For more than 60 years last past the Spring Valley Water Company, a California corporation, and its predecessors in interest, have been engaged in the public service of supplying the city of San Francisco and its inhabitants with water for domestic and other purposes. To enable it to discharge the duties thus assumed, the company has acquired lands and water rights, and has constructed dams, reservoirs, pipe lines, and the usual facilities for conserving, impounding, conducting, and delivering the water thus supplied. Section 1 of article 14 of the state Constitution provides as follows;

Pursuant to this constitutional requirement the board of supervisors of the city and county of San Francisco, iñ the month of February, 1907, passed an ordinance fixing the rates or compensation to- be charged by the plaintiff for the use of water for the year commencing' on the 1st day of July, 1907; and ending on the 30th day of June, 1908; and in the month. of February of each succeeding year thereafter, until and including the year 1914, a similar ordinance was passed fixing the rates or compensation to be charged for the use of water for the ensuing year. Soon after the passage of the ordinance of February, 1907, the plaintiff instituted suit No. 14,275 in the Circuit ■Court of the United States for the Northern District of California to restrain the city and county of San Francisco and the board of supervisors from enforcing the rates or compensation fixed by the ordinance, invoking the jurisdiction of that court on the ground that the rates or compensation thus fixed were noncompensatory, and that the ordinance took the property of the plaintiff for a public use without making just compensation therefor, and deprived the plaintiff of its property with-cut due process of law, in violation of the Fifth and Fourteenth Articles of Amendment to the Constitution of the United States. ’ Similar suits were instituted in the same court, and in the United States District Court, which succeeded to its jurisdiction in 1912, to enjoin the ■enforcement of the rates or compensation fixed by the ordinances passed in the ensuing years for the like reason. After the issues were made up the several cases were referred to the standing master by consent of parties, with directions to take the testimony and report his findings and conclusions to the court. The testimony has been taken, the master’s report has been filed, exceptions to the report have been saved, and the case is now before the court for final disposition.

[1] At the threshold of the case the court is met with the objection that, inasmuch as the. reference was by consent, the findings of the master are conclusive upon the court, unless there has been manifest error in the consideration given the testimony or in the application of governing principles of law. Kimberly v. Arms, 129 U. S. 512 , 9 Sup. Ct. 355, 32 L. Ed. 764 , Davis v. Schwartz, 155 U. S. 636 , 15 Sup. Ct. 237, 39 L. Ed. 289 , and kindred cases are cited in support of this proposition. That rule, however, has but a limited application to a case of this kind.

In Knoxville v. Knoxville Water Co., 212 U. S. 1, 7 , 29 Sup. Ct. 148, 150 ( 53 L. Ed. 371 ), the court said:

But in Chicago, Milwaukee, etc., Ry. Co. v. Tompkins, 176 U. S. 167, 180 , 20 Sup. Ct. 336, 341 ( 44 L. Ed. 417 ), the court said:

This ruling was reaffirmed in Lincoln Gas Co. v. Lincoln, 223 U. S. 349, 362 , 32 Sup. Ct. 271, 56 L. Ed. 466 , and it must be presumed that the court had this rule in mind in ordering the reference, and the parties in consenting thereto.

In this case the master examined the lands, reservoirs, and properties of the company, viewed other lands used as' a basis of comparison for the purpose of fixing land values, heard the witnesses testify, observed their demeanor, and otherwise enjoyed opportunities for weighing and applying testimony which are denied to the court; and for that reason I must accept his finding as to the properties used and useful, and in general his findings on questions of laud values, construction cost, depreciation, and expense of maintenance and operation, because such findings are amply supported by the testimony. But where the findings are in the nature of conclusions from undisputed facts I will lie guided by my own conceptions of right and justice. In the light of these considerations I will refer, briefly as ma,y be, to. the findings relied on to support the conclusion of the master that the rates established by the board of supervisors for each of the several years in question are confiscatory and therefore void.

