Contra Costa Water Co. v. Oakland Etc. , 159 Cal. 323 ( 1911 )

I am unable to agree with the majority opinion. In the consideration of the evidence to determine whether it is sufficient to support the findings, I can see no reason why any different rule should be applied from that governing cases generally coming here on appeal — i.e., that if there is any substantial evidence to support any particular finding, for example, the valuation of plaintiff's property, it must stand and will not be overthrown because there may be apparently a preponderance of evidence to the contrary. The rule is well established and necessarily it can admit of no exception without violating the constitutional provision which leaves with the jury or the trial court the determination of all questions of fact. It seems to me that if the majority opinion had been written with due regard for this rule a different conclusion would have been reached upon the vital question, to wit, the valuation of plaintiff's property devoted to the public use.

When, however, the conclusion was reached that there was not sufficient evidence to justify the finding of seven million dollars as the valuation, there was then determined, as the opinion justly observes, that there existed no "foundation upon which to rest a conclusion as to the sufficiency of the compensation that will be given by the rates fixed, . . . for we would then be without any finding on the question of value, and without any power or ability to supply such finding." This conclusion reached, it seems to me, the case was practically ended and the reversal of the judgment would necessarily follow. If, however, there was not sufficient evidence to justify the finding of valuation, this court is not authorized to search for evidence in the record to find support for some different and lower valuation of plaintiff's property in order to determine the reasonableness or unreasonableness of the ordinance complained of, for I do not understand that we can make findings of fact for any purpose. Neither have we the right to say that the evidence justifies any given valuation, and no more, for to do this is both to pass upon questions of fact and to prejudge the case upon a retrial which the reversal of the judgment requires must take place. The argument upon this point has been addressed wholly to the question — Does the evidence sustain the finding of valuation as fixed by the trial court? Before this court can properly take up the question of some different valuation there should be a trial of that question and a finding by the trial court which alone can make findings of fact.

In order to reach the conclusion that there was evidence justifying a valuation of three million five hundred thousand dollars and hence the rate fixed was not confiscatory because it would, at that valuation, yield an income of 4 1/2 per cent, it became necessary to violate the rule first above stated, whereas, I think, the conclusion, if the court is to enter upon so delicate and dangerous a field of inquiry at all, should have been drawn from such substantial evidence as might be found in the record, whether or not in conflict with other evidence. Had this been done, in my opinion, a much larger valuation than three million five hundred thousand dollars would have found ample justification. The income increases proportionately with the increase of the valuation, the rate being fixed, and hence the importance of ascertaining, in a spirit of fairness to plaintiff, the full reasonable value of its property, taking into account every element which justly enters into such value.

If there were elements of value admitted in evidence in support of the finding adverse to defendants, and against their objection, this court may properly decide whether or not error was committed, in the particular assigned as error. Such is one of the legitimate functions of an appellate court and is exercised as a guide to the trial court upon the retrial of the case as well as to the rate-making body. But to sum up the result of the evidence, independently of the finding of the trial court, and make a finding of the value of plaintiff's property for the purpose of passing upon the reasonableness or unreasonableness of the ordinance is, in my judgment, an assumption of the prerogative of the trial court, and besides, it can be of little value, for the evidence may not be the same upon a retrial.

If there is to be an end to litigation growing out of rate fixing by the rate-making board and successive appeals are to be avoided, this court should, so far as possible, indicate what in its opinion constitute the elements to be considered in ascertaining the value of the property devoted to the public use. No court, so far as I have found, has undertaken to catalogue all these elements or precisely delimit what are and what are not proper to be considered. Some of these, however, have been named as just and proper and should enter into the calculations of the rate-making body. The original cost of construction of the plant, the amount expended in permanent improvements, the amount and market value of its bonds and stock, the present compared with the original cost or construction, the probable earning capacity of the property under the particular rates prescribed by statute or ordinance, and the sum required to meet operating expenses, while there may be others, are all matters for consideration and are to be given such weight as may be just and right in each case. (Smyth v. Ames, 169 U.S. 466, [18 Sup. Ct. 418, 42 L. Ed. 819].)

