CITY OF SAN DIEGO v. SOUTHERN CALIFORNIA TELEPHONE CO

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District Court of Appeal, Fourth District, California.

CITY OF SAN DIEGO v. SOUTHERN CALIFORNIA TELEPHONE CO.*

Civ. 4508.

Decided: January 06, 1953

J. E. DuPaul, City Atty., Shelley J. Higgins, Assistant City Attorney, San Diego, T. B. Cosgrove, Los Angeles, for appellant and respondent City. John A. Sutro, Francis N. Marshall, Pillsbury, Madison & Sutro, San Francisco, Oscar Lawler, Leslie C. Tupper, Lawler, Felix & Hall, Los Angeles, for appellant and respondent Telephone Co.

The City of San Diego, by its Ordinance No. 5681, granted the defendant company a franchise to maintain and operate a system of telephone poles and wires upon the public streets of the city for a period of 30 years from August 7, 1914, which provided that the company should pay the city 2% of its gross receipts arising from the exercise of this privilege. This ordinance was complied with until its expiration on August 7, 1944, whereupon the company elected not to apply for any franchise on the theory that none was needed under the provisions of Section 536 of the Civil Code.

The city brought this action to enjoin the company from thus occupying its public streets, alleys, etc., without a franchise. The court found that the matter was governed by the city charter with respect to what will be called the old city, being the city as it existed prior to the re-enactment of Section 536 in 1905, and by that section with respect to those parts of the city which had been subsequently annexed. It was further found that since August 8, 1944, the company had continued to occupy public streets of the old city in substantially the same manner as before, but without a franchise, and thus had committed and was continuing to commit a public nuisance. A judgment was entered on May 23, 1946, enjoining the company from thus occupying public streets of the old city after 30 days from the time the judgment should become final, and ordering the company to proceed within said 30 days to remove its poles, wires and equipment from the public streets and other public places within the old city. It was further provided, however, that if the company should apply to the city for a new franchise within this 30-day period, and should compensate the city for its use of the streets within the old city during the interim by paying to the city a ‘sum of money determined by applying the rate at which compensation for such franchise and privilege was fixed by said Ordinance No. 5681,’ the injunction should be of no force or effect, except on conditions not material here. The judgment also reserved jurisdiction to modify or change the relief granted, if this became advisable after final judgment. Both parties appealed and the judgment was affirmed. City of San Diego v. Southern California Telephone Co., 92 Cal.App.2d 793, 208 P.2d 27.

Within the time allowed the company applied for a franchise within the old city and paid $158,670.03 as compensation for the interim period, which the city refused to accept as a full payment claiming that it was entitled to $421,435.68. The controversy as to the correct amount of the required payment was submitted to the trial court, and after extended hearings the court found that the rate at which such compensation should be made was fixed by Ordinance No. 5681 as 2% ‘of the gross annual receipts arising from the use, operation or possession of the franchise,’ and that 2% of such gross annual receipts, as thus defined and applied to the old city for the period in question, is $239,337.23. Judgment was accordingly entered for the balance of $80,667.20 with interest from October 4, 1949, when the new franchise was applied for. Both parties have appealed from that judgment.

Certain facts brought out at the hearings are material in passing upon the respective contentions of the parties. The company operates a statewide and interstate communication system and for tariff purposes its service is divided into local exchange service and toll service. Exchange service is usually charged for at a flat monthly rate, the exchange areas being established by the Public Utilities Commission. However, an ‘extended area’ service is sometimes provided whereby the subscribers' local calling area is extended into an area outside his local exchange without the payment of a toll charge. The San Diego ‘extended area’ includes most of the present city of San Diego and a large part of the county, including exchanges in some near-by cities, several military reservations and much unincorporated area. Within this ‘extended area’ subscribers in one change may talk to subscribers in other exchanges free of toll charges, but the lines between these exchanges, so far as here concerned, traverse the old city. The charges paid by a subscriber in the old city thus pays for the privilege of making and receiving calls anywhere within the ‘extended area’. The company's gross revenue for the period in question from San Diego's ‘extended area’ was $27,724,579.76. Its revenue for that period within the area of the old city was $21,017,085.16, which figure includes all charges for all phones located in the old city, plus 20% of the receipts from tolls for all calls originating from phones in the old city, which allocation was made by the company and seems to have been accepted by the city. The linear mileage of telephone plant on public streets and other public places within the old city is 446.30 miles, and the linear mileage of such plant on private property within the old city is 116.14 miles. The total plant mileage on both public and private property in the old city is 562.44 miles, and the percentage of that total which is located on public places is 7935%. The total plant mileage within the San Diego area but outside the limits of the old city is 1409.573 miles, of which 1026.214 miles is on public streets.

