Memo from Edward C. Renwick to E. E. Bennett about the Las Vegas Land and Water Company being required to augment its water supply, 1952

SUBJECT: Power of Nevada Public Service Commission to require LVL&wCo. to augment its water supply. To: Mr. E. E. Bennett From: Mr. Edward C. Renwick. I am attaching hereto excerpts from the Nevada statutes which are pertinent to the question of the power of the public service Commission to make an order requiring LVL&WCo. to augment its water supply. In the proceeding recently instituted by the Commission upon the complaint of the City of Las Vegas, it is ap- parent that the Commission is proceeding in accordance with the procedure set forth in Section 6125 and 6127 of the Nevada Compiled Laws 1929. These sections and Section 6108 and 6117 authorize the Commission to order a utility to provide adequate service or fa- cilities if after a hearing the Commission determines that its service or facilities are inadequate. The statutes require that the order made by the Commission must be a just and reasonable order. These statutory provisions are similar to other state and federal statutes relating to the regulation of publio utilities. The power of a regulatory Commission to make just and reasonable orders of the nature referred to has been repeatedly upheld by the Courts. The real problem, of course, is whether a particular order of regulatory commission is reasonable and the tests used by the Courts in determining its reasonableness. The bulk of the cases dealing with this general problem are cases dealing with the obligation of a public utility to extend its service. In the research that I have made to date, I have un- covered only a few cases dealing with the exact question of the obligation of a utility to enlarge its plant or facilities to serve its existing customers. However, the problems in the two situations are essentially the same and the principles applied by the Courts in testing the reasonableness of the Commission's order are the same. The general rule relating to the obligation of a public utility to render adequate servloe is stated in 43 Am. Jur. page 601 as follows: "In general, where a public utility accepts a franchise to serve the public or a portion thereof and undertakes to serve a community or territory and its inhabitants, it as- sumes a public duty to render service commensurate with its offer of providing a service system which will be reason- ably adequate to meet the wants of the community or territory, "not only at the time of the commencenment of the service, but likewise to keep paoe with the growth of the com- munity or territory served and gradually to extend ite system as the reasonable wants of the community or ter- ritory may require. Accordingly, a public utility, at the suit of a consumer, may be required to extend its service to any part of the district wherein it has re- ceived a franchise and has undertaken to operate, if the extension is a reasonable one, and a public service com- mission may, where its action is not unlawful, arbitrary or capricious, order such an extension of service for the inhabitants in such territory. However, before a public service corporation can be required to enlarge its plant under a statute authorizing such requirement when it outfit reasonably to be done, it must be found that the plant is not reasonably sufficient to furnish adequate eervice, that the enlargement is necessary to Insure such service, and that it is within the scope of the original professed undertaking of the owner." A general statement of the principles which govern the reasonableness of a proposed increase in facilities or service of a public utility is found in the following quotation from 43 Am. Jur. page 602: "The right of an inhabitant or group of Inhabitants of a community or territory served by a public service company to demand an extension of service for their benefit is not absolute and unqualified, but is to be determined by the reasonableness of the demand therefor under the cir- cumstances involved. The duty of a public service company to extend its service facilities, and the reasonableness of a demand for such extension, depend in general, upon the need and cost of such extension, and the return in revenue which may be expected as a result of the extension; the financial condition of the utility; the advantages to the public from such an extension; and the franchise or charter obligation to make such extension. In this last respect, a water company may be compelled to extend its mains so as to supply all the inhabitants of the municipality by which it is franchised, if its charter requires it so to do. Furthermore, although a franchise ordinance provides that a water company need not extend its water mains along any ungraded street or alley, still, if the company has volun- tarily extended its main along suoh a street, it cannot re- fuse to supply a customer thereon, on the theory that it was not compelled to build along that street in the first place. "In regard to the reasonableness of the cost which an extension will entail, it is not necessary that a particular -2- "extension of service shall be immediately profitable, or that there shall be no unprofitable extensions, the criterion being generally whether the proposed ex- tension will place an unreasonable burden upon the utility as a whole, or upon its existing consumers. As to the costs involved in making an extension, various elements, such as the type or quality of construction to be used and the use of any existing equipment or facili- ties, enter into the determination of this matter. But while the utility cannot fix the limits of the proposed extension at territory which will yield an immediate profit, and, on the other hand, cannot be required to make