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Full text of "In the Circuit Court of the United States, Ninth Judicial Circuit in and for the Northern District of California : the Spring Valley Water Works (a corporation) complainant, vs. the City and County of San Francisco (a municipal corporation) et al., defendants., No. 13,395 in equity. The Spring Valley Water Company (a corporation) complainant, vs. the City and County of San Francisco (a municipal corporation) et al., defendants. Nos. 13,598 and 13,756 in equity"

/ ¥ '- 



S^ <* 



C K. ORTTN^KY 



IN THE 



Circuit Court of the United States 
NINTH JUDICIAL CIRCUIT 

IN AND FOR THE 

Northern District of California 



THE SPRING VALLEY WATER 
WORKS (a Corporation), 

Complainant, 
vs. 
THE CITY AND COUNTY OF SAN 
FRANCISCO (a Municipal Corpora- 
tion), et al., 

Defendants. 



No. 13,395 
*" In Equity. 



THE SPRING VALLEY WATER 
COMPANY (a Corporation), 

Complainant, 
vs. 
THE CITY AND COUNTY OF SAN 
FRANCISCO (a Municipal Corpora- 
tion), et al., 

Defendants. 



Nos. 13,598 
and 13,756 
In Equity. 



OPINION OF HON. E. S. FARRINGTON, UNITED 
STATES DISTRICT JUDGE, ON FINAL HEARING 

A. E. Shaw, 

Page, McCutchen & Knight, 

Heller, Powers & Ehrman, 

Solicitors for Complainant; 
James L. Robison, of Counsel. 

Percy V. Long, City Attorney, and 
Thomas E. Haven, 

Solicitors for Defendants. 



■fa. 



SAN FRANCISCO PUBLIC LIBRARY 



3 1223 05864 8826 



c 



! : * 






FRANCISCO HISTORY CENTER 




an Francisco Public Library 



REFERENCE BOOK 

it to be taken from the Library 

31 21S o$%W Tfct> 



INDEX TO DECISION 



Page 
STATEMENT OF FACTS 2 

Income, operating expenses and taxes for fiscal years 1902-3, 
1903-4, 1904-5, 1905-6 2 

Valuation of complainant's properties by Board of Super- 
visors 4 

Complainant's claims as to value and income 4 

Tabulation showing income and operating expenses from 
1902 to 1906 4 

Discrepancies between estimate of Board of Supervisors and 
actual returns as to income and operating expenses 5 

Complainant's contentions as to cost and valuation of prop- 
erties and rate of income 6 

Capitalization and indebtedness of complainant 9 

LEGAL RULES REGARDED AS SETTLED 10 

1. Property devoted to public use is subject to public regu- 
lation 10 

2. Use of water appropriated for sale, etc., is a public use. 10 

3. Duty of Board of Supervisors to fix water rates annu- 
ally 10 

4. Rates must be sufticient to afford just and reasonable 
compensation 10 

5. Ordinance rates presumed just and reasonable. Bur- 
den of proving contrary on complainant 11 

6. Power to fix rates not a function of the court, but rea- 
sonableness a question for court, whose interference 
warranted only on clear showing 11 

7. The issue: Are the rates in question so unjust and 
unreasonable as to be confiscatory? 12 

8. Complainant is entitled to demand a fair return upon the 
reasonable value of the property at the time it is being 
used for the public 12 

9. Public may demand that no more shall be exacted than 
the services rendered are reasonably worth 13 

10. A proper allowance must be made for depreciation... 13 

11. Original cost is not always a fair critreion of pres- 

ent value. Complainant is entitled to benefit of in- 
creased value 13 

12. Market value of bonds and stock not a reliable index 

of value 13 



Page 
THE VALUE OF COMPLAINANT'S PROPERTIES 14 

BCoal Important Cad to be determined is vaii f property 

used and useful iu supplying city with water at the time 
of the inquiry ^ 14 

Considerations governing determlnatioo of value 14 

The four geographical divisions of complainant's properties, 
and their descriptions 15 

1. Peninsula System 15 

2. Alameda System 15 

& City Distributing System 16 

4. Lake Merced Property 10 

Tabulated valuations placed upon plant by experts: 17 

Fitzgerald's estimate of value 18 

Dockweiler's estimate of value 18 

I >ur\ ea's estimate of value 19 

Grunsky's estimate of value 19 

Crunsky's estimated cost of Tuolumne system 20 

Stearns' estimate of value 21 

Hering's estimate of value 21 

Adams' estimate of value 22 

Schussler's estimate of value 23 

Estimates by complainant's experts - of cost of substitutional 

system 24 

Estimates of present value of real property owned by com- 
plainant 25 

Expert testimony unsatisfactory 25 

The rule announced in 1908 case as to substitutional and 

monopoly value considered 26 

Complainant's disapproval of the rule 30 

The answer of the court 30 

The doctrine of substitutional cost as applied to structures, 

lands and water rights 31 

Substitutional value should not include that value which re- 
sults from a monopoly 31 

Complainant is not entitled to a return upon monopoly value. 32 
Definition of lair and reasonable value and application of 

rule to present facts :*2 

San Francisco should pay for what it receives, and for no 

more or no less 33 

No value allowed for property purchased for future use 34 

Value for purposes of condemnation compared with value for 

purposes of rate regulation 37 

Value for rate regulation is value for particular use to which 

property is subjected 38 

1008 opinion approved and followed 44 

Land occupied by and used for reservoirs valued as reservoir 
lands. Balance valued only as watershed land 45 

Cost of lands, rights of way and water rights 45 



Page 

Valuation of water rights $2,100,000 48 

Valuation of rights of way : 48 

Mr. Schussler's estimates and instances of cost 48 

Testimony insufficient to support valuation in excess of 
$200,000 for rights of way 49 

Lake Merced property 49 

Estimates of Grunsky and Dockweiler considered 49 

Baldwin's testimony based upon value for building lots 

inadmissible 50 

Cost of Lake Merced lands and probative value of re- 
cent purchases 52 

Valuation allowed for Lake Merced property, $3,382,600. 56 

Value of office building 56 

No value allowed for going business 57 

No value allowed for good will 00 

No value allowed for franchises 60 

No franchise value allowed in this case because no testi- 
mony upon which any valuation can be based 65 

Properties out of use 66 

Discussion of particular properties claimed to be out of use . . 66 

San Gregorio 07 

Lobos Creek and flume 67 

Part of Locks Creek line 68 

Pilarcitos flume 68 

Crystal Springs old pumping station and Ocean View 

pumps 69 

Meters 69 

Old office building 70 

Branch flume at Pilarcitos dam 70 

San Francisco City Water Works 70 

Crystal Springs upper dam and Upper Pilarcitos dam ... 71 
Calaveras dam and explorations and San Antonio im- 
provements 71 

Portions of the concrete dam, Colma Gulch drainage sys- 
tem, Lake Merced 72 

Cost and present value of properties out of use 72 

Detailed summary of value of properties 74 

Discussion of particular items in above summary 78 

City reservoir sites and pumping tracts 78 

Pipe 78 

Measurements, quantities and dimensions S4 

Tabulated statement of above items : 86 

Crystal Springs system 86 

Alameda Creek system 86 

Pilarcitos system 87 

Lake Merced drainage system 87 

City distributing reservoirs 88 



Pago 

Ponjplllg plants 80 

city pipe system 90 

Special structures 92 

i tepreclatlon 02 

Total value reached by the court discussed 96 

Contributions by stock and bond holders, property purchased 

and dividends distributed OS 

Valuation of properties In 1003 as evidenced by market price 

of stock and bonds 98 

Sale of properties June 15, 1003, as evidence of value 08 

Valuation of properties in 1004 as evidenced by market price 

of stock and bonds 100 

Valuation by complainant's chief engineer in 1801 101 

OPERATING EXPENSES AND TAXES 101 

Tabulated statement for the year 1003-4 101 

Discussion as to certain improper operating expenses 102 

Bond issue 103 

Incorporation 103 

Proxies 103 

Legal expenses 103 

Service connections 104 

Advertising, etc 104 

Net operating expenses and taxes for year 1004-5 104 

Net operating expenses and taxes for year 1905-6 105 

STATEMENT OF INCOME WHICH WOULD HAVE BEEN 
ACTUALLY RECEIVED DURING THE THREE FISCAL 
YEARS UNDER ORDINANCES IN QUESTION 106 

RATE OF RETURN ON VALUATION OF $25,771,084 was 

For the year 1003-4—3.56% 106 

For the year 1004-5—3.74% 107 

For the year 1005-6—3.07% 107 

ORDINANCES HELD TO BE CONFISCATORY, UNCONSTI- 
TUTIONAL AND VOID 108 



IN THE 



Circuit Court of the United States 

NINTH JUDICIAL CIRCUIT 

IN AND FOR THE 

NORTHERN DISTRICT OF CALIFORNIA 



THE SPRING VALLEY WATER 
WORKS (a Corporation), 

Complainant, 
VS. 
THE CITY AND COUNTY OF SAN 
FRANCISCO (a Municipal Corpora- 
tion), THE BOARD OF SUPER- 
VISORS OF THE CITY AND 
COUNTY OF SAN FRANCISCO 
and JAMES P. BOOTH et al., Mem- 
bers of and Constituting said Board 
of Supervisors, 

Defendants. 



No. 13,395 
In Equity. 



THE SPRING VALLEY WATER 
COMPANY (a Corporation), 

Complainant, 
VS. 
THE CITY AND COUNTY OF SAN 
FRANCISCO (a Municipal Corpora- 
tion), THE BOARD OF SUPER- 
VISORS OF THE CITY AND 
COUNTY OF SAN FRANCISCO 
and JAMES P. BOOTH et al., Mem- 
bers of and Constituting said Board 
of Supervisors, 

Defendants. 



Nos. 13,598 

)> and 13,756 

In Equity. 



A. E. Shaw, Page, McCutchen & Knight, Heller, 
Powers & Ehrman, Solicitors for Complainant. James 
L. Robison, of Counsel. 

Percy V. Long, City Attorney, and Thomas E. 
Haven, Solicitors for Defendants. 



Farrington, District Judge: 

Under the ordinance of the City and County of San 
Francisco fixing water rates for the fiscal year 1902-3, 
the gross income of the Spring Valley Water Works 

was $1,962,240.91 

Of this amount there was collected 

from private rate-payers $1,666,401.81 

From the City and County of San Francisco 161,401.95 

and from shipping and other sources 134,437.15 

During that year the company disbursed 

For operating expenses $454,013.77 

And for taxes 236,828.97 

The net income was $1,271,398.17 

In March, 1903, the Board of Supervisors by ordi- 
nance, reduced the rates to be collected from private 
consumers 7 per cent, otherwise the rates remained as 
in 1902. On the 20th day of the following month suit 
was brought by the Spring Valley Water Works in this 
Court against the City and County of San Francisco 
and its Board of Supervisors, to enjoin the enforce- 
ment of the ordinance. A preliminary injunction was 
issued almost immediately, and is still in force. 

During the fiscal year commencing July 1st, 1903, 
and ending June 30th, 1904, the Spring Valley Water 
Works and its successor, the Spring Valley Water Com- 
pany, collected rates under the ordinance of 1902. 



3 

Their gross income was $2,075,983.09 

The amount collected if the ordinance of March, 

1903, had been in force, would have been $1,943,941.06 

Deducting from this estimated income $566,786.97 

for operating expenses and $325,287.66 

for taxes claimed to have been paid by the com- 
pany, there would have been a net income of .$1,051,866.43. 

The ordinance of March 7th, 1904, reduced the rate 
on fire hydrants, of which there were 4,057 in the city, 
from $2 to $1 per month for each hydrant; otherwise 
the rates were fixed as in 1903. This reduction made 
a difference of $48,684.00 in the annual income of the 
Company. June 1st, 1904, the Spring Valley Water 
Company brought suit to restrain the enforcement of 
this ordinance. A preliminary injunction still in ef- 
fect enabled the Company to continue the 1902 rates, 

under which its income for that year was $2,131,323.98. 

The estimated gross income under the ordinance 

of 1904, if enforced, would have been $1,996,496.59. 

Deducting from this estimated income $543,672.42 

for operating expenses, and $336,410.30 

for taxes claimed to have been disbursed by the 
Company, there would have been a net in- 
come of $1,116,413.87. 

March 13th, 1905, the ordinance of the previous 
year was re-enacted without change. This was fol- 
lowed by a third suit commenced May 2nd. A pre- 
liminary injunction permitted the Water Company to 
maintain the rates of 1902 during the following year. 
The gross income received therefrom is estimated at 
$2,243,000.00. The ordinance of 1905, if enforced, 
would have 

yielded an estimated gross income of $2,110,200.00 

and a net income of $1,172,584.63, 



after subtracting. .$387,198.93 for taxes, and 

$550,416.44 for operating expenses. 

For rate fixing purposes the Board of Supervisors 
valued the Company's property as follows: 

In 1902. $24,468,210.00 

1903 24,124,389.00 

1904 24,672,212.00 

1905 25,001,441.00 

■Complainant declares that it is entitled to a net re- 
turn of 7 per cent per annum upon a valuation in ex- 
cess of $40,000,000 for 1903-5, and upon a valuation 
in excess of $50,000,000 for 1905-6; i. e., a net income 
of $2,800,000 for each of the first two years, and $3,- 
500,000 for the last year. 

Tabulating the above figures we have: 



1902-3 



Gross income under' 
1902 ordinance.. j$l,962,240 

Estimated gross in- 
come if ordinance] 
enforced ! 

Operating expenses. 454,013 

Taxes 

Actual net income 
under 1902 ordi- 
nance 

Estimated net in- 
come if ordinance 
enforced 

Net income demand- 
ed 



236,828 



1,271,398 



1903-4 1904-5 



1905-6 



$2,075,983 



1,943,941 
566,786 
325,287 



1,183,910 

1,051,866 

2,800,000 



$2,131,323 i $2,243,000 



1,996,496 2,110,200 
543,672 550,416 
336,410 ' 387,198 



1,251,24] 

1,116,413 

2,800,000 



1,305,384 

1,172,584 
3,500,000 



In the pleadings defendants admit a valuation for 
the property in actual use for supplying water to the 
city, of from twenty to twenty-four million dollars. 



5 

In framing the rates for 1903-4, the Supervisors estimated 

taxes at $242,000.00 

and operating expenses at 450,000.00 



Total $692,000.00 

And gross income under the new ordinance at. . . $1,960,881.97 
Their estimates exceeded the gross income un- 
der the ordinance if enforced, by $9,171.90 

And fell short of the actual disbursements $200,074.63 

Their result was a net income of $1,268,881.94 

This is $62,662.49 over and above a 5 per cent 

income on a valuation of $24,124,389.00 

If $724,773.73, interest paid on the bonded and 
floating debt of the Company during the fis- 
cal year 1903^4 is deducted, there remains 
$524,108.21, sufficient to pay a dividend of 
3.74 per cent on $14,000,000.00, 

the issued capital stock of the Spring Valley Water 
Works. 

During that year the Company 
actually disbursed $566,786.97 for operating expenses 

and $325,287.66 for taxes, 

or a total of $892,074.66. 

If this be subtracted from $1,943,941.06, 

the estimated collections under the ordi- 
nance of 1903, if enforced, the result. $1,05 1,866.43, 

is but 4.36 per cent on the valuation adopted by the 
Board. 

In their answer, filed May 29th, 1903, defendants 
assert that during the fiscal year 1903-4, operating ex- 
penses will not exceed $400,000, or taxes $240,000. 
Now after a showing of an actual disbursement for 
these items of $892,074.63, defendants contend that 
$91,174.88 of this amount is excessive, and under the 



evidence no more than $484,625.79 for operating ex- 
penses, and $316,273.96 for taxes are proper. 

Assuming this to be correct, the net income will be. $1,143, 041. 31, 
or 4.7 per cent on the Supervisors' valuation of. .$24,124,389.00. 

In other words, $63,174.14 short of a 5 per cent return. 
However, there is evidence showing that the Company 
received during the year $141,337 additional income 
from rents, not included in the gross income of $1,- 
946,941.06. There is also evidence tending to show 
that a portion of the property included in the Super- 
visors' valuation was neither used nor useful in supply- 
ing the city with water during that year. 

Complainant contends that "the rates fixed by the 
" several ordinances in question are unjust, unfair, un- 
reasonable, confiscatory and unconstitutional; that 
" the ordinances were finally passed without notice to 
" complainant, and without any provision in any law, 
" organic or statutory, of the State of California, pro- 
viding for such notice; that they were fixed arbi- 
" trarily and at random, and by mere guess-work, and 
" were not based upon actual value of the property, 
" but upon the mere whim of the Board of Supervis- 
" ors; that said Board never did determine or pretend 
" to determine the value of the property of the com- 
" plainant actually in use or to be used; but the evi- 
" dence upon which the Board acted was mere hearsay 
"and unsworn statements; that the rates were fixed 
" by the Board without regard to complainant's right 
" to a reasonable income, based on the cost or the actual 
" value of the property owned by the Company, and 
" used in supplying water to San Francisco and its in- 



" habitants; without regard to complainant's indebted- 
" ness, or the annual interest thereon, or its actual oper- 
" ating expenses or taxes, or the right of its stockhold- 
" ers to a reasonable or any dividend on their stock; 
" without any allowance for depreciation; without ref- 
" erence to the value of the service rendered or to be 
" rendered, and without taking into account the value 
" of the franchise and going business." 

In the bill of complaint for the second suit, and 
again in the bill for the third suit, it is alleged that 
complainant had acquired at a cost of many hundreds 
of thousands of dollars lands, water rights and prop- 
erties for its reasonably immediate use in supplying San 
Francisco with water; that it is preparing such prop- 
erty for such use, and that such properties are reason- 
ably worth many millions of dollars, but the defend- 
ants have refused to take such values into consideration 
in any way in fixing the value of complainant's plant, 
or in establishing rates. 

In complainant's bills for 1904 and 1905 it is alleged 
that the value of the franchise and going business 
should be a part of such actual value, and should be 
added to the values of said properties; that the fran- 
chise increases the value of the plant many million dol- 
lars, and the going business has a distinct, intrinsic and 
separate value of many millions of dollars beyond the 
actual value of the plant. 

These allegations are denied. Defendants take the 
position that complainant is entitled to no income from 
water rates except upon property actually used in sup- 
plying the water, and that property acquired and being 



8 

prepared for future use should not be considered. De- 
fendants also deny that complainant has any franchise, 
and deny that the going business has added anything 
to the value of the tangible property, or that it has any 
value beyond the value of the plant actually in use. 

Complainant is dissatisfied both with the valuation 
and the rate adopted by the Board of Supervisors. It 
alleges that the entire property is worth more than 
$50,000,000; that its actual cost to the stockholders was 
as follows: 

January 1st, 1903 $36,253,235.70 

January 1st, 1904 38,792,040.01 

January 1st, 1905 50,513,722.98 

This actual cost is ascertained by adding to the pro- 
ceeds arising from assessments and from contributions 
by stockholders, interest thereon compounded annually 
at current contemporary rates, and deducting all divi- 
dends paid, plus interest thereon compounded in like 
manner. 

Complainant's demands are thus summarized in the 
opening brief and argument: 

"That the value of complainant's property used and 
" useful in supplying the City of San Francisco and its 
"inhabitants with water, is the sum of $45,000,000; 
" that complainant is entitled as a return (to) seven 
" per cent on the value thereof; that the various ordi- 
" nances establishing rates here complained of be de- 
clared unreasonable, confiscatory, and of no effect; 
" that this complainant is entitled to a water rate 
" which shall produce seven per cent upon the valua- 
" tion of $45,000,000, and in addition thereto shall 



" produce a sum sufficient to remunerate this com- 
" plainant for its operating expenses, taxes, and a fund 
" for depreciation; that this Court further determine 
" the value of complainant's franchise and its value 
" as a going concern, and the value of its good will, 
" and all other intangible elements of value; and 
*«••*.* that the injunction herein issued be made 
li perpetual, and that such further relief be granted 
" complainant as is in accordance with the prayer of 
u its several bills, and in accordance with the usages of 
H equity." 

