United States v. City and County of San Francisco

• Decision Date: 11 April 1938
• Docket Number: No. 4173-R.,4173-R.
• Citation: 23 F. Supp. 40
• Court: U.S. District Court — Northern District of California
• Parties: UNITED STATES v. CITY AND COUNTY OF SAN FRANCISCO.

23 F. Supp. 40

UNITED STATES v. CITY AND COUNTY OF SAN FRANCISCO.

No. 4173-R.

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

April 11, 1938.

COPYRIGHT MATERIAL OMITTED

Frank J. Hennessy, U. S. Atty., and W. E. Licking, Asst. U. S. Atty., both of San Francisco, Cal., and Frederic L. Kirgis, of Washington, D. C.

John J. O'Toole, City Atty., Dion R. Holm, Asst. City Atty., and Robert M. Searls, all of San Francisco, Cal., for defendant.

ROCHE, District Judge.

This is a suit in equity wherein the United States of America, as plaintiff, seeks to restrain the City and County of San Francisco, as defendant, from continuing an activity which is alleged to be in violation of a restriction attached to a grant of lands by the plaintiff to the defendant. The grant is known as the Raker Act (38 Stat. 242), passed by Congress on December 19, 1913. The restriction in question, contained in section 6 of the act, 38 Stat. 245, reads as follows: "That the grantee is prohibited from ever selling or letting to any corporation or individual, except a municipality or a municipal water district or irrigation district, the right to sell or sublet the water or the electric energy sold or given to it or him by the said grantee."

Pursuant to the Raker Act the City and County of San Francisco built a water and power system. Because the defendant lacked an electric distribution system within its territorial limits and was not able to build or purchase one at the time that electric energy was ready for delivery to consumers, it entered into a contract on July 1, 1925, for the disposal of electricity to the Pacific Gas & Electric Company. The plaintiff claims that under this contract the defendant is disposing of electric energy, developed and transmitted by it through its utilization of the rights granted the defendant in and on government lands by the Raker Act, in violation of the condition or restriction attached to that grant by the above-quoted provision in section 6 of the act. Plaintiff is proceeding to compel compliance under section 9(u) of the act, which reads as follows:

"That this grant is made to the said grantee subject to the observance on the part of the grantee of all the conditions hereinbefore and hereinafter enumerated: * * *

"u. * * * That the grantee shall at all times comply with and observe on its part all the conditions specified in this Act, and in the event that the same are not reasonably complied with and carried out by the grantee, upon written request of the Secretary of the Interior, it is made the duty of the Attorney General in the name of the United States to commence all necessary suits or proceedings in the proper court having jurisdiction thereof, for the purpose of enforcing and carrying out the provisions of this Act."

Hereinafter for convenience the plaintiff will be designated as the Government, the defendant, as the City or S. F., and the Pacific Gas & Electric Company, as the Company or the P. G. & E.

On August 24, 1935, the Secretary of the Interior rendered an opinion which declared that the City's disposal of electricity under the contract with the Company was in violation of the quoted part of section 6 of the Raker Act. The City, upon being advised of the Secretary's opinion and requested to cease its activity, gave notice that it intended to continue disposing of its electricity under the contract of July 1, 1925, until restrained from so doing by court action. Thereafter the necessary steps were taken by the Secretary to place the matter in the hands of the Attorney General of the United States, who commenced these legal proceedings as provided for in the Raker Act.

The complaint of the Government alleges that the City is presently selling the electric power, generated by utilization of the grants of the Raker Act, to the P. G. & E. for resale, and that such activity is in violation of the limiting provision of section 6 of the act. The City denies this allegation and sets up the contract with the Company as Exhibit A of its answer as a primary defense for the activity which the Government contends is a sale for resale. In addition S. F. maintains that, even if the contract should be construed to be an arrangement for the sale of electricity for the purpose of resale, there are mitigating circumstances which make the issuance of an injunction improper. Estoppel, good faith, and reasonableness of actions, balance of conveniences, change of conditions, and impossibility are urged as equitable defenses. Invalidity of the restriction, as in excess of the powers of Congress, is also claimed. These various defenses the court regards as secondary and will subsequently refer to them as such.

