Des Moines Gas Company v. City of Des Moines

• Citation: 238 U.S. 153,59 L.Ed. 1244,35 S.Ct. 811
• Decision Date: 14 June 1915
• Docket Number: No. 75,75
• Parties: DES MOINES GAS COMPANY, Appt., v. CITY OF DES MOINES et al
• Court: United States Supreme Court

238 U.S. 153

35 S.Ct. 811

59 L.Ed. 1244

DES MOINES GAS COMPANY, Appt.,

v CITY OF DES MOINES et al.

No. 75.

Argued November 10 and 11, 1914.

Decided June 14, 1915.

Messrs. Nathaniel T. Guernsey and George H. Carr for appellant.

[Argument of Counsel from pages 154-156 intentionally omitted] Messrs. H. W. Byers, R. O. Brennan, and Eskil C. Carlson for appellees.

Mr. Justice Day delivered the opinion of the court:

This suit was begun in the district court of the United States for the southern district of Iowa, by the present appellant, hereinafter called the Gas Company, against the city of Des Moines and others, to enjoin the enforcement of the provisions of a certain ordinance of the city, passed December 27th, 1910, whereby, from and after the 1st day of January, 1911, the rate to be charged and collected for gas in the city of Des Moines was fixed at 90 cents for each thousand cubic feet. The allegations of the bill were that to enforce the ordinance would amount to the taking of the Gas Company's property without just compensation and operate as confiscation of its property, and thereby deprive it of the same without due process of law, and would deny the equal protection of the laws; further, that it would impair the existing contract between the Gas Company and the city, and between the Gas Company and the state of Iowa, growing out of its incorporation under the statutes of the state and of the ordinances of the city, giving rights to the Gas Company to lay its mains and supply gas to the residents of the city. A temporary injunction was allowed, and after issne made, the case was referred to Robert Sloan, Esquire, as special master in chancery to report his findings of fact and conclusions of law. The master afterwards filed his report, and the same coming on before the district court for hearing, upon exceptions, the report of the master was confirmed, and the bill dismissed 'with prejudice' (199 Fed. 204). From that decree the present appeal is taken.

The master's report, as court and counsel agree, gives evidence of very thorough consideration of the subject, and the facts found are accepted by the appellant. From the report we learn that the plant belonging to the Gas Company dates back to the year 1864; that it was owned and operated by the Capital City Gas Light Company until March 1st, 1906, when the present company was organized and the property, real and personal, of the Capital City Company conveyed to it; that the United Gas Improvement Company, of Philadelphia, became the owner of the entire stock of the Capital City Company on June 1st, 1886; that the capital stock then consisted of 3,000 shares of the par value of $100 each, and that subsequently the capital stock was increased to 6,000 shares of the same value each; that the growth of the city of Des Moines increased the demand for gas, and many extensions were added. In making these improvements and extensions, the Capital City Gas Light Company became indebted to the United Gas Improvement Company for cash advanced, and otherwise to the amount of $105,526.49, and also for gas holder $103,958, and the United Gas Improvement Company also owned $400,000 of bonds secured by mortgage on the plant of the Capital City Company. On March 1st, 1906, the Capital City Company transferred and conveyed its property to the present Gas Company, the authorized capital stock of the new company being 22,500 shares of the par value of $100 each. At the time of this transfer, the new company executed to the United Gas Improvement Company $800,000 stock contracts bearing 6 per cent interest until paid, and also authorized and executed to the Commercial Trust Company, of Philadelphia, Pennsylvania, a deed of trust to all property of the Des Moines Gas Company, transferred to it as aforesaid to secure the payment of $1,500,000 5 per cent gold bonds payable semiannually, which were to be issued as provided by said mortgage. The sum of $240,000 bonds were issued at the date of execution of the mortgage, one half thereof used in payment of the debt due the United Gas Improvement Company for the gas holder, and the other half to pay the amount due on account to that company. On January 1st, 1907, there were also issued $400,000 of these bonds to pay the bonds then due of the Capital City Company. When the transfer was made $45,000 was issued to pay for the Valley Junction property. This is a town adjacent to Des Moines, and something like 6 miles from the gas works of the Gas Company, to which the gas is transmitted by high pressure mains through the city, by a distribution system therein. There is nothing in the record to show the value of the Valley Junction property, except that of a high pressure main, which is also used in distributing gas in the city. Extensions and improvements have been made to the works and distribution system since the date of transfer up to the 1st day of January, 1911, to the amount of $412,704.51, and, as provided by the mortgage, bonds have been issued by the trustee to the amount of $1,097,000, and these bonds have all been purchased by the United Gas Improvement Company. The total discount on these bonds is $33,950; $267,000, discounted at 10 per cent, and the balance, $145,000, at 5 per cent. No dividends have been declared by the present company upon its stock, but the interest upon the stock contracts and bonds has been regularly paid, and $389,000 has been paid on the principal of the stock contracts, leaving January 1st, 1911, only $411,000 unpaid. These payments have been made out of the profits derived from the operation of the plant. The officers of the Gas Company are elected by the United Gas Improvement Company, who own and control all the stock, and these officers are also, in the main, the officers of the United Gas Improvement Company, and the latter controls the Gas Company and its business.