The three suits are tried together under a stipula- 
tion that all testimony shall be considered as taken 
separately in each case. The evidence consists of some 
seven thousand pages of typewritten testimony, and 
240 exhibits, many of which are voluminous and com- 
plicated. 

The Spring Valley Water Works, complainant in 
the first suit, was a California corporation, having an 
issued capital stock of $14,000,000, divided into 140,- 

000 shares of the par value of $100 each, and dis- 
tributed among more than 1800 stockholders. In Sep- 
tember, 1903, all the property of the Spring Valley 
Water Works passed into the possession and owner- 
ship of the Spring Valley Water Company, also a 
California corporation, having a capital stock of $28,- 
000,000, divided into 280,000 shares of the par value 
of $100 each. The market value of this stock June 

1 st, 1904, was from $37 to $38.50 per share. A like 
value is alleged for May 1st, 1905. The depreciation 
in the market value of the stock is claimed to be the 
result of unjust and unfriendly rate regulation. 



10 



The interest bearing indebtedness of the .Company, 
and the actual interest charged thereon, as stated in 
the pleadings, was as follows: 

For 1903 and 1904, principal $13,975,000, interest, 
$708,500; for 1904 and 1905, principal, $14,975,000, 
interest $715,000; for 1905 and 1906, principal, $15,- 
975,000, interest, $778,500. 



The following rules will in this opinion be regarded 
as settled: 

1. Property devoted to public use is subject to pub- 
lic regulation. 

2. The use of all water when appropriated for sale, 
rental or distribution is a public use, and subject to 
the regulation and control of the State in the manner 
prescribed by law. 

Const, of Cal., Art. XIV. 

3. Under the law it is the duty of the Board of 
Supervisors of the City and County of San Francisco 
in the month of February of each year, to fix by ordi- 
nance the rates to be collected by any person, com- 
pany or corporation for the use of water to be sup- 
plied to that city and county during the year commenc- 
ing on the first day of July thereafter. The ordinance 
by which such rates are established shall continue in 
force one year, and no longer. 

Const, of Cal., Art. XIV, Sec. 1 ; 
Spring Valley Water Co. v. City and County 
of San Francisco, 165 Fed. 667, 669. 

4- The rates so fixed must be sufficient to afford a 



i r 



compensation for the water to be supplied which is 
just and reasonable, both to the company rendering 
the service and to the public. The Board of Super- 
visors may not under the guise of regulation, estab- 
lish rates which will deprive the water company of 
the whole or any portion of that which under the cir- 
cumstances is a just and reasonable return for the use 
of its property devoted to public service. The use and 
profits of property are themselves property, and are 
alike under the protection of the Federal Constitution. 

5. Rates established by ordinance of the Board of 
Supervisors are presumed to be just and reasonable, 
and the burden of proving the contrary is upon com- 
plainant. 

Contra Costa Water Co. v. City of Oakland, 

113 Pac. 668; 
Railroad Com. of Louisiana v. Cumberland 

Telephone and Telegraph Co., 212 U. S. 

414. 

6. It is not within the power of the court to fix 
or regulate water rates. That is purely a legislative 
function, and cannot be exercised by this tribunal. But 
whether rates already established are just and reason- 
able is a question for the court. If the court in the 
exercise of its judicial discretion determines that a rate 
so fixed is unreasonable, that determination must pre- 
vail over any presumption in favor of the ordinance. 
This court cannot control the discretion of the Board 
of Supervisors; it has no power to review, revise or 
correct an ordinance fixing water rates; it has no au- 
thority to substitute its judgment for that of the board. 



It cannot interfere with the collection of rates estab- 
lished under such an ordinance "unless they are so 
" plainly and palpably unreasonable as to make their 
" enforcement equivalent to the taking of property for 
" public use without such compensation as under all 
" the circumstances is just both to the .Company and 
" to the public." 

Prentis v. Atlantic Coast Line Co., 211 U. S. 

210; 
Spring Valley Water Co. v. San Francisco, 165 

Fed. 667. 

7. There is but one issue for the court to deter- 
mine: Are the water rates in question so unjust and 
unreasonable as to be confiscatory? This question must 
be answered by the court from its own independent in- 
vestigation, without reference to the methods of in- 
vestigation pursued by the Board of Supervisors. 

Spring Valley Water Works v. San Francisco, 

124 Fed. 574, 584; 
Spring Valley Water Co. v. San Francisco, 165 

Fed. 667, 681. 

8. What the Company is entitled to demand in or- 
der that it may have just compensation, is a fair re- 
turn upon the reasonable value of the property at the 
time it is being used for the public. 

San Diego L. & T. Co. v. National City, 174 

U. S. 739, 757; 
San Diego L. & T. Co. v. Jasper, 189 U. S. 

439, 442 ; 
Willcox v. Consolidated Gas Co., 212 U. S. 

19, 41. 



13 

9. The public has a right to demand that no more 
shall be exacted than the services rendered are reason- 
ably worth. The public cannot be subjected to un- 
reasonable rates in order simply that stockholders may 
earn dividends. 

Covington & Lexington T. R. Co. v. Sanford, 

164 U. S. 578, 597, 598; 
Spring Valley Water Co. v. San Francisco, 165 

Fed. 667. 

10. Cost of reproduction is not a fair measure of 
value, unless a proper allowance is made for depre- 
ciation, because all constructive portions of the plant 
are subject to decay, and to be worn out or consumed 
by use. 

Knoxville v. Knoxville Water Co., 212 U. S. 1 ; 
Contra Costa Water Co. v. City of Oakland, 
113 Pac. 668. 

11. Original cost is not always a fair criterion of 
present value because the plant may have cost too 
much, or it may be of unnecessary dimensions. If it 
has increased in value since its acquisition, the com- 
pany is entitled to the benefit of such increase, if such 
increased valuation does not require a return so large 
as to be unreasonable and unjust to the public. 

Willcox v. Consolidated Gas Co., 212 U. S. 19; 
Beale & Wyman on R. R. Rate Regulation, 
Sec. 342. 

12. The aggregate value of bonds and issued capi- 
tal stock of the company at present market prices 
is not a reliable index of the value of the plant, be- 
cause such prices often rise and fall from the opera- 



14 

tion of causes which have little or nothing to do with 
the real intrinsic value of the property; and the 
bonded or other indebtedness of the company may ex- 
ceed the actual value of its property. 

The most important fact to be determined is the 
value of the property. The value to be ascertained is 
the value at the time of the inquiry. Only that prop- 
erty is to be considered which was then used and use- 
ful in supplying San Francisco with water. Among 
the proper matters to be considered are the original 
cost of construction; the amount expended in perma- 
nent improvements; the amount and market value of 
stock and bonds; the present as compared with original 
cost of construction; the probable earning capacity of 
the property under the particular rates prescribed by 
the ordinance for each of the years in question; the 
sums required to meet operating expenses; what it will 
cost to obtain water, equal in quantity and quality to 
the present supply, from the next most available 
source; the depreciation suffered by that portion of the 
plant which is worn by use or action of the elements, 
or shorn of its value by newer, cheaper and more effi- 
cient appliances and machinery; the fact that the plant 
has a franchise and is a going concern with an estab- 
lished business and thousands of customers whose 
buildings are connected with the distributing system; 
and appreciation in value since the various properties 
constituting the plant were acquired. 

To each of these factors just and proper weight must 
be given; and, finally, the result must be the reason- 
able and fair value of the plant as between the com- 
pany and the public. 



*5 

The property thus to be appraised naturally falls 
into four geographical divisions: The Peninsula sys- 
tem, the Alameda system, the Lake Merced property 
and the City Distributing system. 

The Peninsula system includes some 18,740 acres of 
land south of San Francisco, on which are three large 
artificial lakes, the Pilarcitos, the San Andreas and 
the .Crystal Springs. The Pilarcitos constructed be- 
fore 1868, at an elevation of about 700 feet, covers 105 
acres of land, and is capable of holding one billion gal- 
lons of water. The San Andreas, constructed before 
1870, at an elevation of 450 feet above the sea, covers 
475 acres, and holds five and one-half billion gallons. 
The Crystal Springs, completed in 1890, at an eleva- 
tion of 280 feet, covers 1,300 acres of ground. Its 
capacity is 19 billion gallons. The dam is a concrete 
structure, 145 feet in height; it is of sufficient strength 
to support an additional height of more than 30 feet, 
thus its capacity may be increased to 29 billion gal- 
lons, and its surface to 1,730 acres, or nearly 2% square 
miles. The three reservoirs supply San Francisco 
daily about 15,000,000 gallons of water. The com- 
bined storage capacity of the three is 25,500,000,000 
gallons, or about 3,267,000,000 cubic feet, an amount 
almost sufficient to supply San Francisco for two 
years. The Alameda system lies east of San Francisco 
Bay. Beyond Sunol there are about 600 square miles 
of territory drained by Alameda Creek and its tribu- 
taries; this stream naturally flows through Sunol Can- 
yon to the Bay. Immediately above Sunol are about 
1,000 acres of gravel bed. Across Sunol Canvon rest- 



i6 

ing on the bedrock, an underground dam holds back 
the sub-surface flow. Fourteen thousand feet of 
cement-lined tunnels collect the water after it has fil- 
tered through the gravel. 

The holdings of the company amount to about 6 per 
cent of this entire watershed area, or 23,339.59 acres, 
located at points most favorable to the control of its 
output. From this source about 15,000,000 gallons of 
water daily are sent to San Francisco. It passes un- 
der the Bay near Dumbarton Point through four large 
submarine pipes, thence it is taken to Belmont Pump- 
ing Station, and there forced into the city. Within 
the city, constituting the distribution system of the 
company, there are nine distributing reservoirs with a 
joint capacity of 87,000,000 gallons, 410 miles of dis- 
tributing pipes, carrying water through the streets to 
more than 49,000 customers. These mains are con- 
nected with nearly every building, public or private, 
in the city. It has nine pumping stations with a total 
daily capacity of 72,000,000 gallons; more than 76V2 
miles of iron pipe from 22 to 54 inches in diameter, 
and six miles of tunnel. The Lake Merced property 
lies within six miles of the center of the city; it in- 
cludes 2,730 acres of land, on which is a lake covering 
400 acres and capable of holding 2^ billion gallons 
of water. Its daily output is about 3,000,000 gallons. 
By means of a pump on the south arm of the lake this 
water can be forced into the company's mains. 

Seven engineers have examined this property and 
testified as to its value. Their estimates range from 
$22,736,643.55 to $70,000,000. No two of them agree. 



17 

The fact that these men, among the most eminent in 
their profession, after months, and even years, as in 
two cases, of careful investigation, should arrive at re- 
sults so far apart, shows that the problem is one of 
unusual difficulty. 

The experts for complainant value the property 
thus : 





Mr. Schuss- 
ler 


Mr. Adams 


Mr. Schuy- 
ler 


Mr. Hering 


Structures . . . 

Lands and 

water rights 

Stock on hand 


$19,467,000 
31,932,000 

270,000 


$16,062,445 

17,886,948 
or 

22,886,948 

219,098 

160.000 

5,671,509 


$17,924,806 
28,036,000 


$19,649,000 
20,121,900 


Going concern 
Intangible val- 
ue 




5,000,000 


Franchise . . . 




Telephones . . . 






Miscellaneous . 
















Less amount 
deducted to 
get round 
figures 


$51,669,000 
169,000 




Totals .... 


$51,500,000 


$40,000,000 

or 
$45,000,000 


$45,960,000 


$44,770,900 



The experts for defendants value the property as 
follows : 





Mr. (! run- 
sky 


Mr. Grun- 

sky 


Mr. Dock- 
weiler 


Mr. Fitz- 
gerald 


Structures . 

Lands and 

water rights 

Stock on hand 


(Jan. 30, 

1903) 

$14,500,830 

9,339,559 
269,000 


(Jan. 26, 
1904) 
$15,076,744 

9,395,968 
185,500 


$13,672,086 

10,111,304 
270,000 


$17,367,400 

4,104,243 
250,000 


Going concern 
Intangible val- 


1,400,000 








Franchise 
Telephones . . . 
Miscellaneous . 


2,500,000 
15,000 


15,666 




15,666 
1,000,000 






Totals 


$28,024,389 


$24,673,212 


$24,053,390 


$22,736,643 



Mr. Stearns, a witness for complainant, and Mr. 
Duryea, a witness for defendants, estimate the total 
value of the plant at $70,000,000 and $25,451,000, re- 
spectively. 

Mr. Fitzgerald states that his estimate "is based only 
" upon the actual reasonable cost of construction at the 
" time the works were built, and the cost to the com- 
" pany of its lands, both of the sources of supply and in 
" the city." This amount differs but little from the 
actual cost of the property as reported by Mr. Wenzel- 
berger, after an examination of the Company's books. 
It is also in substantial accord with the cost as esti- 
mated by Mr. JDockweiler. No allowance, however, 
is made for depreciation in structures, or for apprecia- 
tion in value of land since it was originally acquired. 

Mr. Dockweiler, after what appears to have been 
a most exhaustive examination, extending over more 
than two years, fixes the primary cost of that portion 



19 

of the plant in use January ist, 1904, at $22,880,462.71. 
The present value of the property on the same date he 
fixes at $24,053,390. This he ascertains by appraising 
the water rights, rights of way, and various tracts of 
land, and by estimating the value of the structures, as 
they were on the last mentioned date. The former he 
fixes at $10,111,304, and the latter at $13,942,086. 

Mr. Duryea says that a substitute system capable of 
supplying San Francisco with 50,000,000 gallons of 
water per day from properties of the Bay Cities Water 
Company can be had at a cost of $25,451,000; and that 
the cost of a similar system, supplying the city but 
35,000,000 gallons per day, the average present output 
of the Spring Valley Plant, would not exceed $20,- 
000,000. 

Mr. Grunsky arrived at his valuation, $28,024,389, 
after an examination made officially as city engineer. 
He fixes the value of the Alameda property at its orig- 
inal cost. The values of remaining portions of the 
system are obtained by actual appraisement of lands 
and structures. In his report to the Supervisors he 
fixed $1,400,000 as the value of going business, which 
he estimated as being 25 per cent of the valuation of 
the City Distributing System. This was given because 
there are numerous connections between the Com- 
pany's distributing system and the service pipes of 
customers, and also to cover contingencies. $2,500,000 
he allowed for franchise. This amount he fixed at 
10 per cent of "a reasonable estimate of the cost of re- 
" constructing and reacquiring the properties, includ- 
" ing the value of the established business." 



20 

Some time prior to these suits, Mr. Grunsky as city- 
engineer, estimated the cost of bringing a supply of 
water to San Francisco from the Tuolumne River at 
$39,531,000. His plan contemplates two reservoirs in 
the Sierras, Lake Eleanor and Hetch Hetchy, with a 
joint storage capacity of 60 billion gallons. When re- 
leased from the reservoirs the water will flow twelve 
miles in the channel of Tuolumne River, thence 
through tunnels and canals to the east side of the San 
Joaquin Valley. From that point it will be taken 
through two 48-inch pipes to Altamont, where it will 
be pumped over the pass, then piped to San Francisco, 
and delivered at an elevation of 200 feet. The distance 
covered will be 165 miles. Mr. Grunsky's plan also 
includes a three billion gallon reservoir, with a pump- 
ing plant capable of raising 40 million gallons of 
water per day at Belmont, in order to provide water 
for the city in case of accident or emergency. Mr. 
Grunsky's belief is that this plant will deliver daily 
between fifty and sixty million gallons of water at the 
south line of San Francisco. The City Distribution 
System, besides piping, will include two large receiv- 
ing reservoirs, one on the House of Refuge tract, and 
the other on Mission Road and Amazon street, with a 
joint capacity of 154,000,000 gallons; six service reser- 
voirs with a combined capacity of 57,000,000 gallons; 
fifteen steel tanks capable of holding in the aggregate 
over seven million gallons; and two pumping stations. 

His estimate of cost is as follows: 
AVorks for collection, storage and delivery of water. .$30,724,000 
City Distribution System 8 807 000 



Total $39,531,000 



21 

After examining Mr. Grunsky's plans and estimates, 
Mr. Stearns says that the original cost will be $54,- 
400,000; that additions and renewals which must be 
made, and future taxes and operating expenses which 
must be paid, will cost much less for the Spring Valley 
property than for the proposed system. The present 
worth of this difference he estimates at $16,100,000. 
Adding this sum to the original cast, $54,400,000, he 
obtains $70,500,000, and declares the final result of his 
computation is that the Spring Valley Plant, meas- 
ured by the Tuolumne scheme, is worth $70,000,000. 

Mr. Hering is of the opinion that Mr. Grunsky has 
underestimated the cost of iron pipe, and failed to make 
a proper allowance for interest during construction ; 
that the proposed open channel between the lake out- 
let and the San Joaquin Valley is impracticable. He 
fixes the minimum cost of constructing the Tuolumne 
plant at $55,000,000. He finds the value of the tangi- 
ble property of the Spring Valley Water .Company as 
follows : 

City Distributing System $ 7,700,000 

Works for collecting and conveying water to dis- 
tributing reservoirs 11,949,000 

Eights of Way 517,000 

Real estate for storage reservoirs, watersheds and 

other purposes 12,498,900 

Water rights 7,106,000 

Total $39,770,900 

To this last amount Mr. Hering adds one-third of the 
difference between the value of the physical plant and 
the cost of the next available substitute; that is, one- 
third the difference between $39,770,900 and $55,000,- 



22 

ooo. The result, $45,000,000, in round numbers, he 
says is the least value of the Spring Valley plant which 
would be fair. He values the water rights at $150,000 
per million gallons of daily delivery; the watershed 
lands at $100, and the reservoir sites at $1500 per acre. 

In Mr. Schuyler's opinion the cost of the Tuolumne 
system will be $54,896,000 

By comparison with this figure he estimates the appre- 
ciation in value of real estate and water rights of 
the Spring Valley Water Company since purchase 
to be 16,497,000 

To this he adds his estimate of their original cost. . . . 11,539,000 

Which gives as his total estimate of the value of the 

lands and water rights 28,036,000 

Adding to this figure his estimate of construction. . . . 17,924,000 

He finds the total value of the plant to be $45,960,000 

He concludes that "The reasonable value of the 
" property for rate fixing purposes is not far from this 
" figure, or between this and $40,000,000." 

Mr. Adams considers first, that in order to pay stock- 
holders current rates of interest on their investment 
from its inception, the property should have a value of 
$50,500,000. 

This amount is made up as follows: 

Direct contribution in cash by stock- 
holders $ 9,177,496.82 

Amount realized from sale of outstand- 
ing bonds 15,975,000.00 

Difference between dividends actually 
paid by the Company and interest on 
stock investment computed at current 
contemporary rates 25,361,226.16 

Total $50,513,723 



2.3 

Second, that the actual investment, exclusive of loss 
to stockholders from lack of revenue subsequent to 
1880, but inclusive of such loss prior to that date, 
amounting to $5,671,000, would be from thirty-five to 
thirty-six million dollars. Third, that the cost of a 
complete substitutional system would be fully $50,000,- 
000. Fourth, that the value of the service limits the 
value to be placed on the property to forty or forty-five 
million dollars. Fifth, that a valuation of $35,000,000 
is too low to yield a proper income to stockholders. He 
therefore concludes that the works are worth from 
forty to forty-five million dollars for rate fixing pur- 
poses. 

In coming to this conclusion his judgment was 
chiefly influenced by the idea that rates to consumers 
" should not be increased beyond a certain point in 
" pursuit of a sound public policy in the interest of 
" both the water company as well as the rate payers." 
He includes in this estimate the value of the going 
business at $5,671,000. This sum he estimates is equal 
to the loss of income resulting from the failure of the 
business to yield current rates of interest on the invest- 
ment from the beginning of the business until the year 
1880. The value of the going business is thus meas- 
ured by the deficiency of revenue prior to 1880. 