Appreciation in value is an element to be considered, for there is no reason why a public service corporation should not enjoy the same advantage of enhanced value as is enjoyed by the owners of other property which has been made more valuable by the service given it by the corporation or which in turn, by becoming more valuable, has added new value to the public service plant. Ordinarily all properties of the community enhance in value paripassu and insofar as this enhanced value attaches to the property of the public service company it becomes a factor in fixing the value for rate-making as well as for any other purpose.(Metropolitan Trust Co. v. Houston etc. R.R. Co., 90 Fed. 683, 687; Cotting v. Kansas City Stock Yards Co., 82 Fed. 850.) Speaking of property affected with a public use, the court said, in San Diego v. National City, 74 Fed. 79: "If it has since enhanced in value, those who invested their money in it, like others who invest their money in any other kind of property, are justly entitled to the benefit of the increased value."

The courts also take cognizance of the element of skill and good management which has contributed to the upbuilding of the enterprise in question. Most public service works are the growth of years of constant changes and development, and, we may safely say, for the enhancement of their usefulness and value. Foresight, intelligent management, and special skill, exceptionally adapted to the work in hand, are required and must be taken into account. Speaking of the persons engaged in these enterprises, the court said, in Brunswick T. Water Dist. v.Maine Water Co., 99 Me. 371, [59 A. 537, 540]: "To be successful, they must be wise and prudent, thrifty and energetic. These virtues, if they have them, they impress upon the property, making it more valuable than it otherwise would have been. Is it to be said that they can have no return for skill and good management? We do not think so."

In the decision of the Interstate Commerce Commission, entitled — "Reproposed Advance in Freight Rates" (1902), 9 Interstate Commerce Com. Rep. 381, 402, it was said: "Moreover, the value of a railway system does not depend upon the mere cost of its embankment or its equipment. It is rather a question of location, of connections, of terminal facilities, of enterprises along its line; and shall nothing be allowed to the foresight and ability which have marked out and perfected that system?"

The evidence showed that plaintiff had encountered and successfully overcome serious difficulties and obstacles in perfecting its system of "which a casual inspection of the works as they now exist gives a very faint idea." An unusual advantage as a source of water supply is the San Leandro Lake, which supplies a large proportion of the water supplying the city of Oakland, and the permanency and reliability of the sources of supply by this and other means should be considered. Speaking of these, one of the witnesses testified: "There are two sources of water supply owned by the company that are deemed of great value in the open market — San Leandro Lake, and that pumped from underground sources at Alvarado. The latter is, of course, included in the purchase price of the Oakland Water Company's plant. The former has been developed at great expense from unusual natural advantages improved by works of great stability and permanency. It represents a property that could not probably be duplicated at equal cost on any other site within many miles of Oakland." The evidence showed that the plant is in no sense experimental but has been thoroughly tested and found equal to all requirements and of tried stability, and this is, as the witness said, "a very important factor in considering relative values of existing properties and properties that are yet uncreated," as any new waterworks would be if built to supplant the present one. These elements, as are others not mentioned, are in a large degree intangible, the value of which in money it is difficult to estimate but which may and should be considered in fixing the value of plaintiff's plant and no doubt entered into the calculation made by the trial court, a fact to which the majority opinion seems not to have given due importance.

Then there are the risks of the business to be considered for, as was said in San Diego Water Co. v. San Diego, 118 Cal. 556, [62 Am. St. Rep. 261, 38 L.R.A. 460, 50 P. 633]: "This is not an ordinary business enterprise. Those who engage in it put their property entirely into the hands of the public. Having once embarked, it is beyond their power to draw back. They must always be ready to supply the public demand, and must take the risk of any falling off of demand." There are other risks to which the enterprise is liable; it must submit to regulation of rates which may be arbitrarily or unjustly fixed, requiring resort to the courts for relief; it is subject to condemnation by the municipality and although presumably it would be paid full compensation, it would be a risk in some measure affecting the value for rate making; there are also dangers of loss from earthquake and flood. The value of the tangible property is doubtless the basic element in the inquiry but clearly there are many others to which consideration must be given and no doubt was given by the trial court, and this it was its duty to do although the evidence named no specific amount as the value of these elements.

Still other elements may be mentioned which enter into any fair consideration of value. "The value of the service which the public receives is also an element to be determined in considering whether the rates are reasonable." (Redlands etc. W.Co. v. Redlands, 121 Cal. 365, 371, [53 P. 843]; San Diego Land Town Co. v. National City, 174 U.S. 739, [19 Sup. Ct. 804, 43 L. Ed. 1154].)

