Los Angeles Gas & Electric Corporation v. RAILROAD COM'N

Decision Date08 April 1932
Docket NumberNo. S-105.,S-105.
Citation58 F.2d 256
CourtU.S. District Court — Panama Canal Zone

Herman Phleger, of San Francisco, Cal., and Paul Overton, of Los Angeles, Cal., for plaintiff.

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

Erwin P. Werner, City Atty., and Frederick Von Schrader, Asst. City Atty., both of Los Angeles, Cal., for intervener.

Before statutory court composed of WILBUR, Circuit Judge, and JAMES and JACOBS, District Judges.

JAMES, District Judge.

The plaintiff brought this suit claiming the right to have an injunction against the defendant railroad commission of the State of California, and its members, to prevent the enforcement of an order of that commission fixing a schedule of rates to be charged for gas service furnished by the plaintiff. There was a motion for a temporary injunction, and, after preliminary oral argument, briefs were provided to be filed. Affidavits were received in evidence on the motion, and the commission submitted also a transcript of all of the testimony presented before it on the rate hearing, which was received without objection. A restraining order issued under adequate bond pending decision. It was understood that the issues might be further argued orally before the court after the filing of briefs, but the parties later agreed that oral argument should be waived, and that the entire case be finally submitted on the record. The court now approves that stipulation.

The California railroad commission has general jurisdiction over public utilities in California. It fixes rates for the service given the public, and its authority to act as a regulatory body within the state is exclusive. In the latter part of the year 1929 it determined that a hearing should be held with the purpose of putting into effect a decreased schedule of rates to govern the gas service of the plaintiff. The questions are the usual ones occurring in such cases, the company complaining of the use of a rate base below the fair value of its property and the commission insisting that it has given full and fair consideration to every element of worth entitled to be included in the total. The company makes the further claim that, assuming the correctness of the base figure, the return allowed is grossly inadequate.

While the plaintiff company is engaged in furnishing both electricity for light and power, and gas for domestic and industrial uses, its departments, both as to investment and operative instrumentalities, are separate and separable. They have been so divided by the commission for rate-making purposes since a date more than twelve years past. Involved in the proceeding before the commission was the matter of proper charges to be made by the company for electricity, but the rates existing were not changed. They had last previously been reduced at the request of the company in order to meet competitive rates established for service furnished by the city of Los Angeles. Therefore, there is nothing here presented which in any way involves the adequacy of charges for electricity.

The commission established two valuation totals as for the gas department of plaintiff, one which is characterized the "historical cost," and, the second, "present fair value." These totals were: Historical cost, $60,704,000; fair value, $65,500,000. On these valuations, the company would earn a net annual return of 7.7 per cent. on the first amount, and 7 per cent. on the second amount. The company claimed a fair value total of $95,767,351.

At a prior hearing had in the year 1928, the commission had fixed a schedule of rates, which estimated upon the base then used, would produce a return of 7.5 per cent. The commission determined at the hearing at which the rates now complained of were fixed that the company was actually earning under the then existing rates an excess over the estimate, to wit, that it was earning 9.6 per cent. on historical cost base, and 8.8 per cent. on fair value base. The commission stated in its opinion that experience had shown that the actual earnings under preceding schedules fixed by it exceeded its estimates. At the hearing before the commission, it was shown that there was a difference of only $300,000 between the historical cost valuation of the commission, and that of the company. This excluded overheads. The commission in its opinion declares, and the fact appears not to be disputed, that the historical cost valuation adopted by the commission in 1917 (referred to as appraisal of 1915) was accepted as correct by both the company and the commission in the series of rate hearings held during the subsequent years. In the proceeding eventuating in the order here complained of, the commission took the 1917 rate base and built up on that to accumulate its final figures of historical cost. How the final figures were arrived at will be more particularly stated hereinafter. The change in the schedule of rates was designed to work a reduction of 9 per cent. in the gross income of the company.