Mr. Schussler, after examining Mr. Grunsky's esti- 
mates and plans, says that the proposed Tuolumne sys- 
tem will cost $55,000,000. Excluding the cost of the 
receiving and distributing reservoirs and the city dis- 
tributing system, he concludes that it will cost in round 
numbers to bring the Tuolumne water to San Fran- 



24 

cisco $45,900,000. Deducting from this $16,162,000, 
" the total cost of all the constructed works of the 
" Spring Valley Water Company now gathering, stor- 
" ing and producing its water supply and conveying it 
" to its distributing reservoirs, including the value of the 
" Lake Merced property, minus the water rights to its 
" outflow and also including the Millbrae and Bel- 
" mont pumping properties," the balance, $29,738,000, 
represents, according to Mr. Schussler, "the value of 
" the entire combination of all the properties, reservoir 
" sites, watersheds, and water rights of the Spring Val- 
14 ley Water Company in San Mateo, Alameda and 
" Santa Clara counties, also including the water rights 
" pertaining to the outflow of Lake Merced in San 
" Francisco County." To this amount he adds $26,- 
431,000, the cost, as he estimates it, of reproducing the 
constructed works of the Company, including .their 
rights of way, the value of the Lake Merced property 
and all the city real estate, including the pumping 
plants at Belmont and Millbrae. 

Thus measured by the estimated cost of the Tuo- 
lumne system, Mr. Schussler finds the value of all 
properties and works of the Spring Valley Water Com- 
pany to be $56,000,000; subtracting from this $4,500,- 
000, his estimated value of properties not in use, he 
finds the value of the works combined now actively em- 
ployed in supplying San Francisco with water to be 
$51,500,000. 

The five experts, Mr. Schussler, Mr. Schuyler, Mr. 
Hering, Mr. Adams and Mr. Stearns, agree that Mr. 
Grunsky's estimated cost of the Tuolumne scheme is 



25 

too low. Mr. Adams fixes the underestimate on iron 
pipe alone at $5,468,000; Mr. Schuyler at $6,426,000; 
Mr. Schussler and Mr. Hering at $12,694,000. Mr. 
Grunsky has omitted interest during construction. 
This, according to Mr. Adams, would amount to 
$5,468,000; according to Mr. Schuyler, $6,741,615; 
according to Mr. Schussler, $3,045,000; according to 
Mr. Hering, $3,800,000. 

The cost of iron pipe, one of the largest items enter- 
ing into the construction of the proposed system, is 
estimated by Mr. Schussler for piping actually laid 
in the ground at 1 1 2-3 cents per pound ; by Mr. Schuy- 
ler at 9 1-10 cents; by Mr. Adams at 8 8-10 cents, and 
by Mr. Grunsky at 6 8-10 cents. 

Thus it appears that estimates on cost of the substi- 
tute system made by complainant's witnesses, range 
from $50,000,000 to $70,500,000. Estimates on cost of 
iron pipe vary from 8 8-10 to 11 2-3 cents per pound. 

Estimates on present value of real property, meas- 
ured in greater or less degree by cost of the Tuolumne 
scheme, are as follows: 

Mr. Adams, between $17,000,000 and $22,000,000 

Mr. Hering $21,121,900 

Mr. Schuyler $28,036,000 

Mr. Schussler $29,738,000 

And estimates of the value of the entire Spring Val- 
ley plant vary from $40,000,000 to $70,000,000. 

A measure of value which leads to such various re- 
sults when applied by the most competent engineers, 
is of little practical use. A very large portion of the 
value thus found for the Spring Valley plant is simply 



26 

a matter of expert opinion which disappears if Mr. 
Grunsky's estimate is correct. 

The ordinance in question is presumed to be valid 
and to provide rates which will yield an income both 
just and reasonable. The respect due from courts to 
legislative bodies demands that such an ordinance 
shall not be lightly set aside. If invalid, its invalidity 
must be shown by evidence which is clear, certain and 
convincing. 

In connection with these estimates, as well as the 
differing valuations made by the Company's officials 
at the rate investigation before the Board of Super- 
visors in 1901, when set against the values found by 
Mr. Grunsky, Mr. Dockweiler and Mr. Duryea, I 
cannot do better than quote the language of Mr. Jus- 
tice Peckham in Will cox v. Consolidated Gas Co., 212 
U. S. 19. 

"Where a large amount of the total value of a 
mass of different properties consists in the value 
of real estate, which is only ascertained by the 
varying opinions of expert witnesses, and where 
the opinions of the plaintiffs' witnesses differ quite 
radically from those of the defendants, it is ap- 
parent that the total value must necessarily be 
more or less in doubt. It, in other words, becomes 
matter of speculation or conjecture to a great ex- 
tent." 

In the 1908 case the court expressed itself thus, in 
relation to the cost of a substitutional system as a factor 
in fixing the value of the plant: 

"Even if permissible, a valuation of the plant 
based on the estimated cost of the next available 



27 

substitutional system, is at best problematical. 
There may be other equivalent substitutes which 
are cheaper. We must reckon, not only with the 
uncertainties of the estimate itself, with the rela- 
tive serviceability and permanency of the substi- 
tute system, with the relative quantity and quality 
of water which it is capable of furnishing, but 
also with undiscovered and overlooked elements 
which may greatly affect the cost. There is, how- 
ever, a still more serious objection to this method 
of valuation. To say the value of the Spring Val- 
ley land and water rights for rate-fixing purposes 
is to be measured by the cost of the Tuolumne sys- 
tem, is to say that the price of Spring Valley water 
should be fixed by comparison with the cost of 
bringing water from Hetch Hetchy. The same 
method was applied to railroad charges when 
rates were based on the cost of hauling freight by 
mule teams, that mode of transportation being the 
next most available substitute. 

The owner of private property sets the price at 
which others may buy or use it; he cannot be com- 
pelled to accept less; this is his right of contract, 
but when he devotes his property to public use, he 
must submit to the right of the public to regulate 
his compensation for such use down to what is just 
both to himself and to the public and that com- 
pensation is to be based, not on the cost of the next 
available substitute, but on a fair reasonable value 
of the property at the time it is used for public 
convenience. While the cost of a substitute system 
may be considered in finding the reasonable value 
of the Spring Valley plant, it cannot be a con- 
trolling element. Otherwise, by securing control 
of all available sources from which water can be 
brought to San Francisco, the company might 



28 

force a greatly exaggerated value upon its plant 
for rate-fixing purposes, and thus absolutely de- 
feat the very object of government regulation." 

Spring Valley Water Co. v. San Francisco, 165 
Fed. 667. 

Complainant's disapproval is thus stated: 

"We submit that this announces the principle 
that appreciation in total value, due to the monop- 
olistic feature growing out of the ownership of all 
available sources shall not be allowed, because the 
service is impressed with a public use, and that 
this item of valuation, inseparable from the whole, 
will be disregarded. 

"We have previously demonstrated the error of 
this view. The property may be subject to rights 
in the public, but it continues to be a subject of 
private ownership. There has been an exercise of 
supervisory police power only— no element of 
value has been taken by the public, and subtracted 
from corporate assets, and when valuation is at 
issue, the element of monopoly, if it exists, has as 
much value in the case of a public as in the case 
of a private corporation. The very fact that 
'water is a necessity of life' proves the value of its 
control. It must be given to the public, but that 
in no way lessens its value. The fact that all sur- 
rounding sources are in the hands of one corpora- 
tion is an element of value accruing to the cor- 
poration, and not to the public. In other words, 
regulation extends only to use and income. It 
neither attempts to, nor does it in fact, lessen value. 
We believe that the court has failed to make this 
distinction. * 

"There are no lands and no water rights within 



29 

fifty miles of the city which might serve to form 
even the nucleus of a waterworks to supply San 
Francisco with water. Nearly all such properties 
are owned by complainant, and, what are not 
owned by it, are in the ownership of other com- 
panies, actually serving communities with water. 
* * * These circumstances, which are accu- 
rately stated from the city's own showing here, 
make it impossible to apply to the ascertainment 
of value of our real estate, outside of San Fran- 
cisco, the method of valuation which would obtain 
if other properties existed in the same localities, 
and were available for the purposes for which 
ours are used. * * * 

"The best guide for determining value is the 
necessary cost of acquiring similar property, capa- 
ble of the same service, or what we conceive to be 
the same thing, the investment that will be re- 
quired to enable one to render an equivalent serv- 
ice to that rendered by this company. 
What we do maintain is that value is measured by 
the cost of the most available adequate substitute. 
* * * If water could be obtained of equal qual- 
ity and quantity from other sources, the cheapest 
possibility would be the limit of value. 
The showing made is that San Francisco must 
have water. There is no intimation that she can 
get it cheaper than from the Tuolumne. The un- 
qualified showing is that the Tuolumne is the most 
available system. * * * We do not say that the 
value of our plant is the cost of the Tuolumne 
system simply because it is the Tuolumne system, 
but that it is the value of the Tuolumne system be- 
cause the Tuolumne system has been shown to be 
the cheapest and the most available. 

M I have never contended, and I do not now con- 



30 

tend that your Honor is compelled to take as the 
measure of value of this property what it would 
cost to bring a supply of water from the 
Tuolumne. I do claim, however, that one of the 
circumstances which you may and should take 
into consideration is what it would cost to render 
the same service to San Francisco that was being 
rendered in the year 1903 by complainant." 

The quotations present in clear relief the real issue 
in this whole controversy. Having secured all avail- 
able reservoir sites, water rights and watershed lands 
within fifty miles, the Water Company says to the City, 
you must have water, if you do not take ours you will 
be compelled to go to the Sierras for an adequate sup- 
ply; it is the only available source, consequently our 
property for the purpose of determining what we are 
entitled to charge you for water, is worth as much as it 
will cost you to construct a plant which will bring an 
adequate supply from the Tuolumne. Your right to 
regulate does not extend to value. The rate-fixing body 
" has no discretion, absolutely none, in determining 
" value. To say that it has any discretion in determin- 
" ing value, is to say that it may whittle it to a point. 
" The only matter in which it has any discretion, if it 
" has any at all, is in the rate of return. It has no dis- 
" cretion even in that respect * * * to go below 
" the current rate of interest. * * * It must find 
" value as it exists." 

Under this thin disguise it is easy to recognize the 
old and familiar doctrine that he who has a monopoly 
is entitled to charge what the traffic will bear. But in- 
stead of applying the principle directly to rates, it is 



3i 

here used to elevate the value, which is the most im- 
portant factor in fixing them. 

The purpose and design of the law which provides 
for public regulation of water rates, was and is to regu- 
late the charge for services like those rendered by com- 
plainant down to what is just and fair and reasonable 
as between the person performing and the person re- 
ceiving the service, and to cut off all above that which 
represents, not the reasonable worth of the service, but 
the power which flows from unrestricted control of the 
sources of supply and the means of distribution. 

Complainant insists that reproduction cost and sub- 
stitutional cost are equivalent terms, and that it is 
illogical to apply this method to the determination of 
the value of structural portions of the plant, and deny 
its application when determining the value of lands 
and water rights. 

In Consolidated Gas Company v. City of New York, 
157 Fed. 849, 854, the value fixed was "what it would 
" cost presently to reproduce each item of property (in- 
" eluding real estate) in its present condition, and capa- 
" ble of giving service neither better nor worse than it 
" now does." 

Reproduction value was there considered to be the 
same thing as present value, properly considered. In 
that case there was a question as to the vast appreciation 
in value of land on Manhattan Island, due to causes 
which affected all New York realty alike, and whether 
the company was entitled to the benefit of such appre- 
ciation; but there was no question as to monopoly 
value of any portion of the plant. If the Gas Company 



32 

had secured every available site and all facilities for 
manufacturing gas, not only within the city but within 
fifty miles thereof, there would have been presented 
the unique question which confronts us here. The most 
striking characteristic of monopoly is its tendency to 
render reproduction by people other than itself, diffi- 
cult and impossible. If the Spring Valley Water Com- 
pany had the same control over lumber, steel, iron and 
other materials used in construction which it has over 
the sources from which water can be obtained, there 
would probably be much dispute as to whether repro- 
duction value of structures is the same thing as pres- 
ent value properly considered. 

As was said in the 1908 case, complainant acquired 
its water rights, reservoir and watershed lands, and de- 
voted them to public service under a law which per- 
mitted, and now requires, public regulation; and many 
of them were acquired after the adoption of the con- 
stitutional provision: 

"The use of all water now appropriated, or that 
may hereafter be appropriated, for sale, rental, or 
distribution, is hereby declared to be a public use, 
and subject to the regulation and control of the 
state, in the manner to be prescribed by law." 

What complainant did was done with open eyes. 
Under the law it was entitled to no more than a fair 
return, not upon the monopoly value, but upon the 
reasonable value of the property at the time it was be- 
ing used for the public. 

It is impossible to consider the constant use of the 



33 

with value by all the federal courts and the courts of 
this State in practically every recent statement of this 
rule, without feeling that regard must be given to the 
service performed by the property; that reasonable 
value and fair value are not always and under all con- 
ditions the precise equivalent of full actual value, or 
the value which would be awarded in condemnation 
proceedings; that the value upon which a fair return 
is due is the value which under all the circumstances 
is reasonable and fair as between the public and the 
person who has voluntarily devoted his property, or 
some portion or use thereof, to public convenience. 

In San Diego L. & T. Co. v. National City, 174 U. 
S. 735, 75J, it is said that a fair return to which the 
owner of such property is entitled cannot always be 
based "upon the total amount invested, because some 
" portion of that which is acquired by the investment 
" may be neither necessary or presently useful for the 
" public service." But the fair return is to be based 
" upon the fair present value of that which is used for 
" the public benefit having due regard always to the 
" reasonable value/' 

San Francisco should pay what is reasonable for the 
service rendered. It should pay for what it receives; 
it should pay for no more and no less. It is unreason- 
able to require payment for a service which is neither 
rendered nor received. It is equally unreasonable that 
the company should expect payment for water which 
it does not deliver; or for the use of property which 
was neither used nor useful in producing, gathering, 
storing, protecting or distributing the water which was 
delivered to the people of San Francisco between June 



34 

30th, 1903, and July 1st, 1906, the period to which our 
inquiry relates. As to this there is and can be no dis- 
pute. 

The average daily consumption is about 33,500,000 
gallons; the daily capacity of complainant's plant is 
35,000,000 gallons, but it is alleged that with addi- 
tional dams and aqueducts complainant's plant will 
be capable of supplying San Francisco with more than 
1 10,000,000 gallons per day. In other words, the plant 
is sufficient with reasonable development, to supply the 
needs of San Francisco when she has a population of 
two million. 

The company has looked ahead for fifty years; it 
has invested wisely and judiciously; it has a great 
property; but it does not necessarily follow that the 
water rates in question are confiscatory because they 
fail to yield an income of seven, or six, or even five 
per cent on the full value of this property. 

On the western slope of the Peninsula there are lands 
and water rights owned by the company which, if de- 
veloped, would yield 18,000,000 gallons of water per 
day, but none of this is used for San Francisco. 

The Portola Reservoir near Palo Alto spreads over 
340 acres of a 923-acre tract owned by the company. 
It is estimated that this source alone will ultimately 
yield the company more than 7,000,000 gallons of wa- 
ter per day. This property has been valued by Mr. 
Schussler at more than $500,000. 

At Coyote Creek there are 11,300 acres 

At Ravenswood, about 1,900 " 

At Locks Creek 1,500 " 

In Arroyo Valle 4 421.8 " 



35 

There are extensive tracts of land in Alameda Coun- 
ty, in San Benito County and at Clear Lake. From 
1899 to 1903, the company paid more than $142,000 
for lands in Santa Clara .County. In the City of San 
Francisco the company owns the Market Street reser- 
voir tract, containing 12-50 vara lots; the Industrial 
School reservoir tract of 42 acres, and the Lobos Creek 
property, valued by Mr. Baldwin, a witness for com- 
plainant, at $281,300, $126,600 and $66,665, respect- 
ively. It is unnecessary to mention more. The com- 
pany admits these properties are not used in supplying 
San Francisco with water, and that these with other 
properties, now gone out of use or never in use, orig- 
inally cost $2,523,625.75. Defendants claim the orig- 
inal cost of such property exceeds $4,600,000. 

The Calaveras, San Antonio and Arroyo Valle res- 
ervoir sites present another phase of the same question. 
By constructing dams on each of these sites, and by ad- 
ding to the height of the Crystal Springs dam, Mr. 
Schussler says the present storage capacity of the com- 
pany can be increased from 28 billion to 100 billion 
gallons, and the daily output from 35 million to 100 
million gallons. "This increase", he says, "can easily 
" be developed gradually, economically, step by step, 
" as the demand for water in San Francisco increases 
" during the first half of the present century." 

The Calaveras, San Antonio and Arroyo Valle sites, 
with adjacent territory, amounting to more than 18,- 
000 acres, are apparently more or less useful at the 
present time, with the exception of 4,421.8 acres in 
Arroyo Valle. They are useful, however, only as wa- 
ter-bearing properties. 



36 

For ten years or more some 2,700 acres of the Cala- 
veras watershed and reservoir lands have been rented 
to tenant farmers for orchard and grain raising, at an 
annual rental which has been as high as $5,900. 

With the filter beds at Sunol and the wells at Pleas- 
anton these 18,000 acres enable the company to draw 
from the entire 600 square miles of watershed an aver- 
age of but 15,000,000 gallons of water per day. 

The Crystal Springs dam was constructed of suffi- 
cient thickness and strength to support an additional 
height of 30 feet. This addition, if made, will bring 
into use as water-covered land 430 acres which are now 
watershed. Defendants claim that the area of this 
" dam is twice as large as experience with other sim- 
" ilar structures shows that it is required to have been", 
and "that portion of this structure which is not pres- 
" ently useful represents a sum of at least $500,000." 

There is nothing in evidence tending to show that 
any addition to the Crystal Springs dam was contem- 
plated before 1903, or that the 430 acres differ in any 
respect from other watershed areas owned by the com- 
pany, save in the possibility of being covered by water 
at some time in the remote future. 

The present service of the above-mentioned proper- 
ties, therefore, is but a small fraction of the duty which 
they could render with easy development. How then, 
are these properties to be valued? If San Francisco 
were seeking to acquire them for a municipal water 
system, under the law of eminent domain the price 
fixed would be the value of the property for the most 
advantageous uses to which it could be applied. 



37 

This rule has been enunciated most clearly in Boom 
Co. v. Patterson, 98 U. S. 408. In that case the defend- 
ant owned in fee an island and parts of two other is- 
lands in the Mississippi River. The possession of the 
islands fitted them, in connection with the west bank of 
the river, to form a boom of extensive dimensions, cap- 
able of holding with safety from 20 to 30 million feet 
of logs. For such a use the Boom Company sought to 
condemn the islands. The jury assessed their value at 
$9,358.33 for boom purposes, and the value for any 
other purposes aside from boom purposes, at $300 only. 
The court sustained a final judgment in the sum of 
$5,500 in favor of the owner of the islands, declaring 
that the adaptability of the property for boom pur- 
poses was a proper element for consideration. 

In a condemnation proceeding, therefore, the exam- 
ination of value could not be restricted to the water- 
bearing capabilities of the reservoir sites, but inquiry 
would be made as to any and all uses for which the 
lands are suitable, including their fitness for reservoirs. 
This, however, is no more than just, because in such 
case the condemning party would take the whole value 
of the property and every use to which it is adapted, 
as well as all future appreciation in value. All would 
be taken and all should be paid for. 

If the properties are to be considered separately, it 
is strenuously urged that the rule in eminent domain is 
the only safe, sane and absolutely reliable guide for 
ascertaining value for rate-fixing purposes; "consid- 
" ered separately, each is useful to the extent of its 
" value for any and all purposes, unless its inclusion 



38 

" at that price would result in a valuation that would 
" place an insupportable burden upon the consumers." 

