Full opinion text
JAMES, District Judge. 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 the 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 $47,070,0OO. 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; 7.4 percent in 1919; 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, having 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 of 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. The large amounts claimed by the company for cost of financing, $5,921,47o; 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.
WILBUR, Circuit Judge (concurring). The Los Angeles Gas & Electric Corporation, hereinafter called “the company” filed its bill in equity to restrain the enforcement of gas rates fixed by the railroad commission of the state of California upon the ground that the rates so fixed were confiscatory, to which an answer was filed by the railroad commission. Affidavits were filed by the plaintiff in support of a motion for temporary injunction. The railroad commission filed affidavits in reply, and the city of Los Angeles and the city of Pasadena intervened and filed affidavits in support of the rates fixed by the California state railroad commission, which will hereinafter be referred to as “the commission.” Upon a hearing before the statutory court a temporary injunction was issued upon the giving of a satisfactory bond. This injunction resulted partly from the stipulation of counsel facilitating the disposition of the case. It was stipulated that the entire evidence which had been adduced before tbe commission should be introduced and considered by this court upon its final determination of the issues involved, and this evidence, with the affidavits filed upon the motion for temporary injunction, should constitute the entire record for the consideration of the court. The ease was thereupon submitted for decision upon the argument already presented upon the motion for an interlocutory injunction and upon briefs to be thereafter filed on behalf of the parties. Elaborate briefs were carefully prepared and present with great precision and emphasis the respective views of the parties. The method adopted for the presentation of this ease has much to commend it. One of the great difficulties in the determination of cases involving the claim that rates fixed by public utility commissions are confiscatory and in violation of the Federal Constitution has arisen from the fact that the issue of confiscation is tried de novo in the federal court, the theory being that the sole concern of the federal court is with the question of confiscation, and that the function of the court so far as it relates to- rate-making is to determine whether or not the rates fixed yield a return which is below the absolute minimum required to avoid confiscation. It has long been recognized by the federal court that, if the rate-making bodies would make specific findings of fact with relation to value and return, and particularly if they would make findings clearly showing that they had considered all the elements of value required by the decision of Smyth v. Ames, 169 U. S. 466,18 S. Ct. 418, 42 L. Ed. 819, and subsequent rate cases, to be considered, the work of the court would be much simplified, and that, while the federal courts must of necessity, in the use of their constitutional authority, exercise an independent judgment as to value and rate of return, the determination of the rate-making body upon conflicting evidence as to the various elements to-be considered in arriving at the value, and in the just determination of the rate to be arrived at by consideration of these elements of value, is entitled to great, though not controlling, weight. In the earlier stages of rate-making, when the problems involved were not thoroughly understood and some of the elements of value and expense were ignored, it sufficed if the court declared the particular rate to be less than the minimum permitted under the Constitution, and therefore enjoined the enforcement of the particular order involved, leaving the rate-making body to fix its rate at some point in excess of the minimum. As the constitutional principles established by the courts were better understood by those engaged in rate-making and more thoroughly developed by the courts, the exercise of a mere veto power on the part of the courts became increasingly unsatisfactory. The Supreme Court has always disclaimed either power or disposition to fix rates of public utilities, or any ability to do so, with the time and facilities at its command. Nevertheless, in later cases it has become desirable that the action of the court enjoining the enforcement of a rate established by a local rate-making body should be sufficiently definite and certain to serve as a guide for the rate-making body in a reconsideration of the problem. To that end in recent cases the Supreme Court has required findings of, fact by the District Court acting as a statutory court, and these findings inevitably involve the fixing of a minimum fair return upon the property of the public utility. It is of course unnecessary in such findings to determine either of. the elements essential in rate-making, that is, the fair value of the property and a fair rate of return thereon. It is only