MR. CHIEF JUSTICE HUGHES delivered the opinion of the Court.
The Los Angeles Gas & Electric Corporation assails as confiscatory the gas rates fixed by an order of the California Railroad Commission in November, 1930, effective January 1, 1931. 35 C.R.C. 442. The District Court,
The Company, organized in 1909, supplies both gas and electric current. Its rates for the latter are not in controversy. The two departments, both with respect to investment and operation, are distinct and have been separately treated for rate-making purposes for many years. 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 1927 the Company's gas rates have been fixed by the California Railroad Commission. Rate orders were made in 1917, 1919, 1921, 1923, 1926 and 1928. During this period the Company's business greatly increased. The rate base for its gas department, as fixed by the Commission, grew from approximately $12,500,000 in 1916 to about $59,000,000 in 1929. The growth was financed by the sale of the Company's bonds and preferred stock. These, according to the findings of the Commission, had been marketed at a gradually lessening cost so that, at the time of the hearing which resulted in the order under review, it was found that the "annual cost of its bond and preferred stock money" was 6.17 per cent. Approximately 60 per cent. of the amounts thus realized is chargeable to the gas department.
1. The Commission's valuations. In determining the rate base, the Commission made two sorts of valuations of the gas properties for the year 1930, — one of $60,704,000 on the basis of "historical cost," and the other of $65,500,000 on the basis of "fair value." The Commission estimated that the return to the Company on the former basis would be 7.7 per cent. and, on the latter, 7 per cent. 35 C.R.C., p. 464.
Historical cost. The finding as to historical cost had relation to the method previously adopted by the Commission in the regulation of the Company's rates. The original rate base was established by the Commission in 1917 upon a valuation made by the Commission's engineers as of October, 1915. 13 C.R.C. 724. In the later rate proceedings, including the one now under review, the
In that estimate, as thus made, nothing was deducted for depreciation and nothing was added for going concern value.
Fair value. The Company claimed before the Commission a rate base of approximately $95,000,000 on the basis of reproduction cost new as of January 1, 1930, less accrued depreciation. 35 C.R.C., p. 456. On comparing the Company's estimate as of that date with the estimate of the Commission's engineer of reproduction cost new (of December 31, 1929), in each case without deduction for depreciation, it appears that the difference, exclusive of overheads and the items mentioned below, was only about
The estimate of the Commission's engineer for reproduction cost one of the same physical property including the gas manufacturing plant, as of December 31, 1929, without depreciation, taking unit prices of that day and overheads at 21.65 per cent., was $72,471,207. As of the same date, but using four-year average unit prices for the years 1926 to 1929, his estimate was $73,210,136, with overheads taken at 22.32 per cent.
In arriving at its total estimate of reproduction cost new, the Company added to its valuation of its physical property the items of "Cost of financing, $5,921,470," "Promoters' remuneration, $2,500,000," and "Going concern value, $9,228,667." These items the Commission did not allow. The items of "cost of financing" and "promoters' profits" were rejected as "too hypothetical and far removed from actuality to properly find lodgment in a rate base." The Company's claim for "going concern" value was based upon expert testimony which the Commission regarded as involving unacceptable theories and assumptions. 35 C.R.C., pp. 459, 460.
Depreciation. The Company estimated $3,470,326 for accrued depreciation. The Commission found that this was too little and that the accrued depreciation was not less than $7,650,000. The Commission stated that this amount was reached after a careful and detailed study involving a physical inspection of the property and analysis of the Company's records. Id., p. 461.