In this connection it is suggested that property once 
devoted to a public use must continue in that use so 
long as it is useful, and that much of the property of 
this company will continue useful for all time. 

The constitution of California forbids the passage 
of any act by the Legislature relieving the property of 
a public service corporation from the duty it was in- 
tended to perform. The constitution was adopted and 
ratified in 1879. The Alameda property was not em- 
ployed in supplying San Francisco with water until 
1887 or 1888, when the first water was taken across the 
Bay. If the company then devoted to the mere catch- 
ment of water lands which were immensely valuable 
for reservoir purposes, knowing that there was no im- 
mediate need for reservoirs thereon, it certainly did so 
with its eyes open. 

There is to my mind a wide difference between the 
situation of the owner who is required to give up his 
property at a valuation fixed in condemnation proceed- 
ings, and the situation of the Spring Valley Company 
in this suit. The former has no option as to what shall 
be taken; no choice as to quantity, price or time. His 
property and all its uses are appropriated, whether he 
will or not. The complainant here was under no such 
constraint; it followed its own judgment, and largely 
consulted its own interest in determining what prop- 
erty it would acquire for San Francisco's water supply, 
and when. It retains exclusive ownership, possession 
and control, save only in this, after it has once applied 



39 

a piece of property to this purpose, it is not at liberty 
to withdraw it or to apply it to any other uses, so as to 
diminish the quantity, or impair the quality of the wa- 
ter necessarily used by and delivered to the city and its 
inhabitants. If the land produces crops of hay or 
grain, if it grows timber, if it contains coal, iron, or any 
valuable deposits, these all belong to the company. 
The city has no right to cut a spear of grass, to remove 
a stick of timber, or mine a pound of coal; but all this 
may be done by the company if it can be accomplished 
without detriment to the city's needed water supply. 
The city's interest in the property is no larger than its 
right to receive therefrom its necessary supply of pure 
water in return for a reasonable compensation. 

Mr. Justice Holmes says in San Diego L. & T. Co. 
v. Jasper, 189 U. S. 439, 446: 

"If a plant is built, as probably this was, for a 
larger area than it finds itself able to supply, or, 
apart from that, if it does not yet have the cus- 
tomers contemplated, neither justice nor the Con- 
stitution requires that, say, two-thirds of the con- 
templated number should pay a full return." 

In Water District v. Water Co., 99 Me. 371, 376, 
Mr. Justice Savage uses the following illustration: 

"Suppose that a five-hundred horse power en- 
gine was used for pumping when a one-hundred 
horse power engine would do as well. As prop- 
erty to be fairly valued, the larger engine might 
be more valuable than the smaller one, yet it could 
not be said that it would be reasonable to compel 
the public to pay rates based upon the value of 
the unnecessarily expensive engine." 



40 

In Consolidated Gas Co. v. City of New York, 157 
Fed. 849, 857, Judge Hough excluded from the valua- 
tion the present worth of leased, vacant and unimprov- 
ed lands to the amount of more than $2,000,000, be- 
cause they were not then in use. 

In Southern Pacific Co. v. Bartine, 170 Fed. 725, 
767, the court declared : 

"If a railroad is built into a new and sparsely 
settled territory, with a view of serving a large 
future population and developing business, the 
Constitution does not require the few people and 
the small business of the present time to pay rates 
which will yield an income equal to the full re- 
turn to be gathered when the country is populated 
and business developed to the full capacity of the 
road." 

To the same effect see: 

Beale & Wyman on R. R. Rate Reg., sees. 343, 

344, 462 ; 
Capital City Gas Light Co. v. Des Moines, 72 

Fed. 829, 844; 
Boise City Irr. & L. Co. v. Clark, 131 Fed. 415. 

The value of property is the value of its uses. If 
but half complainant's land is used, a return on that 
half only should be exacted. The value of that half 
would be the reasonable value of the property in use. 
If complainant's land is susceptible of two equally ad- 
vantageous uses, each of which may be exercised with- 
out detriment to the other, and only one of them is 
taken for the public, half the value of the property 
again would be the reasonable value of the property 



4i 

in use. When watershed lands are used for grain rais- 
ing, under proper restrictions, neither use materially 
interferes with the other. So, also, lands may be em- 
ployed at the same time both for water production and 
water storage. Neither use excludes the other. 

In Long Branch Com. v. Tintern Manor Water Co., 
62 Atl. 474, 480, a much larger reservoir site was pro- 
vided by the company than was or would be necessary 
for many years to come. The original plans provided 
for a very large reservoir, including a high dam; but 
in carrying out the plans a lower dam was adopted, 
and but one-third to one-half the land was covered with 
water. The court deducted from the total value of the 
land about one-third. A dam was constructed at a cost 
of $89,500, of sufficient width to sustain one two or 
three times its height. The court deducted $30,000 for 
excessive cost of the dam. It appeared also that a 36- 
inch main was used when a 30-inch main would have 
been sufficient to perform the service required. This 
main, eight miles in length, cost $300,000. The court 
deducted $75,000. 

In this case the company purchased the Calaveras, 
the San Antonio and the Arroyo Valle reservoir lands, 
and devoted them to public service years in advance 
of any possible necessity for the construction of reser- 
voirs thereon to meet reasonable demands of San Fran- 
cisco. 

My attention has been called to no law which could 
have been successfully invoked against complainant 
had it constructed a reservoir on the Calaveras site in 
1888, and thereafter sold the surplus product above 



42 

what was being sent to San Francisco to other water 
users, during the fiscal years 1903-4, 1904- 5 and 1905-6. 
Had the company pursued such a course the propriety 
and justice of an apportionment of the total value of 
the lands as between the two users would be apparent. 

In cases where the issue is the reasonableness of 
freight rates fixed on the intrastate business of a rail- 
road which is doing an interstate business as well, a 
physical segregation of the property into the two classes 
is impossible, because substantially the entire property 
of the railroad in the state is employed for each ser- 
vice. Yet in such cases the courts have never hesitated 
to apportion the total value of the railroad as between 
the two classes of traffic. The fact that reservoir lands 
have never been used for reservoir purposes cannot 
vary the application of the principle, the city never 
prevented such a use. 

The justice of this is obvious. While the company 
should be in advance of the present demand, and pro- 
vide for emergencies, for growing population, for un- 
usual droughts, and for extraordinary conflagrations, 
it should not be too far in advance. If property is to 
be included in a valuation for rate-fixing purposes, it 
must be shown to be either presently useful, or to be 
necessary for wants which are near at hand. If the 
rule were otherwise, the public might be called on to 
bear the burden of the company's investments in addi- 
tion to paying a reasonable price for the company's 
service. 

The courts are always open. Such lands can always 
be condemned, reservoirs constructed and connected 



43 

with the system within a reasonably limited time be- 
fore they are needed. 

If the Spring Valley Water Company in pursuance 
of its very evident policy to secure control of all near- 
by sources has purchased reservoir lands and secured 
water rights years in advance of any actual need, while 
prices were low and such properties were to be had at 
what they were worth for agricultural and grazing 
purposes, it was a very wise investment, but it was not 
public service. It might be otherwise if the city dic- 
tated these purchases, but it does not appear that such 
was the case. On the contrary, the company has acted 
entirely on its own judgment in making these acquisi- 
tions. Both in argument and testimony it is frequently 
asserted that the city has thus been saved a great deal 
of money. However, the saving to the city is not by 
any means so apparent as the profit to the company. 
The company asks years in advance of any reservoir 
use, not only an income on the cost of such lands, but 
on their reservoir value. Thus the company is not only 
asking the city to carry its very wise investment, but 
also to pay for services which are not rendered. Some 
of these unused reservoir sites were purchased 25 years 
before this litigation was commenced; and even now 
there is no evidence of any intention to build reservoirs 
or increase the height of the Crystal Springs dam with- 
in a reasonably immediate future. The next contem- 
plated development to meet the city's increasing need 
for water, according to the chief engineer of the com- 
pany, is to be on the artesian lands near the south end 
of the Bay. When in the future reservoirs are con- 



44 

structed and in use, the lands will be valued for rate- 
fixing purposes at their full value, the value at which 
they could be acquired at that time in condemnation 
suits. There is no assurance that the company will 
then claim anything less than the highest value of the 
land, or that anything will be abated therefrom be- 
cause the city during many years may have paid the 
reservoir value of lands while it was receiving only 
such watershed service as the lands could render after 
they had been cropped by the company's farmer ten- 
ants. 

I cannot recede from the position taken in the 1908 
case: If the company voluntarily devotes to the mere 
catchment of water, lands which are much more val- 
uable for other purposes, it is unreasonable in fixing 
rates to appraise such lands for more than they are 
worth as watershed areas. 

Spring Valley Water Co. v. San Francisco, 165 
Fed. 667, 698. 

True, these lands have appreciated somewhat, but 
there is no evidence that they have been wanted for 
other uses more valuable than the present, or that San 
Francisco has any present need of them for residential 
purposes. Their enhanced value, if any, is a prospect- 
ive value, which comes in anticipation of the fact that 
some time in the more or less distant future they will 
be needed for reservoirs, or for some other utility. 

There are now all told in the Peninsula system 18,- 
859.94 acres. This land, including the water rights, 
was originally purchased for $1,231,139.23, or an aver- 
age price per acre of $65,278. The Pilarcitos lands,. 



45 

3,9 T 9-47 acres, were purchased at an average price of 
$17.77. The highest priced lands were in the Crystal 
Springs tract; there 8,614.66 acres were purchased at 
an average price of $110.56. 

Of the land in this system 1880 acres are now occu- 
pied by and used for reservoirs. The balance will be 
valued as watershed land merely. These lands for the 
most part are suitable only for grazing, and to a small 
extent for farming. The soil is poor, the land rough 
and hilly. 

Of these watershed lands Mr. Grunsky says: 

"The lands in the watershed, though it is desir- 
able that they be owned by the Water Company, 
are not as essential features of the works as the wa- 
ter rights and the reservoir sites. They could be 
acquired by purchase from time to time at but lit- 
tle more than the value which they have when 
used for the same purposes for which other simi- 
lar lands in the same vicinity are used. These 
lands are for the most part suitable for grazing, 
to some extent for general farming. Fifty dollars 
per acre would be a liberal average to place upon 
them." 

2 3>399-5^ acres are included in the Alameda system. 
This land, with water rights, reservoir sites and rights 
of way, including rights of way in San Mateo County, 

cost $2,451,030.33 

The rights of way cost 37,547.55 

Water rights 296,763.87 

Lands 2,161,718.91 

The Arroyo Valle lands cost $39.93 per acre. 973.97 
acres on Laguna creek cost $239.63 per acre. And 



46 

14,213-23 acres on San Antonio creek cost $38.86 per 
acre. 7,329 acres on Calaveras creek, with water rights, 
cost $171.18 per acre. Some 2,700 acres of the Cala- 
veras lands, including a large portion of the reservoir 
site, were rented to tenant farmers for grain and fruit 
raising. The annual rental in 1903 was $4,512, and in 
1904, $4,262. For four years prior to 1903 the rent was 
$5,972. The annual rental for 1903 is equivalent to a 
5 per cent income on $90,240. This amount will be 
considered in appraising the Calaveras lands. 

The reservoir site lands, 1,880 acres, are valued at 
$1,000 per acre; and the watershed lands, 40,379.52 
acres, at $100 per acre, making a total, after deducting 
the $90,240, of $5,827,712, the present value of the res- 
ervoir and watershed lands. 

In the water rate investigation of 1 900-1 before the 
Board of Supervisors, Mr. Schussler testified as fol- 
lows: 

"The combined surfaces of the reservoirs in San 
Mateo county is 2,340 acres, valuing this at only 
$1,000 an acre that makes the valuation of those 
basins, exclusive of the dam construction, $2,340,- 
000. The watershed that sheds into that, of which 
we own, outside of the reservoir sites, about 17,300 
acres, at $100 an acre, makes the watershed worth 
$1,730,000. The water rights in San Mateo county 
which should properly be charged into it at cost 
is in the neighborhood of $600,000. That makes 
for the reservoir site, the watershed and water 
rights in San Mateo, at a very low estimate, a 
value of $4,670,000. The Alameda creek prop- 
erty has a reservoir site of 1,350 acres, and valuing 



47 

this at only $1,000 an acre makes the reservoir 
worth $1,350,000. In addition to that there are 
3,800 acres of watershed, at $100 an acre, and that 
makes $380,000. Then the water rights that be- 
long to the system all the way down the Alameda 
creek from Vallejo Mill to the bay, are worth in 
the neighborhood of $1,000,000 at present, making 
a total for the Alameda creek system of $2,730,000. 
* * * Q. I will ask you are these figures which 
you put upon the reservoir acreage and drainage 
acreage reasonable? A. Yes, they are very rea- 
sonable. You could not buy them today, except 
in a few instances, you might buy them for a little 
less, but we not very long ago purchased the right 
of 118 acres, which had only five acres in the res- 
ervoir and the rest in the watershed, and we paid 
about $1,000 an acre for the five acres and $10,000 
for the remaining 113 acres, making it practically 
about $100 an acre for the watershed. Q. Are 
those the present values, as I understand it? A. 
Yes, sir." 

Mr. Dockweiler estimates the lands and water rights 
in the Alameda and Peninsula systems at $5,823,675. 
Mr. Grunsky's estimate, made January 30th, 1903, was 
$5,959,164. Both Mr. Dockweiler and Mr. Grunsky 
included in their estimates a reservoir value for reser- 
voir lands not in use as such. 

No question has been raised as to the propriety of 
including water rights among the properties to be val- 
ued, upon which complainant is entitled to a return in 
the water rates. The only difference between the par- 
ties is as to the proper valuation. 

The valuations per million gallons of daily delivery, 



4 8 

fixed by the experts, range from $40,000 to $150,000. 
The elevation of the Peninsula reservoirs adds to the 
value of those water rights; while the fact that the en- 
tire output from Lake Merced and the Alameda sys- 
tem, constituting more than one-half of the entire wa- 
ter supply, must be pumped practically from the sea 
level, detracts materially from the value of those rights. 
It must also be remembered that such rights as com- 
plainant has to the subsurface flow, and to the flood wa- 
ters of Alameda creek and San Mateo creek, have been 
acquired, and their acquisition made possible, only by 
the purchase of high priced lands, and the erection of 
costly structures, all of which receive an independent 
valuation. Obviously such a water right, when consid- 
ered in connection with the cost of lands and structures, 
and the expense of filtering, pumping from artesian 
wells, and protecting with drainage systems, is of much 
less value than if the pure water could be taken from 
a living stream by means of a simple diverting dam, 
and delivered by gravity. 

The average daily amount of water used in San 
Francisco in 1903-4 was about 33,000,000 gallons. 
During the summer months there were days when the 
consumpton was much higher. 

For the water rights used in supplying San Fran- 
cisco, considering all the circumstances, $2,100,000 
seems a very liberal allowance. 

Mr. Schussler estimates the aggregate length of va- 
rious rights of way owned by the company at fifty 
miles, and their value at $500,000. So far as the record 
shows these rights were purchased for about $79,000, 



49 

and many of the purchases were of recent date. For 
instance, in 1902 a strip 33 feet wide and three miles 
long, together with a small tract at the edge of the bay, 
was purchased of the Dumbarton Land Company for 
$11,000. At Millbrae, in November, 1898, a right of 
way from the pump to the bay, 1250 feet in length, was 
purchased for $625, or 50 cents per foot. April, 1902, 
a right of way 1980 feet in length, was bought from the 
University of California for $1,374.80, or 69 cents per 
foot. Including the three - mile right of way above 
mentioned, there is a record of 22,933 ^ eet bought in 
Alameda county for rights of way in 1898 and 1899 
at an aggregate price of $19,131.75, or 83 cents per 
foot. 

Testimony as to the length, location and character of 
the various rights of way is exceedingly meager, and 
wholly insufficient to support a valuation in excess of 
$200,000. 

As I have already stated, the Lake Merced property 
consists of 2730 acres, of which 1,903 are in San Fran- 
cisco, and the remainder in San Mateo county. The 
lake covers 400 acres of that portion of the tract which 
lies in San Francisco; it has a storage capacity of 2,- 
500,000,000 gallons, and an average daily production of 
3,000,000 gallons. A pumping station on the shore of 
the lake is capable of forcing this water into the city 
at the rate of 7,000,000 gallons per day. Increasing 
population in the neighborhood renders it more and 
more difficult to guard the water from pollution. In 
1879 Mr. Schussler testified that it was "very poor wa- 
" ter." An extensive drainage system constructed since 



that date, now serves to convey to the ocean objection- 
able surface waters which otherwise would naturally 
flow into the lake. Still there is some question as to the 
quality of the water. Mr. Grunsky testifies that the 
"water cannot be safely used without filtration." How- 
ever this may be, the lake is unquestionably the least 
desirable of the several sources of supply owned by the 
company. It is valuable as a ready-made reservoir and 
near-by storage, available in cases of emergency, and is 
therefore a necessary and useful part of the system. 
The lake itself is fed from innumerable springs in its 
floor and on its margin. The value of the adjacent 
lands lies in the fact that their possession enables the 
company to hold contaminating agencies at a distance 
from the water. 

Mr. Baldwin, whose qualifications as an expert on 
real estate values in San Francisco are conceded, ap- 
praises this property at $13,650,000, or $5,000 per acre. 
Mr. Grunsky, at $2,030,000, or $743 per acre; Mr. 
Dockweiler at $2,831,500, or $1,035 P er acre. In 1901 
Mr. Schussler testified that the property was worth $3,- 
700,000, or $989 per acre. In December, 1904, in this 
case, his estimate was $4,095,000, or $1,500 per acre. 
Mr. Baldwin bases his valuation on the assumption that 
the tract can be divided into lots, and sold for residence 
purposes. In support of this he cited the Parkside 
property, then being sold in subdivisions of 25 by 100 
feet at from $800 to $1200 each. The witness was con- 
fident that the whole property could thus be disposed 
of in San Francisco and elsewhere within a reasonable 
time. Neither Mr. Dockweiler nor Mr. Grunsky qual- 



5i 

ified as experts on real estate values. Mr. Grunsky 
based his figures on information obtained from two San 
Francisco real estate men. It is insisted by complain- 
ant that the only competent evidence as to the value of 
the property is that of Mr. Baldwin. To this I can 
hardly yield my assent. And as to Mr. Baldwin's tes- 
timony this observation may be made: In this case we 
are dealing with values as they existed, and conditions 
as they were during the years 1903, 1904 and 1905. 
Testimony showing how many building lots a tract can 
be divided into and what such lots could be sold for 
separately has frequently been held inadmissible in con- 
demnation proceedings. Such testimony is too uncer- 
tain and speculative. 

Martin v. Chicago & Milwaukee Elec. Ry., 77 

N. E. 86, 88; 
Gorgas v. Philadelphia, etc., R. R. Co., 1 14 Am. 

St. Rep. 974. 

In Railroad Company v. Cleary, 11 Am. St. Rep. 
913, 916, the court says: 

a The jury are to value the tract of land, and 
that only. They are not to determine how it could 
best be divided into building lots, nor conjecture 
how fast they could be sold, nor at what price per 
lot. A speculator or investor in deciding what 
price he could afford to pay would consider the 
chances and probabilities of the situation as then 
actually existing. A jury should do the same thing. 
They are not to inquire what a speculator might 
be able to realize out of a re-sale in the future, but 
what a present purchaser would be willing to pay 
for it in the condition it is now in." 



52 

If we fix the value of the whole plant, producing 
35,000,000 gallons per day, and the value of the entire 
service performed, by comparison with Mr. Baldwin's 
valuation of the Merced property, the daily output of 
which is but 3,000,000 gallons, the result is startling. 
If property which produces 3,000,000 gallons is worth 
$13,650,000, property producing 35,000,000 gallons per 
day would be worth $159,250,000. 