In considering the claim of the company for a rate base exceeding $95,000,000, against the commission's fair value base of $65,000,000, the point is suggested that, if the large total which the company claims represents reasonable fair value, then the old rates with which the company was satisfied to work would be patently confiscation. This reflection is of no force to influence the decision to be made, except as indicating that the company has not been over modest in proposing its totals.

Admittedly the task of rate-making is one to be essayed only by specialists, men whose research into the problems of business economy, with all of its variants of money cost, depreciation, and commercial outlook, has given them peculiar qualifications for the work. Rate cases, when they are brought into court, come impressed with the presumption that the state agency to which has been committed the duty to regulate public utilities has dealt fairly with the business affected, and that in every matter wherein, under any view, a discretion can be said to have been fairly and reasonably exercised, the courts will not interfere with the orders made. A careful study of the record has been a task entailing considerable labor, but the conclusions resulting need not, in the statement of them, be of proportionate length. It has not been thought of helpful use to analyze in any detail the great mass of evidence, nor to particularly refer to the authorities cited in the elaborate argument presented.

It appears from the record that, in the proceeding which culminated in the rate order complained of, the California commission made a most thorough investigation. It devoted a total period of twenty-four days to the taking of testimony, the hearing being completed in July, 1930. The rate order was signed November 24, 1930. Expert witnesses on both sides were heard, and the commission had recourse to its records of other rate proceedings affecting the plaintiff corporation. It availed itself also of the knowledge gained from experience in dealing over a period of many years with like utilities. In its gas service department, operated within the city of Los Angeles, the plaintiff is confronted with no real competition.

Referring to the growth and stable position of the company on its entire business (gas and electric), the commission, in its opinion, said (and the evidence supported the statement): "The rate base for the gas department has grown from approximately $12,500,000 in 1916 to nearly $59,000,000 in 1929, and its independent active meters from 131,500 during the same period. * * * This remarkable growth has been financed largely by the sale of the company's bonds and preferred stock. These have been marketed at a gradually lessening cost, so that the present annual cost of its bond and preferred stock money normally is 6.17 per cent. Also, its depreciation reserve has been invested in the property. If this be included with its bond, preferred stock money at the rate of 6 per cent. being the rate at which it is required to account for its reserve, the annual cost of its bond, preferred stock and reserve money is but 6.14 per cent. On December 31, 1929, the Company had outstanding in the hands of the public $47,070,000. par value of bonds, $19,469,995 par value of preferred stock, and $20,000,000 par value of common stock. Its depreciation reserve (gas and electric) on that date was reported at $16,804,105.15. All of its common stock is owned by Pacific Lighting Corporation. Since 1916 but $4,500,000 of this stock has been purchased for cash, $5,500,000 however, having been distributed to Pacific Lighting Corporation in the form of stock dividends, representing earnings left in the property. Dividends have been paid on its common stock of 7.20 per cent per share ($100 par value) in 1916, 1917 and 1918; 7.4 percent in 1919; 8.4 percent in 1920, 1921 and 1922; 8.7 percent in 1923; 33.75 percent in 1924, included in which is 25 percent as a stock dividend of $2,500,000; 9 percent in 1925; 9.815 percent in 1926; 35.17 percent in 1927, which includes a stock dividend of 21.42 percent, or $3,000,000; 15 percent in 1928, and 17 percent in 1929. The Company's surplus has grown from $381,212.97 in 1916 to $4,176,663.09 in 1929, while its depreciation reserve increased from $3,804,383.36 to, as said above $16,804,105.15."

Approximately 60 per cent. of the stock and bond money is chargeable to the gas department. Of the outstanding $20,000,000 in common stock, $9,993,000 was reported as having been issued for property, and $10,700,000. as for cash, or, in lieu thereof, at par. The commission was unable to give a cash value to the stock issued for property, and held that the rate of dividends on the common stock did not establish cost of...

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