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4. Ex Parte CommunicationCity of Kalispell Charles A. Harball office of City Attorney City Attomey 312 First Avenue East P.O. Box 1997 Kalispell, M59903-1997 MEMORANDUM O: Mayor Pamela B. Kennedy and Kalispell City Council FROM: Charles Harball, City Attorney James H. Patrick, City Manager Tel 406.758.7708 Fax 406.758.7771 charball@kalispell.com SUBJECT: ,lac Parte Communications — Request for opinion MEETING DATE: Monday, November 28, 2005 — Work Session BACKGROUND: Several weeks ago, Council Member Herron called the City Attor .ey's office and requested that the City Attorney provide a legal opinion regarding exparte communications as it prelates to city council members. He put the question in this ay: "As a council member, elected by the public, I believe that have the right to talk to whoever I kraut, whenever I want., about whatever I want. If there is a law against that, I want you to show it to .e." He was advised that the City Attorneys office would certainly provide that opinion but that he should make that request to the City Manager. A couple of weeks later, Council Member Kenyon indicated that there seemed to be some confusion, or at least differing opinions, among the council members about the legality of ex parte communications and he made a for.a.l request to the City Manager for a legal olio.. I have had the opportunity to discuss the legitimacy of exparte communications with council on at least two occasions over the past five years. Ken Weaver from the MSU Institute on Government has also held seminars for council regarding this issue. As personnel on the Council change over the electi-on cycles, it is necessary to revisit the issue every couple of years, I have found that sometimes it is helpful for Council to see that we do not lure in a vacuum here in Kalispell and to hea.r what other City Attorneys have to say o some of these matters. I have therefore attached a legal opinion issued by the Missoula. City Attorneys office some years ago that addresses exparte communications in relation to lard use planning issues before council. I agree with Jim Nugent'Nugent's assessment and there have not been any significant changes in the lave since the opinion was issue . I am not aware of any other City Attorneys in disagreement with his assessment. Ex Fame Communications .memo November 22,,Zoo Page - 2 t seems as though land use planning issues rase the most questions from council members about what defines ex parte communications and what arequasi- legislative actions vs. quasi-judicial actions. I think that the Nugent opinion addresses these questions well. A council member night simplify the analysis by asking the following questions: ., a. the communication that the council member is having outside of the public forum and . is there content within the communication that might be construed as evidence to be considered by the council member in reaching his or her decision: f the answer to these questions is yes, then the communication is ex parte. 2. a. Is the issue that is the subject of the communication scheduled for a public discussion and vote, and b. does the issue specifically deal with the property or personal rights of an individual If the answer to these questions is also yes, then the communication is ex parte and impermissible. When I analyze this issue, I tend to think of the matter in terms of a civil dispute that is before a court. First, is the matter before the court — has the case been filed? If so, it is improper for the judge to discuss the natter with either party or otherwise gather evidence (even through casual conversation with a non -litigant) ithout fully disclosing that communication with both sides. Each side has the due process right to know all of the evidence that the judge is considering when reaching his or her decision as well as the opportunity to rebut any evidence that i given. Exparte communications deny that right to the parties. Although it is not always obvious when a. matter before the council is quasi- judicial, some matters are abundantly clear. The most apparent matters are when council is asked to make findings and a determination to enforce the City Code. Recent and current examples are the enforcement of construction standards and fire codes. These involve specific parties and specific sets of facts. No council member should enter into communications outside of the public forum about the utter with anybody who purports to present facts about the natter. The remedy that is available to a party who successfully asserts that his or her due process rights have been violated through the improper action of the Council is to have a court set aside the action of the Council and, if the aggrieved Office of City Attomey City of Kalispell Ex Parte Communications Memo November 22, 200 Page - party can shove that he or she has suffered economic da .age as a result of the improper action, a judgment for those damages. However, perhaps the result that 0 is most damaging agi to Council is the loss of public tryst. The appearance of fairness can not be overemphasized in these matters. The public buy -in and public participation local government always suffers when the perception is given that the governing body is giving short shrift to fair play. Respectfully s3ib�nitjed, Chail4..rrrVall, City Attorney James H. Patriot., City Manager Office of City Attomey City of Kalispell OFFICE THE CITY ATTORNEY A 7 4 3 5 Rynian Missoula, MT MISSOULA .......... o 5- } Fax; w # �Fl 1_1 R &"AnCi��`Z��1�I 97-014 TO Mike Kailas, Mayor; City Council; Janet Stevens, Chief Admffiistrative Officer; Cindy Kltt , o G Director; Dave Loomis, o G; ,Jeanie Dixon o G; Denise Alexander, o ' ; Pat Kelley, o G; Martyr Rehbein, City Clerk; Bruce Bender, Public Works Director; Steve King, City Engineer FROM: Jim Nugent, City Attorney DATE: March , 1997 RE: Public record decision making `or land use decisions FACT& Mayor Mike Kailas recently inquired about City Council land use decision raking procedures of the city with respect to zoning and subdivision decision making and citizen or property owner lobbying of land use decision makers. With -respect to m-unicipai governing body lard use decision making, , what safeguaxds may be necessary procedurally to ensure impartial public record decision making and to protect potential duo process n'ghts of parties in'Interest? CN'S1q* Pursuant to Montana- law, - gover=ental agencies must afford parties in interest and- citizens -a. reasonable opportunity for participation in the o rrument -,operation prior to a final decision. being m a by the governing body. A public h ar ng is reqwred for both zoning and subdivision lard use reviews. Reasons for land use decisions should be n the public record in municipal review process that affords due process with respect to property ownership, property rights and property values. Owners, interested parties and citizens are constitutionally entitled to have a reasonably opportunity to participate and be heard prior to a governing body's final decision being made. A governing body's hand review decision making process should not infringe on the independent judgment of the decision makers, nor deprive interested parties of a fair public hearing. Some court decisions focusing on due process rights in land -use proceedings indicate interested (affected) parties are entitled to an opportunity to be heard, to an opportunity to present and rebut evidence, and to a decision making body that has no pre -hearing ex party contacts or dealings between interested parties and members of the decision making body. If there are unavoidable ex parse contacts with decision makers the substance of the contacts are to be publicly disclosed in the public record in time for public comment so that all interested pasties will be aware of the substance of the contacts and have a reasonable opportunity to comment on or rebut the substance of the contact. -k If the land use decision is not made at the conclusion son of the public hearing it, is imperative that there be no owner, interested party or citizen ex parse lobbying contacts with City decision makers between the hearing and the time of making the decision. Basic fairness requires that anv contacts with elected decision makers that may influence the outcome o the decision to be made by the decision making body be on the public record for the public to be awaxe of and able to comment on or rebut the information., comment or data.submitted pursuant to the contact made. Basic fairness requires that there be no hidden reasons or roes influencing decision making pertainingo land use matters involving real property rights and values. Article I, Section 8 of Montana's Constitution establishes a constitutional right for the public to be afforded a reasonable opportunity for citizen participation prior to a final decision. This right is set forth statutorily in Tine 2, chapter 3, MCA and sections 7-1-4 1 41 through 7-1- 4144 MCA. Also, § 76-3-605 MCA