Commission's conclusion as to fair value. The Commission's final conclusion was as follows: "Subject to deduction for accrued and realized depreciation in a sum of approximately $7,650,000, the fair value of the property
Although the accrued depreciation was thus treated by the Commission as deductible, in order to arrive at fair value, the Commission thought that operating results under the fair value theory could best be shown by using an undepreciated rate base. 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 Commission stated that the year 1930 was "in many respects an abnormal year"; that the temperatures had been higher than normal, and that the business depression had had an adverse effect upon the Company's growth and revenue. Still it was found that the Company's business was growing and that with growth there was a tendency for the rate of return to increase. The Commission rested
3. Decision of the District Court. The Company brought this suit in December, 1930, attacking the findings of the Commission as to both rate base and return. The Company alleged that the fair value of its gas properties exceeded $95,000,000, that its gross and net revenues were overestimated by the Commission, that under the rates prescribed the Company would have earned, for the twelve months ending October 31, 1930, but 4.25 per cent. upon the fair value which it claimed, and that the temporary optional rates, for which the Commission's order provided, would also yield less than a fair return and were equally invalid. Upon the motion for interlocutory injunction, the entire record before the Commission was received in evidence together with additional affidavits, and upon the same evidence the parties submitted the cause for final determination.
While the District Court did not make specific findings of values, revenue, expense and rate of return, the Court reviewed the findings of the Commission and the evidence and held that the Commission's valuations were reasonable and that the prescribed rates permitted a reasonable return. Two opinions were delivered, one for the majority of the Court and a concurring opinion by the Circuit Judge, in which the contentions of the Company were examined.
Consideration 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 assumed. Electricity has not to any great extent supplanted gas as a fuel. All of the conditions noted, as affecting the business of the
In the evidence produced on the application for interlocutory injunction was an affidavit of the Commission's engineer who brought the valuation of the Company's properties down to December 15, 1930, by applying the unit prices prevailing on that date. This witness, Mr. Dufour, who had been employed from 1915 to 1921 by the Interstate Commerce Commission, and from that time had served with the California Commission, stated that "he kept in close touch with the prevailing labor and material costs," maintaining as part of the valuation division of the Commission a cost bureau for that purpose; that "the present [December, 1930] trend of material and labor cost is downward; due to the present acute unemployment situation the wages paid the class of labor required for this type of construction is now lower and due to the large number of applicants for employment from which capable men may be selected the efficiency of labor is higher, tending to materially decrease the labor costs";
Summing up its conclusions as to the action of the Commission, the Court said: "What the Commission did then in reaching its base rate figure of fair value was to include all items of property used and useful in the operative plant of the plaintiff, and appraise the value thereof at current market prices. It included original organization costs and franchise values as well. It assumed a live active plant, and affirmed that the ultimate total included all costs of attaching business as the same had accrued and been accounted for. Its fair value figure, assuming the correct estimate and allocation of
The Court observed that the matter of accrued depreciation, which had not been deducted from the fair value base as used by the Commission, was important as affecting the annuity allowance to be considered in arriving at prospective income. The amount allowed by the Commission as depreciation annuity was $1,072,000, while the Company claimed that it should be not less than $2,344,744. The Court noted the inconsistency of this claim, when the Company asserted that the total accrued depreciation affecting its property was only $3,470,326. The Court concluded that the allowances for depreciation annuities which had been made prior to the rate hearing under review were excessive and were not controlling; that depreciation was a matter not capable of definite ascertainment and that it had not been shown that the Commission had not exercised a reasonable judgment. Id., p. 261.
With respect to estimated income for the future, the Court referred to the Company's complaint that the two preceding years had been marked by unusually high temperatures and consequent diminished demand for gas, and that "it was improper to assume average temperatures." But the Court, familiar with conditions in Los
The action of the Commission was also approved with respect to the allowances for materials and supplies and for working capital.
In the final decree the Court set forth its finding "that the values for plaintiff's property as fixed and determined by the defendant Railroad Commission are the reasonable values thereof; that the rates fixed are such as to render a reasonable return on such values and that said rates are therefore not confiscatory," and the Court adopted, "as representing its further findings," the opinion filed by the two District Judges. The Circuit Judge concurred in the decree, referring to his concurring opinion for the findings of fact upon which his action was based.
