The plaintiff brought this suit claiming the right to have an injunction against the defendant railroad commission of the State of California, and its members, to prevent- the enforcement of an order of that commission fixing á schedule of rates to be charged for gas service furnished by the plaintiff. There was a motion for a temporary injunction, and; after preliminary oral argument, briefs were provided to be filed. Affidavits were received in evidence on the motion, and the commission submitted also a transcript of all of the testimony presented before it on the rate hearing, which was received without objection. A restraining order issued under adequate bond pending decision. It was understood that the issues might be further argued orally before the court after the filing of briefs, but the parties later agreed that oral argument should be waived, and that the entire ease be finally submitted on the record. The court now approves that stipulation.
The California railroad commission has general jurisdiction over public utilities in California. It fixes rates for the service given the public, and its authority to act as a regulatory body within the state is exclusive. In the latter; part of the year 192-9 it determined that -a hearing should be held with the purpose of putting into effect a decreased schedule of rates to govern the gas service of the plaintiff. The questions are the usual ones occurring in such cases, the company complaining of the use of a rate base below the fair value of its property and the commission insisting that it has given full and fair consideration to every element of worth entitled to be included in the total. The company makes the further claim that, assuming the correctness of the base figure, the return allowed is grossly inadequate.
While the plaintiff company is engaged in furnishing both electricity for light and power, and gas for domestic and industrial uses, its departments, both as to investment and operative instrumentalities, are separate and separable. They have been so divided by the commission for rate-making purposes since a date more than twelve years past. Involved in the proceeding before the commission was the matter of proper charges to be made by the company for' electricity, but the rates existing were not changed. They had last previously been reduced at the request of the company in order to meet competitive rates established for service furnished by the city of Los Angeles. Therefore, there is nothing here presented which in any way involves the adequacy of charges for electricity.
The commission established two valuation totals as for the gas department of plaintiff, one which is characterized the “historical cost,” and, the second, “present fair value.” These totals were: Historical cost, $60,704,-000; fair- value, $65,500,000. On these valuations, the company would earn a net annual return of 7.7 per cent, on the - first amount, -and 7 per cent, on the second amount. The company claimed a fair value total of $95,767,351.
At a prior hearing had in the year 1928, the commission had fixed a schedule of rates, which estimated upon the base then used, would produce a return of 7.5 per cent. The commission determined -at the hearing at which the rates now complained of were fixed that the company was actually earning under the then existing rates an excess over *258the estimate, to wit, that it was earning 9.6 per cent, on historical cost base, and 8.8 per cent, on fair value base. The commission stated in its opinion that experience had shown that the actual earnings under preceding schedules fixed by it exceeded its estimates. At the hearing before the commission, it was shown that there was a difference of only $300,000 between the historical cost valuation of the commission, and that of the company. This excluded overheads. The commission in its opinion declares, and the fact appears not to be disputed, that the historical cost valuation adopted by the commission in 1917 (referred to as appraisal of 1915) was accepted as correct by both the company and the commission in the series of rate hearings held during the subsequent years. In the proceeding eventuating in the order here complained of, the commission took the 1917 rate base and built up on that to accumulate its final figures of historical cost. How the final figures were arrived at will be more particularly stated hereinafter. The change in the schedule of rates was designed to work a reduction of 9 per cent, in the gross income of the company.
In considering the claim of the company for a rate base exceeding $95,000,000, against the commission’s fair value base of $65,-000,000, the point is suggested that, if the large total which the company claims represents reasonable fair value, then the old rates with which the company was satisfied to work would be patently confiscation. This reflection is of no force to influence the decision to be made, except as indicating that the company has not been over modest in proposing its totals.
Admittedly the task of rate-making is one to be essayed only by specialists, men whose research into the problems of business economy, with all of its variants of money cost, depreciation, and commercial outlook, has given them peculiar qualifications for the work. Bate cases, when they are brought into court, come impressed with the presumption -that the state agency to which has been committed the duty to regulate public utilities has dealt fairly with the business affected, and that in every matter wherein, under any view, a discretion can be said to have been fairly and reasonably exercised, the courts wifi not 'interfere with the orders made. A careful study of the record has been a task entailing considerable labor, but the conclusions resulting need not, in the statement of them, be of proportionate length. It has not been thought of helpful use to analyze in any detail the great mass of evidence, nor to particularly refer to the authorities cited in the elaborate argument presented.