If, as complainant contends, it is entitled to a 7 per 
cent return on the value of its property, above operat- 
ing expenses and taxes, it should collect for 3,000,000 
gallons daily output from Lake Merced on Mr. Bald- 
win's valuation of that property a gross income of $1,- 
025,107.67, or $936.17 for each million gallons of wa- 
ter delivered. So far as the record shows, the highest 
price paid elsewhere in the United States is $193.03, 
in Brockton, Mass. Portland, Ore., pays but $44.91, 
and Los Angeles but $81.22 for the same quantity of 
water. Such a valuation would result in the imposi- 
tion of an insupportable burden upon the rate payers 
of San Francisco. 

The actual cost of the entire Lake Merced lands was 
$697,593.60, or $255 per acre. "The water rights cost 
$150,000. The most recent purchases were 22.8 acres, 
known as the Gum Forest, bought April 14th, 1904, 
for $41,000, or $1,800 per acre; 72 acres, known as 
the Osmont tract, bought January 19th, 1905, for $70,- 
000, or $972 per acre; and 55.7 acres, known as the 
Brooks tract, bought on the same date for $41,827.50, 
or $750 per acre. The Gum Forest fronts on the Ingle- 
side road on the east side of the property, and is there- 



53 

fore nearest the city. The Osmont and Brooks tracts 
are in the watershed, and between the south arm of the 
lake and the ocean. The average price for this 150.; 
acres was $1,015. 

Complainant insists that these transactions, as evi- 
dence, have no probative value, because the Water 
Company was in a position to force the sales under the 
law of eminent domain, and consequently the owners 
were not willing vendors. Testimony of this character 
when offered has usually been rejected upon the theory 
that the parties in making the sale and fixing the price 
were not acting with entire freedom. The purchaser 
in most instances must have the particular property, 
and the vendor can sell to no one else; if they fail to 
agree on the price, it is fixed by some tribunal appoint- 
ed by law. Such a sale would be compulsory, and such 
a situation likely to induce one party or the other to 
recede from his just demands. The rule, however, is 
not without its exception. 

In Presbrey v. Old Colony & Newport Ry. Co., 103 
Mass. 9; and again in Seaboard Air Line v. Chamblin, 
108 Va. 42, it was held that "where the transaction is 
" free from such consideration so that it may fairly be 
" regarded like an ordinary sale between seller and 
" purchaser, the evidence would be competent." 

In the more recent case of O'Malley v. Common- 
wealth, 182 Mass. 196, the court went still further. In 
that case an exception had been taken to the admission 
of evidence as to a sale to the Metropolitan Water 
Board. In overruling the exception Mr. Justice 
Holmes, then Chief Justice of Massachusetts, said: 



54- 

"The exceptions show none of the circumstances, 
nothing beyond the bare fact of the sale. We can- 
not say merely because of the name of the pur- 
chaser that the sale was not a fair transaction in 
the market, rather than a compulsory settlement. 
The Board has power to purchase as well as to 
condemn land." 

The value sought to be ascertained in condemnation 
proceedings is the market value; that is, the price 
which property will bring when it is offered for sale 
by one who desires to sell, but is not obliged to do so, 
and is bought by one who is under no necessity of hav- 
ing it. 

2 Lewis on Eminent Domain, Sec. 706. 

So far as the evidence here shows, if complainant 
had needed these lands in the performance of its duty 
to supply water to San Francisco, it was a need which 
had been equally insistent for more than twenty-five 
years. 

The water product of these lands is drained into the 
ocean. Five weeks before the sale of the Gum Forest, 
Mr. Brooks, "Land Agent" of the Water Company, 
was authorized by resolution of its Board of Directors 
to purchase the property at a price not to exceed 
$1,250 per acre. The fact that the price finally fixed 
and paid was $1,800 per acre, indicates an ordinary and 
not a compulsory sale. It does not appear that any 
condemnation proceedings were threatened or even con- 
templated. Aside from the fact that complainant is* 
a public service corporation, entitled to exercise the 
right of eminent domain in a proper case, there is noth- 



ing which indicates that either sale was forced or com- 
pulsory. Furthermore, before any one of the tracts 
mentioned could be appropriated under the law of emi- 
nent domain, it was necessary for complainant to show 
that the taking was reasonably necessary for the pur- 
pose of supplying San Francisco with water. 

In Spring Valley Water Works v. San Mateo Water 
Works, reported in 28 Pac. 447, there was an attempt 
to condemn 28 acres on the Crystal Springs watershed; 
the court held that the mere fact that the taking of the 
property in question "would be a great convenience" 
to the Water Company, would "enhance the value of 
" its property' 1 , and also "secure a fuller water supply 
to the inhabitants of San Francisco", was not sufficient 
proof of necessity to justify the taking of the property. 

If the rule in that case be applied here, it is not quite 
clear that condemnation proceedings, delayed a quar- 
ter of a century, could have been successfully resorted 
to against the Gum Forest or the Osmont or Brooks 
tracts. 

Finally, complainant having itself introduced the 
only testimony showing the date of each sale, its actual 
consummation and the price paid, in order to show its 
total investment in the Lake Merced property, cannot 
now be heard to object to its consideration. 

Seaboard Air Line v. Chamblin, 108 Va. 42, 50. 

Evidence of actual, contemporaneous sales of por- 
tions of the very property in question, seems to me to 
be useful, and to afford a valuable guide, where the 
opinions of the experts are so irreconcilable. The 
average price paid by the company for the three tracts 



56 

is $1,015.45 per acre. This price probably exceeds the 
full value of the lands as factors in supplying water, 
but falls short of a proper estimate for the water cov- 
ered territory. 

Rents collected from tenants occupying portions of 
the Lake Merced ranch amount to $1,495 P er annum. 
This is equivalent to a 5 per cent annual income on 
$29,900, and will be considered in the appraisement. 

A valuation of $3,412,500 seems to be reasonable for 
this property, and that amount, less $29,900, or $3,- 
382,600 will be allowed. 

OFFICE BUILDING. 

Various appraisements of the office building (cor- 
ner of Geary and Stockton streets) are as follows: 

Mr. Baldwin $900,000 

Mr. Dockweiler 858,734 

Mr. Schussler and Mr. Grunsky 750,000. 

The gross income from this property, counting 
Spring Valley occupancy at $12,000, is $46,380 per an- 
num. The average net annual rental of the property 
from June 30th, 1903, to December 31st, 1905, is 
$34,732, or a 5 per cent income on a valuation of 
$694,640. 25.8 per cent (the ratio between $46,380 
and $12,000) of this valuation, or $179,217. should be 
included among the values on which the company is 
entitled to a return in water rates. Five per cent 
rather than 4 per cent is taken because the higher rate 
is used against defendants in other calculations. 

The value of the property not in use is $515,423. 



57 
GOING BUSINESS. 

The fact that complainant's plant is in actual opera- 
tion, in other words, that it is a going business, is an 
element of value. It is obvious, as Mr. Justice Brewer 
says in National Water Works v. Kansas City, 62 Fed. 
852, that the "mere cost of purchasing the land, con- 
" structing the buildings, putting in machinery and 
" laying the pipes in the streets, in other words, the 
" cost of reproduction, does not give the value of the 
" property as it is today." 

The difficulty here is to ascertain what value attaches 
to the business as a going concern. Mr. Schuyler and 
Mr. Adams, two of complainant's witnesses, consider 
the value of this element to be equal to the cost of es- 
tablishing the business. This is assumed to be the dif- 
ference between the income which the Company 
should have received, and the amount which it did 
actually collect from water rates prior to the time 
when the plant became a paying concern; in other 
words, the deficiency in revenue prior to 1880. It is 
claimed that the amount which should have been re- 
ceived is equal to the amount of interest which would 
have been earned, prior to 1880, by the same money at 
contemporary current rates. Thus fixed, this element 
is worth more than $5,000,000. 

"This estimate is open to the objection that the 
deficiency of revenue may have been due to ex- 
travagant or wasteful management. The company 
may have purchased a plant larger and more ex- 
pensive than necessary; current rates of interest 
may have been abnormally high; many causes 



58 

which have absolutely no relation to the value of 
the company's business now as a going concern, 
may have increased or diminished the deficiency 
in revenue. Furthermore, if it be conceded that 
early deficiency of revenue is the proper measure 
of value for the present going business, then it 
follows that, the greater the deficiency and the 
more unprofitable the business, the greater the 
present value of the going concern; and, if the 
business had yielded large profits from its very in- 
ception, the going business today would be worth- 
less." 

Spring Valley Water Co. v. San Francisco, 
165 Fed. 657, 696, 697. 

Counsel for complainant suggest that "an economi- 
" cally sound appraisement" of this element is found 
by ascertaining the total probable net income of the 
Spring Valley Water Company during such period as 
would be required to construct the Tuolumne system, 
and adding thereto interest during the period of con- 
struction covering the same time. 

Of this method of valuation it may be said that the 
length of the period of construction depends on the 
efficiency and celerity of the contractors. The earn- 
ings of the company depend on the Board of Super- 
visors. And among all the many factors which would 
enter into such a computation, probably not a single 
one can be fixed with any degree of certainty. 

Mr. Grunsky thinks the value due to the fact that 
the company has an established business, should be 
appraised at "about 25 per cent of the valuation of 
" its city distributing system, or $1,400,000." Of this 



59 

amount he also says it "is substantially an allowance 
" for contingencies, omissions, and the like." This also 
seems to me to be an arbitrary method, having little 
or no relation to the real value of going business. 

Mr. Hering, a witness for complainant, says that as 
the cost of establishing a business "has been or should 
"have been covered by the schedule of water rates: 
" further allowance at the end of the term would then 
" be its duplication." 

In a report to the North Pasadena Land & Water 
Company, Mr. Schuyler suggests this value could be 
taken care of fairly by offsetting it against a portion 
of the depreciation. 

Probably nothing further is needed to demonstrate, 
for this case at least, the utter futility of attempting to 
establish a separate and distinct valuation for going 
business. The burden was on complainant if it wished 
such an independent valuation, to produce the evi- 
dence on which it could be based ; but no such evidence 
has been called to my attention. 

In Contra Costa Water Co. v. City of Oakland, 113 
Pac. 668, 676, it was contended, as here, that this valu- 
ation is measured by deficiencies of income prior to the 
time the business was brought to a paying basis. The 
Supreme Court was of the opinion that early losses 
" had no relation to the question of present value, and 
" offered no basis for any valuation." And finally they 
dismissed the subject with these words: "In what we 
" have said we do not desire to be considered as de- 
" ciding that in the matter of fixing rates anything at 
" all should be added to the value on account of the 
" element of going concern." 



6o 

I shall consider the fact that complainant has an es- 
tablished business, not by fixing a definite value there- 
for, but along the lines suggested by the sound and 
practical utterances of Judge Savage in Brunswick 
Water District v. Maine Water Co., 59 Atl. 537, 539: 

"We speak sometimes of a going concern value 
as if it is or could be separate and distinct from 
structure value — so much for structure and so 
much for going concern. But this is not an accu- 
rate statement. The going concern part of it has 
no existence except as a characteristic of the struc- 
ture. If no structures, no going concern. If a 
structure in use, it is a structure whose value is 
affected by the fact that it is in use. There is 
only one value. It is the value of the structure as 
being used. That is all there is to it." 

The good will of complainant will not be considered 
as a proper element for valuation in this proceeding. 
Good will rests on the probability that customers as a 
matter of personal choice, will continue to trade where 
they have been doing business. Here there is no such 
choice. They must take water from the Spring Val- 
ley Water Company or go without. 

Will cox v. Consolidated Gas Co., 212 U. S. 19, 

21, 52; 
Contra Costa Water Co. v. City of Oakland, 

113 Pac. 668, 676. 

FRANCHISE. 

The right to collect rates for the use of water sup- 
plied to any city and county, or the inhabitants thereof, 
is declared by the Constitution of California to be a 



6i 

franchise, and by the same instrument a franchise is 
declared to be property. 

In the 1908 case it was held that complainant's fran- 
chise should be included among the properties on 
which complainant is entitled to a return, at whatever 
reasonable value it is shown to have. Obviously com- 
plainant's plant is much more valuable with than with- 
out a right to collect water rates, yet if it is to be re- 
garded as more than a characteristic of the property, 
it should somewhere and somehow manifest a distinct 
productive efficiency, by earning profits above and in 
addition to what is but a fair return for the use of the 
physical properties composing the plant. This, how- 
ever, has not been shown. According to Mr. Schuyler 
and Mr. Adams, prior to 1880 the income of com- 
plainant and its predecessors fell by more than $$,- 
000,000 short of an adequate income on the moneys 
actually invested. Since that date, according to Mr. 
Adams, the interest on the company's indebtedness, 
added to the dividends paid stockholders, amounted to 
no more than enough to yield an average of 4 per cent 
on the cost of the plant, with no allowance for depre- 
ciation. It thus appears that there never has been, 
above a scant return on the investment, any income 
which could be attributed to the earning power of the 
franchise. 

Complainant insists, however, that it is entitled to a 
valuation on franchise value, because in 1863 the 
Spring Valley Water Works acquired from George H. 
Ensign and others, a franchise to furnish San Fran- 
cisco with water. The consideration, $182,000, was 



62 

paid in stock of the company at par. Two years later 
the Spring Valley Water Company took over all the 
property of the San Francisco ,City Water Works, in- 
cluding its franchise and going business. The consid- 
eration was $3,200,000, also paid for in stock of the 
purchasing company at its face value. In the latter 
deal, according to complainant's calculation, $2,410,- 
000 represents the price paid for franchise and busi- 
ness. This sum of money was thus capitalized, and 
stock issued therefor. It is said that both lots of stock 
thus taken were held as property. Dividends were 
paid on it for many years. It has been purchased by 
successors of the original stockholders in reliance upon 
that franchise and business as a part of the property. 
Complainant now says that under the ruling in Will- 
cox v. Consolidated Gas Co., 212 U. S. 19, 42, 48, 
there should be added to the valuation of its physical 
properties, $2,592,000, in order to arrive at the actual 
value upon which it is entitled to a return. 

In the Willcox case, seven gas companies operating 
in the City of New York, owning exclusive franchises, 
were permitted to consolidate by an act of the Legis- 
lature, which contained a proviso to the effect that the 
capital of the new consolidated company should not 
exceed the fair aggregate value of the property, fran- 
chise and rights of the several companies. The total 
value of the seven franchises was fixed at $7,781,000. 
Stock of the new company was issued to cover that 
value. From the time of their creation to the date of 
consolidation "these companies had been free from leg- 
" islation upon the amount of the rates to be charged 



63 

''for gas"; they had paid enormous dividends; sev- 
eral of the companies had averaged from date of or- 
ganization dividends of over 16 per cent per annum; 
and a statute prohibiting the laying of any more gas- 
pipe in the streets of the city for twenty years further 
enhanced the value of their property. The lower court 
fixed the value of the franchise at the time the suit 
was brought at $20,000,000, on the theory that the 
value of the franchise and the value of the tangible 
property had advanced with equal pace. The Supreme 
Court in declining to allow a valuation exceeding that 
fixed at the date of consolidation, said: 

"Because the amount of gas supplied has in- 
creased to the extent stated, and the other and 
tangible property of the corporation has increased 
so largely in value, is not, as it seems to us, any 
reason for attributing a like proportional in- 
crease in the value of the franchises. Real estate 
may have increased in value very largely, as also 
the personal property, without any necessary in- 
crease in the value of the franchises. Its past 
value was founded upon the opportunity of ob- 
taining these enormous and excessive returns upon 
the property of the company, without legislative 
interference with the price for the supply of gas, 
but that immunity for the future was, of course, 
uncertain, and the moment it ceased and the leg- 
islature reduced the earnings to a reasonable sum 
the great value of the franchises would be at once 
and unfavorably affected, but how much so it is 
not possible for us now to see. The value would 
most certainly not increase." 



64 

The court concludes its discussion of this subject 
with the following words: 

"What has been said herein regarding the value 
of the franchises in this case has been necessarily 
founded upon its own peculiar facts, and the de- 
cision thereon can form no precedent in regard to 
the valuation of franchises generally, where the 
facts are not similar to those in the case before 
us. We simply accept the sum named as the value 
under the circumstances stated." 

The case before us presents few features which are 
similar to those in the Gas case. According to com- 
plainant, there is no history of enormous dividends. 
There is a story of inadequate returns from the very 
beginning. The franchise acquired from Ensign was 
created by an act of the Legislature of the State of 
California, approved April 23rd, 1858; it provided 
for rates yielding not less than 20 per cent per annum 
on the actual capital invested. It required the com- 
pany to furnish water for fire and other municipal 
purposes without charge, and fixed the life of the 
franchise at 30 years. The act confirming the mu- 
nicipal ordinance creating the San Francisco City 
Water Works, was approved March 18th, 1858. The 
ordinance provided that water rates should be so fixed 
by the Supervisors as to afford a gross income on the 
" actual cash capital invested of 24 per cent per annum 
" for the first five years, and 20 per cent thereafter." 
The life of the franchise could not exceed 20 years, 
and the company was required to furnish water to ex- 
tinguish fires, and for other public purposes, without 



65 

charge. Under these statutes the rates should have 
been sufficient to leave a handsome margin, after pay- 
ing taxes, operating expenses and a fair income on 
the investment. Such a margin would represent the 
independent earning power of the franchises. At the 
time they became the property of the Spring Valley 
Water Works, these franchises were undoubtedly ex- 
pected to be in force for years. Because of this fact, 
in 1863 and 1865 tnev were probably worth the full 
amount for which they were capitalized, but the peo- 
ple who took the stock and dealt in these franchises, 
and the company itself, knew the law, and knew that 
one would expire in 20 years, that is, in 1878; and the 
other at the end of 30 years, that is, in 1888. 

In the 44th volume of the California Reports, at 
page 493, there is a case entitled San Francisco v. 
Spring Valley Water Works. It appears that in 1868 
the Spring Valley Water Works, then operating un- 
der the franchises above mentioned, refused to furnish 
further water to the municipality for public use, with- 
out compensation. It took this action on the ground 
that private property could not be taken for public use 
without just compensation. The matter was taken to 
the Supreme Court of the State twice, and finally the 
Ensign Act was declared unconstitutional. 

It is impossible for the court at this time to find an 
independent valuation for these franchises, one of 
which was based upon an unconstitutional statute, and 
both of which expired years ago. There is no testi- 
mony in the case on which any independent franchise 
valuation can be based. 



66 

PROPERTIES OUT OF USE. 