That plaintiff is a going concern is an important element, the value of which witnesses fixed at five hundred thousand dollars, but this item is disregarded in the principal opinion because the value placed upon it by the witnesses, like that of the value of the franchise, was not thought to rest upon any sufficient basis. The opinion states that because the value of the going business and franchise depends upon their earning power, which in turn "depends upon rates to be fixed annually by the city council in such a way as to give only a fair return on the property in use, and the franchise is neither exclusive nor defined by any special contract with the city, these elements would appear to play a very small part, if any, in the matter of valuation." In effect the opinion eliminates both of these elements from any consideration in arriving at the value of plaintiff's property and would warrant their exclusion in any further hearing of the matter. The reasons given for this conclusion are, to my mind, inconclusive and furnish no ground for their elimination altogether as elements of value. It cannot be fair or just to reduce the valuation of the property because of the fact that the council may fix the rates annually, for that would make the rate govern value whereas value should govern the rate, i.e., the rate should always be governed by the principle that the public service corporation is entitled to be allowed to charge a rate which would yield a just and reasonable income based upon the full reasonable value of its property.

Nor should the fact that the franchise is not exclusive or defined by any special contract take from it all value. The view of the majority opinion, on the question of going concern, seems to be derived from the Consolidated Gas Company case, of New York City (212 U.S. 19], 29 Sup. Ct. 192, [53 L. Ed. 382]), where the court placed its opinion largely upon the assumption that the gas company was a monopoly and "that it is not a case for a valuation of `good will.'" That the gas company was a monopoly was assumed from the further assumed fact that the city would not be likely to ever allow its streets and alleys to be disturbed in competition with the established company which had occupied every available space in building and extending its plant. No such assumption can be here indulged. Much testimony was taken to show that another system of supplying the city of Oakland could be built and that the city had the right to build it. Is the city to be allowed to beat down the valuation of a going business by menacing it with threatened possible competition? In the very recent case, decided April 10, 1910, by the United States supreme court — City of Omaha v. Omaha Water Co., 218 U.S. 180, [30 Sup. Ct. 615, 54 L. Ed. 991], this question is considered. The city of Omaha resolved to exercise its option to purchase defendant's plant, under legislative authority. The court said: "The option to purchase excluded any value on account of unexpired franchise; but it did not limit the value to the bare bones of the plant, its physical properties, such as its lands, its machinery, its water-pipes or settling reservoirs, nor to what it would take to reproduce each of its physical features. The value, in equity and justice, must include whatever is contributed by the fact of the connection of the items making up a complete and operating plant. The difference between a dead plant and a live one is a real value, and is independent of any franchise to go on, or any mere good will as between such a plant and its customers. That the kind of good will, as suggested inWilcox v. Consolidated Gas Co., 212 U.S. 19, [29 Sup. Ct. 192, 53 L. Ed. 382], is of little or no commercial value when the business, as here, is a natural monopoly, with which the customer must deal, whether he will or no. That there is a difference between even the duplication, less depreciation, of the elements making up the water company plant, and the commercial value of the business as a going concern, is evident." Citing NationalWater Works Co. v. Kansas City, 62 Fed. 855, 27 L.R.A. 827, 10 C.C.A. 655, 27 U.S. App. 165. In the cited case, Mr. Justice Brewer said: "A completed system of waterworks, such as the company has, without a single connection between the pipes in the streets and the buildings of the city, would be a property of much less value than the system connected as it is, with so many buildings, and earning, in consequence thereof, the money which it does earn. The fact that it is a system in operation, not only with capacity to supply the city, but actually supplying many buildings in the city, — not only with a capacity to earn, but actually earning, — makes it true that `the fair and equitable value' is something in excess of the cost of reproduction. . . . It should pay, therefore, not merely the value of a system which might be made to earn, but that of a system which does earn." I venture to suggest that "good will" is to be distinguished from what is meant by the term "going business." "Good will," said Lord Eldon, "means nothing more than the probability that the old customers will resort to the old place." Words and Phrases, Title "Good Will." "Going business or concern" is a term applied to a corporation which is "still prosecuting its business with the prospect and expectation of continuing to do so, even though its assets are insufficient to pay its debts." (Corey v. Wadsworth, 99 Ala. 68, [42 Am. St. Rep. 29, 11 So. 350, 353; 23 L.R.A. 618].) When applied to a corporation it "means that it continues to transact its ordinary business." (White etc. Mfg. Co. v. Pettus Importing Co., 30 Fed. 864, 865.) Words and Phrases. Here is a duly organized corporation with an established business in full operation and likely to continue for an indefinite period. If its property was being condemned, the Omaha case is authority for holding that the "going business" is an asset of value to be considered. For the purposes of rate-making I am unable to see why it is not a proper and necessary factor. Any element that goes to enhance the legitimate value of plaintiff's plant is part of its property rights and must be taken into account in ascertaining the total value of its property.