necessary to determine whether or not in the given instance the railroad commission has placed the income below the irreducible minimum. The commission fixed the fair value of the company’s property at $65,500,000, and determined that 7 per cent, net was a fair return upon this value. The company claims that the fair value should have been fixed at not less than $95,000,000, and a fair return at not less than 8 per cent. In brief, the company claims that nearly $30,000,000 ($29,500,000) of its capital has been appropriated without compensation by refusal to give any return thereon, and that of the balance, capital sufficient to return an income of $655,000 (1 per cent! of $65,500,000) at 8 per cent, has also been confiscated, that is, $8,187,500, so that the total amount plaintiff claims will be confiscated by the proposed rates is $37,687,500 ($29,500,000, plus $8,187,500). Sixty per cent, of the company’s property is devoted to the gas business and 40 per cent, toj the electric business. Electric rates are not involved here. The amount thus claimed to be confiscated is almost double the par value of the entire common stock ($20,000,000) of the company and more than three times the amount thereof properly apportioned to the gas business ($12,000,000). In view of the fact that it is admitted that the proposed gas rates fixed by the commission will pay interest on that portion of the bonded indebtedness apportioned to the gas business (60 per cent, of $44,341,480 equals $26,604,-888) at 5.96 per cent, and upon the preferred stock so apportioned (69 per cent, of $17,-330,317 equals $10,398,190) at 6.72 per cent., and upon the common stock apportioned to the gas business (60 per. cent, of $20,000,0'00 equals $12,000,000) at 8.50 per cent., which is said to be the cost of such bond and stock money, or upon a total investment of $59,-003,078, interest at about 7.94 per cent., it is obvious that the contentions of the company should be scrutinized with care. On the other hand, as it is conceded by the commission that it has consistently throughout its history, as a rate-making body, followed the theory advanced by the minority members of the Supreme Court) particularly those advanced by Justice Brandéis and Justice Holmes in their numerous dissenting opinions, and has declined to follow the majority opinions of that court, which of course are authoritative and binding upon all courts and rate-making bodies, it is equally true also that the contentions of the commission must be scrutinized with care. The commission, in that regard, states its position in its opinion in the ease at bar as follows: “This Commission for many years, in the exercise of its jurisdiction to establish reasonable rates for utilities of this character, has fixed rates to yield upon the historical or actual cost of the property, taking land, however, at current values and depreciation calculated on a sinking fund basis, a return somewhat in excess of the cost of the money invested in the properly. Where the books were accurately kept these have been deemed to most accurately reflect the actual cost of the structural and other property. Sometimes, when these were not reliable, it has been found necessary to estimate what it cost to produce the whole or parts of the property historically. (Re Coast Valleys Gas & Electric Co. (1917) 14 Cal. R. C. 460; Southern Sierras Power Co. ,(1920) 18 Cal. R. C. 818; Southern California Edison Company (1921) 19 Cal. R. C. 595, and (1923) 23 Cal. R. C. 981; San. Joaquin Lt. & Pr. Corp. (1923) 21 Cal. R. C. 545; Pac. Gas & Elec. Co. (1922) 22 Cal. R. C. 744; Great Western Power Co. (1923) 22 Cal. R. C. 814; Pac. Tel. & Tel. Co. (1929) 33 Cal. R. C. 737.) “Under rates fixed on this basis utilities of this character have grown strong and prosperous. They have experienced no difficulty in securing capital for extensions and new development. Confidence in investments in such utilities has increased and capital has flowed to this field of investment readily and at a gradually, decreasing rate or cost/-’ (Italics ours.) . ' . The commission, of course, recognizes that the rule for the valuation of public utility property has been thoroughly and definitely settled by the Supreme Court, and concedes that its conclusions must be measured by that standard. It nevertheless contends that full consideration has been given to every element of value required to be considered, and that the valuations fixed by it in the case at bar are sustainable on either the theory of the majority or dissenting opinions of the Supreme Court. With these conflicting considerations in mind and before a detailed analysis of the subject, it should be stated that the larger elements of disagreement fall under two or three heads which can be separately considered, but before stating them we will consider in broader lines the contention of the respective parties. We do this because as to many of the facts entering into the -problem the disagreement between the parties is comparatively trivial. The commission states that the actual cash invested by the company in the gas properties of the company is $58,772,799. The amount of bonds and stocks attributable to the gas business, as above stated, is slightly more ($59,003,078). That is to say, the