It appears from the record that, in the proceeding which culminated in the rate order complained of, the California commission made a most thorough investigation. It devoted a total period of twenty-four days ■ to the taking of testimony, the hearing being completed in July, 1930. The rate order was signed November 24, 1930. Expert witnesses on both sides were heard, and the commission had recourse to its records of other rate proceedings affecting the plaintiff corporation. It availed itself also of the knowledge gained from experience in dealing over a period of many years with like utilities. In its gas service department, operated within the city of Los Angeles, the plaintiff is confronted with no real competition.
Beferiing to the growth and stable position of the company on its entire business (gas and electric), the commission, in its opinion, said (and the evidence supported the statement): “The rate base for the gas department has grown from approximately $12,500,000 in 1916 to nearly $59,000’,000 in 1929, and its independent active meters from 131,500 during the same period. * * * This remarkable growth has been financed largely by the sale of the company’s bonds and preferred stock. These have been marketed at a gradually lessening cost, so that the present annual cost of its bond and preferred stock money normally is 6.17 per cent. Also, its depreciation reserve has been invested in the property. If this be included with its bond, preferred stock money at the rate of 6 per cent, being the rate at which it is required to account for its reserve, the annual cost of its bond, preferred- stock and reserve money is but 6.14 per cent. On December 31, 1929, the Company had outstanding in the hands of the public $47,070,0OO1. par value of bonds, $19,469,995 par value of preferred stock, and $20,000,000 par value of common stock. Its depreciation reserve (gas and electric) on that date was reported at $16,804,105.15. All of its common stock is owned by Pacific Lighting Corporation. Since 1916 but $4,500,000 of this stock has been purchased for cash, $5,500,000 however, having been distributed to Pacific Lighting Corporation in the form of stock dividends, representing earnings left in the property. Dividends have been paid on its •common stock of 7.20 per cent per share ($100 par value) in 1916, 1917 and 1918; *2597.4 percent in 19191; 8.4 percent in 1920, 1021 and 1922; 8.7 percent in 1923 ; 33.75 percent in 1924, included in which is 25 percent as a stock dividend of $2,500,000; 9 percent in 1926; 9.815 percent in 1926; 35.17 percent in 192,7, which includes a stock dividend of 21.42 percent, or $3,000,000; 15 percent in 1928, and 17 percent in 1929. The Company’s surplus has grown from $381,-212,97 in 1916 to $4,176,663.09 in 1929; while its depreciation reserve increased from $3,-804,383.36 to, as said above $16,804,105.15.”
Approximately 60 per cent, of the stock and bond money is chargeable to the gas department. Of the outstanding $20;000;000 in common stock, $9,993,000 was reported as having been issued for property, and $10;-700,000. as for cash, or, in lieu thereof, at par. The commission was unable to give a cash value to the stock issued for property, and held that the rate of dividends on the common stock did not establish cost of common stock money. The company had claimed a cost rate of 8.5 per cent, on its common stock. The commission’s evidence was that were this rate applied to common stock as insisted, the annual cost of the company’s capital proceeds would be 6.62 per cent. Commenting on its findings that the annual cost of the company for its bond and preferred stock money was 6.17 per cent., the commission said: “However, just as the assumption that the Company’s property was constructed at prices now current increases the actual cost figure, so a similar assumption that the Company was financed on the bases of current money cost would reduce the figure of 6.17 per cent, to 5.64 per cent.”
If the experience of the company under regulation has been, as the commission finds, that returns have exceeded estimates, then it may well be that its net will be greater than the per cent, allowed under the last rate schedule. 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. 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.
The company produced two witnesses having familiarity with financial investment conditions, who testified that, risks and uncertainties of the business considered, the company should earn more than 8 per cent. on the fair value of its property. The commission was correct in saying that it was not to be controlled by this testimony in the face of facts before it. It cannot be said that, assuming the reasonableness of the base amount used, the rates prescribed would not produce a fair return.