4. We approach the decision of the particular questions thus presented in the light of the general principles this Court has frequently declared. We have emphasized the distinctive function of the Court. We do not sit as a board of revision, but to enforce constitutional rights. San Diego Land & Town Co. v. Jasper, 189 U.S. 439, 446. The legislative discretion implied in the rate making power necessarily extends to the entire legislative process, embracing the method used in reaching the legislative determination as well as that determination itself. We are not concerned with either, so long as constitutional limitations are not transgressed. When the legislative method is disclosed, it may have a definite bearing upon the validity
As the property remains in the ownership of the complainant, the question is whether the complainant has been deprived of a fair return for the service rendered to the public in the use of the property. This Court has repeatedly held that the basis of calculation is the fair value of the property, that is, that what the complainant 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 actual cost of the property — the investment the owners have made — is a relevant fact. Smyth v. Ames, 169 U.S. 466, 547. But while cost must be considered, the Court has held that it is not an exclusive or final test. The public have not underwritten the investment. The property, on any admissible standard of present value, may be worth more or less than it actually cost. The time and circumstances of the outlay, and the effect of altered conditions demand consideration. 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. 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. Indianapolis Water Co., 272 U.S. 400, 411. And when such a change in the price level has occurred, actual experience in the construction and development of the property, especially experience in a recent period, may be an important check upon extravagant estimates.
5. In determining the weight to be ascribed in the instant case to historical cost as shown by the evidence, the outstanding fact is that the development of the property had, for the most part, taken place in a recent period. We agree with the Court below that no ground is shown for assailing the valuation placed upon the Company's property by the Commission in 1917, in its first decision (13 C.R.C., p. 724) and which appears to have been accepted by the Company as a starting point in later rate investigations. See 16 C.R.C., p. 481 (1919); 20 C.R.C., p. 96 (1921). The rate base fixed in 1917 was approximately $13,000,000. From that time the cost of additions and betterments was under constant supervision and was established by the Company's records under the accounting regulations of the Commission. From 1917 to 1919 there was but little change, the Company's estimate of capital, and the rate base as fixed by the Commission, for 1919, being under $14,000,000. 16 C.R.C., pp. 481, 482. Thus the additions and betterments which brought the historical cost of the fixed property (with land at current values) up to $58,842,187, as found by the Commission at the end of 1929, took place in the ten preceding years and approximately two-thirds of the latter amount appears to have been the cost of additions and betterments after January 1, 1922, as the rate base taken at that time was approximately $20,000,000. 20 C.R.C., pp. 97, 98. We have had occasion to take judicial notice of the high level of prices of labor and materials prevailing not only from 1917, as incident to the war, but also in 1922 and 1923 and that there was no "substantial general decline"
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. The difference is over $2,000,000. With an allowance of 11.25 per cent. for overheads, the Commission's engineers estimated the historical cost of fixed
6. Coming to cost of reproduction, we agree with the Court below that the items included in the Company's estimate for "cost of financing, $5,921,470," and "promoters" remuneration, $2,500,000," were too conjectural to be allowed. Wabash Valley Electric Co. v. Young, 287 U.S. 488, 500. Aside from these items, and that of going value to which we shall presently refer, the Company's estimate of cost of reproduction new of the fixed property, without deduction for depreciation, was $77,586,700, which included $831,781 for organization and franchises, leaving for the physical property $76,754,919. While this estimate was described as of January 1, 1930, it was stated to be based, not on spot prices of that date, but upon prices which were "close to the average" of the prevailing prices for the preceding three years. That is, the estimate rests on prices prevailing from 1927 to 1929, inclusive. In making this calculation, overheads were taken at 24.27 per cent. The estimate made by the Commission's engineer of reproduction cost new, without depreciation, which most closely corresponds to the above estimate of the Company, was $73,637,542, including $427,406 for organization and franchises, leaving $73,210,136 for the physical property. This estimate was of December 31, 1929, but was based on four-year average unit prices for the years 1926 to 1929, and overheads were figured at 22.32 per cent.