stock, bonds, and preferred stock money invested in the gas business of the company is from six to seven millions less than the rate base fixed by the commission. It is certainly satisfying at the outset of an investigation of alleged confiscatory rates to realize that the rate fixed is at least sufficiently high so that stockholders, as well as bondholders, are actually receiving a fair return upon their money invested, as distinguished from wha.t may be determined to be a fair rate upon the value of their property devoted to public use. In this connection it should be observed that, under the practice of the commission of basing its rates upon the historic cost of prudent investment theory, the stockholders are protected in their investment even if they do not reap the profits which are justly theirs under the rule established by the Supreme Court. Under this system adopted by the commission it should be stated that the holders of the common stock, although theoretically subject to the greatest hazard in tho busincss, are protected in large measure from the hazards due to fluctuations in value of the property in which their money is invested and have the advantage of deriving, as income upon their stock and as a profit upon their investment, 'the difference between the interest paid to the bondholders and holders of preferred stock and the rate fixed by the commission. In this connection it is interesting to observe that the holders of common stock would have their entire capital investment returned to them by way of dividends in about three years with the present financial set-up of the company and with the rates contended for by it (8 per cent.), so that their investment which is now largely derived from their profits under state regulation would be completely reimbursed in that short period. In making these observations we are not to be deemed as accepting the rate-making system repudiated by the Supreme Court, which the commission itself acknowledges is erroneous, but the fact that the company has been largely financed under this system shows that the historie cost element of value should, perhaps, be given greater consideration than would be the case where a rate-making body for the first time fixes the rate of a going concern which has been financed without interference or supervision by the public officials. Here it should be stated that under the California system the commission, not only fixes rates, but has authority to determine the terms upon which and amounts for which stock and bonds of a public utility may be financed, and the company in this instance has procured most of its capital under this supervision. In addition, it has set up a bookkeeping system in accordance with the general rules of the commission, and as a result various items entering into the valuation of the company’s plant can be readily determined. The expert testimony of competent engineers, in this case, is largely based upon these books. We have already indicated the manner in which the historic cost of the plant has been determined by the commission. At this juncture and before further discussion of the method of valuation adopted by the commission and that contended for by the company, we will indicate the most important points of difference as to such values. The first difference is an item of $9,-288,667 for going concern value. The next large item is that of overhead of $9,144,988. It is next claimed that an excessive deduction was made by the commission for the accrued depreciation to be deducted from the value of the property new. It is claimed that this deduction was excessive by $4,170,674. In addition, the company claims $5,921,470 as estimated cost of financing. These factors, aggregating about $30,000,000, account in large measure for the $30,000,000' difference in value, between the amounts fixed by the commission and the amount claimed by the company as the fair value of its property. Before entering upon a discussion of these differences, it should be stated that the commission, in its opinion, most carefully considered these elements. It cannot be claimed that it ignored them unless the theory of its decision had that inevitable effect. It is conceded at the outset with reference to going value that this element must be considered in fixing the rate base. McCardle v. Indianapolis Water Co., 272 U. S. 400, 47 S. Ct. 144, 71L. Ed. 316. Relation of Overhead, Going Concern Value, and Promotion Expenditures. In view of the fact that the company is claiming nearly $25,000,000 for the sum of these three items in its claim of value, in addition to the amounts allowed by the railroad commission, and as these items constitute the major part of the claim of the company in so far as it relates to valuation, it should be stated at the outset that these three elements of value are more or less interrelated. Whether or not a given expenditure is to be treated as an element of the cost of construction, or of maintenance, or operation, is more or less a matter of judgment. Some or all of the expenses of promoting an enterprise may be appropriately considered as overhead charges and carried upon the-books of the corporation as such. It is also true that expenditures involved in giving life to the dry bones of the