The company claimed the historical cost of its property to be approximately $5,000,-000 more than the amount fixed by the commission. It claimed the right to charge 24.27 per cent, to capital «aeeount as representing overheads from 1913 to 1929, which the commission disallowed in large part. It claimed a “going concern” value of $9;228,667, which was rejected by the commission, as were items designated as cost of financing, $5,924,470; promoters’ remuneration, $2,500,000. The company on its physical operative property, excluding overheads, land, and intangibles, estimated historical cost as $51,661,374; and cost of same, applying unit prices as of December 31, 1929; as $57,871,271. The above were the large items expressing the disagreement as to valuation between the company and the commission.
The commission included in the historical value base as for franchise value an amount of $14,391.23; and, as original cost of organization (derived from records of the company) $415,734.71. Lands were included as of fair value of $3,500,000 as of December 31, 1929, which was approximately $1,775,588 in excess of original cost.
The commission was veiy liberal in its treatment of certain items of property. The company in its early operations furnished artificial gas. Since 1924 it has served natural gas, which is plentiful in the numerous oil fields in Southern California. There is no evidence which discredits the commission’s conclusion that the supply of natural gas wül be abundant and constant. The commission found in effect that at least two of the artificial gas manufacturing plants of plaintiff were no longer needed and might well be retired. Nevertheless, it included them in its valuation as a live necessary part of the operative property. It appears that, had these plants been eliminated, the fair value base would have been reduced by approximately $3,000,009.
In explaining the method by which it reached the valuation totals, the commission referred to testimony of its engineers. These were men of apparently wide experience in the work assigned to them. Witness Dufor testified (we refer both to commission’s record and affidavit here) that as an engineer, *260having a duty to place valuations upon prop-arty of interstate railroads, he was employed from 1915 to 1921 by the Interstate Commerce Commission. He had served with the California commission since March, 1921. He testified that the valuation division of the commission under his charge maintained a cost bureau which was used continuously for the collection of information regarding material and labor costs, and in making analyses of actual purchases by representative public utility corporations within the state, and also securing quotations from vendors. He testified that the trend of material and labor costs was downward; that the unemployment situation ma'de available an unusual number of men suitable and capable to perform such work as was required by the plaintiff company. The method employed to obtain present costs as of June 15,1936, was to take the 1915 appraisement as used by the commission at the 1917 hearing, and add thereto the cost of all articles and property included in additions and betterments, as those items were particularly shown on the books of the company, and then convert such cost prices to ruling price levels as of June 15, 1930. He made a comparative analysis by applying prices prevailing December 15, 1930; and another comparison, under which he assumed a four year construction period from January 1,1926, to December 31,1929, applying average prices prevailing during that time. Under each of these estimates, the total valuation figure arrived at was less than the proportionate fair value base which the commission adopted. In the estimate which assumed a four-year construction period with average prices, the engineer included overhead charges of 22.32 per cent. On his preceding estimates, his overhead charges were computed at 6 per cent.
The engineer, in his affidavit, declared, and his statement corresponds to the declaration of the commission as found in its opinion, that “current price level cost represents the cost of the properties as they existed on December 31, 1929, assuming that the properties were put together historically, but that during the entire life and development of the properties, prices and unit costs had been continuously at the level prevailing on June 15, 1930.”
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 attaeliving business as the same had accrued and been accounted for. Its fair value figure, assuming the correct estimate and allocation of items hereinafter referred to, was one which essentially represented the investment cost, at the present time, of all the operative property and its connected incidentals. The commission used the books of the company, which furnished it with the details and items in complete form. Other engineers who testified as to valuation figures declared under oath that they were familiar with the properties of the plaintiff and had made a thorough and exhaustive study of all the matters as to which they gave information, and upon which the commission based its order. An examination of the voluminous record, including the innumerable tabulations showing the various comparisons made, demonstrates that there was no lack of attention to every element and item which would assist the commission in arriving at what it deemed to be a fair value figure.
