South Bay Irrigation District v. California-American Water Co. (61 Cal. App. 3d 944, 1976)

Opinion

COUGHLIN, J.

In this eminent domain action defendant, California-American Water Company, hereinafter referred to as The Company, appeals from an interlocutory judgment condemning its water works identified as the Sweetwater District of The Company’s San Diego division, hereinafter referred to as The Sweetwater System, and awarding compensation therefor in the sum of $14,485,000, with costs of suit in the additional sum of $17,295.97, subject to The Company’s right to a supplemental trial to determine the amount of compensation to be awarded for designated additional items. The overriding issue on appeal is whether the amount of the award is proper under the evidence and the law in the case.

Plaintiff, South Bay Irrigation District, hereinafter referred to as The Irrigation District, by an amended complaint, and intervener, the City of National City, hereinafter referred to as The City, by a complaint in intervention, pursuant to a joint powers agreement between The Irrigation District and The City, sought acquisition of The Sweetwater System, in its entirety, for the purpose of establishing an integrated, publicly owned water works system.

The Company appeals from the whole judgment. The Irrigation District and The City cross-appeal, with the proviso each of their appeals “is hereby abandoned” if the appellate court should decide to correct any error they assert by a reversal for a new trial instead of by a modification of the judgment.

The action was initiated by a complaint filed May 10, 1968. Trial commenced on November 1, 1971, before the court without a jury, and concluded with a final argument on August 10, 1972. The issue for determination at the trial was the amount of just compensation to be awarded for the taking, which was raised by The Company’s answers alleging “the fair market value of the properties and rights the Plaintiff seeks to condemn herein is approximately $50,000,000,” and .“the damage” to other property of The Company “not being condemned by the Plaintiff by reason of its severance is approximately $5,000,000.” Written findings of fact and conclusions of law and the interlocutory judgment were filed, following the filing of a written memorandum opinion by the trial judge, proposed findings, and a request for special findings which was denied. The Company moved for a new trial, which was denied, and on May 14, 1973 filed its notice of appeal.

The Sweetwater System, which was initiated in 1869, presently serves an area of 33 square miles, including the City of National City, the City of Chula Vista and contiguous unincorporated territory; serves an average of 14.5 million gallons of water per day to 135,000 persons: impounds and distributes water obtained from the Sweetwater River watershed by means of two large dams, i.e., the Sweetwater reservoir and the Loveland reservoir, also water obtained from wells in the City of National City and water imported from the Colorado River through purchase from the Metropolitan Water District of Southern California; includes a water treatment plant, 21 system reservoirs and tanks, 20 distribution system pumping plants, 318 miles of distribution mains, over 25,000 service connections, and more than 1,200 fire hydrants; and also includes other miscellaneous appurtenant facilities. During the period 1950-1969, Colorado River water comprised 70 percent of the water distributed.

Property owned by a public utility water company is impressed with a public use; may be transferred only with the consent of the Public Utilities Commission; may be used only for the purposes to which dedicated unless otherwise authorized by the commission; and is subject to regulation respecting the rate of return thereon as an investment and the rates charged for its services (Cal. Const., art. XII, §§ 3, 6, 9; Pub. Util. Code §§ 216, subds. (a), (b), 451, 454, 456, 851, 2701; Pacific Tel. & Tel. Co. v. Public Util. Com., 62 Cal.2d 634, 645 [44 Cal.Rptr. 1, 401 P.2d 353]; Southern Calif. Edison Co. v. Railroad Com., 6 Cal.2d 737, 754 [59 P.2d 808]). In determining such rates the commission is not bound to use any particular formula or mathematical process (gen., see Power Comm’n v. Hope Gas Co., 320 U.S. 591, 602 [88 L.Ed. 333, 344-345, 64 S.Ct. 281, 287]). Historically the profit allowed such a company on its investment is fixed at a percentage of a factor known as the rate base, which, for rate-fixing purposes, equates the investment. It is the value of the property devoted to public use (Pacific Tel. & Tel. Co. v. Public Util. Com., supra, 62 Cal.2d 634, 644). Investment items or assets included in the rate base are those fixed by rule of the commission; in general consist of properties constituting the utility plant plus an allowance for working capital, materials and supplies, less designated exclusions and adjustments, e.g., property or portions thereof which are unproductive for public utility purposes (see ibid., pp. 663, 667); do not include all of the company’s property or property rights, e.g., contributions in aid of construction, advances for construction and other items hereinafter considered; and are given a money value pursuant to a designated formula. In recent years the value of the items in the rate base has been premised on their original cost less depreciation based on the straight-line remaining-life method (gen., see ibid., pp. 644, 665).

On May 30, 1965, American Water Works Company bid the sum of $41 million for the Sweetwater and five other water systems then owned by the California Water and Telephone Company; and on December 16, 1965, its wholly owned subsidiary, The Company, through an agreement of transfer and sale, and with subsequent approval by the Public Utilities Commission, became the owner and operator of the six separate water systems for the purchase price of $41,290,517.56, which included the payment of $41,281,361.08 in cash and the assumption of customer deposits in the sum of $9,156.48. The total utility plant rate base involved in the acquisition was $29,120,050.45. The purchase price exceeded the rate base by $12,170,467.11. There is evidence tíie bid of the parent company in excess of rate base was prompted by its ambition to expand its operation into California. One of the water systems included in the purchase was known as the Coronado District, and it with The Sweetwater District comprised the San Diego division of The Company’s water systems.

In 1970 the Great Lakes Carbon Corporation sold the Palos Verdes Water Company to California Water Service Company for $8,839,564, which was 2.3 percent more than the utility plant rate base. Evidence of the latter sale was admitted under the concept it furnished comparative market data.

The parties stipulated, in determining the issue of just compensation for the property taken, the inventory date would be April 1, 1969, and the valuation date would be August 15, 1969.

The books of The Company showed the depreciated original cost of the items included in the rate base on April 1, 1969, i.e., the date of inventory, was $10,428,065.97, and on December 31, 1969, was $10,598,036,95.

At the trial The Company contended just compensation for the taking, exclusive of severance damage, should be between $38,570,956 and $50 million; and introduced the opinión testimony of two valuation experts, i.e., J. J. Barr, its president, and John Housiaux, purportedly supporting this contention. On the other hand, The Irrigation District contended just compensation should not exceed $11.3 million, and in support of this contention introduced the opinion testimony of four such experts, i.e., Max Bookman, Harold Heidrick, Jerome Katzin and Edward Neuner, whose valuations ranged from $9.6 million to $11.3 million.