requiresthata public h-earing on a subdivision preliminary plat shall consider all relevant evidence relating to the public health, safety and welfare. Section 76-2-303(2) MCA pertaining to establishing land use zoning provides that "no such regulation, restriction, or boundary shah became effective until after a public hearing -3- in relation thereto at which parties in interest and citizens shall have an opportunity to be heard". The Montane Supreme Court has not yet specifically dealt with the legal necessity to have procedural due process safeguards for affected property owners as park of local government governing and land use decision making processes. Courts differ as to whether a municipal governing body's zoning land use decisions are legislative or administrative quasi.judicial decisions. Rathkopf, Volume 3, The L,a Zoning,and Planning, Section 27A.04[4][a] and [b], pages 27A-39 through 27A-44, pertaining to procedural rights in land use rezoning matters, characterized as quasi-judicial, explains that charact%eriZation as quasi-judicial "means that parties are entitled to greater procedurai rights": [b] Enhanced Procedural Rights Characterization of a rezoning as quasi-judicial carries with it an implicit recognition that there are "interested parties" to the decision ---usually the property owner seeking rezoning and opposed neighbors -- whose interests in the matter are higher than those of municipal residents enez-all and whose interests can virtually be considered as rights and therefore not to be adjusted or withdrawn in the absence of procedures according with due process or fundamental fairness. Thy procedural rights attendant upon characterization of a rezoning as quasi judicial include not only the right to notice and opportunity to be heard but also, variously, the right to present evidence and witnesses, and to rebut opponents' evidence and witnesses, the right to a record of the proceedings, and the right to be supplied by the decision making body with a written statement of fact findings and reasons. _Another aspect of procedural fairness deriving from the quasi-judicial characterization is the right to seek disqualification from the decision making body of persons whose financial interests or biases make their ability to function as impartial decision makers suspect. Related-...hej:g!to may also be a z�ohzbition on ex are ontac s or dealin s between interested partier an members of the ecision makin bod during the, time the rezoning zs under consideration so that thtLLis a rancg�Abat thg_---!de.gi5iQn_Lc�_made solel Qn the basis of matters of record. -- The Montana Supreme Court had indicated that an original zoning ordinance is a legislative action; but issued differing statements as to whether rezoning and variance matters are quasi-judicial or legislative. Sep Love v. City of Missoula, 525 P-2d 551, 554 (1974) (quasi-judicial) and Schanz v. Cit f Biliin s, 597 P.2d 67, 71 (1979) (legislative). Later, the Montana Supreme Court in Greens at Fort Miss oula v. City afNfissoula, 897 P.2d 1.0'78, 1081 (1995), expressly overruled the confusing language fromLowe, supra, held that zoning and rezoning are legislative acts subject to referendum. However, none of these three Montana Supreme 'Court cases have discussed the necessity for quasi-judicial safeguards for directly affected or directly interested property owners that could be adversely affected by any city council land use decision. Pursuant to either characterization, current Montana public participation law requires elementary basic fairness pursuant to which directly affected interested parties in a land use matter as well as citizens are entitled to a reasonable opportunity to participate prior to a final decision. Land use decisions should be based only on the information provided in ,the public record such as public comment either in writing or at public hearing or otherwise specifically presented in the public record for the specific land review in time for public comment, discussion and rebuttal. A leading case pertaining to the importance of an impartial decision along body in land use matters is Fasano us. Board -of, Count Commissioners of Washin�Lton Cou b07 R2d 2330 (1973) which stated: . .. .with future cases in mind, it is appropriate to add some brief remarks on questions of procedure. Parties at the hearin before the county ffovtlirnin�_bodv are ....... entitled to an o��or�unitv to be.eard to an o ortuni to resent and rebut evidence to drib naI which is i artial in the matter - i.e, havin had no pre-hearingor ex narte contacts concernin the uesiion at issue -and to a record made and ade uate findings executed. comment, Zoning Amendments --The Product of Judicial or Quasi -Judicial Action, 33 Ohio St.L.J. 130 - 143 (1972). When we apply the standards we have adopted to the present case, we find that the burden was not sustained, before the commission. The record now before us is insufficient to ascertazn whether there was a justifiable basis for the decision. -5- The only evidence in the record, that of the staff report of the Washington County Planning Department, is too conclusory and superficial to support the zoning change. It merely states: "The staff finds that the requested use does conform to the residential designation of the Plan of Development. It further finds that the proposed use reflects the urbanization of the county and the necessity to provide increased densities and different types of housing to meet the needs of urbanization over that allowed by the existing zoning ... it r i anions and on Masi ns with ut an at e a e ac n w ich t e e ba ed e L fficient to., j.uatfffy, ch e fuse .. . (Emphasis supplied.) Rathkopf The n and Elanning, Volume 3, § 27 A.04 [2 , pages 27A-29 and 27A-30, indicates that this quasi Judicial approach to land use decision making was "actually earlier embraced the 1972 Supreme Court o Washington decision n fl�eMing coma, 502 .2 327, 33 (Wash. 1972). Ex parte non-public public c - nc s in land use proceedings could comprise impartiality of the decision makers without an opportunity for i' r r g opinion comment or rebuttal. Courts appear to be cognizant of the fact that there are almost irresistible pressures on the part of interested p a.r . s �o land use matters as well as others to contact decision makers to express their concern and comment. The FaFano.. decision should not be interpreted as an absolute -prohibition on ex parte contacts but as requiring that in those instances where are ex pane communication does take place, it should be placed on the public record during the public hearing in order o enable all interested parties or Persons to rebut the substance of the communication. The Public disclosure requirement should not be viewed as are a thor*zatior for decision makers to inmate or willingly engage in ex pane contacts; but should be viewed as being more a recognition the fact that it is almost unavoidable that on occasion there will be some sort of ex pane contact made to a decision maker by are interested party in a pending land use matter. The Oregon Supreme Court in PetersO12 vS..._.City Council for �i o Lake sweao, 57 .2 . 326, 331 - 332 (1978), when interpieting Fasano stated. We have interpreted Fasana as not pacing an absolute prohibition on ex pane contacts between county governing boards and parties to decisions pending before them. Rather, we have stressed that if, ex pane communication does take pace it mush be placed on the public record to enable interested persons to rebut the substance of the communication. In Tierney vs. Duris, Pay Less Properties, 21 Or.App. 613, 629, 536 P.2d 435, 443 (1975), we stated: "In any event, we hold there is no violation of Fasano when, as in this case: (I) the "ex pane contracts, [sic] were not with the proponents of change or their agents, but, rather, with relatively disinterested persons; (2) the contacts only amounted to an investigation of the merits or demerits of the proposed change; and, most importantly, (3) the occurrence and nature of the contacts were.rnade a matter of record during a quasi judicial hearing so that parties to the hearing then had an opportunity to respond * * * As we readzn Fasano its basic, requirement is an imnartial., tribunal; ex pane contacts were just mentioned as one way in which impartiality could be compromised (emphasis supplied.) See also West vs. City of Astoria, 18 Or. App. 2127 226 N.31 52A P.2d 1216 (1974) especially concurring opinion); Peck regulation and control of ex parse communications with administrative agencies, 75 Harv.L.Rev. 2.0331 266-68 (19*62) . . . Courts in other jurisdictions which have also considered the propriety of ex parfie contacts in a zoning context have also reached similar conclusions. fee Hot Shopper, Inc. vs. Clouser, 231 F.Supp. 825, 832-33 (D-.C.D.C. 1964); Jarrott vs. Scribener, 22 F.Supp. 827, 834 (D.C.D.C. 1964); Sheridan-Kalorama Neigh. C. vs. D.C.Bd. of Zon. Add., 341 A.2d 312, 318 (D.C.App. 1975; Wilson vs. District of Columbia Bd. of Zoning Adjust., 289 