Wichita Gas Co. v. Public Service Commission

• Decision Date: 09 June 1928
• Docket Number: 27,946,27,944,27,945
• Parties: THE WICHITA GAS COMPANY, Appellee, v. THE PUBLIC SERVICE COMMISSION et al., Appellants. THE HUTCHINSON GAS COMPANY, Appellee, v. THE PUBLIC SERVICE COMMISSION et al., Appellants. THE NEWTON GAS COMPANY, Appellee, v. THE PUBLIC SERVICE COMMISSION et al., Appellants
• Court: Kansas Supreme Court

268 P. 111

126 Kan. 220

THE WICHITA GAS COMPANY, Appellee, v. THE PUBLIC SERVICE COMMISSION et al., Appellants.

THE HUTCHINSON GAS COMPANY, Appellee, v. THE PUBLIC SERVICE COMMISSION et al., Appellants.

THE NEWTON GAS COMPANY, Appellee, v. THE PUBLIC SERVICE COMMISSION et al., Appellants

Nos. 27,944, 27,945, 27,946

Supreme Court of Kansas

June 9, 1928

Appeals from Shawnee district court, division No. 1 and division No. 3; JAMES A. MCCLURE and OTIS E. HUNGATE, judges. Affirmed.

Judgment affirmed.

SYLLABUS

SYLLABUS BY THE COURT.

1. GAS--Regulation of Rates--Evidence. The proceedings in gas-rate cases considered, and held, judgments enjoining enforcement of rate orders promulgated by the public service commission were sustained by the evidence.

2. SAME--Regulation of Rates--Admissibility of Evidence. An assignment of error that proffered evidence was improperly rejected, considered, and held not to be well founded.

William A. Smith, attorney-general, M. J. Healy, John M. Kinkel and Louis E. Clevenger, all of Topeka, for the appellants.

Fred S. Jackson, of Topeka, and Robert D. Garver, of Kansas City, Mo., for the appellees.

Burch, J. Harvey, J., concurs in the result. Hopkins, J., dissenting.

OPINION

BURCH, J.:

These actions were commenced by the gas companies of Wichita, Hutchinson and Newton to enjoin enforcement of schedules of rates for the sale of gas in those cities, and to enjoin the public service commission from preventing the gas company from putting into effect a rate scheme known as the three-part rate. The issues were referred to a referee, and the cases were heard together. The referee made findings of fact and conclusions of law; the report of the referee was approved by the district court, and the relief prayed for by the gas companies was granted. The public service commission appeals.

The commission promulgated an order fixing rates to become effective September 1, 1926. These rates were to supersede existing schedules of rates which were put into effect in August, 1920. The commission and the gas companies agreed the 1920 schedules were unsound. The referee found they were confiscatory, and they were enjoined. After the gas companies prevailed in the district court, the commission took no step to stay the judgments, and the gas companies were at liberty to put into effect schedules of reasonable rates. Instead of adopting the three-part rate, they put into effect another schedule. While that schedule was designated as temporary, it will stand until lawfully superseded, and the three-part rate is no longer in controversy.

The Wichita case will be considered first. The first question to be determined was, What amount of property did the gas company devote to public service, on which it was entitled to earn a fair return? The company purchased the plant in July, 1925, of the Kansas Gas and Electric Company, for $ 2,690,000, and made subsequent additions and betterments, so that the total cost was $ 2,892,594. The commission's rate base was $ 2,450,000. In the district court it accepted the rate base proposed by its engineer, Fletcher, which was $ 2,533,642. The company's engineer, Strickler, put in evidence a table which he prepared showing the reproduction cost new of the physical property, and reproduction cost depreciated. The commission does not choose to print the table in its abstract. Fletcher's tables are printed in full. Fletcher found the reproduction cost new to be $ 3,030,316. He then found the historical cost to be $ 2,426,931, added historical cost to reproduction cost, and divided by 2. The quotient was $ 2,728,623, which he said was fair value new. This value was depreciated to find the rate base. The books of the company did not provide data for computation of historical cost, and there was no other evidence of historical value. Historical value is a fact, and historical value ascertained as Fletcher ascertained it, by guesswork suavely called "estimate," is a misnomer. In his dissenting opinion in the case of McCardle v. Indianapolis Co., 272 U.S. 400, 71 L.Ed. 316, 47 S.Ct. 144, Mr. Justice Brandeis said:

"The process of determining facts will inevitably be misleading unless each step bears a close relation to the realities of life." (p. 424.)

