Pacific Gas & Electric Co. v. Railroad Commission

• Decision Date: 09 February 1939
• Docket Number: No. 3660-S.,3660-S.
• Court: U.S. District Court — Northern District of California
• Parties: PACIFIC GAS & ELECTRIC CO. v. RAILROAD COMMISSION OF CALIFORNIA et al.

26 F. Supp. 507

PACIFIC GAS & ELECTRIC CO. v. RAILROAD COMMISSION OF CALIFORNIA et al.

No. 3660-S.

District Court, N. D. California, S. D.

September 8, 1938.

On Rehearing February 9, 1939.

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Thomas J. Straub, Ralph W. DuVal, Warren Olney, Jr., Allan P. Matthew, Robert L. Lipman, and McCutchen, Olney, Mannon & Greene, all of San Francisco, Cal., for plaintiff.

Arthur T. George, Ira H. Rowell, and Roderick B. Cassidy, all of San Francisco, Cal., for defendant Railroad Commission.

Before WILBUR, Circuit Judge, and ST. SURE and LOUDERBACK, District Judges.

WILBUR, Circuit Judge.

This action was brought by the Pacific Gas and Electric Company, hereinafter called the Company, to enjoin the operation of rates fixed by the California Railroad Commission, hereinafter called the Commission, for the use of gas in the City and County of San Francisco and vicinity. Two claims are made in the bill of complaint, one that the Commission had denied due process of law in fixing the rates, and the other that the Company was denied just compensation for the use of its property by the new rates.

A three-judge court was organized to hear the application for a temporary injunction, as required by law. 28 U.S.C.A. § 380. The matter was referred to a Special Master for report. Upon the hearing of the exceptions to his report, this court concluded that the refusal of the Commission to consider any evidence with relation to the cost of reproduction new of the property of the Gas Company was an arbitrary refusal to consider evidence with respect to the value of the property which the Supreme Court had declared essential to a proper determination of the question of value and confiscation. D.C., 13 F.Supp. 931; D.C., 16 F.Supp. 884. We therefore found it unnecessary to pass upon the question of confiscation in view of our conclusion as to denial of due process of law in the fixing of rates. Appeal was taken to the Supreme Court which on rehearing reversed our decision and remanded the case to this court for further proceedings in accordance with the opinion, 302 U.S. 388, 58 S.Ct. 334, 82 L.Ed. 319.

The parties have furnished stipulated supplementary proof as to income and expenses and have filed additional briefs to supplement their briefs filed before the Special Master, and those before the court on exceptions to the Special Master's report. It thus becomes our duty to determine whether or not the rates fixed by the Commission were confiscatory for the years 1934, 1935 and 1936, in that they denied the plaintiff an opportunity to obtain a fair return upon the fair value of its property. It has been stipulated that our findings should cover each year in which the rates were effective, estimated upon the same rate base as is found to be correct for the year 1934. That is to say, the change in capital investment during the period from 1934 to 1936 is agreed to be negligible.

In April 1936, during the progress of this litigation, the plaintiff consented to the reduction of the rates. Consequently, the prayer for a permanent injunction has been abandoned and the sole remaining question is as to the distribution of the fund resulting from the collection by the Company for gas at the old rates, as permitted by the temporary injunction.

It appears from the report of the Special Master that he concluded that the historical cost of the property found by the Commission to be a reasonable rate base was not such and on the evidence before him determined that the proper basis for determining the fair value of the property of the Company was the "reproduction cost new" of the property less accrued depreciation. Thus the Commission rejected the evidence of reproduction cost new and based its determination of the fair value of the property almost exclusively upon the historical cost of the property, while the Special Master rejected historical cost as evidence of value and took the exact figures of the Company's estimate of reproduction cost new, less depreciation, as fixing the fair value of its property.

The decisions of the Supreme Court are uniform to the effect that both these elements should be considered in arriving at the fair value of the property. The composite result of such consideration, it is thus decided, will be more nearly fair to the utility and to the public than a rate base fluctuating with every turn of the market value of supplies and the cost of labor. In the case at bar (Railroad Commission v. Pacific Gas & Electric Co., 302 U.S. 388, 58 S.Ct. 334, 82 L.Ed. 319) the Supreme Court construed the decision of the Commission as a finding that the historical cost of the property, undepreciated, was the fair value of the Company's property upon which it was entitled to a fair return. We quote from the opinion in that regard as follows page 340:

"In the instant case we cannot say that the Commission in taking historical cost as the rate base was making a finding without evidence and therefore arbitrary. * *

"The Commission specifically found what it considered to be the rate base. 39 Cal.R.Com.Rep., supra, p. 76. The Commission found that rate base to be reasonable. Cal.R.Com.Rep. supra p. 77, note. The import of its opinion is that the rate base represented the Commission's conclusion as to the value which should be placed upon respondent's property for the purpose of fixing rates."