The following is a list of properties out of use, and 
in the column opposite each item is its cost: 

1. Alms House Reservoir Site $ 63,300.00 

2. California Agricultural Association (Clear 

Lake ) 243,341.61 

3. Manzanita Water Company (Portola) 24,421.03 

4. San Francisco Lands and Improvements 23,193.07 

5. Searsville Tunnel 89 865.13 

6. Searsville Dam 121 672.24 

7. Searsville Improvements 32 303.09 

8. Searsville Lands 53 958.25 

9. Pescadero Improvements 35 837.01 

10. Pilarcitos Artesian Wells 6 381.48 

11. Purissima Lands 17 940 qq 

12. San Gregorio 7,150.00 

13. Sausalito Water Works 15 519.07 

14. Buchanan Street Reservoir 133,343.88 

15. Brannan Street Reservoir 8 936.92 

16. Islais Flume 15 190.57 

17. Lobos Creek and Flume 31,259.14 

18. Lobos Creek Artesian Wells 634.90 

19. Lobos Creek Pump 23 469.00 

20. Lobos Creek Lots 2,500.00 

21. Locks Creek Line (part of) 197,809.00 

22. Lafayette Park Pump 9,005.77 

23. Ringold Street Pump 8,115.15 

24. San Andreas Pipe Line (part) 79,000.00 

25. Wells at Headwaters 6 451.58 

26. WelLs at Warren and Tuttle 11,760.03 

27. Wells, Sundry 3^675.68 

28. San Pedro Pumps and Works 26,842.30 

29. Pilarcitos Flume 248 739.80 

30. Stone Inlet Tower and Culvert through Pilar- 

citos Dam 8,400.00 

31. Lake Merced Old Pumps 156,318.00 

32. Crystal Springs Old Pumping Station 79,804.00 

33. Thomasson Lot, Ashbury Heights 1,500.00 

34. Lake Merced Coal Yard Lot 1.600.00 



67 

35. City Engine 8,387.18 

36. Meters 119,531.72 

37. Potter Charges for Wells, Boilers, etc 10,399.85 

38. Old Office Building and Lot (net cost) 10,142.90 

39. Branch Flume at Pilarcitos Dam 9,760.06 

40. San Francisco City Water Works 1,261,198.34 

41. Telegraph; cost of lines to Lake Honda, San 

Andreas and Pilarcitos in 1868 4,459.04 

42. Crystal Springs Upper Dam, proportional cost 

of dam not useful 

43. (Ocean View Pumps $25,349.24) 

44. (Upper Pilarcitos Dam 31,376.40) 

45. Calaveras Dam; explorations and surveys. . . . 44,446.46 

46. San Antonio Improvements 4,305.47 

47. Portion of Concrete Dam, Colma Gulch Drain- 

age System, Lake Merced 25,000.00 

48. Lake Honda Dividing Wall (portion of) 10,000.00 

49. Crystal Springs Dairy Land 25,000.00 

50. Stevens Creek Lands 4,169.50 

51. Arroyo Valley Lands (4,421.8 acres) 64,287.47 

52. Small Dam at Pilarcitos 1,152.75 

Suburban Properties, Ten Parcels of Land and 

Improvements 737,879.36 

Total $4,129,357.80 

ITEM i2. SAN GREGORIO. 
This refers to water rights on the lower San Gre- 
gorio creek. No water was ever drawn from this 
source to San Francisco. Of the total cost of this 
property, $7,150, $2,650 is shown on defendants' ex- 
hibit No. 131, and $4,500 on defendants' exhibit No. 
116. 

ITEM 17. LOBOS CREEK AND FLUME. 
There is no dispute as to the fact that this property 
is wholly out of use, but Mr. Wenzelberger's exam- 
ination of complainant's books discloses a cost of $31,- 



68 

2^9- H- Of that item Mr. Reynolds was unable to find 
$5,600. This precise amount appears in Mr. Wen- 
zelberger's new construction account of date June 30th, 
1886. Mr. Reynolds, under the heading "New Con- 
" struction" for the same year gives only a lump sum, 
$239,367.45. If this were itemized possibly the miss- 
ing item would appear. I allow $31,239.14 as the cost 
of Lobos creek and flume. 

ITEM 21. A PART OF LOCKS CREEK LINE. 

The evidence as to the original cost of the entire 
property, and of that portion of the property which is 
still in use, is so uncertain that I cannot find any part 
of this property out of use in excess of that which is 
conceded, to wit, $197,809. 

ITEM 29. PILARCITOS FLUME. 

According to Mr. Reynolds, the original cost up to 
1865, of the Pilarcitos pipe, flumes, dams and tunnels 
was $458,096.65. Mr. Wenzelberger shows that the 
cost of the Pilarcitos works, outside the flume and pipe 
line, prior to that date, was $170,252.85; the balance, 
$287,843.80, represents the cost of the flume and pipe 
line. Mr. Schussler says that this pipe line and flume 
went entirely out of use after the new Pilarcitos line 
was completed, but that the pipe was taken up, cleaned 
and used elsewhere. According to Mr. Wenzelberger, 
the original cost of this iron pipe was $39,104. The 
cost of the property thus passing out of use is found 
to be $248,739.80. 



6 9 

ITEM 32. CRYSTAL SPRINGS OLD PUMP- 
ING STATION. 

ITEM 43. OCEAN VIEW PUMPS. 

Crystal Springs Old Pumping Station was con- 
structed in 1877 at a cost of $105,804. It is now out of 
use. The force pipe is used in various parts of the 
work. The pump itself was removed to Ocean View 
some time prior to 1891, and is now the Ocean View 
Pumping Plant, and is maintained as a relief pump 
in case of accident to the Lake Merced pump and 
force pipe. It has not been used for nine years. It 
was subjected to a test run in 1891, and was used in 
1877 and 1895. It never was a first class pump. If 
the life of a pump is but 30 years, and wrought iron 
pipe and wooden structures but 40 years, it is evident 
that this property is of but little present worth. How- 
ever, it will not be included among the properties out 
of use. 

ITEM 36. METERS. 

Mr. Wenzelberger gives the cost of meters at $400,- 
293.27, and $70,154.52 for setting and putting them in 
order; total cost $470,447.79. Against this there is a 
credit of $130,761.55, leaving a balance of $339,686.24. 
Mr. Schussler estimates the value of the meters on 
hand at $150,000. This may be a rough estimate, as 
complainant says, but it is in evidence, and inasmuch 
as it was offered by complainant, it will be accepted 
as correct. A deduction of $U9,53 I -72 for meters out 
of use seems reasonable. 



70 

ITEM 38. OLD OFFICE BUILDING. 

This building and lot originally cost $35,142.90. It 
was sold for $25,000, but as no part of the property is 
in use, none of the original cost can be considered as 
property in service. 

ITEM 39. BRANCH FLUME AT PILARCITOS 
DAM. 

There is evidence of three flumes, viz., the Pilar- 
citos branch flume, constructed in 1864; Pilarcitos side 
flume (old), constructed in 1866; and the Pilarcitos 
side flume (new), constructed in 1876. It is not clear 
that the new side flume is not the old side flume taken 
down and rebuilt on a higher level. The branch flume, 
however, will be included among the properties out 
of use. 

ITEM 40. SAN FRANCISCO CITY WATER 
WORKS. 

For the San Francisco City Water Works property 
acquired in 1865, tne construction account of the 
Spring Valley Water Works was charged with $1,- 
698,000. Of this purchase the real property still in 
use is worth $300,000, and pipe in the city distribut- 
ing system $136,801.66. Among the properties out of 
use included in this purchase, was a strip of land on 
Lobos Creek, water rights on the same creek, capable 
of yielding 2,000,000 gallons of water per day; an 
aqueduct leading from Lobos Creek around Fort Point 
to the foot of Van Ness avenue, and a legislative fran- 
chise granted in 1858. The life of the franchise was 



7i 

20 years. Until its expiration in 1878, it was believed 
that the company was entitled to water rates which 
would yield a gross revenue of 20 per cent per annum 
on the investment. With the expiration of the fran- 
chise its value disappeared. When competition and 
rivalry were eliminated there was no good will, and 
when the Lobos Creek water became unfit for general 
use, and portions of its distributing pipe were sold to 
the Gas Company, there was little left of the so-called 
unit value of the property. 

ITEM 42. CRYSTAL SPRINGS UPPER DAM. 
ITEM 44. UPPER PILARCITOS DAM. 

Since the construction of the new Crystal Springs 
dam, the upper dam divides the reservoir into two 
parts. That part of the Greater Crystal Springs reser- 
voir which lies behind the old dam serves merely as a 
settling pond. The same may be said of the upper 
Pilarcitos dam. For water storage, neither has any 
value. The road from San Mateo to the coast crosses 
the lake over the upper Crystal Springs dam. The 
original cost of this dam was $230,827.63. It has very 
little value at the present time. The upper Pilarcitos 
dam cost $31,376.40. Neither will be included in the 
list of properties out of use. 

ITEM 45. CALAVERAS DAM AND EX- 
PLORATIONS. 
ITEM 46. SAN ANTONIO IMPROVEMENTS. 
These items cover expenditures incurred in pros- 
pecting to determine the sites for reservoirs which are 
not constructed, and therefore not in use. 



72 

ITEM 47. PORTIONS OF THE CONCRETE 
DAM COLMA GULCH DRAINAGE SYS- 
TEM, LAKE MERCED. 

This is not in use, and cannot be used until a third 
silt storage dam is constructed. 

The total cost of properties out of use as above 
found, is $4,129,357.80. If we deduct from this $2,- 
100,199.59, the cost of properties now worn out and 
no longer of any value, we shall have $2,029,158.21, 
representing the cost of properties still in existence, 
but not used in supplying San Francisco with water. 
If we add to this amount the appreciation in value of 
the several items, as well as the present value of other 
properties owned by the Company but not in use, $3,- 
071,994, we shall have for the present value of all such 
property, approximately $5,101,152, as shown below. 

In order to avoid disclosure of its plans the company 
has purchased a large portion of its real estate through 
trustees. In such matters its wishes were respected in 
the taking of testimony, consequently it is impossible 
to locate, describe, or value all its holdings. Further- 
more, there is an absence of testimony as to present 
value of many items which are known. In such cases 
I have used the cost price, if disclosed. 

Bringing forward $2,029,158 

the additional values found are as follows: 
Alms House Reservoir Site: 

Present value $ 125,000 

Less 63,300 (cost) 61,700 

Searsville or Portola Lands : 

340 acres Reservoir Site at $1,000.$ 340,000 

572 acres watershed at $50 28,600 



Total $ 368,600 



73 
Less 53,958 (cost) 314,642 

Buchanan or Market Street Reservoir : 

Present value $ 281,000 

Less 133,343 (cost) 147,657 

Brannan Street Reservoir Site : 

Present value $ 38,300 

Less 8,936 (cost) 29,364 

Lobos Creek Lots : 

Present value $ 66,665 

Less 2,500 (cost) 64,165 

Arroyo Valle Land : 

4421.8 acres at $50 $ 221,090 

Less 64,287 (cost) 156,803 

Calaveras Reservoir Site : 

1300 acres at $1,000 

(Reservoir value) $1,300,000 

Plus agricultural use 90,240 

$1,390,240 
Less $100 per acre 

watershed value $ 130,000 1,260,240 

Crystal Springs Reservoir, Land not now in use for Reservoirs: 

430 acres at $1,000 $ 430,000 

Less $100 per acre 

watershed use 43,000 387,000 

1500 acres on Locks Creek 

at $50 $ 75,000 

Office Building, Corner Stockton and Geary Streets: 

Present value $ 694,640 

Less 25.8 per cent, proportionate 

value of Spring Valley 

Water Company use $ 179,217 515,423 

Niles Dam and Aqueduct 60,000 

Total $5,101,132 

This list does not include the unused value of the 
San Antonio, Arroyo Valle and other reservoir sites, 



74 

or undeveloped or unused water rights. Perhaps it is 
worthy of note that Mr. Schussler values the 4421.8 
acres in Arroyo Valle, 1500 acres in the Locks creek 
region, the Alms House reservoir tract and the Mar- 
ket street reservoir tract at $4,500,000. 

SUMMARY OF VALUE OF PROPERTIES. 

The value of complainant's properties used in sup- 
plying defendants with water in 1903-4 was as follows: 

1—1880 acres reservoir land $ 1,880,000 

2—40,379.52 acres watershed 3,947,712 

3—2730 acres Lake Merced property 3,382,600 

4— Water rights 2,100,000 

5— Rights of way 200,000 

6 — City Reservoir Sites : 

Lake Honda $165,000 

University Mound 38,300 

College Hill 40,800 

Clay Street Tank 70,000 

Lombard Street or Upper 
Russian Hill 120,000 

Francisco Street or Lower 

Russian Hill 72,000 

Clarendon Heights 12,600 

Potrero Heights 9,150 

Presidio Heights 40,000 $ 567,850" 

7— Pump Tracts: * 

Black Point $ 15,000 

Clarendon Heights 12,475 

Ocean View, Ocean Side Tank 1,000 

Millbrae Pump Tract, 68 acres. . 25,000 

Belmont Pump Tract, 45 acres . . 16,544 

Carville Pump Tract 1,000 $ 71.019 

8— Bryant Street Pipe Yard and Building $ 65,000 

9 — Office Lot Building (Spring Valley Water 

Company use) $ 179,217 

Total Real Estate $12,393,398 



75 

10— Meters $ 150,000 

11— Stock on hand 270 000 

-12 — Crystal Springs System: 
Lower Concrete Dam. 

Excavation $ 52,920 

Concrete Factory 78,229 

Outlet Shaft 81,510 

Howard Cut 103,433 

Extra Work 79,050 

Main Dam — Concrete 1,399,080 

Upper Dam 50,000 

Buildings at Upper Dam 10,359 

Screen House and Tank at 

University Mound Reservoir. . 6,000 

Pipe Line to San Francisco .... 796,444 

Trestles 20,400 

Tunnels 39,934 $ 2,717,359 

13 — Alameda Creek System: 

36-inch Pipe Line : On trestles. .$ 107,300 

36-inch Pipe Line : In ditch . . . 806,332 
Trestle through marsh| 

Gate at Burlingame ] 75,000 

54-inch Pipe Line 318,530 

Connections 7,670 

Submarine Pipe Line : Double 

16-inch 150,000 

Submarine Pipe Line: Double 

22-inch 285,900 

Pleasanton Improvements 75,559 

Sunol Filter Beds, Laguna 

Ditch and Sunol Dam 275,193 

Sunol Aqueduct 324,608 

Niles Dam and Aqueduct 40.000 $ 2,466,092 

14 — Pilarcitos System: 

Pilarcitos Dam and Waste Weir.$ 326,778 

Upper Pilarcitos Dam 10,000 

Pilarcitos Pipe Line 303,235 

Pilarcitos Side Flume 14,000 

Gate House 21,412 

Pilarcitos Camp 5,093 

Flume and Gauge Tank 840 



7 6 

Tunnel No. 1 27 096 

Tunnel No. 2 68 ' 32 o 

Lake Honda Tunnel 44 Q12 

Lake Honda Screen House 10 640 

Tank House 880 

Lake Honda (Large) Tank 4,000 

Ocean House Flume 9,233 $ 846,139 

15— Lake Merced Drainage System $ 232454 

16 — San Andreas System: 

Main Dam and Waste Weir $ 488,541 

Pi P e Line 480,557 

Forebays, Gate Houses, Outlets, 

Shafts and Appurtenances . . 41,307 

Bald Hill Tunnel 52,875 

Davis Tunnel 29 724 

Flume and Pipe Feeder 17,451 

Buildings at reservoir 11 704 

Screen House and Measuring 

Tank 8,375 

Sewer Pipe 7 317 

College Hill Aerator 1,772 $ 1,139,623 

17 — Locks Creek : 

Locks Creek Flume $ 87,413 

Locks Creek Tunnel No. 1 57,910 

Locks Creek Tunnel No. 2 73 304 

Pilarcitos Stone Dam 7 482 

Pilarcitos Stone Dam Flume . . . 15,901 
San Mateo Valley Clay 

Settling Dam 7 126 

San Mateo Concrete Dam 9,150 

Pipe Line across San Andreas 

Galley 23,280 

Concrete Tunnel, Culvert, etc. . . 5,800 

Buildings 2,500 $ 289,866. 

18 — City Distributing Reservoirs: 

Lake Honda $ 294,157 

University Mound 167,109 

College Hill 57,265 

Francisco Street 43 574 

Lombard Street 41 725 

(Presidio Heights) 



77 

Potrero Heights 17,768 

Clay Street 13,324 

Clarendon Heights 14,577 $ 649,499 

19 — Pumping Plants: 

Belmont Pumping Station $ 277,021 

Millbrae Pumping Station 271,580 

Lake Merced Pumping Station . . 276,116 

Crystal Springs Station 130,756 

Pilarcitos Station 30,167 

Black Point Station 165,787 

Clarendon Heights Station 54,780 

Ocean View Station 10,000 $ 1,216,207 

20— City Pipe System $ 4,500,000 

21 — Special Structures, viz: 

Lake Honda Sewer Tunnel 

Lake Honda Pipe Tunnel 

Bernal Heights, two Tunnels 

Islais Creek Trestle 

Ocean Side Tank $ 59,316 

RECAPITULATION OF STRUCTURES. 

Crystal Springs System $2,717,359 

Alameda Creek System 2,466,092 

Pilarcitos System 846,139 

Lake Merced Drainage System. . 232,454 

San Andreas System 1,139,623 

Locks Creek 289,866 

City Distributing Reservoir . . . 649,499 

Pumping Plants 1,216,207 

City Distributing System 4,559,316 

22 — 12 1-2 per cent for engineering 
and interest during con- 
struction 1,764,569 $15,881,124 

Total Real Estate 12,393,398 

Meters and stock on hand 420,000 

Total $28,694,522 

23 — Less Depreciation 2,922,538 

Total Value of Property $25,771 ,984 



78 

ITEMS 6 AND 7. CITY RESERVOIR SITES 
AND PUMP TRACTS. 

I have adopted the estimates of Mr. Schussler for 
sites of Lake Honda, Clay street tank, Lombard street 
reservoir, Francisco street reservoir, Presidio Heights 
reservoir, Millbrae pump and Carville pump. I have 
adopted Mr. Baldwin's estimates for sites of Univers- 
ity Mound reservoir, College Hill reservoir, Black 
Point pump and Clarendon Heights pump. Mr. 
Schussler values the Belmont pump tract at $25,000, 
and Mr. Grunsky fixes it at $8,000. I appraise the 
Millbrae and Belmont lots at about the same price per 
acre. My estimates on Clarendon Heights and Potrero 
Heights reservoir sites are less than Mr. Schussler's, 
but more than Mr. Baldwin's. 

PIPE, ETC. 

One of the most strongly contested points in the case 
is the present cost of wrought iron pipe. Nearly all 
such pipe used by the company was specially manu- 
factured. There are no regular market quotations for 
just such material. Owing to the disappearance of 
cash books covering an important period in the con- 
struction of the plant, and inaccurate bookkeeping, the 
prices actually paid, not only for pipe, but also for 
iabor and other materials, are involved in more or less 
doubt. Prices, particularly of metal and labor, have 
fluctuated, and there is some uncertainty as to the qual- 
ity of iron used in each line; consequently, present cost 
of reproduction, that is, what it would cost to recon- 
struct the pipe lines in March, 1903, is very much a 



79 

matter of opinion. Mr. Schussler testifies to a unit of 
10.6 cents per pound of pipe, as the present average 
cost. The importance of this unit rests on the fact 
that there are in use over thirty million pounds of such 
pipe. Mr. Schussler's unit is based in the main on the 
cost of the Alameda 54-inch line, built in 1902 and 
1903, and on his estimated average present cost of the 
various grades of iron now used by the company. The 
Alameda 54-inch pipe line probably represents the 
highest grade of material, the most skillful workman- 
ship and the latest and most approved contrivances 
and devices to be found in constructions of this char- 
acter. The pipe is laid in concrete saddles; the in- 
terior edges of the iron plates are bevelled to dimin- 
ish friction, and there are automatic vacuum valves 
with bronze shut-off gates. These improvements are 
not found on the older lines. 

Plates manufactured in Scotland at a cost of between 
5 and 6 cents a pound were used for the original Pilar- 
citos and the original San Andreas 30-inch lines. The 
iron was rusted en voyage. The cost of this iron, ac- 
cording to Mr. Schussler, is today 4.6 cents per pound 
delivered in San Francisco; 27/100 of a cent less than 
the cost of the 54-inch Alameda pipe. The differ- 
ence is made up in part of switching charges and cost 
of moving iron from one point to another in the com- 
pany's shops, an expense which does not appear to 
have entered into the cost of any other pipe. The 
Pilarcitos line, 67,570 feet in length, was constructed 
in 1867 and 1869 at a cost of about $388,883, or 13.67 
cents per pound of plate iron. This pipe was neither 



8o 

chipped nor properly caulked when laid; it gave 
much trouble, particularly "where the ground was 
" alkali", and finally about four miles of it was taken 
up, cleaned, recoated with asphaltum and relaid; 
since then it has done good service. 

