289 U.S. 287 (1933), 412, Los Angeles Gas & Electric Corp. v. Railroad Commission of California

Docket Nº:No. 412
Citation:289 U.S. 287, 53 S.Ct. 637, 77 L.Ed. 1180
Party Name:Los Angeles Gas & Electric Corp. v. Railroad Commission of California
Case Date:May 08, 1933
Court:United States Supreme Court

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289 U.S. 287 (1933)

53 S.Ct. 637, 77 L.Ed. 1180

Los Angeles Gas & Electric Corp.


Railroad Commission of California

No. 412

United States Supreme Court

May 8, 1933

Argued February 7, 8, 1933




1. The legislative discretion implied in the ratemaking power embraces the methods of reaching the legislative determination as well as the determination itself. P. 304.

2. While the method used in fixing rates of a public utility may have definite bearing upon the validity of the result, the Court is not

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to revise the legislative process, but is confined to the constitutional question, whether the rates fixed are confiscatory. P. 304.

3. Upon that question, the party complaining has the burden of proof, and the Court may not interfere unless the confiscation is clearly established. P. 305.

4. In determining whether a public utility has been deprived of a fair return for the service rendered the public in the use of its property, the basis of calculation is the fair value of the property -- that is, its reasonable value at the time it is being used for the public. P. 305.

5. The judicial ascertainment of values for the purpose of deciding whether rates are confiscatory is not a matter of formula, but there must be a reasonable judgment having its basis in a proper consideration of all relevant facts. P. 306.

6. The actual cost of the property is a relevant fact, but not an exclusive or final test. P. 306.

7. The time and circumstances of the outlay and the effect of altered conditions demand consideration. P. 306.

8. Even when cost is revised so as to reflect what may be deemed to have been invested prudently and in good faith, the investment may embrace property no longer used and useful for the public good. P. 306.

9. The reasonable cost of an efficient public utility system is good evidence of its value at the time of construction. P. 306.

10. Such actual cost will continue fairly well to measure the amount to be attributed to the physical elements of the property so long as there is no change in the level of applicable prices. P. 306.

11. When such change in the price level has occurred, actual experience in the construction and development of the property, especially in a recent period, may be an important check on extravagant estimates. P. 306.

12. In order to determine present value, the cost of reproducing the property is a relevant fact. P. 307.

13. This Court has not decided that the cost of reproduction furnishes an exclusive test. P. 307.

14. The Court has emphasized the danger in resting conclusions upon estimates of a conjectural nature. P. 307.

15. The weight to be given to actual cost, to historical cost and to cost of reproduction new is to be determined on the facts of the particular case. P. 308.

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6. Judicial notice taken of the high level of prices of labor and materials prevailing not only from 1917, as an incident of the War, but also in 1922 and 1923, and that there was no "substantial general decline" in such prices from that time to 1926. P. 308.

17. The Court finds no warrant for concluding that, since 1917, when the gas plant here in question was first valued by the state commission, there has been any change in prices of labor and materials making it unfair, in fixing rates for the future, to take the historical cost found by the Commission, as evidence of the value of the company's structural property at the time of the rate order, it clearly appearing that the prices of labor and materials reflected in the historical cost were higher than those obtaining during the later period to which the prescribed rates apply. P. 309.

18. A difference between the Commission and the company as to the amounts to be added for overheads in estimating historical cost becomes immaterial in this case, since the company's higher estimate of that cost is less than the amount taken by the Commission on the basis of fair value as an undepreciated rate base. P. 309.

19. In estimating cost of reproduction, items for financing and for promoters' remuneration, which are merely conjectural, should not be included. P. 310.

20. Plant facilities that have become unnecessary are not included in estimating cost of reproduction as a base for future rates. P. 311.

21. The determination of present value is not an end in itself, but is to afford ground for a prediction of future values upon which to determine valid future rates. P. 311.

22. Estimates of present value, taken as the cost of reproduction as of December 31, 1929, based upon average prices from 1926 to 1929, furnished no dependable criterion of values in the succeeding years, because of the serious decline of prices which the country was facing in a depression amounting to a change of economic level. P. 311.