unreasonable extensions, there is a point midway between these extremes at which the utility may require of the proposed consumer assistance in the necessary outlay in furnishing the service." In 31 A.L.R. page 333 there is collected a number of cases dealing with the power of a public service commission to require a public utility to extend gas service into new territory. This annotation points out that an order of a commission requir- ing a public utility to extend its service to a community which the utility had not previously held Itself out to serve would vio- late the constitutional prohibition against the taking of property without due process of law and that, therefore, suoh an order would be unreasonable and void and would be set aside by Court. On the other hand, the annotation contains a number of cases sup- porting the general rule that a gas company serving the public may be compelled to extend its service within the boundaries covered by its franchise where the requirement is not unreasonable or con- fiscatory* In 58 A.L.R. page 537 there is an annotation on the sub- ject of "duty to extend electrical service or supply individual applicant as effected by cost involved" in which are collected a large number of cases dealing with this subject. There are a number of cases cited in the annotation whioh support the following state- ment which I quote: "It has uniformly been held that it is not necessary that a particular extension of electrical service shall be immediately profitable, or that there shall be no unprofitable extensions, the criterion being generally whether the proposed ex- tension will plaoe an unreasonable burden upon the utility as a whole, or upon its existing consumer." I think it is well settled by the cases that an order of a public utility commission ordering an extension of service or en- largement of plant will be set aside as unreasonable if the cost would impair the ability of the utility as a whole to earn a reason- able return on its investment. There have also been many cases in which the Courts have set aside orders of public utility commissions ordering extensions where the prospects of earning a fair return on the cost of individual extension was so slight as to maks the order unreasonable and confiscatory. However, as pointed out in tbe quotations above, every extension of service, which in itself is not immediately profitable, is not necessarily an unreasonable extension If there are reasonable prospects that the extension will become profitable in the future or the utility as a whole would be able to earn a fair return on its entire property. Where the reasonableness of an individual extension, which is itself un- profitable, is involved but where the utility as a whole can earn a reasonable return, the question of whether the order of the regulatory body is reasonable appears to be largely determined by balancing the needs of the public against the burden which the in- dividual extension plaoes upon the utility as a whole. The precise question before us is not one of extension of service but enlargement of plant. There are two cases, both involving orders of the Publio Utilities Commission of Idaho which deal with this precise question. Both of them very clearly state the principles involved in such cases and show that the general principles governing extensions of servioe are applicable to cases involving enlargement of plant. In the case of Murray v. Public Utilities Commission (Idaho) 150 Pac. 47, the Court reverses an order made by the Idaho Commission fixing rates to be charged by the Pocatello Water Company and requiring utility to make certain extensions to its system or plant. The order of the Commission requiring additions was as fol- lows: "It is hereby ordered that the petitioner begin with- out unreasonable delay, and continue without unreasonable interruption, the construction of a pipe line from Mink creek of sufficient size and capacity by which all of the present supply of said creek not now diverted by petitioner may be conveyed from said Mink creek to the reservoir or reservoirs of plaintiff's system situated upon the 'bench' above the city of Pocatello so that the same may be com- pleted during the present year of 1914; the said pipe line to be 16-lnch riveted steel from Mink creek to Gibson Jack creek, and from Gibson Jack creek to petitioner's upper reservoir at a sufficient distance from the present pipe lines to be independent of them, and to be equipped with effective blow-off valves and automatic air relief valves, and, when completed, to have an actual measured capacity of not less than 3.25 second feet from Mink creek to Gibson Jack creek, and an actual measured capacity of not less than 4.50 second feet from Gibson Jaok creek to the upper reservoir." -4- The portion of the Court's opinion dealing with the reasonableness of this order reads as follows: "The section of the act (Sess. Laws 1913, c. 61) which empowers the commission to order extensions or enlargements of a plant reads as follows: 'Sec. 34. Whenever the commissions, after a hearing had upon its own motion or upon complaint, shall find that addi- tions, extensions, repairs, or improvements to or changes in the existing plant, scales, equipment, apparatus, facilities or other physical property of any public utility or of any two or more public utilities ought reasonably to be made, or that a new struc- ture or structures should be erected, to promote the security or convenience of its employees or the publio, or in any other way to secure adequate service or facilities, the commission shall make and serve an order directing such additions, extensions, repairs, improvements or changes be made or such structure or structures be erected in the manner and within the time specified