Public utility act of California

Front matter

Class __Mi

Book_

Copyright N°

Contents

John M. Eshleman, President of Commission

Biographies of Commissioners 14

The Act and its Relations to the Public 17

Introduction

BY

JOHN M. ESHLEMAN,

President of the Railroad Commission of the State of California.

In a little more than a year, California has made more fundamental changes in its laws affecting public utilities than have been brought about in most states in a quarter of a century. These changes must necessarily be of interest to the dealers in securities. I am optimistic enough to believe that to the dealers in legitimate securities, they will be of inestimable benefit. A bond is to all intents and purposes a mortgage. It constitutes a lien upon certain property. It is to the interest of those who hold liens on property to know that the property is ample to secure their lien. While the bringing about of this result is not the prime object of regulation of public utilities, yet it is one of the necessary results. The interests of the public and the corporation in this regard are the same. Too often in the past liens have been created upon corporate property through bond issues and the money realized from such bonds diverted from the legitimate needs of the corporation, to make large profits for the promoter and the corporation official, who makes use of the corporation to amass for themselves private fortunes. The public becomes interested because it is from the public that the interest on the bonds and the money necessary to retire them at maturity must be collected through the medium of rates. The proceeds from bonds, then become in effect a trust fund which should be utilized in the production of a property which will adequately furnish the service which the public has a right to demand at reasonable rates.

Therefore, although a menace to those who desire to profit at the public expense, yet the Public Utilities Act, as it now stands upon the Statute Books of California, is to be the best interest of the financier, who must advance capital, the corporation, who should utilize it, and the people at large, who must ultimately repay it.

Biographies of Commissioners

John Morton Eshleman

John Morton Eshleman (Republican) was born at Villa Ridge, Illinois, June 14, 1876, and came to California March 2, 1896. He worked in a railroad camp of the Southern Pacific Company, during which time he studied to prepare himself for admission to the University, entering the University of California in 1 898. In 1902 he took his A. B. with highest honors and in 1903 the degree of Master of Arts, He was admitted to the bar and appointed deputy state labor commissioner under Governor Pardee and Commissioner W. V. Stafford. He represented the 52nd District (Berkeley) in the 37th session of the legislature. He was appointed, under District Attorney (now Superior Judge) Everett J. Brown, deputy district attorney of Alameda County, but was compelled by his health to remove to the Imperial Valley. On the formation of Imperial County, August, 1907, Mr. Eshleman was elected its first district attorney, serving out his term. In November, 1910, he was elected railroad commissioner from the third district and chosen as president of the Commission in January, 1911.

Alexander Gordon

Alexander Gordon (Republican), was born in Hants County, Nova Scotia, October 1 6, 1 846. He received a common school education and was brought up on a farm. In 1 869 he moved to California, settling in San Joaquin County, where he engaged in the sheep raising industry. In 1875 he moved to Fresno and began the growing of raisins on a large scale. Since 1901 he has made his residence in Sacramento, where he became the vice president and director of the Sacramento Bank. From 1903 to 1907 he served as member of Auditing Board to Commission of Public Works. From 1907 to 1911 he served as member of Consulting River Board, Department of Engineering. Elected member of Railroad Commission November 8, 1910, from the First District.

Harvey D. Loveland

Harvey D. Loveland (Republican) was born in New York in 1853 and received his education in the schools of that State. For nine years he taught school in New York and Kansas, to which latter State he moved in 1876, where he read law and was admitted to the bar in 1881, but after practicing for a few years engaged in mercantile affairs, to which he has since given his attention. He became a resident of San Francisco in 1887. For several years he was connected with two of the largest mercantile institutions on the coast. He has always taken a lively interest in public affairs; was for six years president of the Pacific Coast Jobbers' and Manufacturers' Association; has also recently retired from the presidency of the Transmississippi Commercial Congress. As traffic director and later as president of the Pacific Coast Jobbers' and Manufacturers' Association, he assisted in accumulating the evidence and prosecuting the suits before the Interstate Commerce Commission in defense of the jobbing interests of the coast in what are known as ^the St. Louis Case, the State Toll Case, the Spokane Case, and otihers. He is vice-president of the International Mercantile and Bond Company, and president of the Merchants and Manufacturers' Securities Company. Mr. Loveland is also prominent in Masonic circles and is Past Grand Commander of the Grand Commandery of Knights Templar of California. He was a member of Governor Pardee's staff and is paymaster general of Governor Gillett's staff, with the rank of Colonel. He was appointed Railroad Commissioner for the Second District by Governor J. N. Gillett November 23, 1907, to succeed Andrew M. Wilson, resigned. He was elected a member of the Railroad Commission November 8, 1910, from the Second District.