The city first contends that after finding that a nuisance existed, enjoining its continuance, and ordering the removal of the company's lines from the public streets, the court included in its prior judgment an order staying the enforcement of that injunction on the conditions named; that this was done under the court's general chancery powers to maintain, in justice to the litigants, the status quo of the parties pending an appeal; that the status quo which was to be preserved is ‘the last actual peaceable, uncontested status which preceded the pending controversy’; that between August 8, 1944, and the date of the judgment the company had occupied the streets without any right to do so; that the court knew the manner in which the compensation had been calculated for each of the 30 years preceding August 8, 1944; that it must be assumed that by its stay order the court intended to maintain the status quo by having the compensation calculated in substantially the same manner; that the amount due the city is not 2% of the gross receipts arising from the operation of any franchise, since no franchise existed, but is the amount specified in the judgment of May 23, 1946; that since it was found that the use of the streets was the same, the same manner of payment must have been intended by the court; and that this is the only way in which the status quo could be maintained. In its computation under this theory the city uses the figure $21,071,784.16 as the gross receipts from the old city during this period, and 2% of that amount is the $421,435.68 which the city demanded. Practically that amount would result if the same method of calculation was followed as that used by the company in making its payments during the 30 years the franchise was in effect. It appears, however, that this method of accounting leaves out of consideration the fact that only about 79% of the telephone lines in the old city are on public streets while the remainder are on private rights of way.

It is true that the amount of payment in question is that required by the judgment. Instead of requiring a payment to be determined in the exact manner followed during the life of the franchise, the judgment required the payment of a sum to be determined by applying the rate of compensation fixed by the expired ordinance. This was of course applicable to the period in question and limited to the area within the old city, and it called for payment in accordance with the company's actual obligation as fixed by the terms of the expired franchise. The terms of the judgment are controlling here and not the fact that the company may have misconceived its obligation under the ordinance during the years the franchise was in effect. If it be conceded that the court's jurisdiction to enter the stay order was dependent upon a maintenance of the status quo that was sufficiently accomplished by requiring the company to make compensation for the interim period in accordance with its prior obligation.

The problem in the present proceeding was, and is, to determine the amount due the city under the obligation imposed on the company by the terms of the prior judgment and of Ordinance No. 5681, which fixed the compensation at 2% of the gross receipts ‘arising from the use of’ the privilege granted. The controlling question is as to what part of the gross receipts within the old city should be taken as arising from the company's use of the streets within the old city. Both parties rely, in part, on the mileage formula announced in the case of County of Tulare v. City of Dinuba, 188 Cal. 664, 206 P. 983, although they differ widely as to the manner in which the principles there announced should be here applied. They agree, but for different reasons, that these principles were incorrectly applied by the trial court. In arriving at its decision, after pointing out that the problem here was somewhat different from that in the Tulare case, the court compared the amount of plant mileage on public streets within the old city with the plant mileage on public streets in the ‘extended area’, finding that 43.15% of all such mileage was within the old city. It then took 43.15% of the total receipts from all of the ‘extended area’ (plus a small amount from another exchange, which need not be explained here), as the part attributable to the use of the streets within the old city. Two percent of that sum is $239,337.23, which the court found should have been paid.

The city contends that the court ignored the evidence in many respects, and that it erred in considering the total receipts and mileage in the extended area, in comparing the plant mileage on public streets within the old city with the plant mileage on public streets in other parts of the extended area, and in not comparing the mileage on public streets and the mileage on private rights of way within the old city. It is then contended that a proper application of the mileage formula involves consideration of three known quantities, from which a fourth may readily be determined; that the known quantities disclosed by the record are (1) the mileage of company plant on both public and private property within the old city; (2) the mileage of company plant on public property alone within the old city; (3) the gross receipts from lines on both public and private property within the old city; and that the fourth quantity, the amount due may be determined by applying to the total gross receipts the percentage that the mileage of plant on public property bears to the total mileage on public and private property, both within the old city. The city applies this mileage formula by comparing the mileage of the company's plant on public streets, etc., within the old city (446.30 miles) with the mileage of the company's plant on both public and private places within the old city (562.44 miles), which discloses that 79.35% of the total mileage of company plant on both public and private property within the old city is located on public places. Since the gross revenue within the old city was $21,017,085.16 the city take 79.35% of this amount, $16,667,057.07, as the gross receipts arising from the use of the privilege within the old city. Two percent of this amount is $333,541.14, which the city contends is the amount due for the period in question on a correct application of the mileage formula.