A.2d 384, 383-84 (D.C.App. 972). These courts recognize that an ex parse contact between a zoning board and an interested party which is neither revealed to other ai.z�.terested parties nor made a part of the public record is a ground for reversing the decision of a zoning board. (emphasis supplied) Another Oregon case, Neubfrger vs. City of Portland, 585 P.2d 351, 358 (1978), found that opponents of rezoning were not prejudiced or denied are impartial tribunal by ex pane contact between city and an applicant for rezoning. The ex pane contacts between city and an applicant for the zone change pertained to the city's purchase of a parcel of land different from the one under consideration for rezoning and the second contact occurred after the rezoning decision had already been made by the decision making authority. euber�ger, �� at 161 also indicated that fuller,procedures are required "whin a Particular action by.. government is directed at a relatively small number of identifiable persons and when that action_ also involves the application of existing policy to a specific factual setting, the requirement of quasi-judicial procedures has been implied from the governing law,,' In a Wisconsin case of Schalow vs. Wa,una.ea. Countv, 407 N.W.2d 316x 139 Wisconsin 2d 284 (Wis. App. 1986), the Wisconsin Court of Appeals held it would be a denial of a zoning variance applicants' right to procedural due process for the zoning board of adjustment to vase their decision upon a hidden reason which the applicants for the variance had no opportunity to rebut. In the Schalow case, the zoning variance applicants were denied their application for a variance request in which they sought a variance from the lot size and setback requirements of the county zoning ordinance to construct a single family dwelling on their vacant lot. In response to the applicants' application for a variance, the Zoning board of adjustment had made an on -site inspection of the lot in question and determined that the vegetation on the lot indicated a low area. However, no testimony to this effect was presented at the hearing, nor was there testimony as to whether building on the dot would violate flood plain or shore land zoning regulations or have undesirable environmental consequences. Although the zoning board of adjustment based their decision on these factors, at no point during the public hearing, or anytime outside the public hearing, did they ever indicate to the applicants for the zoning variance that these matters were a concern to them as board members. The Scha ow court stated supra, at 319, as follows: .. i .t would e a nial of the Schalow's riht to ro edura.l, due roc ss to base a e i i n upon a hidden real n whi h the had no oT)portunily to.reb4 Anderson, supra, sec. 22.38, p. 1 04; Hot Shopper, Inc. vs. Clouser, 231 F.Supp. 825, 832-33 (D.D..C. 1964 affd. 346 F.2d 834 (D.C.Cir. I965). In this respect the board acted contrary to law. (Emphasis supplied) The City of Missoula does not conduct land use zoning, subdivision land development proceedings in a strictly adjudicatory manner and does not have technical adjudicatory rules concerning the introduction of e ence-, allowing opponents to cross-examine each other, etc. However, elementary tary equity and faimess dictate a reasonable opportunity for public participation for interested directly affected `ected parties as well as a decision that is based on the public record, Also, it is possible for other public record information other than the information presented at the public hearing to serve as a basis for some decision making. McQuillan, Municipal Corporations, 3rd Edition revised, Volume , Zoning, Section 25.251, page 305 when discussi ►,ng land use public hearings states that: Since public hearings are part of a legislative rather than judicial process, the decision of the municipal body need not be made solely on the basis of evidence produced at the hearing* For example, a land -use proposal could be inconsistent with Montana state law or the applicable -land use master (comprehensive) plan or in conflict With a local government zoning or subdivision regulations and this information may or may not be part of the evidence actually produced at the public hearing, x CONCL ION& Purstiant to Montana law, governmental agencies must afford parties in interest and citizens a reasonable opportunity for participation in the government operation prior to a final decision being made by the governing body. A public hearing is required for both zoning and subdivision land use reviews. Reasons for land use decisions should be in the public record in order to afford the public a reasonable opportunity to provide the governing body with their comments, CITY ATTO NEY'S OFFICE JIM NUGENT City Attorney N ; krnr %/ c: Zoning File; City Council ` e GAFF MYERS, Plaintiff and Respondent, v. GEORGE F. VINCENT, W. STEPHEN DEE, VICTORIA R. D E, AND ALL OTHER PERSONS UNKNOWN, claiming r who might claim any right, title, estate, or interest in, or lien or encumbrance upon, the real property described in the complaint or any thereof, adverse to the Plaintiff's ownership, Defendants and Appellants. SUPREME COURT of MONTA IA 2004 MT 1 i# 2004 Mont. L XIS 343 No. -122 July 6, 20040 Decided Notice: PURSUANT TO THE APPLICABLE MO TANA CODE SECTION THIS OPINION IS NOT DESIGNATED FOR PUBLICATION. Editorial Information: subsequent Hilstory s corrected July 7, 2004. Reported at Myers v. Vincent, 323 Mont. 534, 100 P. d 165, 2004 Mont. LXIS 4(Mont., July 6, 204 Editorial information: Prior History APPEAL FROM: District court of the First Judicial District, In and for the County of Lewis and Clark, Cause No. ADV 2000-293. The Honorable Dorothy McCarter, Judge presiding. Disposition Reversed and remanded. Counsel For Appellants: Carl A. Latch, Doubek & Pyfer, Helena, Montana. For Respondent: John M. Shont , Squires & Shont , Helena, Montana. Judges: Jstice Janes C. Nelson delivered the Opinion of the Court. We concur: KARLA M. GRAY, JOHN WARNER, JIM I EGI I I , W. WILLIAM LEAPHA T. olijo Opinion by: James C. Nelson Justice James C. Nelson delivered the Opinion of the Court. Pursuant to Section 1 , Paragraph c, Montana Supreme court 1996 internal Operating Rules, the following decision shall net be cited as precedent but shall be filed as a public document with the cleric of the Supreme court and shall be reported by case title, Supreme Court cause number and result to the State Reporter Publishing company and to Vilest Group in the quarterly table of noncitale cases issued by this Court. Gary Flyers (Myers) brought an action to partition in the First Judicial District, Loris and Clark County. Dyers owned a one-third interest in a 160 acre tract of land and W. Steven and Victoria Dee (the Dees) owned the other tiro --thirds interest. The parties agreed to have a referee address all issues in contention. The referee awarded Myers the southern one-third portion of the tract and granted Myers exclusive access to his portion across a separate adjoining 160 acre tract also owned by the Dees. The Dees requested a hearing and Myers moved to adopt the referee's recommendations. The District court denied the Dees' request and approved and adopted the referee's recommendations. The Dees moved for a new trial and the District court denied the motion. The Dees appeal and we reverse. We restate the issues on appeal as follows: 2005 Matthew Bender & Company, Inc., a member of the LeAs exis Group. All fights reserved. Use of this product is subject to the restrictions and terms and conditions of the Matthew Bender Master Agreement. ent. 1. Did the District court err when it adopted the referee's findings of fact and conclusions of lave? 2. did the District Court violate § -3.201 2 � MCA FACTUALANDPROCIEDURALBACKGROUND We first note that because there was no trial, and hence, no trial transcripts, the facts are set forth according to the referee's findings of fact and conclusions of lave, the documents in the District Court record, and the parties briefs. Ruth Kruth i ruth , Ruby Bastian (Bastian), and Doris Vincent (Doris), inherited 160 acres, as tenants in common, from their another. After inheriting the property, Kruth listed the property for sale with a local realtor and included Bastian's and Doris' names. Ruby and Doris did not sign the listing agreement or any other document giving truth authority to act for then. Myers offered to buy the property, made a down payment, and signed a buy/sell agreement with l ruth. Bastian and Doris refused to sign the agreement and Ayers filed an action for specific performance against all three sisters. Truth then sold Myers her one-third interest in the property. Following this, George Vincent (George), brother to the three sisters, purchased the remaining tiro -thirds interest from Bastian and Doris. Myers attempted to deal with all the parties but then filed a complaint in partition. At the same time, George, who owned a adjoining 1 o-acre parcel, sold that parcel, and the two-thirds interest recently