The two engineers differed with respect to method of determining depreciation. What was the value of the 355 miles of distribution mains, which Fletcher estimated would cost $ 1,562,848 to reproduce? Strickler dug hundreds of holes in the ground, and looked at the pipe. Fletcher looked in his books, and determined the matter "scientifically," without the trouble of physical inspection. He used tables, which he said are to the engineer what mortality tables are to a life insurance company. The cost of reproducing the entire plant, item by item, was estimated. The life years of each item, ranging from 50 years to 5 years, was estimated. The average was 41 + years. The dollars invested yearly were estimated in part according to the historical method which has been adverted to, and the average age of the dollars in fixed capital accounts was found to be 9 +. Therefore, the present condition of the Wichita gas utility had to be 41 - 9/41 = 78 + per cent, and the reproduction cost of the gas mains was depreciated by that formula, without regard to their actual condition. The court understands the primary requirement of the scientific method is to get the facts by observation, when they are ascertainable by observation. Life tables are useful. They show averages based on wide experience. But when a life insurance company insures a person 21 years old, whose life expectancy is 41.53 years, it does not rely on the tables. It requires him to undergo a physical examination, to determine if he has cancer, or tuberculosis, or something which will reduce his expectancy below the average. Fletcher said, however, that inspection of pipe in the ground will disclose just two things: first, that it was laid so recently as to be new; second, that you can kick a hole in it. Strickler said soil conditions have much to do with the deterioration of pipe, and the inspection method is more dependable than application of life tables. The supreme court of the United States approves Strickler's method. In the Indianapolis case, supra, involving a water plant, the city engineer used Fletcher's method, and deducted approximately 25 per cent of estimated cost new, to cover depreciation. The court said:

"The deduction was not based on an inspection of the property. It was the result of a 'straight line' calculation based on age and the estimated or assumed useful life of perishable elements. . . . Mr. Hagenah made an estimate of existing depreciation based on actual inspection and a consideration of the probable future life as indicated by the conditions found. He deducted less than six per cent. . . . The testimony of competent valuation engineers who examined the property and made estimates in respect of its condition is to be preferred to mere calculations based on averages and assumed probabilities. The deduction made in the city's estimate cannot be approved." (p. 416.)

In the commission's brief it is said:

"The referee, in his report, did not recognize the method used by the commission's engineer in arriving at a 'fair value' of the property, did not consider the figures submitted by the commission's engineer on the question of estimated book investment, nor the estimated condition of the fixed capital accounts."

The only basis for this statement is that the referee did not see fit to adopt Fletcher's method and figures, and the statement illustrates the public service commission's method of presenting its case. In his report the referee said:

"The engineer for the plaintiffs based his testimony as to depreciation upon a careful examination of the properties. Several hundred openings in the ground were made to enable him to examine the condition of the pipes. The engineer for the commission based his estimates of depreciation upon such historical data as was obtainable as to age of the properties, and then applied tabulations calculated upon the average life of similar property. . . . Taking all the evidence into consideration, it is therefore my judgment that the depreciation is in fact greater than that conceded by the plaintiffs' engineer, and less than that calculated by the engineer for the commission."

There is no contention in the commission's brief that material findings are not sustained by any substantial evidence. There is simply a persistent intolerance of evidence which conflicts with evidence produced by the commission, and this court is asked to accept as conclusive evidence produced by the commission which the referee did not consider was conclusive. The presumption of validity which in the beginning attended the commission's order no longer obtains. The presumption here is the judgment of the district court is correct. This court was not empowered by the constitution to try the case de novo, and findings of fact sustained by evidence are as conclusive upon this court as like findings returned in other cases.

Adding to the value of the physical property going-concern value and working capital, Fletcher proposed a rate base of $ 2,533,642. The referee reported as follows:

"The value of the property is a question of fact rather than of law, and it is to be determined by the court after giving due weight and consideration to all the evidence in the case. In arriving at the valuation of these several properties as hereinafter set out in the findings, I have attempted to give due weight and consideration to all of the evidence throwing light upon those elements of value that have been mentioned by the supreme court of the...