In both of these estimates the gas manufacturing plant was included without any deduction for disuse. The sum
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. "Estimates for tomorrow," the future may be determined. "Estimates for tomorrow," the Court has said, "cannot ignore prices of to-day." Southwestern Bell Telephone Co. v. Public Service Commission, supra; Bluefield Water Works v. Public Service Commission, supra, p. 691; St. Louis & O'Fallon Ry. Co. v. United States, supra. But we know that the estimates of present value, taken as the cost of reproduction as of December 31, 1929, based upon average prices from 1926 or 1927 to 1929, furnished no dependable criterion of values in the succeeding years. The country was facing a most serious decline in prices. It was entering upon a period of such depression as to constitute "a new experience to the present generation."
7. No ground appears for challenging the finding of the Commission, made upon inspection and appraisal, that the accrued depreciation of the property amounted to $7,650,000. While not admitting the accuracy of the finding, the Company does not undertake to contest it here, but takes the amount as the maximum which can be allowed upon the evidence. In determining present value, deduction must be made for accrued depreciation. Knoxville v. Knoxville Water Co., 212 U.S. 1, 10; Minnesota Rate Cases, supra, pp. 457, 458. But the Commission
8. As an item additional to the estimates of value thus far considered, the Company claims to be entitled to an allowance of $9,228,667 for "going value." This Court has declared it to be self-evident "that there is an element of value in an assembled and established plant, doing business and earning money, over one not thus advanced," and that this element of value is "a property right" which should be considered "in determining the value of the property upon which the owner has a right to make a fair return." Des Moines Gas Co. v. Des Moines, 238 U.S. 153, 165; Denver v. Denver Union Water Co., 246 U.S. 178, 191, 192; McCardle v. Indianapolis Water Co., supra, p. 414. The going value thus recognized is not to be confused with good will, in the sense of that "element of value which inheres in the fixed and favorable consideration of customers, arising from an established and well-known and well-conducted business," which, as the Court has repeatedly said, is not to be considered in determining whether rates fixed for public service corporations are confiscatory. Des Moines Gas Co. v. Des Moines, supra. See Willcox v. Consolidated Gas Co., 212 U.S. 19, 52; Cedar Rapids Gas Co. v. Cedar Rapids, 223 U.S. 655, 669; Galveston Electric Co. v. Galveston, supra, p. 396. Nor does this recognition of going value countenance a mere attempt to recoup past losses. Galveston Electric Co. v. Galveston, supra, pp. 394, 395. Deficits in the past do not afford a legal basis for invalidating rates, otherwise compensatory, any more than past profits can be used to sustain confiscatory rates for the future. Board of Commissioners v. New York Telephone Co., 271 U.S. 23, 31, 32. The concept of going value is not to be used to escape the
The principle as thus recognized and limited is obviously difficult of application. Cedar Rapids Gas Co. v. Cedar Rapids, supra. It does not give license to mere speculation; it calls for consideration of the history and circumstances of the particular enterprise, and attempts at precise definition have been avoided. It is necessary again, in this relation, to distinguish between the legislative and judicial functions. It is the appropriate task of the Commission to determine the value of the property affected by the rates it fixes, as that of an integrated, operating enterprise, and it is the function of the Court in deciding whether rates are confiscatory not to lay down a formula, much less to prescribe an arbitrary allowance, but to examine the result of the legislative action in order to determine whether its total effect is to deny to the owner of the property a fair return for its use.