The Company’s experts, in reaching their opinions, relied upon the appraisal method known as the reproduction, replacement or reconstruction-cost-new-less-observed-depreciation approach to determine the value of the utility plant improvements, and added the market value of the land in its natural state, the value of The Company’s books, records and documents, the value of its franchises and consents, the value attributable to organizational costs, i.e., costs incident to acquiring the land, constructing the improvements thereon and commencing the utility business, the value of the utility as a going concern, and the costs incurred in presenting The Company’s case in the eminent domain action as an item a willing buyer and seller would consider in reaching an agreement as to price for the condemned property.

On the other hand, The Irrigation District’s experts, except Katzin, in reaching their opinions, relied primarily upon the appraisal method known as the capitalization-of-income approach, premising such on the rate base which, under their testimony, varied between $10,918,000 and $10,428,000. Katzin used the capitalization-of-income approach but premised his conclusions on factors other than rate base.

There was expert testimony supporting the conclusion that of the $41,290,517.56 paid for the six utility water companies acquired by The Company in 1966, $14,865,000 thereof properly was allocable to The Sweetwater System and. that $3,840,000 of this amount was allocable to the excess of the price paid over rate base.

In approving The Company’s 1966 purchase of the six utilities, the Public Utilities Commission referred to the excess in purchase price over rate base as an acquisition adjustment and declared it was essential there be no misunderstanding of its policy respecting the treatment of any such excess in a rate proceeding, which was to “fix rates on the basis of an original rate base and that the plant acquisition adjustment is not included as an element of such rate base.”

There is evidence supporting the conclusion the profit or rate of return allowed by the commission on The Company’s investment in The Sweetwater System in 1969 was 7 percent of rate base. The Company’s annual reports to the Public Utilities Commission and the testimony of Mr. Barr show its annual net revenue for the years 1965 through 1969 averaged $1,022,800.

In his memorandum decision, the trial judge set forth a detailed summary and analysis of the evidence in the case on the issue of value, including the testimony and opinions of each of the valuation experts and other witnesses; expressed his views respecting the applicability and acceptability of this testimony in determining the issue of just compensation; reviewed the evidence respecting the 1966 sale of the six water utility systems to The Company and the 1970 sale of the Palos Verdes water system to the California Water Service Company and, noting the decision of the Public Utilities Commission approving the former, emphasized its policy foreclosing consideration of the excess of sale price over rate base in fixing rates the purchaser might charge for its services; declared “the issue that towers above all others, and which resulted in the. immensity of the differences in valuation, is the basic one of valuation theory”; discussed the law applicable to the case; outlined and considered the contentions urged by each of the parties; referred to decisions stating the general test for determining just compensation is the loss suffered by the owner, the detriment he sustains, the exchange value of what is taken from him; expressed the conviction just compensation for taking an operating and revenue-producing public utility as an entire unit, as in the case at bench, is the fair market value of the utility determined pursuant to the measure prescribed by the rule in Sacramento etc. R.R. Co. v. Heilbron, 156 Cal. 408, 409 [104 P. 979], i.e., the highest price the property would bring if exposed for sale in the open market, with reasonable time allowed in which to find a purchaser, buying with knowledge of all the uses and purposes to which it was adapted and for which it was capable; concluded “fair market value is the appropriate measure of just compensation for the taking of an investor-owned utility by eminent domain, . . . the fact regulation of earnings must be considered in the ascertainment of fair market value, ... the traditional appraisal concepts of market data, capitalization of earnings, and replacement or reproduction cost new less depreciation, are all entitled to consideration by the finder of fact, [and] the respective weight to be assigned each approach depends upon the case under consideration”; rejected the valuation opinion of Mr. Barr because of his reliance on the formula of reconstruction-cost-new-less depreciation, plus land, land rights and going-concern value as the determinative factor of value in the case rather than one of the factors a knowledgeable, willing buyer and seller would consider; set forth in detail his reasons for such rejection; stated “ ... by no stretch of the imagination can current duplication costs be said to represent or come any where near market value in the present case. Nor can it represent legitimate indemnity or compensation to the owner for loss of services. There is no possibility of a sale as of the date of value or today or in the foreseeable future at that figure,” i.e., Mr. Barr’s valuation figure; also concluded “where reconstruction cost substantially exceeds a figure which earnings will support, it should be given little weight in determining market value.”; rejected the contention the use, in an eminent domain action, of the capitalized-income approach in determining the market value of a public utility whose earnings are controlled by the government does not deny the utility the just compensation guaranteed by the Constitution; stated his conclusion “the most accurate indication of market value in this case is to be determined from the capitalized earnings” with “legitimate assistance ... from such evidence of market data as may exist”; made it clear the capitalized-income or market-data approach was not conclusive, but would produce factors the knowledgeable buyer and seller would consider in agreeing upon the price to be paid for the property taken, by expressly stating: “I may not assume, however, that a hypothetical buyer and seller would agree upon a figure necessarily the equivalent of capitalized earnings.”; argumentatively rejected the contention of The Irrigation District, premised on its interpretation of Evidence Code section 822 subdivision (a), that public agencies are excluded from consideration as prospective buyers or sellers in applying the Heilbron rule (Sacramento etc. R.R. Co. v. Heilbron, supra, 156 Cal. 408), upon the ground such an interpretation would change applicable provisions of substantive law and is contrary to the legislative intent expressed in Evidence Code section 821; referred to the 1966 sale of The Sweetwater System to The Company, and stated although valuation witnesses on each side rejected this sale as relevant evidence, he believed it was relevant, was “concrete evidence, not only that informed purchasers will pay a premium over rate base or capitalized earnings for utility property in general, but for the very property in question” and “the valuation testimony of all of plaintiff’s witnesses loses some credibility because of their failure to accord more weight to the 1966 sale”; considered the question respecting the probability of an increase in the rate of return allowed by the commission relative to The Sweetwater System, and expressed the belief “the evidence would support a probable allowance of 7.8 percent as a rate of return,” the rate of return used by the plaintiff’s valuation witnesses, with the exception of Mr. Katzin, was less than this figure, and these witnesses did not consider the impact of a probable rate increase on the price a knowledgeable buyer might pay for the system; referred to testimony by the witness Barr regarding the feasibility of withdrawing Sweetwater reservoir from the utility plant and devoting it to residential purposes, and concluded “an informed purchaser could well give it some consideration”; dealt with the subject of “going concern” which he considered a controversial concept, related the views expressed in texts and decisions on the subject, briefly summarized the testimony of the witness Housiaux respecting it, noted The Irrigation District’s witnesses did not consider it “an item that properly should be segregated and assigned a separate value inasmuch as their approach was one in which the willing buyer would be purchasing the entity based on its income potential” and concluded, to the extent a willing buyer and seller would be influenced in their determination of price by the additional value of a viable operating utility contrasted with the value of mere land plus a physical plant, going concern is an element of just compensation but separate treatment thereof is not required except as part of a reconstruction cost study; considered the issue of severance damages; summarized his “final approach to just compensation” which showed his determination thereof was premised on market value under the rule in Heilbron (Sacramento etc. R.R. Co. v. Heilbron, supra, 156 Cal. 408), and in determining tlie market value of The Sweetwater System pursuant to that rule he considered many factors which, under the evidence, would be considered by a hypothetical knowledgeable buyer and seller in agreeing upon a price to be paid therefor in a hypothetical open market; declared his “final conclusions of just compensation are judgment decisions based upon the considerations I have endeavored to outline in the foregoing discussion”; and stated his “findings and decision” as follows:

“1. Just compensation to be paid to defendant for the taking of the lands, properties and rights of the Sweetwater District, but without consideration of the lost unbilled revenues and customer accounts receivable, and not including severance damage, is the sum of $14,250,000.

“2. Just compensation to be paid to defendant for the loss of unbilled revenues and customer accounts receivable is $60,000.

“3. Just compensation to be paid as severance damage to the remaining ownership, specifically in its Coronado District, is the sum of $175,000.

“4. Total just compensation to be paid to defendant is the sum of $14,485,000.”

On appeal the memorandum decision of a trial judge stating the reasons and furnishing the bases for his decision, as in the case at bench, should be given special consideration for the purpose of determining whether the process used in reaching his conclusions on the issue of just compensation conformed to the measure prescribed by law (Consolidated Rock Products Co. v. City of Los Angeles, 57 Cal.2d 515, 532 [20 Cal.Rptr. 638, 370 P.2d 342]; Union Sugar Co. v. Hollister Estate Co., 3 Cal.2d 740, 750-751 [47 P.2d 273]; Coakley v. Ajuria, 209 Cal. 745, 749 [290 P. 33]; Winegar v. Gray, 204 Cal.App.2d 303, 312 [22 Cal.Rptr. 301]; see also 1st Olympic Corp. v. Hawryluk, 185 Cal.App.2d 832, 838 [8 Cal.Rptr. 728]).

The Company’s Appeal

The Company contends the reconstruction-cost-new-less-observed-depreciation formula should be the method used to determine the value of its property and just compensation for the taking or, in any event, should be given major consideration in making such determination, and the court erred in giving it little or no weight; in giving major consideration to capitalization of earnings as a determinative factor; in applying the Heilbron market value rule in an eminent domain action condemning a public utility because the “enterprise” taken is special use property possessing going concern value and intangible assets; in failing to include as earnings the probable income from the use of part of The Company’s property for other than public utility purposes or from sales thereof as surplus property and also failing to include the market value of such property in the light of such uses; in failing to give consideration to and include in its award several intangible assets or items of value, i.e., “going concern,” organization and construction costs, the cost of developing its books and records, routes and similar intangibles and the value of its franchises and consents; in failing to include in its award the value of property acquired by contribution; in accepting the testimony of The Irrigation District’s witnesses, which is premised on rate base, historical cost or capitalization of earnings, and upon instructions from its counsel which closed the “open market” to public agencies; in overruling The Company’s objections to the receipt of (1) evidence of rate base, historical cost, and capitalization of earnings for the purpose of determining just compensation, and (2) evidence of the apportionment of the 1966 sale purchase price in applying the market data approach to valuation; in denying its request for special findings; and in refusing to include as a part of the award an additional sum of $3,500,000 incurred by The Company in preparation and presentation of its case on the issue of just compensation.

As we categorize them generally The Company presents 18 contentions in its briefs and oral argument. We have considered each of them and conclude they do not justify a reversal of the judgment for the reasons hereinafter stated.

Preliminarily we note, The Company’s arguments in support of many of its contentions implicitly are directed to the weight and interpretation of the evidence, which are not within the scope of appellate review. The trier of fact is the sole arbiter of such matters (Thompson v. City of Long Beach, 4l Cal.2d 235, 246 [259 P.2d 649]; Dillard v. McKnight, 34 Cal.2d 209, 223 [209 P.2d 387, 11 A.L.R.2d 835]); is not required to accept the opinion testimony of any witness as to value (People v. Ocean Shore Railroad, 32 Cal.2d 406, 427 [196 P.2d 570, 6 A.L.R.2d 1179]); in the exercise of judicial discretion may accept that part of such testimony he concludes worthy of belief and reject that part which is unworthy of belief (Bechtold v. Bishop & Co., Inc., 16 Cal.2d 285, 291-292 [105 P.2d 984]; Cottle v. Gibbon, 200 Cal.App.2d 1, 7 [19 Cal.Rptr. 82]); and, in determining the amount of just compensation in an eminent domain action, is not required to coincide his determination with the specific amount fixed by the valuation testimony of any expert witness (City of Los Angeles v. Retlaw Enterprises, Inc., 16 Cal.3d 473, 491-492 [128 Cal.Rptr. 436, 546 P.2d 1380]; Joint Highway Dist. No. 9 v. Railroad Co., 128 Cal.App. 743, 762 [18 P.2d 413]).

The Constitution of the United States guarantees payment of “just compensation” to the owner of private property taken for public use (U. S. Const., 5th Amend.); and the Constitution of the State of California guarantees such payment for property “taken or damaged” for public use (Cal. Const., art I, § 19). However, absent specific constitutional or statutory provision to the contrary, judicial decisions applying pertinent interpretive common law principles have held certain items of damage resulting from such taking do not constitute an element of constitutionally required “just compensation” (Community Redevelopment Agency v. Abrams, 15 Cal.3d 813, 820, 827, 831-832 [126 Cal.Rptr. 473, 543 P.2d 905]; County of Los Angeles v. Ortiz, 6 Cal.3d 141 [98 Cal.Rptr. 454, 490 P.2d 1142, 68 A.L.R.3d 538]).