purchased from his sisters, to the Dees.1 Ayers then amended his complaint in partition to include the Dees as additional defendants and the Dees and Myers agreed to have a referee address all issues in contention. The referee decided that Myers should be awarded the southern one-third section and the Dees were to retain the northern two-thirds portion of the parcel. Myers was also granted exclusive access to his parcel at the extreme southeast corner of the parcel. This access was from the county road across sixty-two feet of the Dees' adjoining 160 acre tract. .The Dees objected to the referee's findings and requested oral argument on the issues raised by the pleadings and the referee's report. Myers moved to accept the referee's findings and the Dees again objected and requested a hearing. The District court denied the Dees' request for a hearing and approved and adopted the referee's recommendations. The District Court concluded that it saw "no basis for rejecting the referee's recommendations" because "the referee's findings [were] supported by the evidence in the record." The Dees moved for a new trial and the District court denied the motion. The Dees appeal. STANDARD of REVIEW In reviewing a district court's findings of fact in a partition action the applicable standard of review is whether the findings are clearly erroneous. A finding is clearly erroneous when, although there is evidence to support it, a review of the record leaves the court with the definite and firm conviction that a mistake has been committed. Tillett v. p er (1995), 275 Mont. 1, 5, 909 P-2d 1158,1160. DISCUSSION Did the District Court err in adopting the referee's findings of fact and conclusions of law? The Dees argue that the District Court erred because the referee met with Myers without the Dees. They maintain that both parties had agreed to meet with the referee on May 29, 20021 and that on that day the Dees and their counsel gaited for instructions concerning the arranged meeting. The Dees'counsel eventually called Myers counsel to inquire about the meeting and Myers' counsel informed Dees' counsel that he, Myers, and the referee had gone to the parcel the day before and that there would be no meeting on May 29. Myers counters that the District court gave the referee the power to interview the parties and Matthew Bender & company, Inc., a member of the Lexis N a is Group. Al ri q hts reserved. Use of this product i subject to the restrictions and turns and conditions of the Mafthew Bender feaster Agreement. that Myers had strongly encouraged the Dees to schedule a meeting with the referee either at the property or off the property without Myers} presence. Further, Myers argues that the Dees failed to take advantage of the opportunity to meet with the referee between the time the referee was appointed, November 28, 2001, and the time the referee's report was issued, August 5, 2002. In addition; the'Dees also raise issue with the exclusive access that Myers was granted. We decline to address this issue at this time given our aforementioned conclusion. Accordingly, we hold that the District Court erred in adopting the referee's findings of fact and conclusions of lair and we reverser ISSUE TWO Did the District Court violate § '--, MCA The Dees contend that dividing the 160 acre parcel subjects it to the requirements regarding subdivisions embodied in Title 76, Chapter 3,Montana Code Annotated. They assert that the District Court erred because it failed to notify the governing body of the pending division to allow the governing body to present written comment as required by § - - o 2 , MCA . Myers maintains that the failure to do this was harmless. The Dees are correct, Title 76, Chapter 3, Fontana Code Annotated: does apply in this instance. "A subdivision comprises only those parcels containing less than 160 acres ... .of Section - - o :IBC . This chapter does not apply though "to any division of land that: a is created by order of any court of record in this state ... ," Section - -2o1 )(a), MCA . However,, 'the court shall notify the governing body of the pending division and allow the governing body to present written comment on the division." Section -3.201 2 , MCA. A the Dees point out, the governing body was not notified, Myers' argument that this error was harmless is not persuasive. The statute's language i clear and mandatory. 'The court shafi notify the governing body .. , ." Section - -20 , MCA emphasis added). Because this case is being reversed as to the first issue} the statute will have to be complied with in any further proceedings. We reverse and remand for further proceedings consistent with this opinion. JAMES C. NELSON We concur. KA LA M . G FAA ' JOHN WARNER 2005 Matthew Bender & Company, Inc., a member of the L xisN xis Group. All rights reserved. Use oft is product is subject to the restrictions and toms and conditions of the Matthew Bender Master Agreement. CASCADE COUNTY CONSUMERS ASSOCIATION, Fontana consumers Association, Montana state Florists Association, F ALPH PARKER, an Individual, AR " UR SMITH,, an Individual, and LLOYD C. WENNER, an Individual, Plaintiffs and Respondents, ndents, v. PUBLIC SERVICE c COMMISSION f Montana, PA L T. SMITH, JACK HOLMES and LO IS G. BOEDECKER, as members bers thereof and constituting said Public Service Commission of Montana, and the Montana Power company, a Corporation, Defendants and Appellants Supreme Court of Montana 144 Font. 1 ; 394 P.d # 1964 Mont. LEXIS 126 N. 10610 August 19,1964, Decided Editorial Information: subsequent History Rehearsing Denied September g, 1964. Editorial sal Information: rmation: Prior History Appeal from the District court of cascade County. Eighth Judicial District. Honorable Paul G. Hatfield,, .fudge presiding. Disposition Judgment reversed; commission's orders affirmed. Counsel William 1 . M fich (argued), Helena, Sam B. chase, Jr., J. J. Burke, Jr., and William H. coldiron, Butte, John H. Weaver, Great Falls, Robert D. Corette (argued), Sara B. Chase, Jr., Butte (argued), for appellants. Leo C. Graybill, Jr., (argued), P. J. Gilfeather, Great Falls, (argued), C. W. Leaphart, Helena, (argued), for respondents. Judges: Mr. Justice John C. Harrison delivered the opinion of the Court. Mr. chief Justice James T. Harrison, and Mr. Justices castles and Boyle, concur. Mr. Justice John Conway Harrison', dissented in part. Mr. Justice ,Adair, dissenting. Opinion Opinion by: HARRISON {144 Mont. 2 This is an appeal by the defendants and appellants, the Public Service Commission of Montana, and The Montana Poorer company, from a judgment of the district court of the eighth judicial district, the Honorable Paul G. Hatfield, Judge presiding, which set aside and reversed an order of the appellant Commission as being unlawful and not based on sufficient evidence. In April 1961, the appellant Montana Poorer Company, filed a petition with the Montana Public ,service Commission for authority to increase rates and charges, with a price adjustment ent clause, for natural gas service within the State of Montana. The petition alleged the following: (1) Petitioner had been a distributor of natural gas in Montana since 931; (2) That only one increase had been granted petitioner since 1931, and that was in 1953; 3 That in 1954 petitioner had acquired the natural gas system of The Montana -Dakota Utilities Company in the HiLine area of Montana; 44 Mont. 1 4 That present rates and charges are insufficient to produce a fair, reasonable and proper return to the company because of wage increases and benefits, increased costs of materials and supplies and equipment of all kinds, and increased taxes; Petitioner further alleges that due to the continuing and increasing demand for natural gas that large expenditures are required for replacements, property and improvements, also that additional gas reserves are required to supply present and future customers, and that in order to assure an adequate supply the Company was required to and did obtain additional 2005 Matthew Bender & Company, Inc., a member of the Lex!sNe)ds Group. All rights reserved. Use of this product is subject to the restrictions and terms and conditions of the Mafthew Bender Master Agreement. reserves from the Province of Alberta; (6) That the obligations and expense imposed on the Company for said additional natural gas will sharply increase the company's cost of doing business in Montana; The petition further requested the Commission to approve new rates for natural gas service to the Great Falls Gas company for an interim period to .January 11 } and The petition requested a uniform rate for Its entire system, declaring that a zoned rate was undesirable, however, it asked for special industrial and city gas rates for some large users. To this petition of the appellant Company, a rnuititude of protests were filed. Included were the respondents in this action. One month after appellant filed its petition the Commission set the first of the two hearings. The first hearing was held in Helena, Montana, on May 