Thus, in Cedar Rapids Gas Co. v. Cedar Rapids, supra, this Court noted that, in the decision under review, the fact "that the plant was in successful operation" had expressly been taken into account and that a value and been fixed which "considerably exceeded its cost," and hence the court found no warrant for changing the result. In Des Moines Gas Co. v. Des Moines, supra, the Court, dealing with the Master's report and the exclusion of a special item for going value, observed that the Master, "applying the rule of the Cedar Rapids case," had "already valued the property in the estimate of what he called its physical value, upon the basis of a plant in actual and successful operation." As the Master had included overheads at 15 per cent, in that valuation, in addition to organization expenses, the Court was unable to hold that "the element of going value" had not been given the consideration it deserved. In Denver v. Denver
In the light of these decisions, our inquiry must be, first, as to the actual scope and effect of the legislative determination in relation to the value of the property as that of an integrated and established enterprise, and, second, whether the evidence requires the conclusion that
The remaining question, then, is whether the Company has proved, with requisite persuasiveness, a greater amount for going value than that which may be treated as substantially allowed. An examination of the evidence offered by the Company upon this subject shows it to be of a highly speculative and uncertain character. There were two witnesses and the grounds of their estimates put their results in a strong light. The Company's valuation expert, Mr. Luick, gave three methods which he had used as guides in the forming of his judgment as to going
The other witness, Mr. Miller, took Mr. Luick's construction program, in which the latter had figured the cost of reproduction, and had assumed that there would be turned over to the operating department "one-twentieth of the service mains during each quarter of the second to sixth years inclusive." Estimating year by year the cost of securing the business during the construction period, the witness took the difference between 8 per cent. interest on the property used and useful during the year and the net earnings estimated to have been received, and the total of these differences with interest, during the period assumed to be required, was taken to represent the cost of
Our conclusion is that the Company has failed to sustain its attack upon the rate base of $65,500,000.
9. The Commission calculated that the Company would have a return of 7 per cent. on this rate base. We said in Bluefield Water Works Co. v. Public Service Commission, supra, pp. 692, 693, that a "public utility is entitled to such rates as will permit it to earn a return on the value of the property which it employs for the convenience of the public equal to that generally being made at the same time and in the same general part of the country on investments in other business undertakings which are attended by corresponding risks and uncertainties; but it has no constitutional right to profits such as are realized or anticipated in highly profitable enterprises or speculative ventures." We added that the return "should be reasonably sufficient to assure confidence in the financial soundness of the utility and should be adequate, under efficient and economical management, to maintain and support its credit and enable it to raise the money necessary for the proper discharge of its public duties." And we recognized that "a rate of return may be reasonable at one time and become too high or too low by changes affecting opportunities for investment, the money market and business conditions generally." See Smith v. Illinois Bell Telephone Co., 282 U.S. 133, 160. 161. Applying these principles, and considering the financial history of
The question, then, is as to the estimates of revenue and expenses. The Company complains that the Commission's estimate of revenue was too high. The problem largely concerns temperatures, and it is plain that the Commission was justified, in fixing rates which were to apply for a considerable period, in taking average temperatures. The District Court, with its special knowledge of local conditions, and speaking in April, 1932, held that the action of the Commission was fair. The Circuit Judge supplemented this finding of the majority by his holding that there was "nothing unreasonable in the estimate of returns by the Commission so far as temperature is concerned" and that there was "nothing to indicate that due consideration was not given to the possible effect of the depression upon the consumption of gas." 58 F.2d 262, 286.
The controversy as to estimate of expenses turns on the sufficiency of the depreciation annuity allowed by the Commission. The company claimed $2,344,000 (or $2,306,606) as against the Commission's allowance of $1,072,000. But it is not clearly shown that what the Commission allowed will not be adequate protection for the purpose in view, and there is no basis for concluding that the Commission's practice under which the Company has accumulated a large depreciation reserve has resulted in injustice to the Company.
The few minor questions which remain do not require specific mention.
MR. JUSTICE VAN DEVANTER did not hear the argument and took no part in the consideration and decision of this case.
MR. JUSTICE BUTLER, dissenting.
This is an important case. The amount at stake is great, and the principles involved are more important. The reduction made by the commission when prescribing what it found to be reasonable rates, October, 1928, is not definitely shown. But the amount by which the rate of return was reduced indicates a probable reduction by more than a million per year. The net reduction made in November, 1930, by the order under consideration is more than one million per year. That is enough to yield a return of seven per cent. on over $14,000,000. There is also involved more than $2,500,000 now held by the company subject to claims of customers that it be refunded to them if the order shall be sustained.