in said order.' "The use of the word 'reasonably' is to be noted. Here again, in determining what is reasonable, the rights of both consumer and proprietor must be con- sidered. In this conneotion the commission and court must bear in mind the -4a- "provisions of our state Constitution that no person shall be deprived of his property without due process of law, and that private property may not be taken for public use until a just compensation shall be paid therefor, as well as the similar provisions in the federal Constitution, sections 13 and 14, art. I, Idaho Constitution. To compel the proprietor of a utility to make enlargements or extensions under such circumstances that he could not make a fair return upon his whole investment would certainly be depriving him of his property without due process of law. In order to justify the commission in ordering enlargements, the commission should be satisfied from the evidence: First, that the existing plant is not reasonably sufficient to render adequate service (Washington ex rel. O. R. & N. Co. v. Fairchild, 224 U. S. 510, 32 Sup. Ct. 535, 56 L. Ed. 863); second, that the extension of enlargement is within the soope of the original professed undertaking of the proprietor of the utility (N.P.R.Co. v. N.Dak., 236 U.S. 585, 35 Sup. Ct. 429, at page 433, 59 L. Ed.?); third, that after the making of the enlargements or extensions the owner will be insured a fair return upon his whole investment (Smyth v. Ames, 169 U.S. 466-546, 18 Sup. Ct. 418, 42 L. Bd. 819); fourth, that the particular enlarge- ments or extensions are reasonably necessary to insure reasonably adequate service (N.P.R.Co. v. N.Dak., supra, and Washington ex rel. O.R. k N. Co. v. Fairohild, supra). "(12) As before pointed out, we are of the opinion that it is not demonstrated upon the record in this case that petitioner has any valid, existing franchise from the city of Pocatello. An extension of the system cannot be ordered unless such an order would be reasonable under the circumstances. Under such circumstances, we do not think that an order for the extension and enlargement of the plant is reasonable, and therefore hold that the com- mission had no authority to make such an order. "The order of the public utilities commission is re- versed, and the cause remanded, with instructions to the commission to entertain further proceedings in accordance with the views herein expressed." In the case at Osborne Utility Corp. v. public Utilities Commission (Idaho) 1932, 17 Pac. 2d. 333, a water utility filed with the Commission its proposed schedule of rates which were pro- tected by certain consumers. A hearing was had and without making any finding whatever as to the value of water property or the cost of maintenance and operation, including taxes, the Commission sus- pended the proposed rates, fixing a flat rate of $3.25 a month for distribution under the present distribution system of utility and directed the utility within four months to make an extensive enlarge- -5- ment and costly Improvements amounting to an almost entirely recon- struction of the system. The Commission indicated that after the directed rehabilitation, a further hearing would be had at which time the final rates and regulations would be fixed.On appeal to the Court, the order to the Commission was dissolved and the matter remanded to the Commission. The portion of the Court's opinion dealing with the enlargement of plant reads as follows: "As to the necessity of reconstruction, defendant found: 'That in order for the corporation to furnish adequate, efficient and dependable water service to the customers in Osborn and to the public, its water system should be reconstructed with a distributing pipe of at least five inches in diameter, two fire hydrants in Osborn, a storage system of not less than 70,000 gallons capacity at, or near, the source of the water supply.' There is no evidence in the record to support such finding. Evidently, defendant for the most part, relied upon an estimate of appellant's witness, Engineer Ellis, marked for identification but expressly denied admission in evidence. Though, apparently, adopting his recommendatlon as to the details of essential reconstruc- tion, they ignored his estimated cost thereof, approxi- mately $13,700. All these improvements were ordered to be made within four months, during all of which time ap- pellant was to be limited to a monthly tariff of $3.25, a requirement practically confiscatory in its effect, if there be accepted protestant's contention that a $19,000 valuation of the water right and plant is outrageously high. 'Any regulation, therefore, which operates as a con- fiscation of private property or constitutes an arbitrary or unreasonable Infringement of personal or property rights is void because repugnant to the constitutional guaranties of due process and equal protection of the laws.' 51 C.J. 10, par. 23 and authorities cited. And 'the state has no power to compel a corporation engaged in operating a public utility to serve the public without a reasonable compensation.' Mt. Israel Public Utility & Service Co. v. Public Utilities Commission, 297 111. 