enterprise may be treated as overhead charges, or as annual expenditures. That is to say, actual or assumed expenditures, for the purpose of producing the various results entitled to consideration as going concern value, or to be considered overhead, may be carried as promotion expenditures or treated as capital expenditures for attaching business involved in going concern value or as items of overhead, of they may be included in the allowance of annual expenditures charged against the income of the corporation. See Des Moines Gas Co. v. City of Des Moines, 238 U. S. 153, 35 S. Ct. 811, 59 L. Ed. 1244; McCardle v. Indianapolis Water Co., 272 U. S. 400, 47 S. Ct. 144, 71 L. Ed. 316. The importance of these observations which are sufficiently obvious lies in the fact that the commission failed to make a specific finding of going concern value upon the theory that the costs considered and allowed by it in determining the historic cost of the property included the cost of the acquisition of the going concern value, and that the allowance of $65,500,000 as a rate base was made in full recognition of the going concern value, and that in determining the historic cost it had in effect appraised the going concern value. We quote from the opinion of the commission to that effect as follows: “The Company claims $9,228,667 as going concern value, based largely upon the testimony of Col. Alten S. Miller. * * * Were going concern to be treated as an independent item of value, it should be measured with due regard to actualities rather than upon theories and assumptions such as employed by Col. Miller. And it would seem that what it did cost this Company to attach its business is a far more reliable guide than an estimate of what it might cost under a theoretical reconstruction program. By the prescribed accounting rules all costs incident to attaching business are required to find lodgment in New Business Expense. Col. Miller’s position in essence is an attack upon the classification of New Business Expense as an operating item, his line of reasoning.inferring that this expense should have been added to capital year by year. Were new business expense to be added to capital the corollary would be its elimination from operating expense. No very appreciable change in result would follow from allowing a reasonable amount in rate base to represent the cost of attaching the business (following largely Col. Miller’s theory but reducing theory to actuality) and at the same time disallowing New Business Expense in operation. “It is true that Col. Miller includes in his total figure $506,789 as ‘cost of organizing property and personnel’ but he does not attempt to explain how this figure is arrived at. The actual cost of building up the personnel and oi'ganizing the property has of course, under accounting procedure and Commission practice, been included in current operating expense, and if viewed in the light of capital expenditure, just as in the case of the cost of attaching the business, has been taken care of and in effect amortized year by year as incurred. “Substance rather than form is to be considered. So viewed, this Commission does allow for the so-called intangible going concern value by treating its cost as a current operating expense.” In its reproduction cost it rejected the two items for promotion and financing aggregating $7,500,000' as unwarranted by the experience of the company, but it included in its estimate items which it held reasonably corresponded to these items as reflected by the actual history of the company. So far as the rejection of the two items just referred to is concerned, we think the commission was correct in its conclusion if the regulation of rates is to be kept within the domain of practicality rather than fancy. See Galveston Electric Co. v. Galveston, 258 U. S. 388, 42 S. Ct. 351, 66 L. Ed. 678. It is undoubtedly true that the engineers, in estimating reproduction costs, may fairly include items which in their judgment would be involved in, the reconstruction of the whole enterprise. It does not follow that these figures must be accepted by the commission or by the court as items to be 'included in its actual value. It is no disparagement of the engineers to reject this testimony for the reason that reproduction cost, while necessary to be considered, is not the measure of the rate base, but an element to be given such weight as in the judgment of the rate-making body, and subsequently, of the court, is justified by the faets. As stated by Mr. Justice Brandeis, in McCardle v. Indianapolis Water Co., 272. U. S. 400, 47 S. Ct. 144, 153, 71 L. Ed. 316, in his dissenting opinion: “There is, so far as I recall, no statement by this court that value is tantamount to reproduction cost.” And as stated by Mr. Justice Stone, in his dissenting opinion, in St. Louis & O’Fallon Ry. Co. v. United States, 279 U. S. 461, 49 S. Ct. 384, 410, 73 L. Ed. 798: “This court has said that present reproduction costs must be considered in ascertaining value for rate-making purposes. But it has not said that such evidence, when fairly considered, may not be outweighed by other considerations affecting value, or that any evidence of present reproduction eosts, when compared with all the other factors affecting