The commission, following theories that admittedly are contrary to our decisions in confiscation cases, refused to ascertain or to consider the value of the property.
The commission excluded from overhead expenditures actually made by the company the difference between six per cent. and 11.25 per cent. upon the ground that the company charged such difference to operating expenses and not to capital. It refused to give any consideration to the findings of its own engineer that in a proper estimate of the cost of reproduction as of the date of the inquiry such overheads would exceed 22 per cent. The company's estimate was about 24 per cent. Each of these rulings is directly contrary to our decisions. Board of Comm'rs v. N.Y. Tel. Co., 271 U.S. 23, 31; S.W. Tel. Co. v. Pub. Serv. Comm'n, 262 U.S. 276, 287; Ohio Utilities Co. v. Commission, 267 U.S. 359, 362; McCardle v. Indianapolis Water Co., 272 U.S. 400, 408-410; St. L. & O'Fallon Ry. Co. v. United States, 279 U.S. 461, 484-485. The district court followed the commission. This court in accordance with law settled by its own decisions, repudiates that method of treating overheads and adopts 11.25 per cent. It refuses, as did the commission and the lower court, to give any weight to admitted reproduction cost in respect of overhead expenditures.
The valuation by the commission was based upon an inventory agreed to be correct by the plaintiff and commission. It included two standby plants to which the commission attributed $3,000,000. The district court adopted that figure. It declared, 58 F.2d 259, that
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. If permitted to charge reasonable rates, or those merely high enough to be non-confiscatory, plaintiff will continue to be able to earn an ample rate of return upon the value of the property. Its charges for gas are low in comparison with those generally collected for like service. The record shows that, having regard to the effective thermal units in the natural gas that plaintiff has been furnishing in recent years, its rates are less than one-half those formerly collected by it. 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.
This Court's conclusion — depending upon mere coincidences — that value is the same as the "fair value" cost figures found by the commission is without support. The figure used to cover going value was arrived at upon considerations that have no relation to the amount that in any view reasonably may be assigned to that element. It comes about thus: Add $3,000,000 (made available by excluding the standby plants found necessary by the commission and included by the district court) to $4,796,000 (obtained by reversing the findings of commission and accepted by the lower court in respect of unit prices). A part of that total is used to neutralize the errors in law committed by the commission and the lower court in respect of overheads. Enough is taken to increase that item from 6 per cent. to 11.25 per cent. And the calculated balance, $5,618,235, is assigned to going value. That figure certainly is not the result of an appraisal or valuation of plaintiff's going value. Neither the amount attributed to the standby plants eliminated by this court nor the
The rates should be set aside because arrived at by arbitrary methods condemned by our decisions.