The company also contends that the formula applied by the court is erroneous in that it failed to deduct an allocation of part of the gross receipts to plant which is entirely on private property, including central office buildings and equipment located in such buildings and on the private property of subscribers; in failing to take into account the fact that a substantial part of the company's outside plant is on private rights of way; and in apportioning the gross receipts ‘on the basis of relative mileage rather than relative plant investment.’ The company then contends that the Tulare case suggested that the mileage basis there discussed is not necessarily an exclusive method of distributing the gross receipts; that it was established in that case that a city cannot exact franchise payments for the use of any part of the plant situated on privately owned property; that the proportion of the company's plant occupying the public streets and private rights of way can be readily measured by the amount invested in that part of the plant, as compared with the total plant investment in the serving area; that this proportion applied to the total receipts in the area will give the proportion of such receipts which is properly attributable to the use of both public streets and other rights of way; that the next step is to determine what part of the amount so obtained is attributable to the occupancy of the streets for which a franchise is required; that this may be done by applying the ratio of street occupancy to the total of both street and private right of way occupancy, in the entire serving area, ‘to the allocated gross receipts attributable to total street and right of way occupancy’; and that while this last step could be done on a relative mileage basis it would be fairer, ‘in view of plant congestion in the central area’, to also make this latter computation on a relative investment basis. Pursuant to this scheme and to its further contention that the ‘extended area’, where one is used, is the smallest serving area for which the gross receipts within that area can be traced to the use of the plant within that area, the company compares its total plant investment in the San Diego extended area, in a portion of the Del Mar exchange which is not in the extended area but which covers a small corner of the old city, and in an adjusted portion of its plant in the State of California based on toll use, with that part of its total plant investment which occupies streets in the old city. Applying the percentages thus obtained to the total receipts in the San Diego extended area, in the Del Mar exchange, and from that part of the plant in the whole state, respectively, an amount of gross receipts is obtained which is attributed to the use of streets in the old city. Two percent of that amount, over the period in question, amounts to $158,670.03, which the company contends is the extent of its obligation. While the company contends that this figure is the result of the direct application of some of the principles announced in the Tulare case, it was argued in the trial court that under the existing conditions the use of a mileage basis for computing the part of gross receipts attributable to the use of public streets in the old city was ‘inappropriate.’ It is now contended that the suggested investment formula is supported by the principles set forth in the Tulare case, and should be used throughout the computation.

In the Tulare case, 188 Cal. 664, 206 P. 983, the court was concerned with an interpretation of a part of the Broughton Act and the division, between two or more political subdivisions, of 2% of the gross receipts arising from the use of several franchises. It was pointed out that the gross receipts of that franchise holder, a power company, accrued from two distinct factors, one being the power houses and the other the distributing system consisting of poles and wires extending partly over roads and streets and covered by franchises and partly over private easements owned by the company. It was held that the franchise charge could not properly be applied to the part of the gross receipts attributable to the provately owned power houses and rights of way. Without specifying the manner in which the part attributable to the power houses could be determined, the court held that the remainder could be divided among the franchise holders on a mileage basis, giving consideration to whether the distributing lines were on public roads or private rights of way. It was also pointed out that this allocation to the various rights of way on a mileage basis was not necessarily exclusive but was a practical one where the respective rights ‘cannot be otherwise determined,’ and that there might be instances where the extent or value of the distributing system over a given right of way might indicate its earning capacity.