303, 130 N.S. 693, 695, 21 A.L.R. 571, of which case syllabus No. 4 (A.L.R.) is particularly appropriate here: 'An order by the public Service Commission, made without investigation or finding of facts to support it, requiring a public utility to re- construct its plant at a great expense without hope of earning a return on the Investment, is void as taking its property without compensation.' These underlying principles were announced in Murray v. Public Utilities Commission, 27 Idaho, 603, 150 P. 47 L. H.A. 19167, 756, and Capital Water Co. v. Public Utilities Commission, 44 Idaho, 1, 262 P. 863. -6- "In view of the state of the record, the order ap- pealed from is dissolved and the matter remanded to de- fendant board with instructions to take further evidence and make findings as to the fair, present worth of the entire system including water right, its cost of main- tenance and operation, and to make such final order as will not infringe the constitutional rights of appellant as hereinbefore indicated I think the foregoing authorities dealing with extension of service and enlargement of plant state the principles upon which the reasonableness of such extensions and enlargements depend. If the suggestion that the Company bring water from Lake Mead be injected into this case, we should be able under the fore- going authorities to readily demonstrate that the investment in- volved would be so great and the chances of earning a reasonable return thereon so slight that an order requiring such an enlarge- ment of plant would be a confiscation of property and invalid. Our position with respect to a proposal that additional wells be drilled or additional storage provided is not so well de- fined. The cost of such wells or of additional storage is not so great but that the Water Department as a whole could earn a reason- able return on its entire investment if the Commission were willing to grant a reasonable lncrease in rates which would afford a reason- able return on the entire investment. However, it is my opinion that the Commission could not make a valid order requiring such enlargement of facilities unless it made an order authorizing the oompany to oharge rates which would afford us a fair return on the toted investment. For that reason I think it Is important that we have in brief form before the Commission at the hearing data showing that at present we do not earn a fair return on our existing investment. The question of whether the Commission's order requiring the drilling of additional wells was reasonable should be largely determined by testimony relating to the inability of the Company to lncrease its water supply by the drilling of such wells. if an increase in water supply cannot be realized by the drilling of addi- tional wells, then no expenditure of funds would be reasonable even though the Company could be made to earn a reasonable return on its entire investment. On the other hand, if the Commission should con- clude on conflicting evidence that the drilling of an additional well or the provision of additional storage would increase the water supply in Las Vegas without substantial harm to the underground water supply, I think we would have difficulty in setting its order aside in Court. I arrive at this conclusion because I believe that the cost of such improvements would not be so great as to make it impos- sible for the Water Company to earn a reasonable return on its entire investment. I, therefore, think it is essential that in the hearing it is necessary to clearly demonstrate from an engineering standpoint -7- that the drilling of additional walls or the provision of additional storage would be futile and ineffectual aside from the question of the cost of providing such improvements. The provisions of the Nevada statute relating to Court review of the Commission's order are more favorable then those found in the statutes of most states, such as in California for instance. As you know, in California the method of reviewing an order of the Publio Utilities Commission is by a petition for review to the Supreme Court, in which review the Court largely confines its activies to determining whether the Commission has violated any statutory or con- stitutional provision. The findings of fact of the Commission if supported by any evidence are usually considered as being conclusive upon the Appellate Court. The different rules relating to the power of the Court to revise findings of fact depending upon the method of Court review authorized are stated in the following quotation from 43 Am. Jur. 729 i "In general, upon an appeal or review of an order of a public service commission, the court will not hear evidence to review or revise findings of fact made by the commission; the parties may not withhold evidence from the commission and produce it in court. There are also statutory and con- stitutional provisions to tile effect that no new evidence can be introduced upon the review of orders of public service commissions, under some of which provisions the courts may remand a ease to the commissions for further evidence. Where the practice is to bring an action to set aside a commission's order, the action is tried like any other civil notion, ex- cept that new evidence cannot be introduced, unless by the consent of the parties, but the cause must be remanded back to the commission for further action. However, if the trial before a court is essentially denovo, new evidence may be introduced ." Section 6133 of the Nevada statutes authorizes an independent action in the state District Court to vacate and set aside an order of the Commission on the ground that it is unreasonable. In such a case evidence additional to that presented to the Commission can be introduced. This is in effect a trial de novo. Although it has not been determined by Court decision, it is my opinion that under this statute the trial court would be entitled to make independent findings of fact upon the evidence produced in the court trial. Of course the statute provides that the burden of proof is on the person attacking the order of the Commission to show by dear and satisfactory evidence that the order is unreasonable or unlawful. I think the Court would be greatly influenced by the Commission's decision in such trial be- cause it is the general tendency of Courts today to rely upon admin- istrative tribunals with respect to questions of