Statutory provisions pertinent to the issue of just compensation in the case at bench are set forth in former Code of Civil Procedure sections 1248 and 1249 (see People v. Ocean Shore Railroad, supra, 32 Cal.2d 406, 425 [196 P.2d 570, 6 A.L.R.2d 1179]), in Evidence Code section 810 etseq., and in Public Utilities Code section 1411. The latter section responds to the enabling provision of former article XII, section 23a of the California Constitution authorizing the Legislature to confer upon the Public Utilities Commission jurisdiction in eminent domain proceedings to acquire the property of a public utility. It should be noted, present provisions of the Code of Civil Procedure governing eminent domain actions, i.e., section 1230.010 et seq., known as the Eminent Domain Law, do not apply to a case in which an appeal is pending on the operative date of those provisions, i.e., July 1, 1976, by virtue of section 1230.065, subdivision (d) thereof, which provides “[T]he law applicable thereto prior to the operative date governs the determination of the appeal . . .” (see Community Redevelopment Agency v. Abrams, supra, 15 Cal.3d 813, 817); and, for this reason, do not apply to the case at bench.

The term “just compensation,” as used in the constitutional provision guaranteeing the payment of such upon the taking of private property for public use is not constitutionally defined; the elements comprising such are not constitutionally identified; .and the courts, in the exercise of their power to interpret and enforce constitutional provisions, have been required to provide tests or measures to effect the constitutional purpose. Considering this problem, as it applies to property actually taken, the United States Supreme Court, in United States v. Miller, 111 U.S. 369, 373-374 [87 L.Ed. 336, 342-343, 63 S.Ct. 276, 280, 147 A.L.R. 55], stated: “It is conceivable that an owner’s indemnity should be measured in various ways depending upon the circumstances of each case and that no general formula should be used for the purpose. In an effort, however, to find some practical standard, the courts early adopted, and have retained, the concept of market value. The owner has been said to be entitled to the ‘value,’ the ‘market value,’ and the ‘fair market value’ of what is taken. The term ‘fair’ hardly adds anything to the phrase ‘market value,’ which denotes what ‘it fairly may be believed that á purchaser in fair market conditions would have given,’ or, more concisely, ‘market value fairly determined.’ ”; also “It is usually said that market value is what a willing buyer would pay in cash to a willing seller.”

The California Supreme Court, in the early case of Spring Valley W.W. v. Drinkhouse, 92 Cal. 528, 533 [28 P. 681], accepted the concept that the market value of property taken for public use equates “just compensation” for the taking as the measure thereof in an eminent domain action; and is determined in view of all of the facts which would naturally affect its value in the minds of sellers and purchasers. In Sacramento etc. R.R. Co. v. Heilbron, supra, 156 Cal. 408, 409, the court gave definitive meaning to the measure theretofore approved and said: “[T]he rule is of universal acceptance that the measure of this damage is the market value; that is to say, the highest price estimated in terms of money which the land would bring if exposed for sale in the open market, with reasonable time allowed in which to find a purchaser, buying with knowledge of all of the uses and purposes to which it was adapted and for which it was capable.”

The Heilbron definition of market value became the basis (1) of a refined and more explicit statement of the definition of that term premised on a consideration of the statement of the general rule in Spring Valley W. W. v. Drinkhouse, supra, 92 Cal. 528, 533, which refers to the views of prospective sellers as well as those of prospective purchasers, (2) of decisions declaring each of them, respectively, must be a willing seller and a willing buyer (Redevelopment Agency v. Zwerman, 240 Cal.App.2d 70, 75 [49 Cal.Rptr. 443]; People ex rel. State Park Com. v. Johnson, 203 Cal.App.2d 712, 721 [22 Cal.Rptr. 149]; City of Daly City v. Smith, 110 Cal.App.2d 524, 531 [243 P.2d 46]) and (3) of decisions excluding consideration of their views respecting noncompensable items of value. The substance of the definition of market value thus evolved is stated statutorily in former Evidence Code section 814, and Evidence Code section 822, subdivision (e), which provide: “The opinion of a witness as to the value of property is limited to such an opinion as is based on matter . . . which a willing purchaser and a willing seller, dealing with each other in the open market and with a full knowledge of all the uses and purposes for which the property is reasonably adaptable and available, would take into consideration in determining the price at which to purchase and sell the property or property interest being valued ..., unless a witness is precluded by law from using such matter as a basis for his opinion.”; and evidence of the “influence upon the value of the property or property interest being valued of any noncompensable items of value” is not a proper basis for an opinion as to the value of the property (see State of Cal. ex rel. State Pub. Wks. Bd. v. Covich, 260 Cal.App.2d 663, 665 [67 Cal.Rptr. 280]; People ex rel. Dept. Pub. Wks. v. Lynbar, Inc., 253 Cal.App.2d 870, 881, fn. 11 [62 Cal.Rptr. 320]).

Market value as thus defined has been accepted and applied by the courts of California as the general rule governing the determination of just compensation in eminent domain actions (City of Los Angeles v. Retlaw Enterprises, Inc., supra, 16 Cal.3d 473, 490, fn. 14; Klopping v. City of Whittier, 8 Cal.3d 39, 43 [104 Cal.Rptr. 1, 500 P.2d 1345]; Merced Irrigation Dist. v. Woolstenhulme, 4 Cal.3d 478, 488, 491, 494 [93 Cal.Rptr. 833, 483 P.2d 1]; People v. La Macchia, 41 Cal.2d 738, 751 [264 P.2d . 15], overruled on other grounds in County of Los Angeles v. Faus, supra, 48 Cal.2d 672, 680; People v. Ocean Shore Railroad, supra, 32 Cal.2d 406, 425-426; Pacific Gas & Electric Co. v. Devlin, 188 Cal. 33, 38 [203 P. 1058]; Richmond Redevelopment Agency v. Western Title Guaranty Co., 48 Cal.App.3d 343, 350 [122 Cal.Rptr. 434]; People ex rel. Dept. Pub. Wks. v. Lynbar, Inc., supra, 253 Cal.App.2d 870, 881; Joint Highway Dist. No. 9 v. Railroad Co., supra, 128 Cal.App. 743, 755, 756).