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 its 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. Banton v. Belt Line Ry., 268 U.S. 413, 422-423. 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. There is no warrant for inquiry by this court to ascertain whether under the evidence the valuation of the property might otherwise have been pared down to the figure used by the commission and adopted by the district court. It is definitely settled by our decisions that where public utility rates, prescribed by a state commission as reasonable, are
The lower court's decree and opinion taken together may not reasonably be construed to comply with Equity Rule 70 1/2. In confiscation cases, the rule should be strictly enforced. The trial court should make a definite and complete statement of the facts on which it rests its judgment. Cf. Aetna Insurance Co. v. Hyde, 275 U.S. 440, 447. In a number of cases decided in recent years specially constituted district courts failed to make definite findings or to give reasons upon which they grounded their decrees. This court repeatedly and emphatically reminded them of the proper practice and required that it be followed. Virginian Ry. Co. v. United States, 272 U.S. 658, 675; Lawrence v. St. L.-S.F. Ry., 274 U.S. 588, 596; Arkansas R.R. Comm'n v. Chicago, R.I. & P. Ry. Co., 274 U.S. 597, 603; Hammond v. Schappi Bus Line, 275 U.S. 164, 171; Cleveland, C., C. & St. L. Ry. Co. v. United States, 275 U.S. 404, 414; B. & O.R. Co. v. United States, 279 U.S. 781, 787; Railroad Commission v. Maxcy, 281 U.S. 82; Smith v. Illinois Bell Tel. Co., 282 U.S. 133, 162; Tax Commissioners v. Jackson, 283 U.S. 527, 533; Public Service Comm'n v. Northern Indiana Co., post, p. 703; Public Service Comm'n v. Wisconsin Tel. Co., ante, p. 67. Finally, June 2, 1930, we promulgated the rule. 281 U.S. 773: "In deciding suits in equity, including those required
The command that the trial court "shall find the facts specially" means at least that the statement shall be definite, concise and complete as distinguished from discursive, argumentative, obscure or fragmentary. Tax Commissioners v. Jackson, supra, 533. The direction "and state separately its conclusions of law thereon" shows that discussion of facts and law in the course of explanation, reasoning or opinion to clarify or support the conclusion or judgment reached, is not sufficient. The opinion filed in this case as a concurring one appears on its face to have been prepared for adoption by and as the opinion of the court. It was not accepted by either of the other judges; in any event that opinion could not be considered a compliance with the rule. 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; that the rates fixed are such as to render a reasonable return on such values and that said rates are therefore not confiscatory. And the court adopts, as representing its further findings, the opinion filed herein on April 8, 1932, as concurred in by the two district judges who participated in the hearing
Public Service Comm'n v. Wisconsin Tel. Co., supra, decided after the argument of this case, is of special interest. The commission appealed from an interlocutory decree declaring that enforcement of telephone rates prescribed by the commission would result in confiscation of the company's property. The district court filed no opinion and made no special findings of fact. The company moved to affirm. The commission's contention was that the decree should be reversed for lack of specification of the facts on which it rested. The company maintained that the decree was abundantly sustained by the facts shown in the record. We held that Rule 70 1/2 does not apply to decisions on applications for temporary injunctions and made it clear that the duty of the court in passing on such applications was not altered by the adoption of the rule. We said (ante, p. 70): "While an application for an interlocutory injunction does not involve a final determination of the merits, it does involve the exercise of a sound judicial discretion. That discretion can be exercised only upon a determination, in the light of the issues and of the facts presented, whether the complainant has made, or has failed to make, such a showing of the gravity of his complaint as to warrant interlocutory relief. Thus, if the issue is confiscation, the complainant must make a factual showing of the probable confiscatory effect of the statute or order with such clarity and persuasiveness as to demonstrate the property in the interest of justice, and in order to prevent irreparable injury, of restraining the State's action until hearing upon the merits can be had. . . . the court should make the findings of fact and conclusions of law that are appropriate to the interlocutory proceeding." And we refused, even when
The reasons for the enforcement of such a rule are stronger where final judgment is entered. The work done for the court by the writer of the opinion should not be undertaken here. Our rules do not permit adequate opportunity for presentation of such cases as upon trial de novo. Nor is the time that the Justices can give to preparation for and in our conferences sufficient to enable them to reach reasonable conclusions in respect of the bases or details of calculations, revisions and determinations reflected by the elaborate opinion in this case.