Edwin O. Edgerton

Born in Yreka, California, January 8th, 1876. Educated in the common schools and University of Southern California. Admitted to the bar in 1 898. Practiced law eleven years in Los Angeles, California. Became secretary of Municipal League March, 1909. Appointed member of the State Railroad Commission March 13th, 1912.

Max Thelen

Born in Nebraska 1880. Came to San Diego County, California, in 1 888. Graduated from National City, San Diego County, public schools and High School. Worked five years on ranch. Entered University of California August, 1900; graduated May, 1904. Harvard Law School 1904 to 1906. In office of Olney & Olney, attorneys-at-law, San Francisco, November, 1906 to May 1907. Assistant attorney and then attorney for Western Pacific Railway Company from May 1907 to April 1911. Attorney California State Railroad Commission April 1911 to date. Appointed member Railroad Commission March 13th, 1912. First secretary and organizer Berkeley Lincoln-Roosevelt Republican Club. Vice-president City Club of Berkeley. Member Commonwealth Club of San Francisco, University of California Club, and American Society International Law. Lecturer International Law University of California. Joint author with John M. Eshleman of Public Utilities Act.

The Public Utilities Act and Its Relation to the Public.

BY

MAX THELEN,

Commissioner and Attorney, of the Railroad Commission of the State of California.

The Railroad Commission of California was created by the Constitution of 1879. For more than thirty years its jurisdiction was confined to "railroad and other transportation companies," and as to these companies the Commission had power only to fix rates and to prescribe a uniform system of accounts. Finally, in March, 1911, the legislature submitted to the people of this state three constitutional amendments, the purpose of which was to remove certain obstacles in the Constitution to the Commission's effective jurisdiction over railroad and other transportation companies and to authorize the legislature to confer upon the Commission broad powers of regulation and control over the other public utilities of the state as well. The Railroad Commission, anticipating the adoption of the constitutional amendments by the people on October 10, 1911, sent the writer, during the summer of 1911, to visit the leading railroad and public service commissions of the country. The writer made a careful study of the actual working of some twelve of the leading commissions of the country and of the statutes under which they operate, and on his return drafted, together with President John M. Eshleman of the Commission, the new Public Utilities Act. The widest possible publicity was given to the bill after the first draft had been prepared, and the public utilities affected were given every opportunity, both at public hearings and by correspondence, to present fully their objections to the bill, and over fifty of the leading public service corporations of the state availed themselves, through their representatives, of the opportunity so given. The bill was introduced in the Senate, at the extraordinary session of the legislature of 1911, by Hon. Lester G. Burnett on November 28, 1911, and in the Assembly on the same day by Hon. W. A. Sutherland.

1JB LOUIS SLOSS & CO.

It passed the Assembly on December 12, 1911, by the vote of 68 to 1 , and the Senate on December 16, 1911, by the vote of 23 to 0, was signed by Governor Johnson on December 23, 191 1, and became effective on March 23, 1912.

The Act will be discussed under the following heads : ( 1 ) the Railroad Commission; (2) duties of public utilities; (3) powers and duties of the Railroad Commission; (4) procedure before the Railroad Commission; (5) procedure before the courts; (6) effect of the Act on existing powers of incorporated cities and towns; and (7) organization of the Commission for its work.

I. The Railroad Commission.

The reorganized Railroad Commission consists of five members — President John M. Eshleman, H. D. Loveland, Alex Gordon, Edwin O. Edgerton, and Max Thelen, who is also attorney for the Commission. The terms of these commissioners will expire on January 1, 1915. The Governor will thereupon appoint one commissioner to serve until January 1 , 1917, two to serve until January 1 , 1919, and two to serve until January 1 , 1 92 1 . The terms thereafter will be six years. The salary of the commissioners is $6,000 per annum. Each commissioner, when designated by the Commission, has power to hold any investigation, hearing or inquiry, but the order of a commissioner must be approved by the Commission before its becomes effective. It follows that all the commissioners may hold separate hearings at the same time. In this way, the capacity of the Commission for work has been greatly augmented. The office of the Commission is in San Francisco, but hearings are held in such parts of the state as best subserve the convenience of all parties affected.

The Railroad Commission is given power to regulate and control all the public utilities of the state, except that the incorporated cities and towns of the state, including the city and county of San Francisco, retain the powers over public utilities which they had on March 23, 1912, with the privilege, however, of voting those powers into the Railroad Commission. Public Utilities are defined to include the corporations or persons which own, control, operate or manage railroads; street railroads; express companies; sleeping, dining, fruit and other car companies; vessels regularly engaged in transportation over regular routes between points within this state; pipe lines; gas plants; electric plants; telephone lines; telegraph lines; water systems; public wharves; and warehouses used in connection with the transportation of property by a common carrier or vessel, or the loading or unloading of the same.

