nor a taking of property without due process of law, nor a denial of the equal protection of the laws, to fix water rates so as to give an income of 6 per cent, upon the then value of the property actually used, for the purpose of supplying water as provided by law, even though the company had prior thereto been allowed to fix rates that would secure to it 1% per cent, a month income upon the capital actually invested in the undertaking. If not hampered by an unalterable contract, providing that a certain compensation should always be received, we think that a law which reduces the compensation theretofore allowed to 6 per cent, upon the present value of the property used for the public is not unconstitutional. There is nothing in the nature of confiscation about it.”
The reasonableness of a return depends in a measure on local con•ditions, on the risks assumed, and other considerations. But it is a matter of common knowledge that interest rates vary almost as much in the same locality at different times as they do in different localities at the same -time, and in an enterprise of this magnitude the question of locality, while entitled to consideration, is not controlling. At least, the Supreme Court did not so consider it in the case just cited arising in the same state. For these reasons I am of opinion that a return of as high as 6 per cent, on the invested capital or value of property devoted to the service of the public is not confiscatory, and violates no constitutional right of the plaintiff.
After a most careful and painstaking examination of the voluminous record before me, I do not feel that I would be warranted in making other or further changes in the master’s report. Perhaps I might allow an item here or disallow an item there; but the changes would be inconsequential and of doubtful propriety. As said by the court in Cedar Rapids Gas Co. v. Cedar Rapids, 223 U. S. 655, 669, 32 Sup. Ct. 389, 390 (56 L. Ed. 594):
“An adjustment of this sort, under a power to regulate rates, has to steer between ScyUa and Charybdis. On the one side if the franchise is taken to*989 moan that the most profitable return that could be got, free from competition, is protected by the Fourteenth Amendment, then the power to regulate' is null. On the other hand, if the power to regulate withdraws the protection of the amendment altogether, then the property is nought. This is not a matter of economic theory, but of fair interpretation of a bargain. Neither extreme can have been meant. A midway between them must be met.”
In the course of the opinion I have not referred to the voluminous exceptions taken, and this for obvious reasons. The exceptions reserved by the defendants are more than 100 in number, with subheads and subdivisions, and cover 57 closely typewritten pages. Many of the exceptions relate to reasons assigned by the master for his conclusions rather than to his findings on ultimate or material facts. Suffice it to say that in so far as the findings here made differ from the findings of the master the exceptions are sustained, hut in all other respects the exceptions on the part of the defendants are overruled. Certain exceptions were reserved by the plaintiff, but all save one have been sufficiently answered. The plaintiff owns rights of way through Mt. Olivet, Cypress hawn, Greenlawn, and Woodlawn cemeteries. The testimony tends to show that lands in these cemeteries are worth from $1 to $1.50 per square foot for burial purposes. The plaintiff insists that the rights of way through these cemeteries should be valued ou that basis. In that conclusion I cannot agree. No such price was paid for the rights of way, and the mere presence of the cemeteries adds nothing to their value for water supply purposes. Certainly the fortuitous fact that pipe lines pass through these cemeteries adds nothing to the value of the system as a whole, and affords no reason why water rates should be based on the price the citizen is willing or compelled to pay for the six feet of earth, that will mark his last resting place.
Much has been said by counsel representing the city about the original cost theory and its adoption by the California Railroad Commission. In answer to that argument it need only be said that the theory thus advocated has been repudiated time and again by the Supreme Court of the United States and the question is not an open one.
It remains to apply the conclusions thus announced to the facts of the several cases. Fortunately the court is relieved from one of the chief difficultiés which usually arise in cases of this kind; that is, the return that may be expected under the regulations in question. No such difficulty can arise here, because the ordinance for each year expired with the year, the rates have already been collected, and the return is a mere matter of computation. The valuation fixed by the master varies from $32,900,000 in 1907- 08 to $39,000,000 in 1913-14 and 1914 — 15. The net revenue varies from $696,648.74, or 2.1 per cent., in 1907-08, to $1,654,589.87, or 4.24 per cent., in 1914-15. The highest rate of return was therefore during the last year, and, if the ordinance for that year is declared noncompensatory and void, the same conclusion must follow in each of the earlier cases as a matter of course. The valuation for the year 1914-15 has been reduced from $39,000,000 to $34,000,000. A net return of 6 per cent, on that valuation is $2,040,000, or approximately $385,000 in excess of the ordinance rates. During each of the years in question a temporary re
L,et decrees be entered accordingly.
<&wkey;For other ciases seo same topic & •KEWmiMBBR. in all Key-Numbered Digests & Indexes