*982 At the commencement of the trial the parties agreed that the case involving the 1913 rates should be deemed the principal one; that the value of the property and property rights of the plaintiff should be ascertained and fixed as of December 31st of that year; and that the value for the other years should be ascertained by deductions and additions to the inventory, aided by certain stipulated percentages. No objection has been'urged by either patty to the deductions or additions made to the 1913 valuation for the purpose of ascertaining and fixing the value for the remaining years, so that for the present we need only concern ourselves with the 1913 valuation. This statement, of course, has no application to the so-called Pleasanton Ranch Rands, which were not acquired until 1912. The master found that the value of all property of the company, used and useful as of December 31, 1913, was $39,000,000; that the net revenue for the year 1913-14, based on the ordinance of February, 1913, was $1,531,385.16, or 3.93 per cent.; and that a fair rate of return on the invested capital was 7 per cent. Speaking roughly, and without going into unnecessary details, the items going to make up the 1913 valuation are as follows:

—which the master reduced to $39,000,000.

For reasons already stated, I adopt the finding of the master that all the above properties are used and useful. The finding is fully warranted by the testimony, and is further warranted, if not impelled, by the acts and conduct of the city and its representatives, extending over a period of years, in the matter of fixing rates, and in the condemnation suit instituted by the city to condemn the water system now in question. For the like reason I accept the valuations placed on the San Francisco lands, the Peninsular watershed lands, the Peninsular miscellaneous lands, the Alameda lands, the rights of way and structures, and the finding as to the necessary amount of working capital. The valuation placed on the reservoir lands seems somewhat fanciful and arbitrary, but I would not feel warranted in making a reduction that would make a difference in the final outcome of the case. The valuations placed on the other properties call for special consideration.

[2] First. As to the Merced watershed lands: Merced Ralees, containing an area of 336 acres, furnish at present a part of the city water supply. During the year 1913 the total water supply of the city from all sources was 39.7 million gallons daily, or 88 gallons per .capita. Of this total 3.4 million gallons daily, or less than one-tenth of the' *983 whole, was taken from the lakes in question. In addition to the ownership oí the lakes the plaintiff owns 2,482.71 acres of adjacent watershed lands. The parties are not agreed as to the necessity for maintaining this watershed. The watershed lands are situated from 4% to 7 miles from the civic center of the city, and are separated from the city by the range of hills dominated by the Twin Peaks. The lands are chiefly valuable for residential purposes, and the plaintiff contends that they cannot be safely used for these purposes so long as the water of the lakes is used for domestic purposes; that it will be necessary to abandon' [lie use of the lakes as a source of supply for domestic purposes at an early date, and that thereafter the lake water will only be used in case of emergency. The defendants, on the other hand, contend that the maintenance of this watershed is unnecessary; that the water of the lakes can be adequately protected from pollution by the maintenance of a narrow margin or strip of land around the lakes. The master found that the maintenance of the watershed was necessary to protect the water of the lakes against pollution as long as the lake water is used for domestic purposes, and in that conclusion 1 concur. The question remains, however, wha,t valuation should he placed upon these lands for rate-making purposes ? The master found that the market value of the lands in the year in question was $5,532,-231.50, but that for rate-making purposes the value was only $3,242,-160, as already indicated. Both parties have excepted to the valuation thus fixed, the plaintiff contending for the full market value, the defendants insisting’ upon a still further reduction. Manifestly these watershed lands are not worth their full market value for rate-making or water-supply purposes; for if the lands are placed at their full market value of approximately five and one-half million dollars, and there is then added thereto the sum of $336,000, the value placed on the lakes for reservoir purposes, and the further sum of $315,000, the value placed upon the water rights in the lakes, the result is a capital investment of upwards of $6,000,000 for lands, reservoirs, and water rights, furnishing less than one-tenth of the total water supply of the city. It must be at once apparent that no such valuation can be considered or accepted. What valuation should, then, be adopted? In my opinion, the valuation fixed by the master is too high and unwarranted. If we accept his valuation of almost three and a quarter million dollars as of December 31, 1913, and add thereto the valuation placed on the lakes for reservoir purposes, and on the water rights in the lakes, we still have a capital investment of almost $4,000,000 for lands, reservoirs, and water rights, furnishing less than one-tenth of the total water supply, and this without dams, conduits, pipe lines, and all that goes to make up a complete system. In other words, on this basis the company would have upwards of $40,000,000 invested in lands, reservoir sites, -and water rights alone, or more than the value of its entire system as found by the master. For the purposes for which these lakes and watershed lands are used, they are of no greater value than the lands and reservoir sites which go to make up the balance of the system. Indeed, they are perhaps of less value, because of the somewhat doubtful quality of the water furnished from this source. *984 If the use of these lands was necessary or indispensable to the maintenance of the system, a different question would be presented; for in that event the plaintiff would probably be entitled to a reasonable return on their full market value, whatever that value might be. But these lands are not indispensable to the maintenance of the system, and for water-supply and rate-making purposes are worth only the reasonable cost of obtaining an equivalent supply from an alternative source, which is conceded to be accessible. If it be said that the company is entitled to a reasonable return on the full value of these lands until water can be brought in from an alternative source, the answer is that practically the same conditions have existed for a long period of years, and the necessity for a change should have been anticipated and the change provided for. For these reasons I am of opinion that there should be a further deduction of $1,500,000 from the value of these watershed lands.

