388 IBEIGATION INVESTIGATIONS IN CALIFORNIA. 



THE FIXING OF WATER RATES. 



The constitution of California contains a pi'ovision requiring that water rates 

 shall be fixed annually in the month of February of each year by the city councils 

 or boards of trustees for cities and towns, or by the countj^ boards of supervisors, 

 for water systems that are not within corporate limits of cities or towns. This 

 provision has worked a great hardship upon companies supplying water and caused 

 them to svitfer such loss from the construction of the law as to render it impossible 

 for them to realize any profit. The eii'ect has been to exclude capital from invest- 

 ment in the development of water systems, and to set up a constant war against 

 capital invested in this verj' necessary class of public improvements, which is adverse 

 to the general welfare of the State and seriously retards its growth. 



The law would be a satisfactory one if a proper basis were established to bind 

 and control those who adjudicate the matter, either the bodies who have the power 

 to fix the rates or the courts who have the power to review the action of the city 

 councils or county supervisors. It has been suggested that there should be a State 

 board intrusted with judicial power for the fixing of water rates, to hear testimony 

 in all cases, and decide as between the water purveyors and the consumers; this board 

 to take cognizance of all local conditions and adopt some equitable basis of more or 

 less uniform application. The first step to be settled by such a board would be the 

 basis for determining the value of the plant. In arriving at the value of the plant, 

 the courts have laid down the rule that the cost is but one element of the value. 

 Other considerations must be taken into account, such as the value of the fi'anchise 

 for distributing a needed commodity, the strategic position which the plant occupies, 

 and its importance to the comnmnity supplied by it. The board should determine 

 how depreciation shall be allowed for and determine whether the rates should be 

 sufficient to cover a sinking fund for the reproduction of the perishable parts of a 

 plant within a given period, or whether the rates shall be increased from time to time 

 sufliciently to raise funds for replacing worn-out portions of the plant at the time 

 the expenditure is necessary, which latter method would result in a widelj' varying 

 rate from year to year. The constitution fixes a verj^ wide latitude of net income to 

 which the water companies are entitled over and above operating expenses of from 6 

 per cent to 18 per cent per annum. This may have been intended by the framers of 

 the constitution to provide for a fund to cover depreciation, but if this is the case it 

 fails to do so satisfactorily. If a definite maximum rate of interest of 6 per cent 

 were fixed in addition to depi'Cciation and operating exi>enses, it would be reasonable 

 and fair to all parties concerned. This would remove all possibility of controversy, 

 and the board, after having determined the value of the plant and the probable ratio 

 of depreciation, would then only have to decide what the reasonable expense of 

 operation should be to determine the rates required. 



Such a commission, or board of control, should have authority to decide in 

 advance of the construction of an irrigation system dependent for its supply upon 

 storage reservoirs, as to what would be a reasonable provision in the way of storage 

 for dry seasons, and what proportion of the total capacity of the reservoir could 

 safely be distributed for irrigation each year, and from this and other data they 

 should determine the value of the water rights to be charged to the lands for 

 irrigation service. 