After showing, from the point of view taken of the evidence by the majority opinion, that a valuation of three million five hundred thousand dollars might find support "over operating expenses and taxes; and after deducting for depreciation what is assumed as one per cent of the value of the perishable and non-perishable property, the opinion proceeds: `In that event, we would have over four and one half per cent (the excess would be very slight) net for the stockholders. This certainly would be a very substantial net return, considerably more than is derived from many investments eagerly sought by capital. We do not wish to be understood as intimating that even such a return would be considered by us as a full and fair return under all the circumstances, were we engaged in the exercise of the legislative power of fixing the rates. That, as said before, is not a function of the courts. We simply mean that we do not believe it to be so low, under the circumstances appearing here, as to warrant a court in holding it to be beyond the legislative power to fix.'"

The opinion holds that the evidence presented in the 5,500 printed pages "would have supported a value of not exceeding $3,500,000.00," from which must be deducted something for depreciation. The case seems to have been exhaustively tried on all questions of law and facts. Whether on a retrial plaintiff's case may be strengthened I know not. But as it stands, this court, by a majority, holds that unless strengthened no greater amount than three million five hundred thousand can be supported, and this amount must be diminished by depreciation. As already suggested, I think the court should not thus forestall and prejudge the findings to be made upon a retrial. And the reason given in the opinion for discussing the question does not seem to me satisfactory, — namely: "We have said this much for the purpose of showing that the judgment cannot stand if the finding of the trial court as to the value of plaintiff's property is not sufficiently sustained by the evidence." As heretofore remarked, there has been no fair opportunity given plaintiff to show that the evidence would justify a finding of something, and it may be but little less than seven million dollars, which, in my opinion, should first be passed upon by a trial court, either on the evidence presented by this record or such additional evidence as may then be submitted. The conclusion reached by the majority of the court, I am satisfied, leaves out of its consideration elements of value which the trial court properly included and which materially affected its conclusions.

There was much evidence directed to the question — What would have been a reasonable per cent, when the ordinance was passed, to allow as income based upon the valuation of the property, exclusive of operating expenses and taxes? It was shown in many different ways, which need not be enumerated, that seven per cent was a reasonable rate; that ordinary investments upon security absolutely safe, such as government bonds, mortgages and the like, yielded six per cent. The cases hold that stockholders in water companies are entitled to receive a rate of interest in excess of that which would be considered reasonable where the loan is free from risk. The cases are cited in the briefs and are conclusive upon the point.

In San Diego Water Co. v. San Diego, 118 Cal. 556, 570, [62 Am. St. Rep. 261, 38 L.R.A. 460, 32 P. 633], this court held that in the ascertainment of the rate of interest which should be allowed, comparison should be made between the company's business and other kinds of business involving a similar degree of risk. Chief Justice Beatty, in that case, stated what he regarded and what I think the company is entitled to, — namely, "rates ought to be adjusted to the value of the service rendered, and this means that the water company should be allowed to collect annually a gross income sufficient to pay current expenses, maintain the necessary plant in a state of efficiency, and declare a dividend to stockholders equal at least to the lowest current rates of interest, not on the par or market value of the stock, but on the actual value of the property necessarily used in providing and distributing the water to consumers." Even now when money is "easier" and rates of interest less than in former years — say ten years ago when this ordinance was passed — the current rate on undoubted security is six per cent. How, then, can it be justly said that 4 1/2 per cent to the stockholders "would be a very substantial net return, considerably more than is derived from many investments eagerly sought by capital?" This may be true of surplus capital held "on call" in safe hands, or of trust funds where absolute security is the prime consideration, but it is not true of investments similar to the one here, nor is it true of ordinary, current loans in business enterprises.

Neither am I willing to subscribe to the proposition that the rate-making authority may, with the sanction of this court, adopt 4 1/2 per cent as a reasonable rate of net income to the company, while at the same time informing that body that "we do not wish to be understood as intimating that even such a return would be considered by us as a full and fair return under all the circumstances, were we engaged in the exercise of the legislative power of fixing rates." This may be a salve to the consciences of the court but it is tantamount to saying to the rate-making body — The courts will not disturb your ordinances so long as you provide an income to plaintiff equal to 4 1/2 per cent upon the value of its property, although we think it unreasonable; and it is quite probable that a body acting for the consumers and deriving its life from them, would not be likely to allow any greater rate.