The San Andreas 30-inch line, 65,300 feet in length, 
was laid in 1870 and 1871. This pipe gave so much 
trouble that about 26,000 feet was replaced in 1897 and 
1898 with what is known as the 44-inch San Andreas 
pipe. Actual cost in 1897 of this 44-inch pipe deliv- 
ered in San Francisco was 2.65 cents per pound. The 
average present value of all the San Andreas pipe de- 
livered in San Francisco is estimated by Mr. Schussler 
at 4 cents per pound. The total cost of the entire line, 
as shown by complainant's accounting department, was 
$689,162, or 12.97 cent s per pound for the old, and 
8.5 cents per pound for the new line. In February, 
1904, Mr. Schussler estimated the cost of the San An- 
dreas line at $600,000; in 1901 at $550,000. During 
the same year Mr. Ames, secretary of the company, 
fixed the cost at $499,168.24, and Mr. Grunsky, then 
city engineer, appraised it at $490,443. Mr. Schuss- 
ler's present valuation, excluding 10% for contin- 
gencies and 5% interest during construction, is $571,- 
658. 

The Crystal Springs 44-inch pipe line, originally 
95,660 feet in length, was constructed in 1884 and 
1885 at a cost of $955*308.43, or 10. 1 cents per pound 
of iron plate. In the water rate investigation of 1889- 
90, Mr. Schussler testified that the cost of this line 
complete in the ground, with water running through 



8i 

it, was 8.9 cents per pound for the No. 6 iron, and 
exactly 9.4 cents a pound for the No. 7 iron. The cost 
of manufacturing and laying the pipe, including extra 
fittings, appears to have been 2.77 cents per pound of 
iron plate as against 3.39 cents for the 54-inch Ala- 
meda pipe. 

The Alameda 36-inch line, 144,135 feet in length, 
was constructed in 1887 and 1889 at a cost, computed 
by complainant, of $1,296,000, or 12.87 cents P er 
pound. 

In 1897 force pipe for the new Millbrae pumps 
cost 3 cents a pound delivered in San Francisco, or 
2*4 cents in Pennsylvania. 

In the rate investigation of 1 900-1, Mr. Schussler 
said: 

"We have lately made a contract for iron, at, 
I think it was, 2.65 cents a pound free on board 
the cars in Harrisburg, and I think the freight 
is 75 one-hundredths of a cent, making it about 
3.41 cents here. Making allowance for the cost 
of manufacturing the iron and rivets, shipping, 
and then working the pipe, rivetting, punching, 
calking, dipping asphaltum, transportation, dig- 
ging the trenches, rivetting the pipe together 
in the ditch and calking it boiler-fashion, 
covering it up again and restoring the ground as 
we find it before we dig the trench, and making 
proper allowances for the manholes, blow-offs, 
air-cocks, etc., it will not come very far from 8V2 
cents per pound. That means good first class 



82 

In explanation of Mr. Schussler's answer counsel 
say: 

"Mr. Schussler referred to the Islais Creek 
pipe, which was the latest pipe for which iron 
had just been ordered of the same quality as that 
used in the bulk of the new San Andreas pipe line. 
This iron, although not up to the quality of the 
high grade charcoal iron used in nearly all of 
the other pipe lines of complainant, was still good 
first class iron." 

Mr. Schussler's explanation is that 8% cents 

"was about the estimate of cost at that time for 
that low grade iron * * * we have imported 
iron which cost us delivered here, instead of 3.41 
cents, it cost us 4.87 cents, while the iron of the 
Crystal Springs and Alameda pipe cost us about 
4.6 cents per pound here. * * * You will 
find that the difference between the figure at that 
time and the figure here is fully justified by the 
increase of the price of the metal and the labor." 

As all the important pipe lines were constructed, 
except the Alameda 54-inch, before Mr. Schussler gave 
his estimate of 8% cents per pound, it is safe to con- 
clude that the Alameda 54-inch pipe as a whole, is the 
most costly to be found in the system. 

As an illustration of this, the record shows that the 
manholes on the Alameda 54-inch line cost $25 as 
against $25 for the San Andreas and $15 for the Ala- 
meda 36-inch and the Crystal Springs. Air-vales for 
the 54-inch pipe cost $60 each as against $54 for the 
San Andreas, $25 for the Alameda 36-inch and $20 for 



83 

the Crystal Springs. Blow-offs for the first line cost 
$55 as against $50 for the San Andreas and $8 for the 
Alameda 36-inch and the,Crystal Springs. 

In 1 901, a year and a half before this suit was 
brought, Mr. Grunsky said the best quality of lamin- 
ated iron could be delivered in San Francisco for 3% 
cents per pound, and could be laid in the ground com- 
plete for 6.8 cents per pound. Mr. Schuyler and Mr. 
Adams fix the unit of cost for the Crystal Springs line 
at 9.4 cents per pound for pipe laid in ditches, and 
6.9 cents per pound for pipe laid on trestles. For the 
Alameda 36-inch line their corresponding units are 
9.4 cents and 7.4 cents per pound. For the Pilarcitos, 
Mr. Adams' unit is 10.5 cents, Mr. Schuyler's 10.5 
and 10.6. For the San Andreas 44 and 37-inch pipe 
their unit is 8.5. For the 30-inch San Andeas 10.6, 
For the Lobos Creek 44-inch pipe, 9.6. For the Locks 
Creek 44-inch pipe 9.6. Mr. Schussler's unit is 10.6, 
except for less important lines, where the figure some- 
times reaches 1 1 cents. For pipe laid on trestles, Mr. 
Schussler estimates the cost per pound for the 44-inch 
Crystal Springs at 8.6, and for the Alameda 36-inch 
pipe at 8.51. 

I have adopted the following units: 

Alameda 54-inch 10.6 

San Andreas 44 and 37-inch pipes 8.5 

Crystal Springs : Pipe in trenches 9.4 

' ' Pipe on trestles 6.9 

Alameda 36-inch : Pipe in trenches 9.4 

" " Pipe on trestles 7.4 

San Andreas 30-inch pipe and the Pilarcitos 10. 



84 

These units when increased by 12%% for contin- 
gencies, engineering and interest during construction, 
are, in my judgment, a fair and liberal estimate of the 
cost of laying wrought iron pipe. 

As to measurements, quantities and dimensions, there 
has been very little dispute. For the most part Mr. 
Schussler's figures have been adopted. The point of 
difference is the unit of cost, and as to this, variance 
among the experts is largely due to varying judgment 
as to efficiency and cost of labor. For example, on 
the San Andreas waste weir, 696,000 brick were laid; 
the cost per thousand is thus estimated: 

Schussler Adams Schuyler 
Cost of brick, cement and sand de- 
livered at weir $26.48 $24.37 

Labor 25.80 9.50 



$52.28 $33.87 $35.00 

Mr. Schussler says a day's work on this weir for a 
bricklayer was 500 brick; Mr. Adams says 1,000, and 
Mr. Higgins, foreman when the work was performed, 
says "We must have averaged from 1,000 to 1,200 
" brick a day." 

On the Pilarcitos tunnel the units were as follows: 

Schussler Adams Schuyler Higgins 
Cost of brick, sand and 

cement $24.08 $22.32 $22.32 $18.00 

Hauling 7.50 4.33 4.33 5.00 

Labor 31.70 11.88 14.45 24.00 



Cost per thousand brick $63.28 $38.55 $39.20 $47.00 

Mr. Higgins, who performed this work, says his 
contract price for the labor was $24 per thousand brick 



8.? 

laid; each bricklayer averaged 1,500 brick per day, 
and there was a profit on the contract. Mr. Schussler 
estimates a day's work on this tunnel at 400 brick; 
Mr. Schuyler and Mr. Adams at 800. 

For 157,200 cubic yards of concrete work at the 
main Crystal Springs dam, Mr. Schussler's estimated 
price per cubic yard is $10.38, of which labor is $4.16. 
Mr. Adams' unit is $8.90, of which labor is $1.50. Mr. 
Schuyler's unit is $9.00, of which labor is $1.62. 

The value of the Pilarcitos side flume is estimated 
by Mr. Schussler for its 100,000 feet of redwood lum- 
ber at 18 cents per foot; by Mr. Adams, Mr. Schuyler 
and Mr. Grunsky at 14 cents. 

While the cost of labor has advanced over prices rul- 
ing in more recent years, yet since the earlier struc- 
tures were built, prices for brick, cement, wrought iron 
plate and asphaltum for dipping pipe, have fallen. 
Modern methods have reduced the expense of drifting 
tunnels, and steam shovels could be used to good ad- 
vantage in excavations like those at Sunol. 

The following table, though not a complete state- 
ment of all material and work appraised, exhibits sub- 
stantially and fairly the effect of the unit values. The 
unit adopted for brick work, cement work, woodwork 
and wrought iron, includes the cost of incorporation 
into structures. In the final result 12%% is added to 
cover engineering, interest during construction, etc. 
The table includes lumber in flumes, chutes and fences, 
but not lumber in buildings. 



86 





Value 


Unit 


Brick work (10,680,544 brick) . . 


$ 356,196 


$33.35 per M. 




Lumber (1,576,092 ft.) 


120,640 


76.54 per M. 




Concrete work (5,712,730 cu. ft.) 


1,874,400 


.328 " cu. 


ft. 


Excavations (989,158 cu. yds.) . . 


508,940 


.514 " cu. 


yd. 


Embankments (820,500 cu. yds.) 


521,555 


.635 " cu. 


yd. 


Drifting tunnels, etc. (39,172 








ft.) 


433,139 


11.057 " ft. 




"Wrought iron pipe in trenches 








(28 085 970 lbs.) 


2,667,634 


.0949 per lb 




Wrought iron pipe on trestles 








(2,136,800 lbs.) 


154,689 


.0723 " " 









ITEM i2. CRYSTAL SPRINGS SYSTEM. 

I have allowed nothing for removing pipe from the 
bed of Crystal Springs reservoir. This pipe was re- 
laid in the 44-inch San Andreas line. The expense 
was incurred in saving the pipe, not in constructing the 
dam. 

While the main concrete dam is thicker and stronger 
than is necessary for its present service, as an extra 
precaution for the safety of people who live below 
between the dam and the bay, it is certainly useful. 
No deduction is made, though precedents are not 
wanting for such a course. 

ITEM 13. ALAMEDA CREEK SYSTEM. 

The Niles dam and aqueduct have had no part in 
supplying the city with water since the works at Sunol 
were completed. They are not essential factors in the 
present system. In case of serious injury to the Sunol 
dam, the dam and aqueduct at Niles might be useful. 
Such a contingency, however, is not probable. The 
only present use of this property is in supplying ri- 



87 

parian owners on Alameda creek at and below Niles 
with water. The present value of this property is 
$100,000. I have included it in the inventory at a valu- 
ation of $40,000, which is, in my opinion, a very lib- 
eral measure of its probable emergency usefulness to 
the city. 

ITEM 14. PILARCITOS SYSTEM. 

The Ocean House flume had not been reconstructed 
in 1903 when the ordinance of that year was adopted, 
hence the valuation is of the old flume. 

ITEM 15. LAKE MERCED DRAINAGE SYS- 
TEM. 

Mr. Adams' estimate is $234,738 

Mr. Schuyler's 241,553 

Mr. Dockweiler's 227,090 

Mr. Grunsky's estimate is $242,889 

Plus 24,288 

For engineering and contingencies. 

Total 267,177 

Mr. Schussler's estimate is $296,970 

Plus 29,697 

For contingencies, 

And 16,333 

For interest during construction. 
Total 343,000 

Original cost, as shown by Mr. Reynolds, was but 
$210,660.29, and of this amount $7,284.69 was expended 
in 1903 and 1904, probably after the ordinance of 1903 
was adopted. Furthermore, some $25,000 worth of 
work in this structure is not in use, and will not be 
useful until "the third or upper silt storage dam proves 
" to be a necessity and is being constructed." Whether 



the $7,284.69 should be included in the $25,000 I am 
unable to determine. 

Mr. Schussler's estimates on brick work, concrete 
work and excavations, in my opinion, are too high. 
For instance, on the drainage system 2,061,900 brick 
were used at a cost according to Mr. Schussler of 
about $98,910. Mr. Adams' estimate on the same work 
is about $55,000, a difference of $43,910. For 750 
cubic yards of excavation and 22,740 cubic feet of 
concrete at .Colma Gulch, Mr. Schussler's estimate is 
$10,590; Mr. Adams' $6,094 an d Mr. Schuyler's, 
$7,492. For 6040 cubic yards of excavation in the 
masonry channel and wooden chute, Mr. Schussler's 
estimate is $1,500 as against $1,120 by Mr. Adams. 
For 6170 feet of castiron drainage pipe Mr. Schussler's 
figure is $8,140, or $1.31 a foot, as against Mr. Adams' 
$4,936, or 80 cents per foot. If $25,000 and $43,900 
are deducted from Mr. Schussler's estimate, the bal- 
ance, $228,070, is still in excess of Mr. Dockweiler's 
estimate. I shall allow $232,454. 

ITEM 18. CITY DISTRIBUTING RESER- 
VOIRS. 

The estimates are as follows: 

Mr. Dockweiler $575,287 

Mr. Adams 680,049 

Mr. Schuyler 716,739 

Mr. Grunsky ' 729,232 

Mr. Schussler 820,682 

Amount allowed 649,499 

The Presidio Heights reservoir is not included be- 
cause it was not commenced until 1902 or completed 



8 9 

until 1904. The greater portion of its cost was not 
incurred until after the 1903 suit was commenced. 
$7,353.71 was expended on the Lombard street reser- 
voir in 1904. It was constructed about 1863. There 
is no record of any expenditure on the property be- 
tween 1863 and 1904 except $8,340.71 in 1879. It 
was valued by Mr. Grunsky in 1901 at $26,500. 

ITEM 19. PUMPING PLANTS. 

Actual cost as compared with expert estimates is as 
follows: 

Cost $1,135,644.62 

Mr. Schussler 1,651,000.00 

Mr. Schuyler 1,432,000.00 

Mr. Eckhart 1,398,211.71 

Mr. Adams 1,335,474.00 

Mr. Fitzgerald 1,315,095.21 

Mr. Grunsky 1,227,395.00 

Mr. Dockweiler 1,192,561.00 



Amount allowed $1,216,207.00 

February 6th, 1901, two years before the ordinance 
of 1903 was passed, Mr. Schussler submitted to the 
Board of Supervisors his estimate on pumping plants 
as follows: 

"1.— Belmont Station complete $ 175,000 

2.— Millbrae Station complete 265,000 

3. — Crystal Springs Station complete 92,000 

4. — Pilarcitos Station complete 25,000 

5. — Ocean View Pumping Station complete 50,000 

6. — Lake Merced Pumping Plant complete, with 
force pipe and San Andreas pipe connection, 
bridge, Ocean View tank, wharf, suction pipes 

and screens, etc 300,000 

7. — Black Point Pumping Station, inclusive of 



90 

brick-lined storage tunnel, wharf and real 

estate 200,000 

8. — Clarendon Heights Pumping Plant, exclusive 

of real estate 75,000 

Total estimate of above eight Pumping Sta- 
tions, exclusive of real estate (except Black 
Point, Millbrae, Belmont) $1,182,000." 

There is no testimony of any expenditures since Feb- 
ruary, 1901, on any of these plants, except $5,019.84 
on the Clarendon Heights in 1901, and $130,558.45 
on the Belmont. Of this last amount $58,458 was ex- 
pended in 1903 and 1904, probably after the 1903 or- 
dinance was passed. 

Mr. Eckhart values the engines for the seven differ- 
ent stations, excluding Ocean View, at $477,885; the 
original cost he says was but $397,732. The actual 
cost of the Millbrae engines in 1898 was $79,780; these 
he appraises now at $91,660. Concrete work which 
then cost 34 cents per cubic foot, he values at 40 cents. 

I find the present cost of reproducing the seven 
pumping stations first mentioned, $1,206,207, and to 
this I add $10,000, the present value of Ocean View 
pump. This, as I have already said, is the old Crystal 
Springs pump, and has not been in use for nine years. 
The total is $1,216,207. This, when increased i2 1 /2% 
for interest during construction, engineering, legal ex- 
penses, etc., will exceed the original cost of the seven 
stations more than $230,000. 

ITEM 20. CITY PIPE SYSTEM. 

Mr. Schussler's estimate is based on the cost of lay- 
ing in 1903-4 new pipe of first class quality. It does 
not appear that all castiron pipe in the system is of 



91 

the same grade. Pipe taken from lines outside San 
Francisco, after being cleaned was relaid in the city. 
This seems to have been the uniform practice. The 
company now claims a valuation of $5,108,300, or 
about $12,376 per mile for 412.74 miles, of such cast- 
iron pipe. In 1901 the claim was $3,636,000, or 
$9,523 per mile for 382 miles. This is an apprecia- 
tion in the course of two years of 54 cents a foot. 

The theory on which the chief engineer of the com- 
pany has proceeded in valuing the city pipe system is 
thus explained: 

"If a pipe has been laid on a macadamized 
street, and the next year a bituminous pavement 
with concrete is put over it that makes the pipe 
under the ground and under the pavement that 
much more valuable as what the bituminous pave- 
ment cost because if we had not laid the pipe 
prior to the bituminous and concrete pavement we 
would have had to cut the bituminous pavement 
and lay the pipe and then replace the pavement." 

When the 1903 ordinance was passed the market 

price of castiron pipe was but $38 per ton. Mr. Schuss- 

ler has based his estimate on a price of $40, and Mr. 

Adams on a price of $45. The various estimates on 

the present value of the castiron pipe lines of the city 

distributing system are as follows: 

Mr. Schussler $5,780,700 

Mr. Schuyler 4,898,055 

Mr. Fitzgerald 4,654,431 

Mr. Adams 4,481,716 

Mr. Dockweiler 4,401,504 

Mr. Grunsky 4,308,430 

The value fixed is $4,500,000. 



92 

ITEM 21. SPECIAL STRUCTURES. 
According to Mr. Schussler, the aggregate length 
of the two Bernal Heights tunnels is 1343 feet; 
through them passes a 44-inch pipe encased in brick, 
which fills the entire tunnel space around the pipe; and 
403,500 brick were used at an expense of $55.70 per 
M. Mr. Adams estimates the cost of laying these 
brick at $32 per M., and Mr. Higgins, who performed 
a portion of this work, says but two concentric rings of 
brick were placed about the pipe, the back filling was 
of earth, and but 209,820 brick were used. The mem- 
ory of the man who actually worked in the tunnel 
should be the most accurate as to back filling and the 
number of rings of brick about the pipe. I allow 
225,960 brick at $37.50 per M. 

ITEM 23. DEPRECIATION. 

Depreciation may be delayed, but it cannot be pre- 
vented. Ultimately every structure in complainant's 
plant will be worn out by use, wasted by action of the 
elements, broken by accident, abandoned in the devel- 
opment of the system, or displaced by newer and more 
efficient contrivances. In view of this fact, it was held 
in the 1908 case that complainant was entitled to an 
annual allowance to cover such loss. The highest 
courts have repeatedly declared this fact cannot be 
ignored in determining the value of property in rate 
cases. 

In Knoxville Water Co. v. City of Knoxville, 212 
U. S. 1, and more recently in Contra Costa Water Co. 
v. City of Oakland, 113 Pac. 668, the lower court 



93 

found the present cost of reproducing the plant, but 
failed to take into account the fact that an old plant 
is worth less than a new one. In each, the result was 
a reversal. 

It is impossible to measure accurately such loss until 
it has matured. When a machine is worn out, we know 
its original value is gone; but while the machine is in 
use the amount of deterioration is largely a matter of 
opinion. 

Here the difficulties of the problem are increased 
by the fact that a very large portion of the most valu- 
able construction, such as pipes, masonry and concrete 
work, are concealed in the ground, or under water. 