The name Railroad Commission is preserved for the reason that this is the name given by the Constitution to the body upon which the legislature is authorized to confer these additional powers.

2. Duties of Public Utilities.

All charges made by public utilities must be just and reasonable. Their service, instrumentalities, equipment and facilities shall be such as will promote the safety, health, comfort and convenience of their patrons, employees and the public. Their rules and regulations must be just and reasonable. They must file with the Commission schedules or tariffs showing their rates, fares and charges and can change the same only on 30 days' notice unless a lesser time is authorized by the Commission. No increase in rates, fares or charges may be made without the permission of the Commission after a showing justifying the increase. No free or reduced rate transportation or service may be given except as specifically authorized by the Act. Preferences and discriminations are made unlawful. Common carriers are forbidden to charge more for transportation for a shorter than for a longer distance over the same line or route in the same direction except after securing the permission of the Commission: a similar provision is made applicable to telephone and telegraph corporations. Railroad corporations must in proper cases provide on their own property such connections, spurs and tracks as may be necessary to accommodate the needs of shippers. Street railroads under the control of the Commission may not charge more than five cents for a continuous ride in the same general direction within the limits of any city or town except on a showing before the Commission that the greater charge is justified. All public utilities must furnish the information concerning their business which may be required by the Commission and permit free access to their records to the representatives of the Commission and comply fully with all orders and directions of the Commission.

LOUIS SLOSS & CO.

3. Powers and Duties of Commission.

The Railroad Commission is given very wide powers over the public utilities of the state. The Commission is given power, among others —

(a) To fix all rates, fares, charges and classifications.

(b) To establish through routes and joint rates, fares and charges.

(c) To investigate all interstate rates, fares and charges affecting this state and to apply to the Interstate Commerce Commission or to any court of competent jurisdiction for relief.

(d) To prescribe just, reasonable, safe and proper service, equipment, facilities and methods.

(e) To prescribe additions, extensions, repairs and improvements.

(/) To direct that additional cars or trains be operated and that trains stop with greater frequency and at proper places.

(g) To direct connections, in proper cases between the tracks of railroad or street railroad corporations.

(h) To direct, in proper cases, that switch connections and spurs be installed.

(i) To direct that physical connections and joint rates over two or more telephone or telegraph lines be established in specified cases.

(/) To direct the use, in proper cases, by one public utility of a part of the property of another utility, on, over or under any street or highway.

(k) To direct the installation of safety appliances and other devices to safeguard the health and safety of employees, patrons and the public.

(/) To regulate crossings of railroad tracks and streets or highways in specified cases.

(m) To investigate the cause of accidents and to take steps to prevent their recurrence.

(n) To provide demurrage rules, and rules for the collection and delivery of express packages and telephone and telegraph messages.

(o) To fix standards, classifications, measurements and practices of gas, electrical and water corporations.

(p) To ascertain the value of the property of every public utility.

(q) To establish uniform systems of accounts for each class of public utility.

(r) To permit or refuse to permit new street railroad, gas, electrical, telephone or water corporations to enter a field already served by an existing corporation of like kind.

(s) To permit or refuse to permit corporations mentioned in (r) to exercise rights under new franchises or permits.

(0 To regulate transfers of the property used in the public service of public utilities, except express corporations, wharfingers and warehousemen, and the acquisition by one public utility of stock in another utility.

(u) To regulate and control the issues of stocks, bonds and other evidences of indebtedness of all public utilities within the state.

4. Procedure Before Railroad Commission.

Any person or corporation, chamber of commerce, board of trade, or any civic, commercial, traffic, agricultural or manufacturing association or organization or any body politic or municipal corporation may by petition in writing, filed with the Commission, complain of any act done or omitted to be done by any public utility in violation, or claimed to be in violation, of any provision of the act or any order or rule of the Commission. Public utilities have the same right to complain. Hearings and investigations may also be held by the Commission on its own initiative. The Commission has adopted Rules of Practice and Procedure specifying in detail the steps necessary to be taken by parties desiring to file formal complaints or applications with the Commission. These rules provide a procedure which enables the Commission to get at the heart of a controversy or application simply and speedily, without regard to the technical rules of evidence or procedure. A copy of these rules may be secured by any citizen upon application to the Commission. Hearings are held before the Commission sitting en banc or before a commissioner designated for that purpose. After the hearing, the Commission files its decision, which goes into effect within twenty days unless otherwise specified in the order.