And this leads to the question — What is the function of the trial court in passing upon the reasonableness or unreasonableness of a rate-fixing ordinance? The opinion says it is not the function of the court to fix the rate, as that is purely a legislative function. In the sense that the court may not fix a rate and order the legislative body to adopt it, the proposition is correct. In its decree the trial court did not direct the council to provide for seven per cent income over and above plaintiff's operating expenses and taxes. In one of its findings it did, however, upon sufficient evidence, express the opinion that "a just and reasonable rate for the water to be so supplied is seven per cent of said sum of $7,000,000.00, over and above the expenses and taxes hereinafter mentioned; and plaintiff is entitled to receive for the water which will be supplied by it . . . at least seven per cent upon said $7,000,000.00 over and above and in addition to its operating and other expenses," etc. It is well settled that the lower court had the authority to determine whether or not the rates fixed by the council were reasonable. Incidentally to this inquiry it was within the power of the court to say what is a proper charge. The council is entitled to know what the court would regard as unreasonably low and, in determining what rate would be unreasonable, the court must have some standard by which to govern its action, some rate which may be brought into comparison with the rate allowed by the ordinance, without which I can conceive of no criterion to control its decision. In the case here the evidence fully sustained the conclusion of the trial court. But even so, the decree directed the council to so fix the rates as to "afford to plaintiff a just and reasonable compensation for the service rendered and the water supplied, and as will yield a sufficient income to pay its expenses and taxes, and a reasonable rate of interest upon the value of plaintiff's property," etc.; and further, to fix the rates "in accordance with the principles established in this decree." I do not understand that the council was directed to do more than fix a reasonable and just rate, guided, it may be, though not compelled to adopt what the court named as a reasonable rate.

Some writers have spoken of a "twilight zone of injustice" in which the legislative body may roam at will in fixing rates and, while acting in this unilluminated region, the courts are powerless to control its judgment. That is, as intimated in the majority opinion, that the council may adopt a rate which the court would not, if sitting as a legislative body, regard as reasonable, and yet, sitting as a court, it cannot say is unreasonable. If there is warrant in reason for such a doctrine, the court should at least place some sort of limit to this field in which the rate-making body may exercise an uncontrolled discretion. It is within the proper and rightful exercise of its functions for the court to say to the legislative body that any rate which fails to measure up to what the court may declare to be reasonable compensation would be void as unreasonable, and, in my judgment, it is competent for the court, in view of all the circumstances, to say what this minimum should be, having reference to the nature and character of the service to be rendered. How can this court consistently say that 4 1/2 per cent is not "a full and fair return under all the circumstances" and yet, in view of the evidence, say that 4 1/2 per cent would be "a very substantial return, considerably more than is derived from many investments eagerly sought by capital?" Apparently, this "twilight zone" has a range of 2 1/2 per cent below what the evidence showed would be a reasonable rate. This is altogether too wide a range of discretion.

Expert witnesses, in placing a value upon the San Leandro Lake, based their valuation upon "the miner's inches of water under a four-inch pressure practically constant and certain yielding capacity," at twenty-five hundred dollars per inch. Whether this was too high a value it is not within our province to determine. As a fair and legitimate method of ascertaining the value of this reservoir, however, I have no doubt. In many parts of the state the value of water is thus ascertained. The majority opinion seems to discredit it.

Finally, in the opinion prepared on rehearing, the court says: "If the rates fixed yield less than the lowest per centage of profit which is ordinarily obtained in the locality upon equally safe and permanent investments in enterprises of a kindred character, the regulation is as clearly confiscatory as if no return at all is provided upon a portion of the property actually employed." Applying this rule to the evidence before us, I am clearly of the opinion that the rates fixed by the council are confiscatory. Nor can I reconcile the above rule with subsequent portions of the majority opinion which holds that 4 1/2 per cent is not confiscatory, for the evidence would warrant our holding that six per cent "is the lowest percentage of profit which is ordinarily obtained in the locality upon equally safe and permanent investments in enterprises of a kindred character."

Justices Henshaw and Melvin being disqualified and unable to act in this cause, Hon. N.P. Chipman, presiding justice of the district court of appeal for the third appellate district, and Hon. M.T. Allen, presiding justice of the district court of appeal for the second appellate district, were selected by the remaining justices of this court to act pro tempore, in the consideration and decision of this cause and until the decision therein becomes final.