Various ordinances have been passed, regulating the price of gas, from which the master finds as follows:

'1. That for the years 1896 and 7 the price of gas should be $1.30 per M. C. F. net; for the years 1898 and 9, $1.25 net; for the years 1900 and 1, $1.20 net; for the years 1902, 3, and 4, $1.15 net; and for the year 1905, $1.10 net; and for the years 1906 to 1910, $1 net with the proviso that it may add 10 cents per M. C. F. to each of these prices, but shall be required to discount that sum for the payment by or before the 15th day of the month following that in which the gas was consumed.

'2. That the city pay for the term of fifteen years for each street lamp, $18 per year, until they should reach 500, when it should be reduced to $17 for each lamp.

'3. That its gas should not be less than 22 candle power.'

There is no question of the authority of the city of Des Moines, under the laws of the state, to regulate the rates at which gas shall be furnished to the city of Des Moines and its inhabitants. After valuing the real estate and various items of personal property as hereinafter stated, the master adopted as the only practical way in his judgment of determining the reasonable value of the buildings, their contents, the yard structures and the mains, house and street lamp services and meters, the process of estimating the cost of reproducing them new, and then estimating the depreciation which should be deducted, in order to obtain their present value. Under this method, the master summed up the value of the property of the Gas Company as follows:

'The new ordinance deprives the complainant of the right to add 10 cents per M. C. F. to the price of gas, unless paid on or before the 15th day of the month following that in which the gas was consumed, and the evidence shows that the average working capital for the past five years was $120,000, and that when the ordinance went into effect, that they were then using $142,000 as working capital.

'Without the means of enforcing prompt payment, and without any inducement so to do, on the part of their customers, in my judgment the working capital should not be diminished, and the

                     amount allowed is .................. $ 140,000
                     To this add real estate .............. 150,000
                     To organization expenses ............... 6,923
                     To meters in stock ..................... 6,603
                     Present value of physical properties
                     aside from above items.............. 1,937,402
                                                          ---------
                      "Total physical value ........... $2,240,928"
                 

What is called in this summary 'the present value of physical property' the report shows was arrived at by the master in the manner following: He first found what he thought was the base value of the property, i. e., 'what it would cost to produce it at the present time new, without adding thereto any overhead charges.' This figure he fixed at $1,975,026. To this he added overhead charges, 15 per cent, $296,254. From this he deducted depreciation, $333,878, leaving as the value of the property thus ascertained, $1,937,402.

As appears from the opinion of the court and the arguments of counsel in this case, exceptions to the master's report so far as the Gas Company is concerned pertain principally to two questions: One as to his manner of dealing with what is termed the 'going value' of the concern, and the other as to the addition of the sum of $140,000 to the valuation, because appellant insists, upon the plan of valuation by cost of reproduction less depreciation, it would cost that sum to take up and replace pavements not laid when the mains were put in, but necessary to be removed and replaced in the reproduction thereof.

Before considering the correctness of the rulings of the master and their confirmation by the district court, it is proper to notice that there is considerable difference between counsel as to what the master actually found, as to whether he included the sum of $300,000 which he was disposed to allow for going value in the $2,240,000 valuation found by him, or...