Los Angeles Gas Electric Corporation v. Railroad Commission of California

• Decision Date: 08 May 1933
• Docket Number: No. 412,412
• Citation: 77 L.Ed. 1180,53 S.Ct. 637,289 U.S. 287
• Parties: LOS ANGELES GAS & ELECTRIC CORPORATION v. RAILROAD COMMISSION OF CALIFORNIA et al
• Court: U.S. Supreme Court

289 U.S. 287

53 S.Ct. 637

77 L.Ed. 1180

LOS ANGELES GAS & ELECTRIC CORPORATION

v RAILROAD COMMISSION OF CALIFORNIA et al.

No. 412.

Argued Feb. 7, 8, 1933.

Decided May 8, 1933.

Appeal from the District Court of the United States for the Southern District of California.

[Syllabus from pages 287-289 intentionally omitted] Messrs. Herman Phleger, of San Francisco, Cal., Paul Overton, Maurice E. Harrison, and James S. Moore, Jr., all of Los Angeles, Cal., for appellant.

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

Messrs. Erwin P. Werner, City Atty., and Frederick Von Schrader, and William H. Neal, Asst. City Attys., all of Los Angeles, Cal., for appellee City of Los Angeles.

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 in November, 1930, effective January 1, 1931. 35 C.R.C. 442. The District Court 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 rate-making 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 per cent. Approximately 60 per cent. of the amounts thus realized is chargeable to the gas department.¹ Under the commission's order of 1928, the gas rates were estimated to yield a return slightly in excess of 7.5 per cent. 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 per cent. 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 per cent. and, on the latter, 7 per cent. 35 C.R.C. p. 464.

Historical Cost.—The finding as to historical cost had relation to the method previously adopted by the commission in the regulation of the company's rates. The original rate base was established by the commission in 1917 upon a valuation made by the commission's engineers as of October, 1915. 13 C.R.C. 724. In the later rate proceedings, including the one now under review, the historical cost was built upon the value established in 1917 augmented by net additions and betterments as entered upon the company's books, but with land at current values.² Of the total amount fixed by the commission on the basis of historical cost, the sum of $1,862,103 was for materials and supplies, working capital, and estimated net additions and betterments for 1930, leaving $58,842,187 as the historical cost of the fixed property at the end of 1929. Aside from overheads, the estimates made by the company and by the commission of the historical cost of this property did not differ widely.³ The main difference lay in the treatment of overheads in the book entries of additions and betterments from 1916 to 1929; the company contends that the amounts recorded in its books in respect to indirect construction costs were inadequate. The reference is to the amounts which should be included for engineering and superintendence, legal expenses, injuries and damages, insurance, taxes, interest during construction, and contingencies. The general instructions of the commission as to classification of fixed capital accounts provided that such overheads should be assigned or apportioned to particular accounts, so that each item of property should bear its proper share, and a considerable range of discretion in making allocations rested with the company. 35 C.R.C. p. 451. The company had availed itself of this opportunity, and the average charge on the company's books for these costs from 1913 to 1929 was about 6 per cent. of the direct labor and material charges. The commission's engineers were of the opinion that 11.25 per cent. might reasonably have been charged to capital, and, on that basis, the total historical cost of fixed property would have been raised from $58,842,187 to $61,019,662. The company's engineers estimated that 14.48 per cent. should be allowed for these overheads, bringing that historical cost up to $63,413,246. The commission stated that its conclusions had been reached upon the assumption that the company's allocations in reporting additions and betterments were properly made, and that the effect of the long-continued practice of the company was that it had been allowed under the rate orders, in the form of operating expenses, the items which it now claims should have been added to capital. The commission thought that the company was not in a position to raise the question. The commission recognized an exception in the item of interest during construction which, when not charged to capital, had been charged to income accounts and did not go into operating expenses, and accordingly there was included in the commission's finding of historical cost an additional allowance, for that interest, of $155,000 which the commission deemed to be fair. 35 C.R.C. 451—453.

No deduction was made from the total historical cost for the investment in the generating plant and equipment which the commission found were being rendered unnecessary by the introduction of natural gas. In order to meet the rapidly increasing demand, the gas manufacturing plant had been greatly expanded, until in 1924 the company had a plant of $98,500,000 cubic feet daily capacity. The book value of this plant was approximately $10,000,000, and the amount included therefor in the company's estimate of historical cost was approximately $10,500,000. Since April, 1927, on account of the supply of natural gas, the company has not manufactured gas except on one occasion, on March 13, 1928, when, in anticipation of a shortage, a certain amount (569,000 cubic feet) was manufactured, which constituted but nine-tenths of 1 per cent. of the gas sent out on that day. The Commission found that the evidence convincingly established 'the existence of a natural gas supply adequate for years to come.' But, as the investnent in the manufacturing plant had been made prudently and in good faith, it was included by the commission in the estimate of the historical cost of the company's gas properties.

In that estimate, as thus made, nothing was deducted for depreciation and nothing was added for going concern value.

Fair value.—The company claimed before the commission a rate base of approximately $95,000,000 on the basis of reproduction cost new as of January 1, 1930, less accrued depreciation. 35 C.R.C. p. 456. On comparing the company's estimate as of that date with the estimate of the commission's engineer of reproduction cost new (of December 31, 1929), in each case without deduction for depreciation, it appears that the difference, exclusive of overheads and the items mentioned below, was only about $3,000,000 in the valuation of the physical property.⁴ In its estimate the company included overheads at 24.27 per cent., or a total of $14,990,278. On that basis, the value of the physical property was estimated by the company, without depreciation, at $76,754,919.⁵ This included $12,134,665 as the 'reproduction value of the standby manufacturing facilities,' above mentioned. The company's witness testified before the commission (in 1930)⁶ that in his estimate of reproduction cost he had 'attempted to obtain prices that would be reasonably stable and might prevail over the next three years'; that the prices used were 'very close to the average of those which prevailed for a 3-year period prior to January 1, 1930'; and, while in his opinion there was 'a temporary slump in prices,' he did not think it probable that there would be 'any substantial change within the next two or three years.'

The estimate of the commission's engineer for reproduction cost new of the same physical property including the gas manufacturing plant, as of December 31, 1929, without depreciation, taking unit prices of that day and overheads at 21.65 per cent., was $72,471,207. As of the same date, but using four-year average unit prices for the years 1926 to 1929, his estimate was $73,210,136, with overheads taken at 22,32 per cent.⁷ His estimates on the last-mentioned basis, but with overheads at 6 per...