Leaving out of view for the moment the matter of overhead charges, we feel satisfied that the commission was justified in making use of the cost appraisal amount fixed in its order made in the year 1917. This amount was arrived at after an exhaustive investigation. ' The books of the company were determined to have been accurately kept, and different items of property wore completely segregated so that additions and betterments costs were easily aseei*tained. Where a utility company in rate proceedings adopts, as correct, an amount fixed in an initial order made at the time it came under regulation, it ought not to be permitted to assail that amount at this time on the ground that it is inaccurate.
The matter of overhead charges has a somewhat different aspect. The commission’s allowance of 6.35 per cent, for overheads was due in part to the position in which the company had voluntarily placed itself. In the hearing which resulted in the first order made affecting the company’s rates, the company was advised that a larger amount of overhead might be charged to capital than it had customarily charged on its books to that account theretofore. These overheads occurred by reason of expenditures for engineering, superintendence, interest and taxes during construction, injuries and damages, legal services, etc. The company might, in its operative department, make use *261of the same organized agencies as were used also in the construction of extensions and additions to its plant and operative facilities. Operative expense generally incurred in rendering the service was chargeable to expense, and hence would be a deductible item from gross income, while overheads incurred for extensions, betterments, and additions would augment capital account. The commission had adopted rules under which such segregation was to be made. The company proceeded, however, through all the years from 1913, to charge to capital account overhead costs amounting to less than an average of 6 per cent. In the last proceeding, that here reviewed, the company sought to reform its accounts and charge an overhead of 24.27 per cent. The commission, in referring to that matter in its opinion, said: “In the initial case involving the gas rates of this Company a rate base was fixed including overhead charges substantially higher than those charged by the Company in preceding years and approximating those now claimed. The Company was thus fully apprised of a basis of assigning to capital certain general charges alloeatable in part to capital and in part to operation. Notwithstanding the fact that it was thus definitely advised of the propriety of allocating more of these to capital and less to operation, the Company, in subsequently making these splits or allocations, saw fit to allocate on its books the bulk of these to operation much as it bad done prior to 1917. Under the uniform system of accounts a considerable range of discretion in making allocations such as here involved rests with the Company. Either the responsible accounting officers of the Company made these allocations in the exercise of their best judgment at the time when all of the facts were fresh in their minds or, for reasons presumably to the advantage of the Company, deliberately undercharged capital and overcharged operation. In the various proceedings before the Commission it reported additions and betterments, as well as operating expenses, based upon its books and the allocations there recorded. The findings of the Commission indicate that determinations as to rates went on the assumption that such allocations were properly made.”
It is true that one of the valuation engineers for the commission testified that the company might properly have charged to capital 11.25 per cent, on account of overheads. Nevertheless, the action of the commission in this regard, we think, was reasonable. The fact was that the company, declining to follow the suggestion of the commission that it assign to capital a greater amount of overhead expenditures, charged all of such expenditures exceeding approximately 6 per cent, of the total thereof to operative expense, with the result that it has had during successive years the benefit of a much reduced net income figure, by the use of which, in turn, its rate charges have been increased.
From the fair value base, as used by the commission, accrued depreciation was not deducted. The matter of accrued depreciation heea'me important as affecting the annuity allowance considered in arriving at prospective income. The amount allowed by the commission as depreciation, annuity was the sum of $1,072,000’. The company claimed that the annuity should he not less than $2,-344,744. The commission marked the inconsistency of the claim of the company to such a large amount for annuity depreeiation, when it was claiming that the total accrued depreciation affecting its property was only the sum of $3,470,326. This, notwithstanding that the accumulated depreciation reserve for the gas department on December 31, 1920, amounted to $9',350,680. The commission’s engineers computed depreciation amounts under straight'line and sinking fund methods to be respectively $15,345,154, $7,-774,867. The sinking fund method figure of $7,774,867 was the one referred to in the commission’s opinion, and it appears that the method employed corresponds to the accounting practice of the company. It is to be noted that under accepted rules, as between straight line and sinking fund methods, the sinking fund base is undepreciated, while the straight line base is a depreciated base.