5. Procedure in the Courts.

The provisions concerning procedure on appeals in the courts from orders of the Commission have been drawn with considerable care for the purpose of securing a procedure which should be simple and expeditious and should properly protect the Commission and the public. No cause of action may arise in any court out of any order or decision of the Commission except to a person or corporation which shall first have asked the Commission for a rehearing. The Commission, if it finds that it has made an error, can thus modify its decision before litigation in the courts results. If the rehearing is denied, or if after a rehearing the Commission reaffirms its order, any party feeling aggrieved may go directly to the state supreme court for a review of the question whether the Commission acted within its authority in making its order or decision. On the hearing before the supreme court, no new evidence may be introduced, but the matter must be disposed of on the evidence presented to the Commission. In this way the public utilities will be compelled, as they should be, to present their evidence before the Commission, instead of holding it back and then going to the courts and presenting great masses of new and additional evidence which the Commission did not have before it when it rendered its decision. The findings and conclusions of the Commission on questions of fact are made final, thus preventing the great abuse of a complete re-trial in the courts of a case on its facts. If the court suspends the order or decision of the Commission, pending the hearing on the review, the party petitioning for the review must file a bond to protect the parties injuriously affected by the delay in the enforcement of the Commission's order, and if the Commission's order reduced rates or fares, the supreme court must direct the public utility affected to pay into court or into some bank or trust company paying interest all rates or fares collected by it in excess of the rates or fares prescribed in the Commission's order. If the Commission ultimately wins, all excess rates and fares so collected and deposited must be paid back by the public utility to the persons or corporations who were compelled to pay the same. It is hoped that the procedure thus provided will tend to prevent the long drawn-out court proceedings and the reliance on technicalities to which public utilities have largely resorted in other states to tie the hands of the state, acting through its railroad or public service commission.

The Act prescribes adequate penalties for its violation by public utilities, their officers and employees and by other corporations and persons.

6. Effect of Act on Powers of Incorporated Cities

and Towns.

Although the language of the Public Utilities Act conferring powers upon the Commission is very general in its terms, the Act, following the provisions of Section 23 of Article XII of the Constitution of the state, as amended on October 10, 1911, specifically provides that nothing therein contained shall affect the powers over public utilities vested in any city and county or incorporated city or town at the time the Act should go into effect, which was March 23, 1912. The result of this provision is that the city and county of San Francisco and the incorporated cities and towns of the state retain such powers of control as were vested in them on that day until they vote them into the Commission if they so desire. The most important of these powers are the power to fix rates and fares, a power which most, if not all, of our incorporated cities and towns have as to many public utilities, and the power to regulate the service, equipment, facilities and extensions of public utilities, a power which some of our cities have secured by their freeholders' charters or otherwise. The question as to what powers are vested in the Commission and what powers in the municipality must be answered separately as to each municipality and will depend on the constitutional, statutory and charter provisions applicable to each such municipality.

Section 23 of Article XII of the Constitution of this state also provides that the legislature shall establish the election machinery by which the incorporated cities and towns of the state may, if they so desire, confer their powers as to any or all classes of public utilities upon the Commission. The extraordinary session of the legislature accordingly passed a companion act to the Public Utilities Act, referred to as the Hewitt Election Act, introduced in the Senate by the Hon. Leslie R. Hewitt, passed by the legislature, approved by Governor Johnson on January 2, 1912, and effective on March 23, 1912. The Hewitt Act provides that an election for this purpose may be called in any city and county, or incorporated city or town, by the legislative body thereof either on its own initiative by a three-fifths vote of its members or in pursuance of a petition signed by 10 per cent of the qualified electors and filed with the clerk of the legislative body. A majority of the votes cast on any proposition submitted at the election is sufficient to confer upon the Commission power over the public utility affected by that proposition. If the city or town has voted its powers as to any class of public utilities into the Railroad Commission, it may thereafter by a similar vote reinvest itself with such power.

The Commission has no power over municipally owned plants. The same Section 23 of Article XII of the Constitution, under which the legislature acted in passing the Public Utilities Act, in defining the corporations and persons to be affected, uses the words "every private corporation," thereby excluding by inference a municipal or other public corporation.