We should follow Public Service Comm'n v. Wisconsin Tel. 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. Dubourg de St. Colombe's Heirs v. United States, 7 Pet. 625. The report of the commission in this case occupies 54 pages of the record and the opinions of the participating judges extend through more than 71 pages. That the burden of mere analysis, comparison or concordance is very great
Chicago, M. & St. P. Ry. Co. v. Tompkins, 176 U.S. 167, was a confiscation case involving the validity of statemade railroad rates. The trial judge, without the aid of a master, examined the pleadings and proof, made findings of fact, stated his conclusions of law, delivered an opinion and rendered a decree dismissing the bill. But he failed to find an essential fact, the cost of doing local business. This court remanded the case with instructions to refer it to a competent master. Speaking through Mr. Justice Brewer, it said (p. 179): "The question then arises what disposition of the case shall this court make. Ought we to examine the testimony, find the facts, and from those facts, deduce the proper conclusion? It would doubtless be within the competency of this court on an appeal in equity to do this, but we are constrained to think that it would not (particularly in a case like the present) be the proper course to pursue. This is an appellate court, and parties have a right to a determination of the facts in the first instance by the trial court. Doubtless if such determination is challenged on appeal it becomes our duty to examine the testimony and see if it sustains the findings, but if the facts found are not challenged by either party
Lincoln Gas Co. v. Lincoln, 223 U.S. 349, involved the validity of a city ordinance regulating charges for gas. The court below failed to make findings of fact in respect of the sums annually required for depreciation and replacements. This court, speaking through Mr. Justice Lurton, said (p. 361): "The cause should have gone at the beginning to a skilled master, upon whose report specific errors could have been assigned and a ruling from the court obtained." The case was remanded to the district court with instructions to refer it to a competent master with directions to report fully his findings upon all questions raised by either party, and with leave to both parties to take additional evidence.
1. There is no warrant for reversal here of the commission and district court in respect of unit prices upon which they built up their "fair value" figure. If business conditions since the commission made its order are deemed to affect that figure, we should remand with directions to the district court to find the facts. Atchison, T. & S.F. Ry. Co. v. United States, 284 U.S. 248, 260, 262.
2. This court should not undertake to ascertain the amount of overheads properly to be included. But, if that matter is to be considered here, the 22 per cent. included in the commission's reproduction estimate and the company's 24 per cent. should not be ignored but should be considered in connection with the 11.25 per cent. included
3. There is no warrant for this court's elimination from the agreed inventory of standby plants which were included by the commission and district court.
4. There has been no appraisal of going value. That element was arbitrarily excluded below. There is no rational foundation for the amount attributed to it here.
5. As the commission's refusal to apply principles of valuation established by our decisions resulted in arbitrary undervaluations, the prescribed rates should on that ground be set aside.
6. The decree appealed from should be vacated and the case remanded for compliance with Rule 70 1/2.
7. The district court should refer the case to a special master to report in accordance with the practice followed in cases such as this.
MR. JUSTICE SUTHERLAND joins in this opinion.
The president of the commission, October 21, 1931, in an address before the National Association of Railroad and Public Utilities Commissioners apparently in opposition to constitutional law as established by numerous decisions here, said: "It is safe to say that in practically none, if any of the cases in which there have been permanent injunctive orders issued by the federal courts, would actual confiscation have followed the Commission findings. This is stated not only from general knowledge of the facts but from specific knowledge of the experience in California. A study of the court opinions indicates beyond reasonable doubt that in practically every major rate case in the last seventeen years in that state the findings of the Commission could not have withstood the test imposed by the federal tribunals." Report, Forty-third Annual Convention, 1931, pp. 180, 190.
None was appointed in: San Diego Land & Town Co. v. Jasper, 189 U.S. 439; Louisiana R.R. Comm'n v. Cumberland Tel. Co., 212 U.S. 414; Allen v. St. Louis, Iron Mt. & S. Ry., 230 U.S. 553. (At the urgent request of the parties, the court consented to try the case without the aid of a master. 187 Fed. 290, 294.) Darnell v. Edwards, 244 U.S. 564; McCardle v. Indianapolis Water Co., 272 U.S. 400; United Fuel Gas Co. v. R.R. Comm'n, 278 U.S. 300; Railroad Comm'n v. Los Angeles Ry. Corp., 280 U.S. 145; Smith v. Illinois Bell Tel. Co., 282 U.S. 133. (Assigned for the taking of testimony to one of the three judges. 38 F.2d 77, 79.)