value, must be given a weight to which it is not entitled in the judgment of the tribunal ‘informed by experience’ and ‘appointed by law’ to deal with the very problem now presented.” The rule was stated by Justice Brandéis, speaking for a majority of the Supreme Court, in Georgia Ry. & Power Co. v. Railroad Commission (1923) 262 U. S. 625, 630, 43 S. Ct. 680, 681, 67 L. Ed. 1144, as follows: “The refusal of the commission and of the lower court to hold that, for rate-making purposes, the physical properties of a utility must be valued at the replacement cost, less depreciation was clearly correct.” Among the facts to be considered in determining value is the actual practical history of the enterprise as developed by the evidence. Galveston Eleetric Co. v. Galveston, 258 U. S. 388, 42 S. Ct. 351, 66 L. Ed. 678; Greencastle Water Works Co. v. Pub. Service Comm. (D. C.) 31 F. (2d) 600; Georgia Ry. & Power Co. v. Railroad Comm., 262 U. S. 625, 43 S. Ct. 680, 67 L. Ed. 1144; Colorado Power Co. v. Halderman (D. C.) 295 F. 178; City of Winona v. Wisconsin-Minnesota Light & Power Co. (D. C.) 276 F. 996. Overhead Charges. The contention that a portion of the overhead properly chargeable to a new enterprise or to reproduction value has been absorbed in current expense charges, and should not be again allowed as a capital expenditure, is even more emphatically and definitely urged. During its history the company has kept its books in such fashion as to reflect in the historic cost that portion of the general expenses of the company it had determined were to be added to the capital investment and the portion which it claims should be paid from the current revenue of the company as an expense. The historic cost, therefore, as determined from its books, would include only that element of overhead which the company had charged, on its books as a capital expenditure. The commission contends that it would be inequitable to permit the company to shift its ground after it has for years treated a portion of its expenditures as necessary expense incidental to its business to be deducted from the gross revenues, and now to claim that this amount, which it has already received as an incidental expense to be deducted from its gross revenue, should itself be treated as an investment upon which it must receive future income. Thus, it is claimed the consumers are required, not only to furnish the capital in the first place, but also to pay income "upon the capital so furnished. The Supreme Court, however, has so definitely and emphatically held that the company is entitled to a reasonable rate of return upon the fair value of its property, regardless of whether or not that property was derived from the consumers by the imposition of excessive rates or otherwise (Board of Pub. Utilities Com’rs v. N. Y. Tel. Co., 271 U. S. 23, 46 S. Ct. 363, 70 L. Ed. 808), that the mere fact that an excessive amount may have been allowed to the company by way of income to cover expenditures is not decisive of the issue. We pause here, however, to advert to the fact that overhead is involved in both the historic cost and the reproduction value. It is clear, we think, that in considering the historic cost of the plant the company cannot include therein elements of value which have been apportioned to general expense and paid from the current revenues as an expense of operation. In building up the historic value of the plant it is obvious under the system of bookkeeping devised by the commission and used by the company that it would be entirely illogical to include in the historic cost those expenditures which had been deliberately allocated to the routine and general expenditures of the business. On the other hand, it is clear that in determining the reproduction cost, that is to say, the cost of reproducing a plant as useful and efficient as that of the company, the assumed overhead, due' to general expenditures necessarily incident to such rebuilding, should be apportioned upon a reasonable and scientific basis. It is upon the apportionment of these expenses that the experts disagree. It is estimated by the company’s engineers that the overhead would add 24.27 per cent, to the cost of reproduction. It is conceded by the commission’s engineers that the overhead percentage upon reproduction cost should be 22.32 per cent. The commission fixed as the overhead in its finding of fair value 6.35 per cent., a difference between the commission’s finding and its engineers of 15.97 per cent., or $9;144,998, and a difference, on the basis of the company’s engineers, of $2,374,743 more. It is therefore claimed that the rate base should have added to it at least $9,144,998. If then we accept the reproduction cost as the fair value it would seem to follow inevitably that this additional overhead should be allowed as a part of the capital investment. The company correctly claims that in rate-fixing the Supreme Court has indicated a decided preference for the reproduction cost as a determining factor in establishing value. If the Supreme Court had definitely held that the fair rate base could not be less than the reproduction cost, we would be constrained upon this issue of overhead alone to enjoin the rates fixed by the commission (Georgia Ry. & Power