While some of the principles of the Tulare case may be applicable, a different situation is here involved. The amount due under the judgment is payment at the rate fixed by the ordinance, which is 2% of the gross receipts arising from the use of the privilege. Only one privilege is involved and there is no question of apportionment between several public bodies. In the Tulare case, there was a natural distinction between the manufacture of a product in one place and the distribution of that product in other places, and both factors contributed to gross receipts which came from places both outside and inside the franchise areas. No such distinction between the manufacture of a product and its distribution can reasonably be made here, and the gross receipts from the one area involved, the old city, can be and were determined. These receipts come from furnishing a means of communication between people in different locations, which is purely a service involving nothing other than the furnishing of that service. Telephone subscribers within the old city are charged for this service and payment therefor includes also a right to some such service outside of the city and within the extended area. While this extended service is in part made possible by outside service in the extended area, paid for by others, those payments are not included in the income received in the old city. Not only is no further apportionment or deduction from the receipts within the old city required or justified by the existence of the extended service in the extended area, but all such calls, both ways, use the city streets in large part, and would be impossible without such use. While toll service stands on a different basis it also uses the city streets, and an allowance therefor in proportion to calls originating within the old city was included in the admitted gross receipts within the city, and no objection is made to that allocation.

The amount of gross receipts actually received within the old city is easily ascertainable and is clearly disclosed by the evidence. Obviously, the part thereof which may be said to arise from the use of the city streets, as distinguished from private rights of way in the city, must be determined and segregated. This can be determined, on a mileage basis, in proportion to whether the wires and conduits, the basic element making this communication service possible, are on public streets or on private rights of way. All telephone calls go through one of these rights of way, the public or the private. This is the service being paid for, which results in the gross receipts within the old city, and in a very real and practical sense all those gross receipts arise either from the use of the streets or the use of private rights of way within the old city.

The central office equipment and buildings, with the instruments, switchboards and equipment located on the property of the various subscribers, are merely incidental to the operation of the communication system, the basic element of which is the wires and lines enabling people in different locations to talk to each other. The value of such buildings and equipment is a false quantity insofar as the present problem is concerned, and should not be considered and used as a basis for a deduction in arriving at the gross receipts within the city, within the meaning of that term as it is involved here. The matter of a proper return on the investment is one for a different forum. A consideration of the investment element, under the different situation prevailing here, is not required by the distinction made in the Tulare case between the manufacture of the product there involved and its distribution, and is not justified here since the basis figure to which the 2% is to be applied can here ‘be otherwise determined’ in a fairer and more rational manner. Moreover, this is not an instance where the value of the equipment ‘over a given right of way may indicate its earning capacity’ [188 Cal. 664, 206 P. 990] the possibility of which was suggested in the Tulare case. As we view the matter the gross receipts within the city here involved, which can be easily ascertained and which are disclosed by the evidence, must reasonably and logically be held to arise from two sources only, the lines of communication occupying the public streets and those occupying private ways, within the old city.

The company's further contention, that the allocation as between lines on public streets and those on private ways, within the old city, should also be made on a ‘relative plant investment basis' rather than on a mileage basis because of ‘plant congestion in the central area,’ adds an improper complication since it bears no direct relation to the use of the streets, since the allocation can more practically and reasonably be made on a mileage basis, as suggested in the Tulare case, and since a part of such congestion inevitably occurs on the public streets. The compensation for the use of streets, here involved, is based on the gross income accruing from the use of the privilege granted, and not on what it may have cost the company to put itself inj a position to exercise that privilege. The proper allocation should be based on the extent to which the streets are used for telephone lines and not on the number or cost of the wires.

The actual gross receipts in the old city were collected within the old city and made possible by the system of wires in that area, which enabled the people therein to talk to each other, and to people in other areas by a further use of lines within the old city. These receipts are contributed to and arise from the use of wires passing over both public and private ways. The compensation for the privilege of such use, as fixed by Ordinance No. 5681 and the prior judgment, should be determined by attributing the gross receipts within the old city to the use of both public and private ways, and apportioning them between the two ways on a relative mileage basis.

We conclude that the city's second contention must be sustained, and that the amount of the payment here required is to be determined in this manner. This results in the figures contended for by the city in this connection. These figures, which are fully supported by the evidence, disclose that the correct amount of the payment required by the prior judgment is $333,541.14, of which $158,670.03 has been paid.

The judgment is reversed, with directions to enter judgment in favor of the city for $174,871.11, with interest from October 4, 1949. The city to recover its costs on this appeal.

BARNARD, Presiding Justice.

GRIFFIN and MUSSELL, JJ., concur.