3, 242 1961, for the purpose of allowing appellant Montana Poorer Company to present Its case in chief. On .July 18, 1961, the Dearing was reconvened in Butte, Montana, for the purpose of cross-examination of appellant Company's witnesses and for the presentation of protestants' evidence and for Montana Power's rebuttal. This portion of the hearing took from July 18 to August 2, 19 , and the major portion of the 2,900 pages of testimony waS produced during this period. (144 Monty The entire fiscal production, transmission and policy operations were explored by all Interested parties at the Board bearing. It was contended by the appellant company that in conformity with the generally agreed policy throughout the country that a fair rate of return is in the neighborhood of six percent. The appellant Comm fission agreed that six percent was what they strived for in their order. The testimony produced by the expert fiscal witness, Mr. Woy was to the effect that in 1960 they earned a return in the gas portion of the business of 3.54 percent figured on the reproduction cost less depreciation theory of figuring rates; 5.28 percent on the original cost theory; 7.30 percent on original cast less depreciation; but only 4.49 percent on his estimate of fair value of the system; and that if the Commission would grant the increase, in 1962 they Mould earn 6.07 percent. W. C. Gilman, a fiscal expert employed by The Montana lower company, testified that a fair rate of return for Montana Power gas properties should be 6.75 percent, Dr. L. S. lnappen, the fiscal expert of protestants, in his testimony criticized the 6.75 percent figure of Mr. Gilman, pointing out that it was based on 161.07 percent of book value of the common stock and would amount to a o. 9 percent of its 1960 book value, or 20.28 percent of its 1962 book value. He stated that used on Mr. Woy's figures, The Montana Power Company was earning more than 6 percent on every one of the functions, as set forth separately, I. e., production, transmission, and distribution. Mr. ,John W. Rushing, fiscal expert of the Commission, testified that he recommended 5.96 percent as a reasonable return on fair value. Throughout the testimony some difficulty was evidenced in separating the multiple functions of the company which break down basically to 67 percent electrical and 33 percent gas. In this respect The Montana loner Company is unique Mort. 1751 among privately owned public utilities. Both the Commission and the District court seem to have had difficulty in properly separating the figures given and relating them to the gas rate only. Evidence of rates of return on the whole Company's gas and electricity ran from 8.3 percent up to 9.3 precept making this private utility company one of the high income utilities. Evidence given showed that the value of the stock in The Montana Power Company increased five times in the gears 1 o-o. Testimony revealed that well over 00,000 is spent yearly in advertising, raising a question of hover much spent in this field by a company, with a franchise that serviced two-thirds of the State of Montana, is reasonable and beneficial to the rate payer. However, the amount did not shock the conscience of the Commission so neither the District court nor this court has Matthew Bender & Company, Inc., a Member of the LexisNexis Group, All rights reserved. Use of this product is subi ect to the r :stri ctio ns a rid terms and conditions of the Ma tth ew Bender Master Ag reement. the matter on appeal. Montana Poorer Company spends about 7.00 percent of their money on interest. Prior to getting Canadian gas, the Company paid independent Montana producers 5.7 cents per cubic foot or less as against about 24 cents for the Canadian gas although the company did say recently it had increased its offer for Montana gas. Testimony given by the Company, and approved by the Commission, provided for a uniform rate for the entire system, as against a zone rate; Concerning takes paid by the Company it was shown that of the increase requested that some 54 percent of the additional revenue collected would be paid by The Montana Poorer Company into federal, state and local treasuries. Certain facts concerning the gas supply and reserves were testified to during these hearings, that are of import to this case in view of the allegations made by the protestants at the hoard meeting and denials by the petitioners (now appellants) as to the necessity of The Montana Power Company's securing Canadian gas. (144 Mont* 1 The Protestants infer that Montana, particularly the area north and northwest of Great Falls, is a great undeveloped gas area and that if The Montana Power Company would pay enough for the gas when found in sufficient quantities to make it profitable, reserves would be found. The Company denied that the price paid by them is the limiting factor, but alleges that discoveries of the quantity of gas found in Canada just have not happened in Montana in spite of considerable exploration both by Montana Power and other interested groups. Further, that in Montana over a period of nine gears, g - o, the records show that 11.5 dry holes occur for every producer. While in contrast Alberta has one producer for each 3.6 holes d rifled; North Dal ota, ore producer for each 7.7 holes drilled; and W yorn ing 1 to 7. Too, the Company alleges that with an increase in consumption during the past tern years they were running short of reserves and that it was absolutely necessary to get into Canada when they did in order to secure adequate reserves. The Board hearing revealed that in 1954 the Company purchased from the Montana -Dakota Utilities all of its properties north of Great Falls and as far east as Fort Belknap. This purchase included the contract to serve the Great Falls Gas Company. In addition to the northern area, testimony revealed three other sources of supply and reserve servicing the Company; purchase from the Montana -Dakota Utilities in south central Montana of gas from Wyoming, the Dry Greek field in Montana, and the unconnected part of the system serviced by the Big Coulee field built in 1955 to service central Montana. Prior to 1950, The Montana Power operated exclusively in the United States, but in that year they went into Alberta for the purpose of developing additional gas in the Pakowl i Labe area just north of Montana. The Company contends that even with the Pal o tl i Lake reserves they would have been unable f 144 Mont. 1 to supply the annual requirements of customers beginning in 1963. The Company testified that as a result of their going into Canada early, and being the first to import gas out of Canada, that they were allowed to join with The Pacific Gas and Electric Company in 1959 to import some thirty million feet of gas per day which amounts to 10,920,000,000 cubic feet per year at a price of 24 cents per thousand cubic feet or at a cost of $ 209,000 per month maximum, or if taken at go percent load factor in the amount of ,coo per month. The Company alleges that in such amounts they have secured an adequate reserve for Montana's immediate reeds, The Canadian gas is purchased from The Alberta -Southern Gas Company which pays the Alberta producer and the transportation costs of said gas to a point some four riles north of the United States border. There it Is delivered to the Canadian -Montana Pipe Line Company, an exporting company, which transports the gas four miles to The Montana Power Company lire at the border. The 2005 MafthewBender & Company, Inc., a member of the LexisNexis Group. All rights reserved. Use of this product i subject to the restrictions and terms and condibons of the Matthew Bender Master Agreement. Canadian -Montana Pipe Line Company is paid a transportation cost for the four mile trip and is a wholly owned subsidiary of Montana Power Company. In order to get this gas from the border into its system, the Company had to build some 56 miles of 16 inch pipe from the border to Cot Bank at a cost of $ Z565,914. In addition to testimony on the Canadian gas purchases the appellant Company testified on additional costs made necessary doe to their storage projects. The Canadian contract, calling for a go percent load factor, necessitated additional storage because the Company had to take at least 90 percent of the daily contract. So one new storage area was added in the Deer Lodge Malley to the other storage areas in Madison County, Shelby, Cot Bank and Box Elder. The respondents contended at the Board hearings and on appeal to the district court that the Company failed either in its petition to allege or at the hearings to show: {1 44 Mont. 1 Sufficient evidence to show the actual amounts it spent for the periods testified to or for the test year, and that there was insufficient showing of original costs; 2 No competent evidence from which the actual value of Company's gas reserves could be determined, and that the methods used for determining gas reserves were unreasonable and arbitrary; 3 Property not actually used to serve customers