The California Public Utilities Commission, in the exercise of its jurisdiction over proceedings in eminent domain seeking condemnation of a public utility, has followed the general rule. In one of its recent decisions, Re City of Riverside, 74 P.U.C. 193, where a water company was taken by eminent domain proceedings, the commission, in determining just compensation for the taking, used “the concept of the highest price, estimated in terms of money, that a willing buyer would pay to a willing seller for the property if exposed for sale on the open market, where each is under no unusual pressures of time or circumstance and each has knowledge of all the uses and purposes to which the property is best adapted and for which it is reasonably capable of being used.” The concept thus expressed is a statement of the general market value rule. Its use conformed to other commission rulings (see Re Denair Community Services District, 67 P.U.C. 476; Alder croft Heights Company, 65 P.U.C. 416; Re Monterey Peninsula Municipal Water District, 63 P.U.C. 533; Re City of North Sacramento, 56 P.U.C. 554). In applying this concept the commission, in City of Riverside, used a method of approach upon which The Company relies, contending the commission’s decision respecting such is authority for its position in the case at bench. We will consider this contention hereinafter.

Under the general rule, the knowledgeable and willing buyer and seller are assumed persons and the locale of their purchase and sale of the property taken is an assumed “open market” (Joint Highway Dist. No. 9 v. Railroad Co., supra, 128 Cal.App. 743, 757). The trier of fact, to the extent supported by the evidence, determines the price the seller and buyer would agree upon in the open market, subject only to the limitations imposed by Evidence Code section 813 which provides: “(a) The value of property may be shown only by the opinions of:

“(1) Witnesses qualified to express such opinions; and

“(2) The owner of the property or property interest being valued.

“(b) Nothing in this section prohibits a view of the property being valuéd or the admission of any other admissible evidence ... for the limited purpose of enabling the court... to understand and weigh the testimony given under subdivision (a)...Thus, within the limits set by admissible opinion testimony of qualified experts, the jury or the court, premised on its evaluation of the evidence in the case, determines the price upon which the assumed knowledgeable buyer and seller would agree (see Joint Highway Dist. No. 9 v. Railroad Co., supra, 128 Cal.App. 743, 765; cf. United States v. Toronto Nav. Co., 338 U.S. 396, 402 [94 L.Ed. 195, 200-201, 70 S.Ct. 217, 221]); in determining what factors would motivate them in reaching an agreement as to price, and in weighing the effect of their motivation, may rely upon the opinion of experts in the field and also upon its knowledge and experience shared in common with people in general (Vallejo etc. R.R. Co. v. Reed Orchard Co., 169 Cal. 545, 576-577 [147 P. 238]); and draws its own conclusion of value by a process of balancing and reconciling the varying opinions on the subject (City of Fresno v. Hedstrom, 103 Cal.App.2d 453, 461 [229 P.2d 809]). The trial judge in the case at bench, in his memorandum opinion, refers to this process and the conclusions reached as “judgment decisions.”

The evidence need not show the existence of an actual seller and buyer, or the existence of an actual market. A showing of potential sellers and buyers in a potential market will suffice (City of Los Angeles v. Retlaw Enterprises, Inc., supra, 16 Cal.3d 473, 496; Joint Highway Dist. No. 9 v. Railroad Co., supra, 128 Cal.App. 743, 756).

The provisions of Evidence Code section 814, prescribing the foundational requisites to an opinion as to the value of property, sanction an opinion based on matters of a type that reasonably may be relied upon by an expert in forming such an opinion, including but not limited to the matters listed in sections 815-821, which, in substance, describe the appraisal trilogy consisting of three methods or approaches used by appraisers in forming an opinion as to market value (State of Cal. ex rel. State Pub. Wks. Bd. v. Stevenson, 5 Cal.App.3d 60, 63 [84 Cal.Rptr. 742]; State of Cal. ex rel. State Pub. Wks. Bd. v. Covich, supra, 260 Cal.App.2d 663, 665-666), i.e., market data, capitalization of income and reproduction cost (see also De Luz Homes, Inc. v. County of San Diego, 45 Cal.2d 546, 563-564 [290 P.2d 544]). The market data approach includes a consideration of comparable sales (Evid. Code, §§ 815, 816).

There is a distinction between a measure of just compensation in an eminent domain action and the methods used to determine the amount of that compensation under that measure. Rules of law establishing the former are substantive, while those fixing the latter are procedural. Thus, there is a distinction between “market value” as a measure of just compensation and “market value” as the amount of that compensation determined by the market data approach. Although the latter is included in the former, the former is not limited to the latter. Confusion has followed a failure to appreciate the nicety of this distinction and has resulted in seeming exceptions to the general rule when applied to particular property. This confusion is exemplified in statements giving the impression market value as a measure of just compensation does not apply to the taking of a public utility because there is no market data upon which to premise a determination under such a measure.

In Kimball Laundry Co. v. U. S., 338 U.S. 1, 5-6 [93 L.Ed. 1765, 1771-1772, 69 S.Ct 1434, 1438, 7 A.L.R.2d 1280], the court, after stating just compensation “is only that value which is capable ... of exchange for some equivalent [and] [i]ts measure is the amount of that equivalent,” stated, “[S]ince a transfer brought about by eminent domain is not a voluntary exchange, this amount can be determined only by a guess, as well informed as possible, as to what the equivalent would probably have been had a voluntaiy exchange taken place. If exchanges of similar property have been frequent, the inference is strong that the equivalent arrived at by the haggling of the market would probably have been offered and accepted, and it is thus that the ‘market price’ becomes so important a standard of reference. But when the property is of a kind seldom exchanged, it has no ‘market price,’ and then recourse must be had to other means of ascertaining value ....” [Italics ours.] It should be noted the court refers to “market price” rather than “market value.” In similar vein the same court said, in United States v. Toronto Nav. Co., supra, 338 U.S. 396, 402 [94 L.Ed. 195, 200-201, 70 S.Ct. 217, 221]: “At times, however, peculiar circumstances may make it impossible to determine a ‘market value.’ There may have been, for example, so few sales of similar property that we cannot predict with any assurance that the prices paid would have been repeated in the sale we postulate of the property taken. We then say that there is ‘no market’ for the property in question. But that does not put out of hand the bearing which the scattered sales may have on what an ordinary purchaser would have paid for the claimant’s property. We simply must be wary that we give these sparse sales less weight than we accord ‘market’ price, and take into consideration those special circumstances in other sales which would not have affected our hypothetical buyer. And it is here that other means of measuring value may have relevance—but only, of course, as bearing on what a prospective purchaser would have paid.” In each of these decisions it is apparent the court was referring to the inadequacy of the market data approach to a determination of “market value” rather than to the inadequacy of “market value” as a measure of just compensation. In suggesting other methods of determining “value” may be relevant to the issue respecting the price a “hypothetical buyer” or “prospective purchaser” would pay for the property taken, the court relied upon the general market value rule as the measure of “just compensation.”