Before examining the facts and the law pertaining to the issues raised by the parties, it is necessary to understand the background for the litigation. Therefore the court will present a brief history of the Hetch Hetchy project, with particular reference to the City's activities in the generation and transmission of electric energy. Thereafter the court will dispose of its problems by an examination of them in the following order: (1) The restriction in section 6 of the Raker Act; (2) the question raised by the City's secondary defenses — the legal effect of the restriction in the grant; (3) the nature of the contract between the City and the Company; (4) certain arguments made by the City as to the construction of the contract.

History of the Project.

On December 19, 1913, the Raker Act was passed by Congress. It granted certain federal lands and rights to S. F. upon the condition that the water and power to be obtained from the contemplated project would be sold by the City directly to its inhabitants.¹

The act was the culmination of persistent efforts on the part of San Franciscans to assure themselves of adequate water and low rate electricity for their growing city. Work was begun on the Hetch Hetchy dam and power stations in the Yosemite region of the high Sierras soon after the act became law. By 1923 the City was disposing of electric energy which it derived from the Early Intake power station (built as a preliminary unit for the construction of Hetch Hetchy itself).² On May 8th of that year the National Park Service started proceedings through the then Secretary of the Interior against the City. San Francisco's mode of distribution of Early Intake electricity through the facilities of the P. G. & E. was questioned. After proper hearings, it was determined that energy was being sold to the Company in violation of the provisions of the Raker Act. Since the Moccasin Creek Power Plant (the chief future source of power for S. F.), was nearing completion at the time this decision was rendered, it was essential that a new plan for distributing electricity be adopted as soon as possible.

To avoid further violation of the law governing Hetch Hetchy power, S. F. entered into a contract with the P. G. & E. in 1925, whereby arrangements were made for the utility company to distribute the City's energy on its behalf. The contract of July 1, 1925, was an attempt to set up an agency agreement which would comply with the terms of section 6 of the Raker Act. Under this contract, City power was to be turned over to the Company at its Newark substation, about 35 miles southeast of S. F. The Company was to pay the City on a 75 per cent. load factor basis for electricity made available by the Hetch Hetchy power plants.³ Line losses, estimated at 24 per cent. of the energy received by the Company at Newark, were to be deducted from the electricity actually delivered, in determining payments due to the City. Of the money collected from San Francisco consumers of electricity supplied by the Hetch Hetchy power plants, the City was to receive 26.935 per cent. and the Company, 73.065 per cent. These proportions were to be applied to the payments made by customers, who were charged 2.383 cents per kilowatt hour at the time the contract went into effect. As rates were varied, the payments were to be adjusted accordingly, so that the percentages remained fixed during the life of the contract between the City and the Company. The City was to be paid by the Company whether the latter used all of the Hetch Hetchy power or not, and whether the Company "load dispatcher" accepted the energy generated in the City power plants at Moccasin Creek and Early Intake in whole or in part. The contract was made terminable on one day's notice by either side or upon the request of the Secretary of the Interior, should he find it to be in violation of the Raker Act.⁴

In 1925 the new contract between the City and the Company became operative, with the parties to it hoping that the arrangement heeded the admonition against resale of electricity which was set forth in section 6 of the act. Thereafter verbal and written encounters took place intermittently between the City and the Government, but it was not until 1934 that the present controversy threatened to reach legal proportions. In that year the Secretary of the Interior started an investigation to determine whether S. F. was complying with its obligations under the Raker Act. The results of conferences, hearings, and study were contained in an opinion of the Secretary, who concluded that the act was being violated (Plaintiff's Exhibit 11). The subsequent proceedings by which a suit arose and reached the United States District Court have been outlined above.

The chief issue to be settled by the court in the present controversy is this: Does the City's present disposal of electric power under the contract of July 1, 1925, made by the City and the Company, violate section 6 of the Raker Act?

The Restriction in Section 6 of the Raker Act.

As a necessary preliminary to a study of the contract, the conditions set forth in section 6 must be carefully examined in order to ascertain what kind of arrangement would be permitted between the City and the Company. The court again recites...