City of Winona v. Wisconsin-Minnesota Light & Power Co.

• Citation: 276 F. 996
• Parties: CITY OF WINONA v. WISCONSIN-MINNESOTA LIGHT & POWER CO.
• Decision Date: 05 March 1921
• Court: U.S. District Court — District of Minnesota

276 F. 996

CITY OF WINONA v. WISCONSIN-MINNESOTA LIGHT & POWER CO.

United States District Court, D. Minnesota, First Division.

March 5, 1921

R. A Randall, of Winona, Minn., and O'Brien, Young, Stone &amp Horn, of St. Paul, Minn., for plaintiff.

Butler Mitchell & Doherty, of St. Paul, Minn., for defendant.

BOOTH District Judge.

This cause came on for hearing upon exceptions to the report of the special master heretofore appointed in the cause to take and report to the court the evidence in the case, to examine the evidence, make the necessary computations, find and state the facts, and make a report to the court of the facts as found and of the results of such computations, and to recommend to the court in the report a form of proper decree.

The exceptions are voluminous and cover practically the whole range of the master's findings. It will not, however, be necessary to take them up and discuss them in detail. Among the master's findings the following appear:

'That the ordinance, a copy of which is Exhibit E, attached to the complaint, entitled 'An ordinance to amend an ordinance entitled 'An ordinance relative to lighting the city with gas," passed August 1, 1870, and the ordinances amendatory thereof, are violative of the Fourteenth Amendment to the Constitution of the United States, and are therefore void and of no effect; and I would further find that the price and rate for gas as fixed in said ordinances, i.e., $1.45 per thousand cubic feet, is unreasonable, confiscatory, and void.'

'The ordinance, a copy of which is Exhibit F attached to the complaint, entitled 'An ordinance establishing maximum charges to be made for gas in Winona,' passed January 24, 1920, was passed without authority; that the same is in violation of the Fourteenth Amendment to the Constitution of the United States and is therefore null and void; and that the rate therein prescribed, namely, $1.45 per thousand cubic feet for gas, is unreasonable, confiscatory, and void.'

These findings are approved.

In reference to operating expenses of the company, valuation of its property, and the rate of return:

The master found that a proper allowance for operating expenses of the company for the ensuing year was $105,373.97, which would be equivalent to ................	$1.463
per thousand cubic feet of gas sold;
That the excess leakage in the system amounted to ...............	.046	Per M
	--------	cu. ft.
per thousand cubic feet, which deducted as a penalty from the operating expenses left ..........................................		$1.417
as net operating cost.
The master found that an amount should be set aside for
depreciation reserve equivalent to ...............................		.13
of gas sold.
He further found that the rate of return which would be reasonable was 8 per cent., and he found that the valuation upon which the return should be computed was $577,043, equivalent to ............		.60
of gas sold.		-------
Total rate recommended as reasonable ........................		$2.15.

As to the operating expense: After examination of the evidence I am of opinion that the master's findings are in the main sustained, and with minor corrections made as suggested by counsel, the operating expenses are allowed at $1.41 per M cubic feet of gas sold.

The method adopted by the master of handling the city contract for gas appears to be justified, and is approved.

As to depreciation reserve: The rate allowed by the master was 2 1/2 per cent. on the value of physical property depreciated, less the value of land and of benches. This in figures was 2 1/2 per cent. on $386,225, making $9,655, equivalent to 13 cents per thousand cu. ft. of gas sold.

After examination of the evidence I am of opinion that the rate of allowance for depreciation reserve was justified by the evidence, and was fair and reasonable. But inasmuch as the valuation made by the master should in my judgment be revised, the resultant figures as to depreciation reserve will be changed, and will be given later on. As pointed out by the master, this general depreciation reserve is exclusive of a special depreciation reserve for relining benches, which latter is included in operating expenses.

As to the rate of return: The evidence in my opinion justifies fully the rate, adopted by the master, of 8 per cent.