The Company has cited the foregoing cases, among others, in support of. its contention the trial court erred in adopting “market value in its usual sense” as the measure of just compensation for taking a public water utility because it is a rarely traded, highly regulated, special use property. In effect, The Company is contending, among other things, market value is not a measure of “just compensation” where market data to determine such is unavailable. The cited cases do not support this position. Market value under the general rule may be determined in many ways, none of which is exclusive (State of Cal. ex rel. State Pub. Wks. Bd. v. Stevenson, supra, 5 Cal.App.3d 60, 63) and only one of them relies on market data, i.e., the market data approach.

The Company also cites and places major reliance on the statement in Citizens Utilities Co. v. Superior Court, 59 Cal.2d 805, 817 [31 Cal.Rptr. 316, 382 P.2d 356], that: “ ‘Fair market value’ is not the exclusive standard by which to measure just compensation, and it is widely recognized that such a standard is meaningless when, as here, a public utility is being condemned.” That case did not involve a consideration of the measure of just compensation for taking a profitable operating public utility by an action in eminent domain. Instead, the issue of just compensation in the case,was limited to the measure thereof for taking improvements added to the public utility after an award for its taking had been made in the action but before the award had been paid. None of the decisions cited in support of the statement upon which The Company relies involved an eminent domain action to acquire a public utility and, thus, did not consider the measure to be used in determining just compensation in such an action. In State ex rel. Herman v. Southern Pacific Co., 8 Ariz.App. 238 [445 P.2d 186, 189], the court characterized the statement in Citizens Utilities Co. as dicta. We agree with this characterization.

The statements of law in an opinion are to be understood in the light of the facts and the issues before the court (Porter v. Bakersfield & Kern Elec. Ry. Co., 36 Cal.2d 582, 590 [225 P.2d 223]).

We conclude the statement in the Citizens Utilities Co. case does not foreclose application of the general market value rule as stated in this opinion to the circumstances in the case at bench.

Statements in The Company’s briefs on appeal contribute to the confusion respecting the meaning of terms of value relating to the market and their relationship to the general market value rule as a measure of just compensation. Thus, The Company contends “market value in its usual sense is not the measure of just compensation in this case because the public utility enterprise here taken is special use property, possesses going concern value and other intangible assets, and is not regularly traded in a free, fair or open market”; “Market value is not synonymous with just compensation when rarely traded special use property is condemned”; “Evidence of market value based on alleged market sales data should have been excluded (1) because usual market value is not the standard . . .”; reconstruction is the measure to be applied “when traditional market value fails”; and some courts “continue to verbally adhere to the ‘market value’ test, despite the substantial absence of market sales data.” On the other hand, The Company contends: “The proper standard of just compensation in this case is the fair market value of all of defendant’s tangible and intangible properties valued in a hypothetical fair and open market.” [Italics ours.]

In reality, The Company’s contentions, considered as a whole in the light of the general market value rule as stated in this opinion, are not a complaint against the use of that general rule, which was followed by the trial court, but are objections to the bases or approaches used by the court in applying that rule; the court’s rejection of the opinions of its experts on “just compensation” and of the reconstruction-cost-new-less-observed-depreciation basis or approach they used in reaching their opinions; to the court’s alleged acceptance of the opinions of The Irrigation District’s experts on “market value” because the hypothetical “open market” they considered did not include public agencies among the prospective hypothetical buyers in that market and were premised on the capitalization-of-income basis or approach, which should not be used in determining the market value of a public utility; to the court’s consideration of market data in applying the general market value rule; and to the alleged fact the court and The Irrigation District’s experts did not include alleged compensable elements of value in determining the “just compensation” to be awarded.

The opinion of the witness Barr, who was president of the parent company, that “just compensation” for taking its property was an amount between $38,570,956 and $41,070,956 was based on accumulation of the market value of its land in an unimproved or raw state, the value of the improvements thereon determined by the reconstruction-cost-new-less-observed-depreciation basis or approach, the going concern value of the enterprise and the value of other items, tangible and intangible. Barr applied the hypothetical buyer and seller agreement rule to the broad issue of “just compensation” and premised his opinion on the amount they would agree upon “if they were free of control and regulation over the earning power, the earnings of the entity, and free of any governmental control as to the price they could pay ....”

The opinion of the witness Housiaux that “just compensation” for the taking was $50 million was based on the reconstruction cost of the water system plus the value of its intangible assets appraised at $12,905,000 to $13,053,000. Included in the latter were going concern, land acquisition and construction costs, franchises and consents, and books, records and documents.

The record supports the conclusion the trial court, under the evidence, did not abuse its discretion in rejecting these opinions or the use of the reconstruction-cost-new-less-observed-depreciation basis or approach in reaching them, or in determining the issue of market value under the general rule.