The Court also clarified our duty in the premises by holding that the findings of the Commission must be sustained unless overcome by convincing proof. The Court stated:

"There is a further contention as to the burden of proof. But the applicable rule is clear. Respondent is in a federal court complaining of the constitutional invalidity of state made rates and respondent is held to the burden of showing that invalidity by convincing proof. Los Angeles Gas Corp. v. Railroad Commission, supra, 289 U.S. 287, at page 305, 53 S.Ct. 637, 643, 77 L.Ed. 1180; Lindheimer v. Illinois Bell Telephone Co., supra, 292 U.S. 151, at page 169, 54 S.Ct. 658, 665, 78 L. Ed. 1182; Dayton Power & Light Co. v. Public Utilities Commission, 292 U.S. 290, 298, 54 S.Ct. 647, 651, 78 L.Ed. 1267." Railroad Commission v. Pacific Gas & Elec. Co., 302 U.S. 388, 58 S.Ct. 334, 341, 82 L. Ed. 319.

An examination of the cases thus cited by the Supreme Court in support of the rule as to the burden of proof, and of other cases since decided, indicates more fully the duty of this court in approaching and disposing of the problem. While it is quite true that the federal courts, in determining questions of confiscation in violation of the Fourteenth Amendment, U.S.C. A.Const. Amend. 14, exercise their own independent judgment as to the facts and may disagree with the factual conclusions of the rate fixing body, it cannot disregard such findings. It has become clearer in later decisions of the Supreme Court that due respect must be paid to the judgment of the rate making body where its conclusion of fact must necessarily result from the exercise of its judgment upon conflicting evidence. While in a technical sense the court, in considering a rate alleged to be confiscatory exercises its own independent judgment on both the facts and the law, and does not sit as a reviewing court, it is in essence called upon to pass upon the judgment of the rate making body, and some consideration must be given to its decision in the region in which fair and independent judgment may be exercised by those charged with the duty of ascertaining the facts,¹ and where that judgment has been fairly exercised and the result is reasonable the court sufficiently discharges its duty to exercise its own independent judgment by finding the result arrived at by the rate making body to be reasonable. The finding of the rate making body should always be in focus when the evidentiary facts are considered. This rule is clearly implied in many other recent decisions by the Supreme Court, notably in Los Angeles Gas & Elec. Co. v. Railroad Commission of California, 289 U.S. 287, 53 S.Ct. 637, 77 L.Ed. 1180, wherein the three-judge district court and the Supreme Court on review, analyzed the findings of the Railroad Commission of California, and determined whether or not such findings were reasonable and supported by evidence, and in exercising its own independent judgment sustained the conclusion of the Commission that although it had expressly declined to give a specific valuation to the element of "going concern value" of the utility's property as a part of the rate base it had nevertheless given a substantial recognition thereof in its valuation. Dayton Power & Light Co. v. Public Utilities Comm., 292 U.S. 290, 54 S.Ct. 647, 78 L.Ed. 1267; see also, Denver Union Stock Yard Co. v. U. S., 304 U.S. 470, 58 S.Ct. 990, 82 L.Ed. 1469. In Lone Star Gas Co. v. State of Texas, 304 U.S. 224, 58 S.Ct. 883, 82 L.Ed. 1304, it was held that the utility company was entitled to attack the findings of the Texas Railroad Commission on the same basis as that on which they were made. See also, United Gas Public Service Co. v. Texas, 303 U.S. 123, 625, 58 S.Ct. 483, 493, 82 L.Ed. 702; also, Denver Union Stock Yard Co. v. U. S. supra, 304 U.S. 470, 58 S.Ct. 990, 82 L.Ed. 1469.

In San Diego Land & Town Co. v. National City, 174 U.S. 739, 19 S.Ct. 804, 43 L. Ed. 1154, it is stated that judicial interference is not justified unless "clearly and beyond all doubt * * * the rates prescribed will necessarily have the effect to deny just compensation" page 810. In Railroad Commission of Louisiana v. Cumberland Tel. Co., 212 U.S. 414, 29 S.Ct. 357, 53 L.Ed. 577, it is said that the rates established by the Commission were prima facie fair and valid and the burden of showing that they were confiscatory and unreasonable rests upon the complainant. In New York & Queens Gas Co. v. McCall, 245 U.S. 345, 348, 38 S.Ct. 122, 124, 62 L.Ed. 337, it was said that while the court will not analyze...