Charles Evans Hughes

“ Even when cost is revised so as to reflect what may be deemed to have been invested prudently and in good faith, the investment may embrace property no longer used and useful for the public. This is strikingly illustrated in the present case where the company has a large gas manufacturing plant which, in view of the supply of natural gas, has not been used for several years and is not likely to be used for many years to come, if at all. ”

“ The state, by the exertion of legislative power, established the rule that public utility rates, including those charged for gas, shall be just and reasonable. It is powerless to enforce, and therefore must be presumed to have intended that is commission should not attempt to prescribe, confiscatory rates. The commission's field of action is within reasonable limits above the point or line where confiscation would commence. ”

“ In determining that basis, the criteria at hand for ascertaining market value, or what is called exchange value, are not commonly available. The property is not ordinarily the subject of barter and sale and, when rates themselves are in dispute, earnings produced by rates do not afford a standard for decision. The value of the property, or rate base, must be determined under these inescapable limitations. And mindful of its distinctive function in the enforcement of constitutional rights, the court has refused to be bound by any artificial rule or formula which changed conditions might upset. ”

“ Electricity has not to any great extent supplanted gas as a fuel. All of the conditions noted, as affecting the business of the company, sustain the commission in its statement that the plaintiff's securities are capable of being marketed at moderate interest rates, and that it will continue to grow.' 58 F. (2d) 256, 259. The court found that the commission 'was very liberal in its treatment of certain items of property'; that 'since 1924' the company has served natural gas, 'which is plentiful in the numerous oil fields in Southern California' ”

“ With that deduction, the estimate of the commission's engineer would be about $70,000,000, without allowance for depreciation.
We find it unnecessary, however, to consider the details of these estimates, for there is a fundamental objection to their acceptance as a basis for a finding of confiscation. The determination of present value is not an end in itself. Its purpose is to afford ground for prediction as to the future. It is to make possible an 'intelligent forecast of probable future values' in order that the validity of rates for the future may be determined. ”

“ But no one would question that the reasonable cost of an efficient public utility system 'is good evidence of its value at the time of construction.' We have said that 'such actual cost will continue fairly well to measure the amount to be attributed to the physical elements of the property so long as there is no change in the level of applicable prices.' McCardle v. ”

“ We noted at the outset that there is a difference between the parties with respect to the amount which should be taken as historical cost. The company contends that, in entering additions and betterments in its books it charged too little to capital account for overheads, and it directs attention to the opinion of the commission's engineers that 11.25 per cent. of direct labor and material items could reasonably have been charged to capital for indirect construction costs instead of 6 per cent., the amount actually charged. ”

“ 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. ”

“ In ascertaining the return protected by the Constitution, the commission is required to take into account and make proper allowances for the actual original and the estimated present cost of the property, including overheads. It is bound to include a just and reasonable amount to cover going value. The amount omitted in respect of each of these items is large enough to invalidate rates based on the valuation. ”

“ And, in absence of contrary showing and finding, its charges must be deemed to have been considered just and reasonable by the regulatory authorities of the state and by the public. Unquestionably, and the opinion of this court so implies, millions should be added to the cost figures applicable to the physical items in order to find the value of plaintiff's property, the amount protected by the Constitution. The ground on which the commission excluded going value was that the cost of attaching the business was charged to operating expenses. The District Court followed the commission. ”

“ 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. ”

“ This gave, in lieu of the rates prescribed, a provisional schedule of rates to be charged in 1931, and until the further order of the commission, which was deemed to involve a reduction in revenue of approximately 7 per cent., instead of 9 per cent. as otherwise contemplated, the company to agree to establish a temperature reserve to which should be credited the amount by which the net earnings of its gas department for the year 1931 should be in excess of a stated sum. ”

“ The rule was intended to make unnecessary analysis or extended examination for the ascertainment of the facts and propositions of law on which rest decrees of the courts of first instance. The opinion of the majority does not purport to 'find the facts specially' or to 'state separately its conclusions of law thereon.'
The decree is not a compliance with the rule. 'The court now finds that the values for plaintiff's property as fixed and determined by the defendant Railroad Commission are the reasonable values thereof ”

“ Co., vacate the decree, and remand the case for special findings. The District Court should appoint a special master to hear the parties, make specific findings of fact, and state separately his conclusions of law and recommendation for a decree.
The District Court should have referred the case to a special master for such a report. Experience has made it plain that rate confiscation cases are intricate in respect of facts and involve complicated, grave, and difficult questions that are impossible of adequate examination by a court without the assistance of a master. ”

“ Considering the growth and stable position of the company, the court pointed out that 'with a history of successful and profitable business, and no real competition to meet in its field of service, the hazard is small and the probabilities of continued demand assured. ”

“ Three million so thrown out is sufficient to require reversal. It was for the commission to decide whether these plants are required properly to safeguard the public service. This court should hesitate long before holding they are not. Seven per cent. on $3,000,000 so eliminated is $210,000, about 58 cents on each of the 385,000 meters, a small charge to insure readiness to serve.
The commission refused to consider or allow anything for going value. Plaintiff's gas properties adequately serve a great and, before the present depression, a rapidly growing demand. ”

“ The result is that the commission allowed for the year 1930, as a basis for its calculation of return, a valuation of $65,500,000 without deduction for depreciation. Id. p. 462.
2. The Commission's Estimate of Return.-Based upon assumed revenue and operating expenses, and with allowance for a depreciation annuity and taxes, the commission estimated that the company would earn a net return of 7 per cent. upon this undepreciated rate base. ”

“ The figure used conforms to the accounting practice of the Company as to the bulk of its investment, which has increased from approximately $13,000,000 in 1917 to over $58,000,000 in 1929, the difference representing net additions and betterments during this period as inscribed in the Company's books and records. ”