223 U.S.

349
32 S.Ct. 271
56 L.Ed. 466

LINCOLN GAS & ELECTRIC LIGHT COMPANY, Appt.,

v.
CITY OF LINCOLN et al.
No. 83.
Argued December 6 and 7, 1911.
Decided February 19, 1912.

Messrs. Halleck F. Rose, Charles A. Frueauff, Edmund C. Strode, and

John F. Stout for appellant.
[Argument of Counsel from pages 350-353 intentionally omitted]
Messrs. Fred C. Foster and William M. Morning for appellees.
[Argument of Counsel from pages 353-356 intentionally omitted]
Mr. Justice Lurton delivered the opinion of the court:

This case involves the validity of an ordinance regulating the appellant's

charges for gas furnished to consumers, and forbidding a charge in excess of $1
per thousand feet. The bill assailed the rate as confiscatory, and therefore a
taking of property without compensation. The ordinance rests upon legislative
power to regulate the charges of such public-service companies.

The sufficiency of the price prescribed to produce a fair profit upon the value
of the property employed in the business is to be strongly presumed. The
burden of showing its confiscatory character rests, therefore, upon the
complaining company.

The court below, upon a final hearing, held that the appellant had not made out
its case, and dismissed the bill, with leave to renew the litigation if, upon actual
operation under the ordinance, the returns upon its business should not prove
reasonably remunerative. The ordinance was never put in force. Within a few

days after it went into effect this bill was filed and an injunction, pendente lite,
granted, which was continued in force down to the final decree, and when this
appeal was allowed, was, by order of the court allowing it, continued pending
the appeal, under a bond conditioned to account for all overcharges if the
ordinance should be sustained.
4

The case was not referred to a master, as is the usual course in such cases,
although there was a great mass of conflicting evidence relating to the value of
the plant, cost of operation, and gross and net income. Neither did the court
make specific findings of fact to which specific objection could be made. Such
facts as may be said to constitute 'findings of fact' appear in the way of large
conclusions in the course of the opinion found in the record.

In this, as in every other legislative rate case, there are presented three
questions of prime importance: First, the present reasonable value of the
company's plant engaged in the regulated business; second, what will be the
probable effect of the reduced rate upon the future net income from the
property engaged in serving the public; and, third, in ascertaining the probable
net income under the reduced rates prescribed, what deduction, if any, should
be made from the gross receipts as a fund to preserve the property from future
depreciation.

The valuation fixed by the court is the main point of attack. That the company
is entitled to a fair return upon the value of the property at the time of the
inquiry is the rule. San Diego Land & Town Co. v. Jasper, 189 U. S. 442, 47 L.
ed. 894, 23 Sup. Ct. Rep. 571.

The court, as one means of finding the present value of the gas-making plant,
found that the present cost of replacing it would be $566,073.59. The items
which enter into this valuation, and the reason for reaching this result, as stated
in the opinion, are shown by the paragraphs here set out:

'In determining for what amount the plant could be reconstructed, I have
accepted in the main the testimony of complainant's witnesses as being the
most satisfactory, and I find that the plant could be reconstructed for the
following sums:

Coal gas apparatus...... $ 80,605.00

Water gas apparatus....... 29,278.00
Mains in dirt streets..... 90,578.00
Mains in paved streets... 130,027.00
Gas services, etc........ 107,106.82
Gas meters in use......... 36,282.90

Meter connections.......... 6,304.00

Piping for gas ranges..... 16,500.00
--------$496,681.72
Engineering expenses (2 1/2
per cent)................ 12,417.04
Real estate................ 4,000.00
Present value of buildings. 24,643.00
Contingent expenses in
construction............. 25,000.00
Cost of organizing company. 3,000.00
--------$565,741.76

10
'While
the evidence as to the depreciation is somewhat vague and indefinite, I think,
upon the items aggregating said $496,681.72, there should be deducted for
depreciation 10 per cent, amounting to the sum of $49,688.17, making the total
present valuation of the plant $516,073.59; but it is apparent that, for the successful
and economical operation of the plant, a certain amount of working capital is
required. This amount I find to be $50,000, making the total value of complainant's
investment, upon which it is entitled to a reasonable return, $566,073.59.
11

'While it is true that the testimony shows that the complainant has not such
working capital, but has purchased upon credit the supplies necessary to
operate, yet I think that, in determining what is a reasonable compensation, a
working capital should be considered.' [182 Fed. 927.]