fact which the ad- ministrative body is authorized to decide. The statutes of Nevada also provide for an appeal to the supreme Court from the judgment of the trial court. This method of Court review of the Commission's decisions is about as favorable a method as we could expect to have. -8- NEVADA COMPILED LAWS 1929 Section 6100: Creates a public service commission "whose duty it shall to supervise and regulate the operation and mainten- ance of public utilities ..... in conformity with the provisions of this act." ? ? Section 6108: "Every public utility ...... is hereby required to furnish reasonably adequate service and facilities." Section 6117: "The Commission shall have power, in the Interest of safety or service, after hearing to determine and order required and necessary repairs, reinforcements, construction and connection of property lines, equipment, appliances, buildings, tracks and all property used or useful in public utility service;.. Section 6125: "Upon a complaint made against any public utility by any ...??? municipal corporation, that any ????? practice, or act whatsoever affecting or relating to ????? the production, trans- mission or delivery or furnishing of ..... water,... or any service in connection therewith is, in any respeot, .....insufficient, ... or that any service is inadequate, the Commission shall proceed, with or without notice, to make an investigation of such oomplalnt, and if, as a result of such investigation, the Commission shall determine that probable cause exists for such complaint, it shall order a hearing thereof, upon notice to the public utility. But no order affecting said ..... practice or act complained of shall be entered without a formal hearing." Section 6127: "If, upon any hearing and after due investigation..? it shall ...... be found that any practice, act or service complained of is ...... insufficient, ???? or if it be found that the service is inadequate, or that any reasonable service cannot be obtained, the Commission shall have the power to substitute therefor such other ...... practices, service, or acts, and make such order relating thereto as may be just and reasonable....... The Commission may, at any time, upon its own motion, investigate any of the ....... practices, and service, and, after a full hearing as above provided, by order, make such changes as may be just and reasonable, the same as if a formal complaint had been made," Sectlon 6133: "Any party in interest being dissatisfied with an order of the Commission fixing ????? any .... practices or services, may within ninety (90) days commence an action in the district court of the proper County against the Commission and other interested parties as defendants to vacate and set aside any such order on the ground that.....any such......practice, or service, fixed in such order is unreasonable........any party to such action may introduce evidence in addition to the transcript of the evidence offered to said Commission." -1- Section 6133: "(a) No Injunction shall issue suspending or staying an order of the Commission except upon application to the court or judge thereof, notice to the Commission having been first given and hearing having been had thereon." *(b) If, upon the trial of such action, evidence shall be introduced by the plaintiff which is found by the court to be dif- ferent from that offered upon the hearing before the commission, or additional thereto, the court, before proceeding to render judgment, unless the parties to such action stipulate in writing to the contrary, shall transmit a copy of such evidence to the commission, and shall stay further proceedings in said action for fifteen (15) days from the date of such transmission. Upon receipt of such evidenoe the com- mission shall consider the same, and may alter, modify, amend, or rescind its orders relating to such rate or rates, fares, charges, classifications, joint rate or rates, regulation, practice, or service oomplained of in said aotion, and shall report its action thereon to said court within ten days from, the receipt of such evidence "(c) If the commission shall rescind its order complained of, the action shall be dismissed; if it shall alter, modify or amend the same, such altered, modified, or amended order shall take the place of the original order oomplained of, and judgment shall be rendered thereon, as though made by the commission in the first instance. If the original order shall not be rescinded or changed by the commission, judgment shall be rendered upon such original order." "(d) Either party to said action, within sixty (60) days after the service of a copy of the order or judgment of the court, may appeal or take the case up on error as in other civil actions, there an appeal is taken to the supreme court of Nevada, the cause shall, on the return of the papers to the higher court, be immediately placed on the calendar of the then pending term, and shall be assigned and brought to a hearing in the same manner as other causes on the calendar." "(e) In all actions under this section the burden of proof shall be upon the party attacking or resisting the order of the Commission to show by clear and satisfactory evidence that the order is unlawful, or unreasonable, as the case may be." Section 6158: "Any person, firm, association or corporation, who or whioh, as a public utility, is now, or may hereafter be, engaged in the business of furnishing for compensation, any city, town, village or hamlet within this state with water for domestic purposes, shall be lawfully bound to furnish said city, town, village or hamlet a reasonably adequate supply of water at reasonable pressure for fire protection and at reasonable retes, all to be fixed and determined by the public service commission of this state." -2-