Co. v. R. R. Commission, supra), but it has not done so. It has left the fixing of the fair value of the property to be determined by the courts in the light of constitutional principles thoroughly established by it which require a consideration, not only of the cost of reproduction, which must necessarily be somewhat theoretical as we shall presently illustrate, but also its historical cost. If either was decisive of the-value, it would be unnecessary to consider the other. If both are to be considered, judgment must be exercised in determining the value. McCardle v. Indianapolis Water Co., 272 U. S. 409, 410, 47 S. Ct. 144, 71 L. Ed. 316. Assuming for the moment, as the commission decided, that the historic cost fixed by it correctly recognized all overhead elements of value which the company in its system of bookkeeping and accounting had apportioned to capital, should the company now be permitted to augment its capital because reproduction cost would reflect greater overhead? It is a fundamental principle of equitable jurisprudence that he who seeks equity must do equity. The company in the case at bar is seeking the aid of a court of equity to exact from the consumers a larger amount than has been accorded to them by the commission. Should equity aid the company to again exact from the consumers in-' come upon a sum which they have already paid to them, not as capital, but as income? We are not without authority upon this exact question. It has been held that this cannot be done. Natural Gas Co. v. Pub. Serv. Comm., 95 W. Va. 557, 121 S. E. 716. It should be observed in connection with the item of overhead that we are not dealing with a definite item of property such as a gas main, but with a system of bookkeeping and accounting as to which judgments may differ; whether an attorney’s fee paid by the company in the conduct of its business should be charged to capital and the expenditure added to the rate base,' or whether it should be treated as an incidental expenditure in the management and control of its business, is obviously a matter of judgment upon which there can be no conclusive determination. It is in this situation that the commission allows the company to make an apportionment of its expenditures from year to year between .capital and operating expenses. We conclude, then, that the company cannot justly complain of an apportionment of its capital by the disallowance of its present claims of the overhead addition thereto, where the company has already been paid that overhead in conformity with its own claims that only 6.35 per cent, of it represented capital expenditure. The point is so important that we quote from the decision of the Supreme Court of West Virginia upon that exact point as follows: “We are of opinion that'in any estimate of the present fair value of the company’s property, based upon reproduction cost new, less depreciation, there may properly be included in such estimate a reasonable allowance for ‘overhead charges,’ if such charges have not already been paid as operating expenses, but the evidence as to the amount is too uncertain in this case for us to determine any particular sum. Upon further inquiry the commission can ascertain such amount as may be warranted by the evidence, and that sum, when so found, may be given such weight, along with the other facts relevant to the inquiry, as the commission may deem proper. But no allowance for overhead costs should be made where they have already been paid by the public as operating expenses. The utility should not be permitted to capitalize such overhead charges and require the public to keep on paying a return on expenses already repaid the utility. If, however, it should be found that actual expenditures have heretofore been made for overhead costs which have not been charged to and paid as operating expense, allowance should be made therefor.” Natural Gas Co. v. Pub. Serv. Comm., 95 W. Va. 557, 121. S. E. 716, 723. See, also, Des Moines Gas Co. v. Des Moines, 288 U. S, 153, 165, 35 S. Ct. 811, 59 L. Ed. 1244. In this connection, however, it should be noted that the situation here is differentiated from that presented in the Board of Publie Utility Com’rs v. N. Y. Telephone Co., 271. U. S. 23, 46 S. Ct. 363, 70 L. Ed. 808, the case much relied upon by the company in its contention that it. is entitled to income upon the capital investment represented by overhead improperly charged to current expense. The Supreme Court in that case was dealing with a situation where the regulating board had expressly found that the returns allowed by it upon the fair value of the property were at least $1,300,000 less than the amount to which the company was entitled as a fail-rate of return upon its property. The board in its findings made it clear that the only justification for the rate fixed by it was its contention that the company had accumulated an excessive depreciation reserve amounting to $16,902,530. The board, therefore, allowed a depreciation annuity of only $683,-430, although it found that a proper annual allowance for depreciation and amortization would be $3,314,716. The difference between these two amounts was to be made up on the books of the company by appropriation from the previously received depreciation account. The