12

But the appellant does not accept the valuation thus fixed. It contends that there
should be added to that the following:

13

Steam boiler for water gas.................... $ 2,225.00

Underestimate of present value
of buildings.................................. 10,000.00
Underestimate of working
capital....................................... 10,000.00
Underestimate of meter
connections.................................... 6,102.00
Underestimate contingent
expenses of construction...................... 37,500.00
Interest on idle capital during
construction.................................. 40,000.00
Promotion of business, or going

value and franchise, as

elements in replacing value.................. $10,000.00
--------205,852.00
Add court's valuation......................... 566,073.59
--------$771,825.59

14 appellee, on the other hand, in support of the general decree dismissing the bill,
The
joins issue upon each of these items, and insists that if the court shall see fit to go
into the evidence, it will find that the plant has been greatly overvalued. It
particularly objects to the large item of $107,000 for gas service, and to the item of
$50,000 added to the value of the property as 'working capital,' and says that the
incorrectness of this is seen in the admission that the appellant has in fact no such
working capital engaged in the business. Appellee further contends that the 'expense
of operation' in 1907 includes reconstruction or replacement work, and that such
items enlarge the operating expenses of that year unduly and correspondingly reduce
the net income. If the expense of operating the plant for that year is to be accepted
as the standard by which the operating expenses of future years are to be estimated,
the objection is serious if the facts are as claimed.
15

The appellant further claims that the sum of $8,000 deducted from the net
income, as a permanent protection against future depreciation in the value of
the plant, is too small, and should be much larger. Upon this there was
conflicting expert testimony. Upon all of these questions of valuation and of
operating expense there is much evidence, and much of it conflicting. The
findings of the court, as before stated, are of too comprehensive a character to
be of much help in dealing with the details which are embraced.

16

But it is urged that even upon the valuation fixed by the court, the estimated
future net income will be little over 5 per cent, and, in consideration of the
character of the property and the high average interest rate prevailing in
Nebraska, this is not a reasonable or fair return, and demonstrates the
confiscatory character of the ordinance. But if the $8,000 first deducted from
the receipts, and laid aside as a permanent fund to meet future depreciation, be
taken into account, the estimated future net income with the rate in force will
exceed 6 per cent.

17

Nor did the circuit court hold that a net profit of 5 2/10 per cent would be a fair
and reasonable return upon the value of the property employed. What the court
found was, in substance, that at least an income of that amount was certain,
aside from the amount reserved for a permanent preservation fund. What the
court said was this:

18

'While complainant, I think, is entitled to at least 6 per cent upon the money
invested, it does not appear that the reduced rate would not yield that sum. It is
quite probable that the reduced rate would considerably increase the
consumption of gas, and thus increase the complainant's net profits.

19

'The record shows that in June, 1904, complainant voluntarily reduced its rates
from approximately $1.50 per thousand to $1.20, and the amount of gas
consumed, and net profits resulting, considerably increased. The inquiry in
cases of this character is not alone what has complainant theretofore earned, but
it is what will be the effect of the ordinance reducing the rate upon the future
net earnings of the company; and it devolves upon complainant to show, not
that the past rates have not produced a reasonable return, but that the rate
prescribed by the ordinance will not in the future produce a reasonable return.'

20

This case is full of difficult and grave questions. Such conclusions as to facts as
are found in the court's opinion are not helpful when, as here, errors are
assigned which open up substantially the whole case. The cause should have
gone at the beginning to a skilled master, upon whose report specific errors
could have been assigned and a ruling from the court obtained.

21

In the case of Chicago, M. & St. P. R. Co. v. Tompkins, 176 U. S. 167, 179, 44
L. ed. 417, 422, 20 Sup. Ct. Rep. 336, this court was called upon to review a
decree upholding a state-made railroad rate which had been unsuccessfully
attacked as confiscatory. In that case, as in this, the matter had not been referred
to a master, but had been decided by the circuit court upon the whole of the
evidence. It came to this court upon such a variety of questions of fact and law
as to practically open up the whole case. Impressed with the seriousness of the
questions involved, this court remanded the case for a reference and report by a
skilled master. As to this practice, this court said:

22

'The question then arises, What disposition of the case shall this court make?
Ought we to examine the testimony, find the facts, and from those facts deduce
the proper conclusion?