23. "Going value" is included in the base in determining whether rates are confiscatory, but not "goodwill." P. 313.

24. The concept of "going value" is not to be used to escape rate-fixing authority, but, on the other hand, that authority is not entitled to treat a living organism as nothing more than bare bones. P. 313.

25. Where the estimate purports to give the fair value of the plant as a going property with business attached, and exceeds substantially the value assigned to the physical property, omitting parts no

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longer needed in the business but including allowances for interest, organization expenses, franchise, land values, overhead, etc., the excess may be assigned to "going value," although not so described in terms by the Commission making the valuation. P. 316.

26. An allowance for "going concern" value will not be adjudged so insufficient as to result in confiscation where the evidence offered to prove its insufficiency is highly uncertain and speculative. P. 317.

27. Principles governing the calculation of fair rate of return restated. P. 319.

28. Considering the financial history of the company, its relations and opportunities, and the general situation with regard to investments, the Court cannot say that 7% return is confiscatory in this case. P. 319.

29. The Court finds no reason to disturb the finding in this case as to revenue and expenses, the former depending largely upon probable future temperatures (influencing the consumption of gas for heating) and the latter upon the sufficiency of the depreciation annuity allowed by the Commission. P. 320.

58 F.2d 256 affirmed.

Appeal from a decree of the District Court, constituted of three judges, which dismissed the bill in a suit by the appellant gas company to enjoin the defendant state commission and officers from enforcing new gas rates, which it attacked as confiscatory.

HUGHES, J., lead opinion

MR. CHIEF JUSTICE HUGHES delivered the opinion of the Court.

The Los Angeles Gas & Electric Corporation assails as confiscatory the gas rates fixed by an order of the California Railroad Commission [53 S.Ct. 639] in November, 1930, effective January 1, 1931. 35 C.R.C. 442. The District Court,

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of three judges, granted an interlocutory injunction and on final hearing dismissed the bill. 58 F.2d 256. The company appeals.

The company, organized in 1909, supplies both gas and electric current. Its rates for the latter are not in controversy. The two departments, both with respect to investment and operation, are distinct, and have been separately treated for ratemaking purposes for many years. From 1913, when natural gas in substantial quantities was first made available in Los Angeles, until 1927, the company distributed a mixture of natural and manufactured gas, and since 1927 straight natural gas has been distributed. The company's service extends over the greater part of Los Angeles and neighboring cities and unincorporated territory. It has over 2,900 miles of mains and 385,000 meters. From 1917, the company's gas rates have been fixed by the California Railroad Commission. Rate orders were made in 1917, 1919, 1921, 1923, 1926, and 1928. During this period, the company's business greatly increased. The rate base for its gas department, as fixed by the Commission, grew from approximately $12,500,000 in 1916 to about $59,000,000 in 1929. The growth was financed by the sale of the company's bonds and preferred stock. These, according to the finding of the Commission, had been marketed at a gradually lessening cost, so that, at the time of the hearing which resulted in the order under review, it was found that the "annual cost of its bond and preferred stock money" was 6.17 percent. Approximately 60 percent of the amounts thus realized is chargeable to the gas department.1

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Under the Commission's order of 1928, the gas rates were estimated to yield a return slightly in excess of 7.5 percent. 32 C.R.C. 379, 386. Concluding that these rates actually yielded a much higher return, the Commission reduced the rates by the order now under review. It was intended to effect a reduction of 9 percent in gross revenue. 35 C.R.C. pp. 463, 469. The reduction amounted to about $1,300,000 in gross revenue and about $1,080,000 in net revenue.

1. The Commission's Valuations. -- In determining the rate base, the Commission made two sorts of valuations of the gas properties for the year 1930 -- one of $60,704,000 on the basis of "historical cost," and the other of $65,500,000 on the basis of "fair value." The Commission estimated that the return to the company on the former basis would be 7.7 percent and, on the latter, 7 percent. 35 C.R.C. p. 464.

Historical Cost. -- The...

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