Second. As to the value of water rights. The master found that these water rights had a value of $90,000 per million gallons daily for the years 1913-14 and 1914 — 15 and a somewhat lesser value for the earlier years. If the water supply owned and controlled by the plaintiff was drawn from a stream or other definite source, I am not prepared to say that this valuation is excessive or unsupported by the testimony. But the San Francisco water supply is peculiar in this respect. As said by the master:

Under such circumstances, to allow the company the full value of watershed and storage reservoirs, and add thereto the value of the water when collected and stored, is to place a double burden on the rate payers. The plaintiff is undoubtedly entitled to the full value of its storage facilities, but in addition to this it is only entitled to the fair value of the water -rights in their natural state. And I am far from convinced that these winter flood waters flowing wildly to the bay and sea are worth $90,000 per million gallons daily, or even a small part of that sum. Of course all the water rights of the plaintiff are not of this character, but, making due allowance for its claims of every kind, I am of opinion that $1,500,000 should be deducted from the value of the water rights as found or fixed by the master.

Third. The next item is for construction cost of the Calaveras dam. The facts in relation to this partially constructed dam are these: Construction work commenced about 1910, or at least the first item of construction cost appears in the findings of the master for the year 1910-11. The master found that the dam should be completed some time during the present year or next year, unless construction work is delayed by the present war or other causes. When completed the *985 reservoir resulting from the construction of the dam will furnish forty-five million gallons daily to the city water supply, or more than the entire supply for any of the years in controversy here. The items allowed for this dam in the several years are, in round numbers, as follows:

These several items are made up of the cost of preliminary investigations, engineering, construction work, and interest. It is conceded that these several sums were actually expended, and that the construction of the dam is a necessary addition to the water system; but it is likewise conceded that for the years now in controversy the dam added nothing to the city water supply. For this latter reason the defendants contend that the money thus expended should he omitted from property values for rate-making purposes. The plaintiff is entitled to a reasonable return upon its invested capital, and whether it receives that return from time to time as money is expended in the acquisition of property or in the construction of works, or whether it receives a higher rate of return when the works are completed and in use, to malee up for interest and other charges during construction, is a matter of form rather than of substance. Perhaps the rule adopted by the master is the more equitable, because it obviates the necessity for any considerable increase in rates in any given year. The chief importance of the items, as I view them, is the bearing they have on the next item to be- considered by the court, namely, the going concern value. I will therefore allow the items to stand, stating, as I did in regard to reservoir values, that their omission will not change the final result.

Fourth. The next item is the going value, or going concern value, of the plant or system, fixed by the master at $3,400,000. Such value is defined by the Supreme Court in Des Moines Gas Co. v. Des Moines, 238 U. S. 153, 165 , 35 Sup. Ct. 811, 815 ( 59 L. Ed. 1244 ), as the value which inheres in a plant where its business is established as distinguished from one which has yet to establish its business. In further discussing the question in that case the court said:

It appears from the record that for a great many years last past the plaintiff has wisely anticipated its future needs, and has acquired property and rights long before there was an actual necessity therefor, and long before such property or rights were put in actual use. I also think it sufficiently appears that the value of the property and rights thus acquired was added to the value of the plant or system at the earliest opportunity, and that later rates were based thereon. At least there is nothing in the record to indicate the contrary. And the plaintiff now asserts the right to have the value of works under construction added to the value of the system, and to collect returns thereon, long before the works are actually completed or put in use, and we have a right to assume that the same course has been pursued in the past. For instance, in the case of the Calaveras dam, under the findings of the master the rates of the company will be based in part on money invested in the construction of the dam for many years before the dam is completed or put in use, and long before the rate payers derive any benefit, therefrom. In the light of this practice, is it just or proper to add another percentage to the cost of the dam when put in actual use on the theory that it is then a going concern? It may be urged that the present value of the plaintiff’s property does not depend upon past practices, and that such past practices cannot be taken into consideration, but, as said by the Supreme Court, every case is controlled by its own circumstances, and, under the circumstances disclosed by this record, I feel that past practices are a safer and more equitable guide than dogmatic theories and assumptions not justified by the record. No doubt the company has sustained losses by way of interest on investments in property and in construction work before receiving returns thereon, and probably losses in preliminary investigations and in establishing its business which have not been fully compensated for as operating expenses or otherwise; but, in view of all the circumstances, I deem the allowance of the master excessive, and deduct therefrom the sum of $2,000,000.

Fifth. Reference has already been made to the Pleasanton Ranch lands. For many years the company owned land in the vicinity of these lands, and pumped water for the system from the underlying' gravel. These pumping operations lowered the water table under adjoining lands to such an extent that some time prior to the year 1912 the company was threatened with litigation by adjoining landowners. To avoid injunction suits or actions for damages, or perhaps both, the company deemed it advisable to purchase the lands outright and did so about the latter year. It thus acquired approximately 4,500 acres of land, at a cost of approximately $1,500,000. The value of these lands was included by the master in the rating base, and to such *987 inclusion the defendants have excepted. I am inclined to the opinion that the exception is well taken. However desirable the acquisition of these lands may have been from a business standpoint, the fact remains that they are not necessary to the maintenance of the system, and are not used or useful in connection therewith. It seems to me that the correct basis would be to ascertain as nearly as possible the value of the right or interest in these lands which is actually used for public purposes, and base the rate of return on that valuation. However, the master has allowed nothing for the water rights from these lands, and the rents and profits, amounting to about $40,000 annually at the time of the trial, have been accounted for as a part of the revenues of the system; and if the court should now undertake the difficult task of determining the value of the right or interest actually used for public purposes, and base the returns thereon, after deducting from the net revenues the rentals accounted for, the difference would be inconsiderable; at least, the difference would not be determinative of the case.

[3] Sixth. The master found that the plaintiff was entitled to a return of 7 per cent, on its invested capital during the several years in controversy here. If this is to be deemed a mere finding that such a rate of return was fair and reasonable as between the company and the water consumers, I have no comment or criticism to make. If, on the other hand, it is to be deemed a finding or conclusion that any less rate of return was confiscatory and violative of the Constitution of the United States, I must dissent therefrom. This court has no jurisdiction to review the action of the board of supervisors in the matter of fixing rates, and no jurisdiction to enjoin the enforcement of rates which are lower than the court itself would fix after full investigation. Any such attempt on the part of the court would be usurpation in its worst form. In Spring Valley Water Works v. San Francisco, 82 Cal. 286 , 22 Pac. 910, 1046 , 6 L. R. A. 756, 16 Am. St. Rep. 116 , the court said:

This language was quoted with approval by the Supreme Court in San Diego Land Co. v. National City, 174 U. S. 739, 750 , 19 Sup. Ct. 804, 810 ( 43 L. Ed. 1154 ), and in the same case Mr. Justice Harlan said:

[4] Cases may doubtless be found in which trial courts have found that public service corporations were entitled to a return of 7, or even as high as 8, per cent, on the capital invested in certain enterprises; but I have found no case where the court has held that a less rate of return than 7 per cent, is confiscatory or violative of the Constitution. A return of 6 per cent, was approved by the Supreme Court in Willcox v. Consolidated Gas Co., 212 U. S. 19 , 29 Sup. Ct. 192, 53 L. Ed. 382 , 48 L. R. A. (N. S.) 1134, 15 Ann. Cas. 1034, and I think the concensus of opinion favors the view that such a rate of return is not confiscatory or violative of the Constitution. In Stanislaus County v. San Joaquin & K. R. C. & I. Co., 192 U. S. 201, 213 , 24 Sup. Ct. 241, 246 ( 48 L. Ed. 406 ), the court had under consideration a California statute fixing the net annual receipt or return for furnishing water at not less than 6 nor more than 18 per cent., based on the value of the property used and useful. And in discussing the validity of such a statute the court said:

The reasonableness of a return depends in a measure on local con•ditions, on the risks assumed, and other considerations. But it is a matter of common knowledge that interest rates vary almost as much in the same locality at different times as they do in different localities at the same -time, and in an enterprise of this magnitude the question of locality, while entitled to consideration, is not controlling. At least, the Supreme Court did not so consider it in the case just cited arising in the same state. For these reasons I am of opinion that a return of as high as 6 per cent, on the invested capital or value of property devoted to the service of the public is not confiscatory, and violates no constitutional right of the plaintiff.

After a most careful and painstaking examination of the voluminous record before me, I do not feel that I would be warranted in making other or further changes in the master’s report. Perhaps I might allow an item here or disallow an item there; but the changes would be inconsequential and of doubtful propriety. As said by the court in Cedar Rapids Gas Co. v. Cedar Rapids, 223 U. S. 655, 669 , 32 Sup. Ct. 389, 390 ( 56 L. Ed. 594 ):

In the course of the opinion I have not referred to the voluminous exceptions taken, and this for obvious reasons. The exceptions reserved by the defendants are more than 100 in number, with subheads and subdivisions, and cover 57 closely typewritten pages. Many of the exceptions relate to reasons assigned by the master for his conclusions rather than to his findings on ultimate or material facts. Suffice it to say that in so far as the findings here made differ from the findings of the master the exceptions are sustained, hut in all other respects the exceptions on the part of the defendants are overruled. Certain exceptions were reserved by the plaintiff, but all save one have been sufficiently answered. The plaintiff owns rights of way through Mt. Olivet, Cypress hawn, Greenlawn, and Woodlawn cemeteries. The testimony tends to show that lands in these cemeteries are worth from $1 to $1.50 per square foot for burial purposes. The plaintiff insists that the rights of way through these cemeteries should be valued ou that basis. In that conclusion I cannot agree. No such price was paid for the rights of way, and the mere presence of the cemeteries adds nothing to their value for water supply purposes. Certainly the fortuitous fact that pipe lines pass through these cemeteries adds nothing to the value of the system as a whole, and affords no reason why water rates should be based on the price the citizen is willing or compelled to pay for the six feet of earth, that will mark his last resting place.

Much has been said by counsel representing the city about the original cost theory and its adoption by the California Railroad Commission. In answer to that argument it need only be said that the theory thus advocated has been repudiated time and again by the Supreme Court of the United States and the question is not an open one.

It remains to apply the conclusions thus announced to the facts of the several cases. Fortunately the court is relieved from one of the chief difficultiés which usually arise in cases of this kind; that is, the return that may be expected under the regulations in question. No such difficulty can arise here, because the ordinance for each year expired with the year, the rates have already been collected, and the return is a mere matter of computation. The valuation fixed by the master varies from $32,900,000 in 1907- 08 to $39,000,000 in 1913-14 and 1914 — 15. The net revenue varies from $696,648.74, or 2.1 per cent., in 1907-08, to $1,654,589.87, or 4.24 per cent., in 1914-15. The highest rate of return was therefore during the last year, and, if the ordinance for that year is declared noncompensatory and void, the same conclusion must follow in each of the earlier cases as a matter of course. The valuation for the year 1914-15 has been reduced from $39,000,000 to $34,000,000. A net return of 6 per cent, on that valuation is $2,040,000, or approximately $385,000 in excess of the ordinance rates. During each of the years in question a temporary re *990 straining order was granted by the court, and the plaintiff was permitted to and did collect approximately-15 per cent, in excess of the ordinance rates. The actual net return during the year 1914 — 15, with this 15 per cent, added, was $2,011,903.97, or less than 6 per cent, on the valuation as found and fixed by the court. For these reasons I feel constrained to hold that each and all of the several ordinances are violative of the Constitution of the United States, and therefore void.

L,et decrees be entered accordingly.

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