Counsel for the city contend that no annual allow- 
ance for depreciation should be given because it has 
been made good by current repairs and replacements, 
charged to operating expenses, and paid out of the 
water rates. On the other hand, counsel for the water 
company stoutly maintain that the structural portion 
of the plant cannot be reproduced for its original cost, 
and that its reproductive cost should not be diminished 
by reason of depreciation. However, complainant 
insists that it is entitled to an annual allowance for de- 
preciation, and defendants believe true value cannot 
be ascertained except by substracting depreciation from 
present cost of reproduction. 

The efficiency of the plant undoubtedly has been 
maintained by repairs and replacements, but to find the 
property has not depreciated is simply impossible. 
The evidence shows that structures costing more than 
$2,000,000 are no longer in use. In 1899, 3 1/7 miles 



94 

of small pipe, which could not have been used over 
forty years, was "taken up and abandoned jointly", 
being replaced by larger pipe. In 1898, five miles of 
the San Andreas 30-inch wrought iron pipe, which had 
been in use about 30 years "gave evidence of getting 
" worn out", and was replaced with 44-inch pipe. The 
first Lake Merced pump "built in 1877 has been 
" broken up and * * * sold for old iron." "The 
" flume from the Pilarcitos stone dam to tunnel No. 
" 1 of the Locks Creek line has been rebuilt after 32 
" or 33 years." The old Lafayette tank went out of 
use in 1903 or 1904; the Market street reservoir and 
the pipe line leading thereto from Lake Honda have 
been out of service more than ten years. The upper 
Crystal Springs dam, completed in 1878 at a cost of 
over $219,000, capable of holding three billion gal- 
lons of water, is now practically submerged in the 
new Crystal Springs reservoir; it serves merely as a 
causeway between the east and west side of the lake, 
and also as a settling basin for roily waters which come 
into the north end of the reservoir at certain seasons of 
the year. Even the water supply is subject to deterio- 
ration. Formerly Lobos Creek furnished the city with 
two million gallons of water per day; the water is now 
unfit for use. 

Mr. Grunsky estimates the period of serviceability 
for various parts of the works in service as follows: 

Pump engines 40 years 

Boilers 20 

Wrought iron pipe 40 

Flumes 20 ' 

Wooden buildings 40 

Water meters 15 



95 

After a careful examination of pipes laid in the city, 
he says the results fully justify his conclusions. 

Mr. Dockweiler is quoted as saying the life of a 
pump is but 30 years. Mr. Schuyler, after an examina- 
tion of pipe which had been in use 30 years, declares 
that it is good for 30 years longer. Mr. Adams says 
the depreciation on such a plant will amount to one 
per cent per annum of the original cost. 

I find the annual depreciation of this plant to be one 
per cent per annum for cast iron pipe; 2 per cent for 
wrought iron pipe; 2.5 per cent for pump engines, 
flumes and wooden structures; and 5 per cent for boil- 
ers. Thus I have ascertained the annual depreciation 
to be $212,983. 

The total depreciation to be deducted from the re- 
production cost of structures is $2,922,538. This I have 
ascertained by multiplying the annual depreciation of 
each structure for the number of years it has been in 
use, using original cost as the basis of calculation. In 
case of the cast iron pipe constituting the city distribu- 
tion system, the result was obtained by ascertaining the 
average length of time the pipe laid each year had been 
in service. I have calculated depreciation only on 
wrought iron pipe, cast iron pipe, wooden structures 
and the pumping plants. While reservoirs, concrete 
work, brick work, tunnels and excavations are undoubt- 
edly subject to deterioration, I conclude the amount ob- 
tained is sufficient to fairly cover all loss resulting from 
this cause, except in a few special cases, like the Crys- 
tal Springs upper dam, which originally cost $219,- 
476.61, and which I now value at $50,000. The upper 



9 6 

Pilarcitos dam, originally costing about $30,000, I 
value at $10,000; and the Ocean View Pump, costing 
$23,030.58, at $10,000. These three items afford an 
additional depreciation of $202,507.19. 

My calculations give depreciation as follows: 

Wrought and cast iron pipe $2,544,302.15 

Pumps and pumping plants 258,483.41 

Woodwork 119,752.81 

Total $2,922,538.37 

The necessity for deducting depreciation is apparent 
when we consider the fact three experts on behalf of 
complainant have made an exhaustive examination 
and a careful appraisement of the structural portions of 
complainant's plant, with total results as follows: 

Mr. Schussler $19,467,000 

Mr. Adams 16,062,445 

Mr. Schuyler 17,924,806 

Each estimate is the present cost of reproducing 
property without allowance for depreciation, and usual- 
ly exceeds original cost. As an illustration of this, Mr. 
Schussler fixes the cost of the upper Pilarcitos dam, 
now practically submerged in the Pilarcitos Reservoir, 
at $30,000, and adds thereto 30 per cent for increased 
price of labor and materials. 



$25,771,984 falls far short of $40,000,000, the lowest 
estimate offered in complainant's behalf. Nevertheless, 
in arriving at the smaller amount, I have for the most 
part based present value of integral portions of the 
plant on figures in evidence given by complainant's 



97 

witnesses in this or some other proceeding. The total 
of all contributions directly made by stockholders from 

1858 to 1903, inclusive, is but $ 9,177,496.82 

Adding to this the bonded debt 13,975,000.00 

And the floating debt 1,017,500.00 



The result $24,169,996.82 

is approximately the entire amount advanced by stock 

and bondholders to acquire 

$25,771,984 worth of property in use, 

$ 5,101,132 worth of property in existence but not in 

use, and 

$ 2,100,199 worth of property neither in existence nor 

in use. 

During the same period 
$22,450,313 have been distributed in dividends, and 
$3,991,228 undivided profits have been put back into 
the works. 

If the property is actually worth from $40,000,000 
to $70,000,000, that fact should be reflected at some 
time in the market value of the company's stock and 
bonds. 

When the 1903 suit was brought, Judge Morrow, on 
motion for an interlocutory injunction, fixed the value 
of the property by adding the sum of bonded and 
floating indebtedness to the average market value of 
the stock during the month in which the suit was com- 
menced, April, 1903. Thus: 

Capital stock, present value $11,760,000 

Bonded indebtedness 13,975.000 

Floating indebtedness 1,017,500 

Total $26,752,500 



98 

(Spring Valley Waterworks v. San Francisco, 124 
Fed - 574, 598.) 

The price of the stock was $84. It is alleged in the 
bill that the value of the stock at that time was about 
$83 to $85. It is also alleged that its low value was 
due to the passage of pretended ordinances fixing 
water rates, and that but for such ordinances the actual 
market value of said stock would now be about $97 per 
share. Immediately after the suit was brought, bonds 
of the company were selling for $95. The floating debt 
was $1,017,500. Summarizing these the value would 
be as follows: 

140,000 shares at $97 $13,580,000 

Bonded debt 13,276,250 

Floating debt 1,017,500 

Total $27,873,750 

If we deduct from this amount $5,101,132, the value 
of existing properties owned by the company but not 
in use, we have $22,772,618 representing the value of 
the property in actual use. 

The highest price ever reached by the stock was 
$103. If we take stock at $103, bonds at par, and add 
the floating debt, we shall have this result: 

140,000 shares at $103 $14,420,000 

Bonded debt [[" ^[q^qqq 

Floating debt 1 017 500 



Total $29,412,500 

Deducting value of existing property not in use 5,101,132 



The present value of the property is $24,311,368 

June 15th, 1903, shortly after its incorporation, the 



99 

Spring Valley Water Company offered to purchase 
from the Spring Valley Water Works all the proper- 
ties of the latter company, as a whole, subject to out- 
standing encumbrances, for the sum of $11,480,000, 
payable five years later without interest. It also of- 
fered to issue and sell all or any part of its capital stock 
to stockholders of the old company in the proportion 
of two shares for each share of the Spring Valley 
Water Works and at a price of $41 per share for stock 
in the new company. This offer a few days later was 
withdrawn and a second offer of $82 per share for such 
portion of the outstanding stock as the new company 
itself did not acquire before June 19th, 1908, was sub- 
stituted. It was also proposed that the new company 
should not participate in any distribution of the capital 
of the old company. July 13th a third proposal, raising 
the price to $90 for stock of the old company, or $45 
for stock of the new company, was accepted. 

The consideration thus fixed may be summarized as 
follows: 

Bonded indebtedness at par $13,975,000 

Stock at $90 12,600,000 

Floating debt, approximately 1,077,446 

Total $27,652,446 

As this offer included all the property of the com- 
pany, it also included property not then in use. De- 
ducting $5,101,132, the approximate present value of 
such property, the result is $22,551,314, the price of the 
Spring Valley property used in supplying San Fran- 
cisco with water, as shown by that transfer. 

It is earnestly contended that this transaction was 



100 

not a sale; that it was merely a reorganization of the 
Spring Valley Water Works. The charter of that 
company would expire in 1908; its capital stock was 
$14,000,000, and therefore the limit of its bond issue 
was $14,000,000. Its then issued and outstanding 
bonds amounted to $13,975,000. It was necessary to re- 
organize or cease business. On the other hand, if the 
consideration were merely nominal, why were the first 
and second offers not accepted? Why negotiations ex- 
tending over so long a period, which resulted in raising 
the consideration from $11,480,000 to $12,600,000? 
There were about 1800 stockholders. Without the con- 
sent of stockholders holding at least two-thirds of the 
stock, the transfer could not be consummated. To them 
the consideration must be satisfactory. They were not 
bound to accept stock in the new concern. Furthermore, 
the consideration was fixed by those most competent to 
judge the value of the property; fixed during the 
progress of this suit in which that value is the most im- 
portant issue, and admissions of value by the Board of 
Directors, if against the interest of the company, of 
much weight. 

In the 1904 case it is alleged that the market value of 
complainant's stock prior to 1901 averaged about $97 
per share and has at times had a market value of $103 
per share, and but for the ordinances of 1901, 1902, 
1903, 1904 and 1905, the actual market value of com- 
plainant's stock (280,000 shares of Spring Valley 
Water Company instead of 140,000 Spring Valley 
Water Works) would now be about $48.50 or more per 
share, but that the same is only about $^y or $38.50 per 



IOI 

share by reason of the passage of said ordinances. It 
was also alleged that the bonded debt was $14,975,000. 
The floating debt, as shown by the evidence, was about 
$1,188,893.45. The value of the property on the basis 
of these allegations may be summarized thus: 

Bonded debt $14,975,000.00 

280,000 shares of stock at $37.75 10,570,000.00 

Floating debt 1,188,893.45 

Total • $26,733,893.45 

If we take the stock at $103, or $51.50 for the new 
stock, the highest price ever reached, we have: 

Bonded indebtedness $14,975,000.00 

280,000 shares stock at $51.50 14,420,000.00 

Floating debt 1,188,893.45 

Total .$30,583,893.45 

This diminished by 5,101,132.00 

Leaves a value for the property in 1904 of $25,482,761.45 

In 1 891 when the capacity of the plant was 30,000,- 
000 gallons per day, the entire property was valued by 
its chief engineer at $20,000,000, in round numbers. If 
a plant producing 30,000,000 gallons is worth $20,- 
000,000, other things being equal, a plant producing 
35,000,000 gallons should be worth $23,333,333. 

OPERATING EXPENSES AND TAXES. 

The amount actually paid out during the fiscal year 
1903-4 was: 

For operating expenses $566,786.97 

For taxes 325,287.66 

Total $892,074.63 



102 
Deducting improper charges aggregating 79,985.10 

The net operating expenses and taxes for said fiscal 

year are $812,089.53 

The deductions are as follows: 

1.— Refund taxes $ 941.91 

2. — Taxes on properties not in use 7,904.79 

3. — Expense Lobos Creek 2,038.17 

4. — Expense Portola Reservoir 882.15 

5.— Expense Pescadero 1,027.00 

6. — Error in coal account of 1890, corrected in the 

account of this year 10,730.00 

7.— Expense water suit 13,100.05 

8.— Expense for issuing bonds 3,525.64 

9. — Expense of incorporating Spring Valley Water 

Company, paid to the Secretary of State 2,846.90 

10. — Expense of procuring proxies on reorganization 524.50 
11. — Expense of new bonds after incorporation of the 
the Spring Valley Water Company; paid to 

The American Bank Note Company 9,000.00 

12. — Expense of examining the legality of the new 

bond issue 10,000.00 

13. — Service connections 14,650.19 

14.— Advertising, etc 2,813.80 

$79,985.10 

The first six items are conceded. As to the seventh, 
proper costs will be awarded or apportioned in due 
time by the court. There is no reason why rate-payers 
should be compelled to bear the entire burden of this 
litigation, whether they win or lose. 

In San Diego Water Co. v. City of San Diego, 50 
Pac. 633, 638, the court says: 

"It will be the duty of the court on a retrial to 
allow no item of expenditure which is not satisfac- 
torily shown to be an actual and proper charge in 



103 

the actual conduct of the business of supplying 
water; and, when legal or other general expenses 
are claimed, they must be shown to have had a 
proper relation to that business." 

ITEMS 8,9, 10, n AND 12. 

It is argued that these items "are all expenses in con- 
nection with the reorganization of the corporation and 
"getting out a new bond issue in 1903. That reor- 
" ganization and new bond issue was necessary because 
" the charter of the old corporation would have expired 
"on June 19, 1908, and it can be readily seen that it 
" was necessary to reorganize the corporation and re- 
" fund its indebtedness before that time arrived. The 
" old corporation then had a bonded indebtedness of 
"$13,975,000, which was within $25,000 of the ex- 
" treme limit allowed by law. There was then no 
" other means of supplying water to San Francisco and 
" its inhabitants except through the properties of com- 
" plainant's predecessor. The corporation had to be 
" reorganized and a new bonded indebtedness issued as 
" a matter of necessity. The expense of doing this 
" could not be charged to new construction ; it was 
" in no sense a constructive work, and it was in fact a 
" necessary expense of maintaining the properties in 
" use." 

In other words, the owner of a property is about to 
die leaving a large indebtedness, and inasmuch as the 
business must go on and the property be vested in new 
owners, the expenses of administration, of transferring 
the property and arranging for money to meet liabili- 



104 

ties, should be borne, not by the estate itself, but by the 
patrons of the business. The argument answers itself. 

ITEM 13. 

It appears that in 1903 the expense of service con- 
nections, principally in the down town districts of the 
city, amounted to $48,265.71. Of this expense 38%, 
or $18,533.18, was charged to permanent improve- 
ments, while 62%, or $29,732.53, was charged to 
operating expenses, to be paid out of the water rates. 
A portion of this expense, amounting to $31,165.54, 
was returned to the company, and thereafter appor- 
tioned; 85%, or $26,483.10, to permanent improve- 
ments, and only 15%, or $4,672.44, to operating ex- 
penses. 

Nothing is offered in justification of such an appor- 
tionment of receipts. The company not only recovers 
its entire expense, but quite a profit in the matter of the 
connections; while the operating expense account not 
only meets its own loss, but bears the burden of the 
profit which is taken by the company. 

Item 14 is made up of charges for newspaper ad- 
vertisements, lunches, charity, stock and bond exchange 
dues, printing deeds and experting. No reason is given 
why these expenses should be borne by the rate-payers. 

The amount actually paid out during the fiscal year 

1904-5 was: 

For operating expenses $543,672.42 

For taxes 353,172.91 

Total $896,845.33 



Deducting improper charges aggregating 78,587.77 

The net operating expenses and taxes for said fiscal 

rear are $818,257.56 

The deductions are as follows: 

1.— Taxes refunded $16,762.61 

2. — Taxes on properties not in use 6,906.61 

3. — Expenses on Lobos Creek 1,513.50 

4. — Expenses Portola Reservoir 1,008.51 

5. — Expenses Pescadero 948.00 

6. — Expenses water suit 51,447.14 

7. — Expense issuing bonds 1.40 

$78,587.77 

While it is possible that the operating expenses are 
excessive for 1904.-$ and also for 1905-6, by reason of 
improper apportionment of moneys received for serv- 
ice connections and for hydrants set, still there is no 
evidence sufficient to support any deductions therefor. 

The amount actually paid out during the fiscal year 
1905-6 was: 

For operating expenses $550,416.44 

For taxes 387,198.93 

Total $937,615.37 

Deducting improper charges aggregating 65,415.46 

Net operating expenses and taxes for said fiscal year 

are $872,199.91 

The deductions are as follows: 

1. — Taxes on properties not in use $ 7,820.72 

2. — Expense on Lobos Creek 1,402.63 

3. — Expense Portola Reservoir 1.653.50 

4. — Pescadero expense 948.00 

5. — Expense in water rate suit 31,890.61 

6. — Roof and brick bottom at Francisco street Reser- 
voir 17,700.00 



io6 

7.— Bridge at Sunol Filter Beds 500.00 

8._New pipe Daly's Hill 3,500.00 

$65,415.46 

Items 6, 7 and 8 are apparently expenditures for new 
construction, which should be charged to permanent 
improvement rather than operating expenses. 

It is clear under the decisions, that property not in 
use in supplying water to the city cannot be included 
among the properties on which the company is entitled 
to a return from the rate-payers. The same rule ex- 
cludes from consideration in this proceeding all rents 
collected by the company for such unused property, as 
well as taxes and expenses paid thereon. 



The gross income during the fiscal year 1903-4, if 
the ordinance of March, 1903, had been en- 
forced, would have been $1,943,941.06 

Deducting operating expenses and taxes.$812,089.53 

And depreciation 212,983.00 1,025,072.53 

The remainder $918,868.53 

would afford an income of but 3.56% on $25,771,984, 
the present value in 1903 of that portion of complain- 
ant's property on which it was then entitled to a re- 
turn. 

It is unnecessary to find the value of complainant's 
property in 1904 and 1905. It is sufficient that it was 
no less than in 1903. 

The gross income during the fiscal year 1904-5 
under the ordinance of March 7, 1904, if col- 
lected, would have been $1,996,496.59 



ro7 

Deducting operating expenses and taxes.$818,257.56 

And depreciation 212,983.00 1,031,240.56 



The remainder $965,256.03 

is but 3.74% of $25,771,984. 

The gross income during the fiscal year 1905-6 under 
the ordinance of March 13, 1905, if enforced, 

would have been $2,110,200 

Deducting operating expenses and taxes.$872,199.91 

And depreciation 212,983.00 1,085,182.91 



The remainder $1,025,017.09 

would have yielded an income of but 3.97% on $25,- 

77 ! ,984- 

In the 1903 case (Spring Valley Waterworks v. San 

Francisco, 124 Fed. 574, 600), on motion for an inter- 
locutory injunction, Judge Morrow held that a 4.4 per 
cent income on the value of this property "is unreason- 
" ably low and confiscatory, and amounts to the taking 
u of private property for public use without just com- 
" pensation, thereby depriving the complainant of its 
" property without due process of law." 

In the 1904 case on application for temporary re- 
straining order (Spring Valley Water Co. v. San Fran- 
cisco. 165 Fed. 657), Judge Gilbert found that a net 
income of less than 4.4 per cent on the value of this 
property is less than a just compensation, and allowed 
a preliminary injunction as prayed for. 

In the 1908 case (Spring Valley Water Co. v. San 
Francisco, 165 Fed. 667, 705), it was held that 4.03 per 
cent on the present value of this property is less than 
a just and reasonable return. 



io8 

I am satisfied that each ruling cited is correct. The 
reasons given in their support amply justify my present 
conclusion that rates which yield a net return of no 
more than 3.56 per cent as in the 1903 case; 3.74 per 
cent, as in the 1904 case; and 3.97 per cent, as in the 
1905 case, are unreasonably low, unjust and confisca- 
tory. 

It follows, therefore, that the ordinances complained 
of are unconstitutional and void, and that a decree 
must be rendered in favor of complainant in each 
of the three suits, viz. : The Spring Valley Water 
Works v. The City and County of San Francisco, et 
ah, No. 13,395; The Spring Valley Water Company 
v. The City and County of San Francisco, et al., No. 
13,598; and The Spring Valley Water Company v. The 
City and County of San Francisco, et al., No. 13,756.. 

It is so ordered.