The weight to be given a method or approach to an opinion or determination of market value should be considered in the light of the views of the hypothetical buyer and seller respecting the results from the use of that method or approach and the factors considered in applying it to the circumstances at hand (Evid. Code, § 814; United States v. Toronto Nav. Co., supra, 338 U.S. 396, 402 [94 L.Ed. 195, 200-201, 70 S.Ct. 217, 221]; People ex rel. Dept. Pub. Wks. v. Leadership Housing Systems, Inc., 24 Cal.App.3d 164, 169-170 [100 Cal.Rptr. 747]). The evidence justifies the conclusion a hypothetical buyer would consider $38 million an unreasonable price to pay for The Company’s enterprise in the light of, among other things, the age of the improvements (see Redevelopment Agency v. Del-Camp Investments, Inc., 38 Cal.App.3d 836, 842 [113 Cal.Rptr. 762]), the method or approach used by its experts in determining depreciation, i.e., observed depreciation (see Pacific Gas & Electric Co. v. Devlin, supra, 188 Cal. 33, 46-47), governmental restrictions on the income an investment therein might produce (cf. City of Los Angeles Dept. of Water and Power, 32 C.R.C. 579, 582), and the fact less than four years earlier it was one of six water systems purchased by The Company for the total price of $41,290,517.56. The witness Barr, as president of the parent company, was instrumental in negotiating the 1966 purchase of the six water systems by The Company, which was preceded by the parent company’s bid of $41 million. There is no showing this bid was the product of a reconstruction-cost-new-less-depreciation basis or approach to value. On the other hand, the evidence supports the conclusion the bid and subsequent sale were premised on a consideration of the rate base for the water systems purchased, plus a premium, with acceptance by the buyer of the fact the return on its investment would be regulated by the Public Utilities Commission using the rate base as the investment factor. This transaction indicates a public utility purchaser might be willing to accept a lesser return on its investment than otherwise obtainable because of the advantages incident to a monopolistic type of operation.

Reproduction-cost-new-less-depreciation, and its alternative, used by The Company’s opinion witnesses, reconstruction-cost-new-less-observed-depreciation, are acceptable bases for or approaches to an opinion or determination of the market value of property taken in an eminent domain action; are not dispositive bases or approaches, nor “market value” nor, per se, a measure of “just compensation”; but, rather, are aids to a determination of “market value” as the measure of “just compensation” (People v. Ocean Shore Railroad, supra, 32 Cal.2d 406, 427-428; State of Cal. ex rel. State Pub. Wks. Bd. v. Stevenson, supra, 5 Cal.App.3d 60, 63; City of Pleasant Hill v. First Baptist Church, 1 Cal.App.3d 384, 397, fn. 1 [82 Cal.Rptr. 1]; Joint Highway Dist. No. 9 v. Railroad Co., supra, 128 Cal.App. 743, 759-760; Fairfield Gardens, Inc. v. United States, 306 F.2d 167, 173; United States v. Certain Interests in Property, etc., 296 F.2d 264, 270; see also City of Reading, 39 C.R.C. 195). In People v. Ocean Shore Railroad, supra, 32 Cal.2d 406, 427-428, the court said: “In a number of cases it has been held proper to admit evidence of reproduction cost as an aid to determining value, especially when the property is adapted to a particular enterprise and there are ordinarily no willing buyers and hence no market for that type of property. [Citation.] It has also been held that reproduction cost is a proper test where there is a taking of a going concern with a view to continuing the operation. [Citation.] The general rule, however, is that the proper measure of damages is not the market value of the land plus the reproduction cost of the improvements, but the market value of the property as improved, in view of all the uses to which it is adaptable and available....

“The mere fact that a structure or improvement may have cost a certain amount, or that it would cost that amount to reproduce it, is not conclusive proof of its value in the market, or that a purchaser would be willing to pay that sum.”

Reproduction or reconstruction-cost-new-less-depreciation has been used in commission eminent domain proceedings to fix upper limits of market value (City of Los Angeles Dept. of Water and Power, 37 C.R.C. 117; City of Los Angeles Dept. of Water and Power, 32 C.R.C. 579; City and County of San Francisco, 33 C.R.C. 202); and in proceedings where the operation of a public utility company was not profitable (Eureka II, 18 C.R.C. 952; Fair Oaks Irrigation District, 15 C.R.C. 304). In City of Los Angeles v. Klinker, 219 Cal. 198, 211 [25 P.2d 826, 90 A.L.R. 148], the court made the statement, which was dicta in the case, that reconstruction cost might be a criterion for establishing market value where, under peculiar circumstances, no other criterion would be appropriate. The case at bench is not within any of the foregoing situations.

On the other hand, it has been said: “Generally speaking, reproduction cost is not considered the best evidence of fair market value if other evidence is available.” (United States v. 55.22 Acres of Land, etc., Yakima Co., Wash., 411 F.2d 432; 435); and “[Reproduction cost, evidence almost invariably tends to inflate valuation,” because it sets an absolute ceiling on market price “which may not be, and most frequently is not, even approached in actual market negotiations.” (United States v. Benning Housing Corporation, 276 F.2d 248, 250.)

In any event reproduction or reconstruction-cost-new-less-depreciation as an aid to determining market value, as well as other aids; e.g., market data and capitalization of income, are relevant to that issue only to the extent they develop factors which hypothetical buyers "and sellers would consider in determining the price to be paid for the property under consideration (United States v. Toronto Nav. Co., supra, 338 U.S. 396, 402 [94 L.Ed. 195, 200-201, 70 S.Ct. 217, 221]; United States v. 55.22 Acres of Land, etc. Yakima Co., Wash., supra, 411 F.2d 432, 435; United States v. Certain Interests in Property, etc., supra, 296 F.2d 264, 270; People ex rel. Dept. Pub. Wks. v. Leadership Housing Systems, Inc., supra, 24 Cal.App.3d 164, 169-170).

As noted, The Company cites the decision in City of Riverside, 74 P.U.C. 193, in support of its position, relying on the fact in the eminent domain proceeding there under consideration the commission accepted opinions of value based on the reproduction-cost-new-less-depreciation approach and rejected those based on the capitalization-of-income approach. Such a proceeding simulates an action in a trial court. The commission is the trier of fact; evaluates the evidence; and makes its findings. Its written opinion, like the memorandum decision of the trial judge in the case at bench, sets forth the process by which it reached its conclusions. Its decision is subject to judicial review simulating appellate review of a judgment of the trial court (Southern Calif Edison Co. v. Railroad Com., 6 Cal.2d 737, 749 [59 P.2d 808]). Whether the commission in the City of Riverside proceeding properly exercised or abused its discretion in rejecting opinions based on the capitalization-of-income approach and accepting those based on the reconstruction-cost approach has not been judicially determined. The issue at bench is whether the trial judge in the action at bench properly exercised or abused his discretion. Each determination must be made in the light of the evidence in the respective cases, i.e., proceeding or action. However, from the opinion in the City of Riverside, supra, 74 P.U.C. 193, we note the broad scope of the process used by the commission in reaching its conclusion based on the particular evidence in that particular case, as is evident in the following statements: “In reaching our ultimate findings herein we have given due consideration to what is revealed by the entire record, as well as to those matters which, in our opinion, would be considered by the hypothetical ‘knowledgeable willing buyer and seller,’...