As to valuation of the property: The master adopted the method of cost of reproduction new less depreciation. Four estimates were submitted for consideration, as appears from the evidence:

------------------------------------------------------------------------------- No. 1. No. 2. No. 3. No. 4. ------------------------------------------------------------------------------- Company's Company's Company's Estimate Estimate Estimate Reproduction Reproduction Reproduction New New New City's Cost, Cost, Cost, Estimate 5-Year Current Current Classification. Normal Average Price Price Pre-War Price Basis Basis Construction Basis Ending For For Cost. May 1, May 1, March 1, 1919. 1919. 1920. ------------------------------------------------------------------------------- Land $ 8,960 $ 8,960 $ 8,960 $ 8,960 Transmission and distribution 140,454 216,415 294,095 323,504 Buildings and miscellaneous structures 17,268 24,822 32,668 35,935 Plant equipment 73,795 101,338 136,440 163,728 General equipment 3,964 6,385 8,146 8,961 Paving (actually disturbed) 878 1,463 1,742 1,916 ------------------------------------------------------------------------------- Total physical property not including overhead 245,319 359,383 482,051 543,004 charges. -------------------------------------------------------------------------------

The land values in all cases were taken on the basis of current values.

The master also adopted the estimate No. 3, representing cost of reproduction new of the physical properties at prices prevailing May 1, 1919. He then made a deduction for depreciation of 12 per cent., and thereafter made additions for overheads, cost of financing, working capital, and going value, and finally reached the figure $577,043.

These figures of the master are the subject of exceptions by the city and by the company, both as to the basic figures adopted and as to the various additions and deductions made by the master.

I can see no valid objection to adopting the method of cost of reproduction new as a help to arriving at present reasonable value, provided proper revision be made whenever necessary, and providing other relevant facts are not ignored. Such method has been quite common, although not exclusive of other methods. But there must be ever kept in mind the ultimate purpose of the investigation, and also certain guiding principles laid down by the Supreme Court of the United States. The purpose of the inquiry is plainly indicated by the court in the case of San Diego Land Co. v. National City, 174 U.S. 739, 757, 19 Sup.Ct. 804, 811 (43 L.Ed. 1154), where it is said:

'What the company is entitled to demand, in order that it may have just compensation, is a fair return upon the reasonable value of the property at the time it is being used for the public.'

The guiding principles are stated in a large number of cases in varying language, but in meaning substantially the same. The following citations will suffice:

In Smyth v. Ames, 169 U.S. 466, 547, 18 Sup.Ct. 418, 434 (42 L.Ed. 819), the court said:

'What the company is entitled to ask is a fair return upon the value of that which it employs for the public convenience. On the other hand, what the public is entitled to demand is that no more be exacted from it for the use * * * than the services rendered by it are reasonably worth.'

In Willcox v. Consolidated Gas Co., 212 U.S. 19, 52, 29 Sup.Ct. 192, 200 (53 L.Ed. 382, 48 L.R.A. (N.S.) 1134, 15 Ann.Cas. 1034):

'And we concur with the court below in holding that the value of the property is to be determined as of the time when the inquiry is made regarding the rates. If the property, which legally enters into the consideration of the question of rates, has increased in value since it was acquired, the company is entitled to the benefit of such increase. This is, at any rate, the general rule. We do not say there may not possibly be an exception to it, where the property may have increased so enormously in value as to render a rate permitting a reasonable return upon such increased value unjust to the public. How such facts should be treated is not a question now before us, as this case does not present it. We refer to the matter only for the purpose of stating that the decision herein does not prevent an inquiry into the question when, if ever, it should be necessarily presented.'

In the Minnesota Rate Cases, 230 U.S. 353, 434, 33 Sup.Ct. 729, 754 (57 L.Ed. 1511, 48 L.R.A. (N.S.) 1151, Ann. Cas. 1916A, 18), the court said:

'The basis of calculation is the 'fair value of the property' used for the convenience of the public, * * * or as it was put in San Diego Co. v. National City, * * * 'what the company is entitled to demand in order that it may have just compensation, is a fair return upon the reasonable value of the property at the time it is being used for the public.' * * * The ascertainment of that value is not controlled by artificial rules. It is not a matter of formulas, but there must be a reasonable judgment having its basis in a proper consideration of all relevant facts'-- citing with approval Smyth v. Ames.

As I understand the ruling of these cases, it is that the utility company is entitled to have a fair return upon the reasonable value of the property used and useful in rendering the service, and as of the time the...