From the evidence presented, it appears quite clearly that annuity depreciation allowances made prior to the date of the rate hearing here concerned were in excess of what the company could properly claim. Prior allowances, if excessive, were not controlling. Depreciation was a matter not capable of definite ascertainment,, and the commission had the right to use its judgment under all of the facts displayed before it, aided in weighing the evidence by its experience in dealing with this company’s property and other like utilities, and to- adopt a per cent, depreciation rather than the amount deducted by the company. It is not demonstrated by any evidence that the allowance made by the commission as for depreciation annuity for the future would not, in its amount, be equivalent to the replacement outlay at going costs.
*262The large amounts claimed by the company for cost of financing, $5,921,47o1; promoters’ remuneration, $2,500,000'; cost of attaching business (going concern value) $0,228,667; added “difficulty” costs, $580,-195, we think, were properly rejected as for their total amounts. The company’s claim was that these sums should be added to the present investment cost of its property on the theory that in fixing fair value it was entitled to assume an original venture to be promoted and built up over a contemplated period of eight years, saying, in effect: “If we were starting today to develop our business anew, without capital or customers, all of the amounts enumerated would probably be expended.” Basically,, the object of an appraisement for rate-making purposes is to find the full value of the investment in the business. The investment is represented by the value of the property used and necessary in the business — -not what it would cost to promote and establish a like business starting today.
In fixing the estimated income for the future, the commission adjusted its figures to average temperatures. The company complained that at least the two preceding years had been attended by unusually high temperatures and consequent diminished demand for gas, and that it was improper to assume average temperatures. And yet the practice adopted was fair. We may note that the winter of 1931-32 in the city of Los Angeles, as it has thus far progressed at the end of January, has been one of the coldest in many years. And so, the rule of assumed average temperatures seems to be the only reasonable one to adopt. During unusually mild winters the utility service will earn less than was estimated to be allowed to it, and in colder winters will earn more. The commission recommended that a temperature reserve be established by the company and prescribed an alternate set of rates, to produce a larger return with a condition that the excess should feed the temperature reserve fund, so that income could be equalized between lean and productive years. This was not accepted by the company.
There were other amounts affecting the rates, which as to their kind and allocation were agreed to have been properly assigned, but as to the sufficiency of the allowances thereof the company made objection. For materials and supplies held for construction, the company claimed $612',735. The commission allowed $450,000. The commission was presented evidence showing that the average value amount of materials and supplies kept on hand by the company for the years 1927-1928 and 1929' was $6121,735; and that in 1929 the amount was $571,000. The allowance of $450,000 for the year 1930' cannot be said to be arbitrary. The commission was authorized to determine within reason and fairness what sum would cover future needs.
For working cash capital, an amount of $2,333,850 was claimed; $645,000 was allowed. This item was to cover delayed income receipts, occasioned by the wait between time of delivery of gas to the consumer and collection of the charges. In brief, the company claimed a' sum representing total earned amounts at retail prices. The commission found that cost of service should be considered, rather than retail charges, which latter would include profit. It considered, in computing the amount, the fact that the company, in its purchase of natural gas, was extended thirty days’ credit. An offset was accordingly charged against the expense total in arriving at the result. We think the method used was a proper one.
Some smaller items were involved which in their amounts would not require a different decision, regardless of how they might be treated.
It is concluded that the plaintiff is not entitled to the relief demanded, and that its prayer for an injunction should be denied. Decree will be entered accordingly.
JACOBS, District-Judge, concurs.
The breakdown of the rate base figure used for 1930 is as follows:
Estimates of the historical cost of the structural property were made in this proceeding, both by the company and by the commission’s valuation department. Excluding overheads, the company reached a figure approximately $300,000 higher than the one obtained by taking the 1917 rate base as fixed by the commission in Its first decision and building up on that, while the valuation department of the commission reached a figure approximately $300,-' 000 lower than the one thus obtained. The fact that each of these estimates, independently reached by employing somewhat different methods and procedure, corresponded so closely to the historical cost figure as used and accepted by the commission and hy the company as correct in the series of rate determinations running from 1917 to 1928 confirms its substantial accuracy. 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. Mr. McAuliffe and the company’s land appraiser were surprisingly close in their results. In the few points of difference Mr. McAuliffe’s testimony was the more convincing.