was used to determine the rate base; Public Service Commission improperly used "cost of capital" basis for determining rags; and 5 Improper meeting held between the appellants Montana Power Company officials and commissioner's on October 4. At the close of the evidence, counsel for the respondents moved the Commission to: "Order an independent audit in accounting of the Company's books and records to reflect a new -reproduction -cost study,} and 2 for an accounting to establish an original cost basis; and that the whole problem of the (gas) leases` * * should be looked Into* * * to determine what should be included in certain accounts' and further stated "I think it Is going to take an accounting to determine what should be in there, so I would like to make that as a further motion." Such an independent audit and accounting was immediately made by employees of the Commission which took several weeks to complete. On October 4, 1961, at Helena, officials and experts of The Montana Power Company, together with the Company counsel made an appearance before at least two members er of the Commission. They were summoned by the Connmission or a member or members thereof to clarify certain matters having to do with the inter -relationship of the return on Montana property and Canadian property and the effect upon income takes f144 Mont, resulting from this. Neither the respondents nor their counsel were notified of this meeting, nor were any records kept as to what was said. Upon learning of this October 4th meeting, the respondents on October 27, 1961, filed a petition to reopen the matter for further hearing. This petition was based on an affidavit alleging the meeting of October 4. The petition requested that the Commission suspend all further proceedings in the matter and that further hearing be meld for the purpose of examining witnesses of The Montana Power Company and to allow the protestants to present additional evidence. A. ruling on this motion was taken under advisement by the appellant Commission. The Commission on February 2, 1962, issued its Order No. 2897 which fined rates and charges for natural gas service by Montana Power. The appellant Commission dismissed the motion for further hearing made on October 27 and stated: "The purpose of the informal meeting was a part of the Commission's independent 2005 Matthew Bender & Company, Inn,, a member of the Lexis exis Group. All rights reserved. Use of this product is subject to the restdctions and terms and conditions of the Matthew Bender Master Agreement. investigation of matters on which the members of the Commission wanted to become more fully informed within the meaning of the statutes supra." The appellant Commission referred to 1 . C . M - 1947, § 0-10 , as authority for the informal hearing. This statute authorizes the Commission to adopt proper rules and regulations relative to audits, investigations and hearings. Rule 3.7 of the Commission reads: "The Board Commission reserves the right to conduct any independent investigation either before or after hearing to the end that it may be fully informed," On February 16, 1962, respondents and four other protestants filed with the Commission a Petition for Rehearing, to which The Montana Power Company filed objections. A week later the Commission on February 23 issued Order No. 2 -- A which denied the Petition for Rehearing and "after re -considering all of the evidence introduced by all parties at the hearing held in this Docket and the briefs of the parties heretofore filed" reaffirmed . Mont; 180) Order No. 2 "except the rate schedule for the Great Falls Gas Company" which it modified in certain particulars not Involved in this appeal. The respondents then, on April 27, 1962, filed a complaint in the district court below to set aside order No. 2897 as unlawful, unreasonable: discriminatory and unjust. Both defendants filed answers and a certified copy of the Record of Proceedings held and testimony taken before the Commission was certified to the District court. Following a pre-trial conference the lower court made a Pre-trial order dated July 27, 1962. Hearings commenced in the District Court before Judge Hatfield on August 15, 1962, and were continued to and concluded on September 5. t the conclusion of the appeal before Judge Hatfield, the court ordered the testimony of the hearings had before the court transcribed and submitted to the appellant Commission, as required by section 0-12 , subd. (3), R.C.M.1947. The appellant Commission on October 10, 1962, in a Supplemental Order No. 2-B ratified and affirmed its previous orders 2897 and -A. n April 26, 1963, Judge Hatfield, the presiding Judge made a lengthy order- wherein he reviewed the facts and the law and set aside and reversed as being unlawful and not based on sufficient evidence the orders of the appellant Commission. on June 3, 1963, he signed his Findings of Facts and Conclusions of Lave and on the seine day signed a judgment against appellant Commission. Said judgment went to the apellant's orders 2897 and 2- A. In addition to the hearing on the above two orders heard by Judge Hatfield, the appellant Commission, beard testimony from which an action resulted in Blaine County entitled "McCartney, Johnson, Anderson, Vita Rich and Havre Laundry and Hi -Line Gas consumers Assn. v. Public Service Commission, Cause No. 6143. Upon the disqualification of Judge Elwell in that matter, Judge Frank Haswell assumed jurisdiction. Mont. 1He heard the parties on September- 20, 1962, having delayed a previous setting of the case on August o, 1962, in order to have a transcript of the case heard in Cascade County by Judge Hatfield. it was stipulated that Judge Haswell could examine the evidence presented before Judge Hatfield in considering this case. Judge Haswell found that the Cascade County case was different in certain respects to the one being heard by him in Blaine County. He therefore took additional testimony on the case and then transmitted his findings to the appellant Commission as provided by section 0-12 , R.C.M.1 . The appellant Commission after considering this evidence returned the case to Judge Haswell reaffirming the appellant Commission and The Montana Power Company. It should be noted that Judges Hatfield and Haswell in their separate judgments made reference to the two cases: Judge Hatfield, in paragraph IV of the judgment, said: That this judgment and order~ shall apply to the rights of the parties to this action or this action itself as distinguished from the rights of the parties to cause No. 6143 in the district court of the Twelfth Judicial District of the Mate of Montana, in and for the County ofBlaine." 2005 Matthew Bender & Company, Inc., a member of the LeAsNexis Group. All rights reserved. Use of this product ct i subject to the restrictions and terms and conditions of the Matthew Bender Master Agreement. Judge Haswell found: "That all the findings and orders of the Public Service Commission of the State of Fontana contained in orders No. 2897 and -# Docket No. 4997, to theextent that all are applicable to the rights of the parties to this action itself, distinguished from the rights of the parties to cause No. 55117B in the district court of the Eighth Judicial District court of the State of Montana, in and for the County of Cascade, are hereby affirmed." The appellants, in a supplemental brief, contend that section -12 , subd. (1), R.C.M.19471 providing that an interested party dissatisfied with an order of the commission 11may within ninety days commence an action in the district court of the proper co ntyff contemplates that an action appealing a Commission Mont. order can be brought in but one county. (Emphasis supplied.) Under this contention the case from Blaine county first secured jurisdiction over the appeal and the Cascade court had no jurisdiction to issue the judgment here appealed from. They cite as authority Colorado Interstate Gas co. v. State corporation Commission, 192 Kan. 29, 386 P . d 2 ; 1 n re Woodsi e-Florence Irrigation Dist.# 121 Mont. 346, 194 I . d 2 1; Larson v. Witmer, 124 Mont. 399, 224 '. d g 3; State ex rel. Stephens v. Keaster, 82 Mont. 126, 266 l`"'. 387. With this contention we hold brief. In the first place the argument is not timely due to the fact it was raised neither in the pleadings nor briefs of appellants. Secondly, neither the parties nor the facts are the same in the two cases, and no effort to consolidate the two cases was ever rude. Third our statute differs from that of the Kansas case relied upon. From the findings of fact and conclusions of law and judgment the appellant set forth some sixteen specifications of error, which are as follov s- " . The court below erred in entering judgment in favor of Plaintiffs (Respondents) and against the Defendants (Appellants.) „2. The court below erred in setting aside and reversing as being unlawful and not based upon sufficient legal evidence Commission Order No. 2897 of Docket No. 4997, including further rates and charges set forth in Order No. g-. "3. The court below erred in declaring the rates and charges set forth in Order No. 2897, including further rates and charges set forth in Order No. 97 -► , to be unlawful, void and of no force and effect, and in vacating and setting aside said rates. " . The court below erred in failing to take into account the fact that rate -making proceedings are legislative, not judicial in character. ". The court below erred in failing to give proper weight Monte 3 to the statutory presumption that rates fixed by the commission are prima facie lawful. " . The court below erred in finding that Plaintiffs were not given an opportunity to cross - exam ine or to argue or to introduce rebuttal evidence as to the meeting of October 4, 1961 and as to the investigation conducted by the Commission's staff. 