7. Organization of Commission for Its Work.

In order to be able to handle the great amount of business which it will be called upon to perform under the Public Utilities Act, the Commission has organized its work thoroughly and systematically. It has provided the following six departments: (1) office; (2) legal; (3) rate; (4) engineering; (5) statistics and accounts; and (6) service. The office department consists of the secretary and his staff and will perform the administrative work of the Commission. The legal department will represent the Commission in court, advise the Commission and each commissioner on all questions of law, supervise all formal proceedings before the Commission and have particular responsibility as to applications for permission to issue stocks, bonds or other securities. The rate department will handle all matters affecting the rates of all public utilities. The engineering department will perform the Commission's engineering work as to all public utilities and its service work as to railroad and other transportation companies and water corporations. The department of statistics and accounts will work out a system of accounting for each class of public utilities, wherever feasible, will edit the annual and other reports of public utilities to the Commission, and will furnish the necessary information from the records of the public utilities in cases of rate fixing, approvals of stock and bond issues and kindred matters. The service department will have supervision over the quantity, quality and safety of the service rendered to the public by gas, electrical, telephone and telegraph corporations and wharfingers and warehousemen. Each department will have its work properly subdivided so as to secure as far as possible men peculiarly fitted to handle each kind of work which the Commission will be called upon to perform, to the end that the Commission's business may be disposed of promptly and efficiently.

The problem of placing the relation between the public utilities and the people on a basis which shall be fair and reasonable and just is the greatest problem which faces this state to-day. It is an economic problem and affects directly the comfort and prosperity and happiness of every man, woman and child in this state. The framers of the Public Utilities Act hope and believe that the administration of that Act will prove of tremendous benefit to the people of this state, while at the same time winning for the public utilities a measure of confidence on the part of the traveling and consuming and investing public which they otherwise could not possibly have won. The writer trusts that the administration of this Act will conduce materially to the end desired by all good citizens — the happiness and prosperity of this great state and of all her people.

Valuation of Public Utilities.

By Henry A. Lardner, Manager of San Francisco Office, J. G. White & Co., Inc.

The unmistakable trend of the times is toward the regulation and control of all public service or utility corporations by the creation of State Commissions endowed with broad powers, and the broadening for that purpose of the powers of those older commissions created primarily for the regulation of common carriers.

As the regulation of a public utility usually begins with an investigation of the cost and the fairness of its charges for service, and as these have or should have a definite relation to the value of the investment or physical property, it follows that before the equity, or otherwise, of rates can be established, it becomes necessary to determine beyond question the fair value of the property or plant of the company under investigation.

This, together with the limitation by the Commissions, both as regards the class and amount of securities which a public service corporation may issue, and the increasing demand of financial institutions for more detailed information regarding the corporations in which they are interested, has resulted in the development of an entirely new branch of engineering, viz., the detailed valuation of corporate assets.

Before the institution of public utility commissions, the necessity of knowing in detail a corporation's actual assets and their value was not realized to anything like the present extent, and without this incentive it is safe to say that a large majority of corporations neglected to obtain this valuable information. Since this data may now be called for by the Commissions, the public utility corporations have awakened to a need of these valuations, which they at first were disposed to look upon as a burdensome and unnecessary expense, but which on the contrary they are actually finding of the greatest value to themselves in making a comprehensive analysis of their own affairs.

The making of a competent physical valuation is a very considerable undertaking, and to arrive at the full and ultimate value of the property, it must be made in great detail. To do this and to have the work accomplished with expediency and economy, a valuation organization must include the necessary executive and engineering experience to properly direct the field and office staff.

As in construction engineering, so also, in appraisal engineering are the best results only obtained by such engineers having in their employ specialists in each branch of the many which go to make up the large public service corporations of to-day, as an appraisal such as is now demanded by many of the financial institutions and the Commissions in order to meet all requirements and justify the outlay involved, necessitates, not only an intimate and thorough knowledge of the construction entering into the properties being valued, but a thorough and intimate knowledge of their operation and management as well. Only by such a combination can full justice be done, and much of hidden value be discovered and properly tabulated.

In arriving at the value of a property two general methods may be followed. First, in the event of the Company's records and books having been carefully kept, these should give, with a fair degree of accuracy, what has been expended in the actual construction, which plus certain charges which most companies frequently fail to take into account, should represent the original cost.

This method, when applied alone, however, is open to objection, as aside from the fact that a company's books seldom contain all the information required, a field check is in nearly every case necessary in order to verify the records or to ascertain what changes, additions or deductions have been made since the date of original construction. Furthermore, the fundamental basis recognized by both the Courts and Public Service Commissions on which the value is to be arrived at is the Cost of Reproduction; that is, the cost of reproducing the property as it actually is at the time of the appraisal. Therefore, while the cost as ascertained from the books may be of historic interest and of assistance in settling many of the complex questions which naturally arise in work of this character, it is by no means conclusive.