“Although present and potential earning power of a regulated public utility can affect its market value either positively or adversely, depending on a number of variable factors which we have considered and weighed in connection with the studies and testimony on that element in this record, we are of the opinion that ‘market value’, or ‘just compensation’, in this case should be approached by according greater weight and reliability to values represented by physical and intangible assets of the properties involved.” [Italics added.] We also note, the commission apparently misunderstood the effect of Evidence Code section 819 as applied to the condemnation of a profitably operating public utility in its entirety. We consider this matter hereafter.

We are not persuaded by the opinion of the Public Utilities Commission in City of Riverside that the trial court in the case at bench abused its discretion, under the evidence in this case, in giving greater weight to opinions of value based on the capitalization-of-income approach than to those based on the reconstruction-cost approach.

It should be noted, the trial court in the case at bench did not conclude the reconstruction-cost approach to a determination of value, and the opinions based thereon, should not be considered, but, rather, concluded, under the circumstances, they should be given little weight.

The Company’s attack upon the trial court’s use of the capitalization-of-income approach, and the opinions based on this approach, is premised on erroneous concepts of the law and on arguments directed to the weight of the evidence rather than its sufficiency as a matter of law.

The Company contends the trial court relied on the capitalization-of-income approach as the sole test in determining market value of The Sweetwater System. The trial judge’s memorandum decision belies the contention.

The Company states parenthetically the court and The Irrigation District’s opinion witnesses deemed rate base the equivalent of capitalized income. This is an interpretation it places on the evidence rather than a fact. The opinions of market value based on the capitalization-of-income approach and other considerations exceeded the rate base to which the witnesses testified. In considering capitalization of income as an approach to an opinion or determination of market value, the witnesses and the court were entitled to conclude the prospective income a purchaser of the water system would, receive in the reasonably foreseeable future following an assumed sale would equate the average thereof received during the period 1965 through 1968, which approximated $1 million a year, or would be in an amount premised on a calculation using the rate base and a probable allowed future rate of return thereon not to exceed 7.8 percent, which is the rate of return the trial judge referred to in his memorandum decision as a “probable allowance.” Having established the probable net income from the investment, the calculation to determine the amount of the investment depends upon the percentage of profit the hypothetical buyer reasonably might expect from his investment (gen. see De Luz Homes, Inc. v. County of San Diego, supra, 45 Cal.2d 546, 564-565).

In the event the rate of return allowed .by the commission and the rate of return the hypothetical buyer might reasonably expect are the same, the rate base and investment would be the same. On the other hand, if the two rates of return differ, rate base and investment would not be the same.

In any event, the owner of a public utility is entitled to receive only the profit allowed by the commission, and capitalization of that profit is a factor the trial court may conclude a hypothetical buyer and seller would consider in negotiating the price to be paid for the utility purchased.

Capitalization of income is “a generally accepted method of valuing property from which income may be or is derived.” (De Luz Homes, Inc. v. County of San Diego, supra, 45 Cal.2d 546, 564; see also South Utah Mines & Smelters v. Beaver County, 262 U.S. 325, 330 [67 L.Ed. 1004, 1007, 43 S.Ct. 577, 579]; Southern Calif. Edison Co. v. Railroad Com., supra, 6 Cal.2d 737, 751-753; State of Cal. ex rel. State Pub. Wks. Bd. v. Stevenson, supra, 5 Cal.App.3d 60, 63; State of Cal. ex rel. State Pub. Wks. Bd. v. Covich, supra, 260 Cal.App.2d 663, 665-666; City of Riverside, supra, 74 P.U.C. 193; Re Denair Community Services District, supra, 67 P.U.C. 476, 481; Re Monterey Peninsula Municipal Water District, supra, 63 P.U.C. 533, 537; Re Sacramento Municipal Utility District, 44 C.R.C. 467, 475; see also City of Thibodaux v. Louisiana Power & Light Co., 225 F.Supp. 657, 667 [rule applied to condemnation of an electrical power distribution system].)

The Company and amici curiae contend capitalization of income other than rentals, as a basis or approach in determining market value of property, is proscribed by Evidence Code section 819, which reads: “When relevant to the determination of the value of property, a witness may take into account as a basis for his opinion the capitalized value of the reasonable net rental value attributable to the land and existing improvements thereon (as distinguished from the capitalized value of the income or profits attributable to the business conducted thereon).” The phrase “value of property” as used in the section means the amount of “just compensation” to be awarded in an eminent domain action (Evid. Code, § 811). The section is a codification of the rule in People v. Dunn, 46 Cal.2d 639, 641 [297 P.2d 964], which applies to a determination of the market value of land and the improvements thereon. The reason for the rule is that profits derived from a business conducted on land, with or without improvements, is too speculative, uncertain and remote to be considered as a basis for ascertaining market value of the land, with or without improvements. The reason is not applicable where the property is a business or enterprise, such as a public utility, including all of its assets, tangible and intangible. The section is limited in application to the determination of “just compensation” for taking land and existing improvements thereon, rather than for taking a business.

By virtue of Evidence Code section 814, an opinion and determination of the market value of condemned property may be based on matters which the hypothetical buyer and seller described in the general market value rule would consider in determining the price at which to purchase and sell the property under consideration “including but not limited to the matters listed in Sections 815-821” of that code (see also City of Santa Barbara v. Petras, 21 Cal.App.3d 506, 510 [98 Cal.Rptr. 635]); and thus capitalization of the income of a condemned public utility, which is not a matter included in Evidence Code section 819, may be a basis for such an opinion or determination.

However, The Company contends the use of capitalization of income as a basis or approach to an opinion or a determination of the market value of a public utility, in an eminent domain action, denies the owner thereof just compensation where, as in the case at bench, the income thereof is depressed by legislatively imposed rate regulations. Included in this contention is the claim govemmentally imposed restrictions on the scope of the rate base,