7. The court below erred in finding that the Commission, in valuing gas reserves, used outside information and evidence. „ . The court below erred in finding that the Commission rejected the methods proposed by Montana Power for valuation of gas reserves and substituted a determination of value for gas reserves not supported by legal evidence in the record. "9. The court below erred in finding that the only evidence of Reconstruction cost New Less Depreciation valuation in the record was specifically rejected by the Commission as a basis of value. "1 . The court below erred in finding that the Commission's determination of which gas properties are used and useful was based on information obtained outside the record. "l 1. The court below eared in holding that there was any denial of due process of law or any 0 05 M aftafth ew Bender & company, Inc., a memb r of the t_e is N e is Group. All rights reserved. Use of this product i subject to the restrictions and terms and conditions of the Matt yew Bender Master Agreement. violation of the Constitution of the State of Montana or of the United States Constitution. " l 2. The court below erred in stating in its Conclusion of Lave No. 6 that there is no evidence in the record to substantiate the Reproduction cost New Depreciated valuation placed by the Commission upon gas reserves and used in determining the rate base. "l3. The court below erred in assuring or inferring in its conclusion of Lair No. 5 that the Commission, in valuing gas reserves, used information and evidence obtained outside the record without a full and fair bearing and in assuming or inferring in its Conclusion of Law No. that the Commission Mont, secured or gathered evidence outside the hearing without a full and fair hearing. "14. The court below erred in stating in its Conclusion of Law No, 8 that Order No. 2897 is based on information and purported evidence obtained outside the record and without fair hearing procedures. "1 . The court below erred in stating in its Conclusion of Law No, g that order No. 2897 is based on insufficient legal evidence. " . The court below erred in stating in its Conclusion of Laver No. 10 that the record in this case is insufficient for the Commission to determine whether or not Montana Poorer is receiving a fair return upon a fair value for its properties, and in assuming or inferring that the Commission used or relied upon information and evidence obtained outside the record without a full an € fair hearing." These specifications of error can be grouped into the following categories for discussion purposes concerning this case: 1. Was the October 4 meeting a denial of due process by the Commissioners and if so did the subsequent bearing before the district court change the status of the rights of the Protestants with regard to this October 4 meeting? . Were the actions of the Commission after the hearing, in sending employees to check statements made at the hearing., a denial of due process? 3. Was sufficient evidence received at the bearings to support the Commission's orders? . Were the gas leasehold interests included by the Commission, as part of plant production and made a part of the rate base, a proper inclusion' Concerning the October 4 meeting, the respondents protested and filed a petition to reopen the hearings for the purpose of examining the witnesses of the Fontana Poorer Company, who the appellant Commission had called in to clarify certain matters relating to their Canadian properties. Demand was made Mort. that an opportunity be afforded for explanation and rebuttal. The appellant Commission's order of February 2, 1962, rejected and denied this demand. At this point in the proceedings there was timely and adequate assertion of the infringement of respondents' rights calling for remedial action by the Commission. We meet at the threshold of this opinion the fact that as to the request for a bearing to examine the participants, the Commission erred in not granting the respondents` petition. Whether the respondents were prejudiced by this will be discussed later. The fundamentals of a fair hearing were denied the respondents when a bearing was held when respondents were not present, and when the testimony of that bearing was not spread on the record. Here, what was done by the appellant Commission is subject to a proper objection. From the standpoint of due process, the protection of the individual against arbitrary action, a deeper vice is this, that even now we are not certain what evidentiary facts were taken by the appellant Commission or whether or not it rested any of its conclusions on said evidence. The facts of the October 4 meeting, with the exception as to who was there, are uncertain} except for what Corn issioners Sm ith and Boedeci er testified to. 00 f aft ew Bender & company, Inc., a member of the IlexisNexis Group. All rights reserved. Use of this product is subject to the restrictions and terms and conditions of the Matthew Bender Master Agreement, The district court did not rely on the testimony of the appellant Commission as to what happened at the October 4 meeting, holding on the evidence produced before It that due process was denied respondents by the very holding of the meeting. This court has recognized that the regulatory commissions of this state are invested with broad powers within their sphere of administration authorized by the legislature. Tobacco River. -Power Co. v.: Pub... Service comm'n, 109 Mont. 521, 98 P.2d 886. Even In quasi-judicial proceedings their informed and expert judgment receives proper consideration 44 Mont. 186) by the courts of this state when such judgment has been reached with due consideration of constitutional restraints. Baker Sales Barn, Inc. v. Montana Livestock comm'n, 140 Mont. 1, 367 P.2d 775. Much that is done by these administrative agencies of the state, within the reaIm of ad ini trative discretion, is oxen pt by the leg islature from supervision by the courts if those restraints are obeyed. Therefore the need is great, where power has been bestowed so broadly, that the safeguard of a fair hearing be maintained in its fullest. The right to such a hearing is one of the rudiments of fair play assured every litigant by the Fourteenth Amendment to the constitution of the united States, and section 27 of Article Ill, Montana constitution, as a minimal requirement, This cannot be compromised on the altar of convenience or expediency. This court has often spoken out against the abuse of purer by state boards. In the case of State ex rel. state Board of Equalization v. lovich, 142 Mont. 201, 383 P.2d 818, we recently said: '7his court has uniformly held that the State Board's actions, if arbitrary, fraudulent, or contrary to law, are void and will be so declared by the courts.' Bee also State ex rel. Reid v. District court, 134 Mont. 128, 328 R2 4; Johnson v. Johnson, 92 Mont. 512, 15 R2d 842. Concerning the Industrial Accident Board's activities} two recent opinions of this court, State ex rel. Fish v. I.A.B., 139 Mont. 246, 362 P.2d 852, and Graham v. Tree Growers, Inc., 14 Mont. 483, 385 P.2d 83, we have pointed out that all administrative boards and tribunals should zealously guard against any appearance of unfairness in the conduct of their hearings. Too, we notified all such administrative agencies in these opinions that the court 11will carefully review all administrative hearings to guarantee the Fair conduct of heir hearings." In considering the activities of the Montana Livestock Commission, this court in Baker Sales Barn, Inc. v. Montana Livestock co'n, 140 Mont. I , 9, 367 P.2d 77, stated: (144 Mont. 1871 "It needs no citation of authority to say that this discretionary power is not an unrestricted power. It roust be based on a reasonable use of the power. The statute, section 4 -909, establishes the limits of the power in as reasonable a manner as words can describe. On review provided in the district court under section 4 -9 7 the legislature specifically left discretion in the Commission and left to the court only the duty to examine the records made before the commission to determine whether the latter acted, 'capriciously, arbitrarily, or abused its discretion and whether it acted according to