23

'It would doubtless be within the competency of this court on an appeal in

equity to do this, but we are constrained to think that it would not (particularly
in a case like the present) be the proper course to pursue. This is an appellate
court, and parties have a right to a determination of the facts in the first instance
by the trial court. Doubtless, if such determination is challenged on appeal, it
becomes our duty to examine the testimony and see if it sustains the findings;
but if the facts found are not challenged by either party, then this court need not

go beyond its ordinary appellate duty of considering whether such facts

justified the decree. We think this is one of those cases in which it is especially
important that there should be a full and clear finding of the facts by the trial
court. The questions are difficult, the interests are vast, and therefore the aid of
the trial court should be had. . . . We are all of opinion that a better practice is
to refer the testimony to some competent master, to make all needed
computations, and find fully the facts. It is hardly necessary to observe that, in
view of the difficulties and importance of such a case, it is imperative that the
most competent and reliable master, general or special, should be selected, for
it is not a light matter to interfere with the legislation of a state in respect to the
prescribing of rates, nor a light matter to permit such legislation to wreck large
property interests.'
24

The question as to what sum, if any, upon the facts of this case, should be
annually deducted from the net income as a permanent maintenance or
replacement fund, is novel and presents a grave problem.

25

Conflicting expert evidence has been introduced presenting radically different

theories as to the necessity, character, and amount of such a fund, and as to how
it should be created, preserved, and expended. Some of this evidence puts the
sum to be annually deducted and set aside as a permanent fund at 5 per cent
upon the value of the plant at the time of deduction. It is obvious that if this
view is sound, there will be little or nothing of the net income left for
distribution among shareholders, and no basis for legislative rate reduction
now, and none likely until such time as the income from the permanent fund
will keep up the plant. The work of reconstructing and replacing old parts by
new in a plant of this kind must, in the very nature of things, be going on
constantly. Heretofore it seems to have been so well and continuously done that
the value of the plant as a whole has suffered less than 1 per cent per annum if
the total depreciation be distributed through the more than thirty years of
operation. So far as can be now seen, reconstruction and replacement charges
have, up to the present time, been borne by current revenue, with the result that
the revenue remaining in the single year of 1907 showed a net surplus of
$73,851.83,a sum large enough, if distributed to shareholders upon the basis
of the value of property engaged in the business as claimed by appellant, to
have paid a dividend of 10 per cent, and about 15 per cent upon the valuation
settled by the circuit court.

26

There is no finding as to the extent of the application of the revenue of 1907 to

reconstruction or replacement, as distinguished from current repairs and
operating expenses. It is, however, plainly inferable that the revenue of that
year was used to the extent necessary. If, in the past, reconstruction and

replacement charges have been met out of current expenses, the fact must be
taken into consideration, both when we come to estimating future net income
and in determining what sum shall be annually set aside to guard against future
depreciation. This doubtless influenced the court below in settling upon the
amount of $8,000 as a sufficient annual appropriation of income as insurance
against future depreciation. But if the constantly recurring necessity to do
reconstruction or replacement work was in 1907 met out of the current income
of that year, thereby diminishing the net income, the fact should be given
weight in estimating future net income; otherwise there will be a double
deduction on that account, first, by paying such charges as they occur, and
thereafter by a contribution out of the remaining income for the same object.
27

The facts found are not full enough to at all justify this court in dealing with this
problem of a replacement fund.

28

There should be a full report upon past depreciation, past expense for
reconstruction or replacement, and past operating expenses, including current
repairs. We should be advised as to the gross receipts for recent years, and just
how these receipts have been expended. Then the amount to be set aside for
future depreciation will depend upon the character and probable life of the
property and the method adopted in the past to preserve the property. It can be
readily seen that the amount to be annually set aside may be such as to forbid
rate reductions because of the requirement of such a fund. The matter is one
first for a skilled master, who should make a full report upon the value of the
property, the receipts and the expenses of operation, and the sums paid out on
reconstruction and replacements, and in dividends in recent years.

29

For the reasons indicated, we direct that the decree be reversed, and the cause
remanded to the district court to refer the case to a competent and skilled
master, to report fully his findings upon all of the questions raised by either
party, separately, and with leave to both parties to take any additional evidence
they may wish within a time to be fixed by the court, and that that court, upon
such report, proceed as equity shall require.

30

It is further ordered for the protection of all parties that the injunction granted
in the court below continue in force until final decree there, upon condition that
the appellant enter into a new bond, with sureties satisfactory to the court
below, to account for all overcharges to consumers since the original restraining
order, in the event the ordinance shall be sustained, and that, if such bond be
not made within twenty days after the filing of the mandate, that the injunction
stand dissolved.