law.' That this is proper has been discussed by this court in Peterson v. Livestock Commission, 120 Mont. 140, 150, 181 P.2d 1522 157, wherein it was said- ... only proper questions that may be tried by a court on appeal from an order such as the one here involved is whether the commission acted capriciously or arbitrarily or without jurisdiction or authority under the law."' In a number of opinions this court has considered the activities of the Montana Milk control Board, and in the latest opinion of this court concerning due process we said quoting from l ebbia v. New York, 291 U.S. 502, 54 Sup.ct. 505, 78 L. Ed. 9401 "'due process* demands only that the law shall not be unreasonable, arbitrary, or capricious, and that the means selected shall have real and substantial relation to the object sought to be attained."' Montana Milk control Bd. v. Rehberg, 141 Mont. 149, 376 P.2d 508. In considering the taxing power of a county, the court, in Great Northern ley. Co. v. Roosevelt County, 134 Mont. 355, 332 P.2d 501, quoting from Mullane v. central Hanover Bank & Trust Co.: 339 U,S. 306, 70 S. ct. 652Y 94 L. Ed. 865, said: "'An elementary and fundamental 2005 Matthew Bender & Company, Inc., a member of the L.e is axis Group. All rights reserved. Use of this product is subject to the restrictions and terms and conditions of the Matthew Bender Master Agreement. ent. requirement of doe process in any proceeding which is to be accorded finality is notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections."' See also Mont. ) O helm v. State Fish & Game Comm., 133 Mont. 362, 323 ,P.2d 1116. A review of these opinions indicates that this court has carefully charted the procedural course for the administrative quasi-judicial agencies, both legislative and executive, however, this co rt's opinions have recognized that these quasijudicial commissions have wide latitude in matters of discretion in considering the factual evidence. The court has pointed out that it it the duty of the court to examine the records made before the commissions to see that they do not act capriciously, arbitrarily or abuse their discretion and whether they acted according to law. Our numerous opinions concerning these administrative bodies have cautioned that they would be strictly held to the elementary and fundamental requirements of due process in all of their proceedings. Had the factual situation concerning this October 4 meeting remained as it did at the time it was heard in the district court, Mare would be no question that the Commission's action might have been reversible error. However, what happened at Mont. 1891 the district court hearing., as concerned the October 4 meeting must be considered in light of the allegations made by respondents here on -appeal, In the pre-trial order of Judge Hatfield one of the issues of fact concerned this meeting, (1) concerning the meeting of October 4, 1961, were ratters of explanation and evidence, if any, presented to the Commission without t opportunity for cross-examination and rebuttal? Too, one of Judge Hatfield's issues of law was: 1 May the Public Service Commission hear explanations and evidence, if any, at a meeting with The Montana Power Company officials without consent or permission of plaintiffs or opposing groups` Having thus framed an issue of fact and an issue of law to be presented, the burden of proof fell upon the appellants, The Montana Power Company and the Commission and the record before Judge Hatfield shovers that they complied in every respect with the court's inquiry into the law and the facts of the October 4 meeting. All the officials of The Montana Power Company who participated in the October 4 meeting were present and available for direct or cross-examination by the respondents. In addition, the commission had available two commissioners, Smith and Boedecker, who participated, plus William Johnson, Commission Auditor, and William M fic f Commission Attorney. The latter two employees of the Commission were the persons designated by the Commission to male the post -hearing audit demanded by the respondents at the end of the hearing. With all the participants present, a full opportunity was accorded respondents to bring out all the facts, and to explore all of the ramifications of the October 4 meeting, plus any information they desired to obtain on the post -hearing audit made by Johnson and Mufich. They chose not to examine all the participants at the meeting but concentrated on Commissioners Smith and Boedecker, even though Mont. o the latter constantly stated in his testimony that it would be 2005 Matthew Sender & company, Inc., a member of the LexisNexis Group. Al rights reserved. Use of this product is subject to the restrictions and terms and condibons of the Matthew Bender Master Agreement. necessary to get that information from either Mr. Johnson or Mr. Mufic . summary of commissioner Smith's testimony showed that Smith called the meeting with Boedecl er's agreement. The Company officials were summoned to Helena as Commissioner Smith testified "to make the answer more clear than was in the record in Butte." He further stated that the information solicited did tend to clear up some questions he had but did not change his opinion as to the outcome of the case. It was not until he was cross examined by counsel for the Power Company that Commissioner Smith was tied down to what actually took place at the October 4 meeting and it was shown that his problem with the transcript occurred over testimony given by Mr. Harrington, the company treasurer, concerning income tax payments In the United States and Canada, and the reason Smith was troubled by the testimony was that he was not present when the testimony was given. The next witness, J. J. Harrington, vice-president and treasurer of The Montana ower Company, was called and gave testimony concerning the income tax situation, but no question was directed to him concerning the October 4 meeting by the respondents. Counsel for the Poorer Company had to point this out, before the witness left the stand, and when the respondents chose not to go into the testimony of the meeting they said they would bring him back as their witness which they did. Commissioner Boedec er was called and examined extensively concerning the post -bearing audit but not one question was asked on the October 4 meeting. counsel for the appellant Power Company reserved the right to recall Mr. Boedecker on the basis of what happened at that meeting. When examined and cross examined as to this meeting, and its effect on the ultimate decision, he concurred with Commissioner Smith Mont. 1911 as to ghat happened at the meeting, and said what he learned did not charge his opinion or affect the ultimate decision. Mr. Harrington testified fully as to what he told the commissioners at the October 4 meeting and it agreed in almost every detail with what Commissioners Smith and Boedec er had previously testified to concerning united States and Canadian income taxes. With this testimony concerning the October 4 meeting, particularly the detailed statement by Mr. Harrington, the burden shifted to respondents to show damage to them resulting from the meeting. Having failed to do so, we cannot agree with the respondents' contention that the very denial of their right to cross examine immediately after- the October 4 meeting denied them dos process, in view of the record made here. This court has previously said that where the statutes provide for judicial review of a particular order made or agreed upon by a prejudiced com m issioner here is no denial of due process. State ex rel. Mueller v. District Court, 87 Mont. 108, 285 P. 92 ; State ex rel. bolt v. District Court, 103 Mont. 438, 63 P.2d 1 o2 ; Montana Power Co. v. Public Service Commission, B.C.Mont.193 12 F-Supp. 946. Regardless of the innuendo caused by the one-sided meeting called by the Commission, this court must assume that elected and appointed officials of this state who take oaths of office will live by that oath in the performance of heir duties and will act honestly in accordance with law in the performance of heir official duties. To bold otherwise would be to impede the operations of our state government. Having failed to show that the meeting of October 4 changed the Board's decision even though the opportunity was availed them by having all persons available for examination, we find that the district court erred in bolding that the respondents were denied due process. The railroad and Public Service Commission of this state differs from ether administrative agencies of our state Mont, 2 government in that it is a department of our government created by the legislature, whose officials are elected to carry out and promote a legislative function. it is unique, in that it combines regulatory functions of a railroad commission, plus rate --making duties of a public service commission, which in most states are handled by separate commissions. Therefore, much of the case law of other states has no 005 Mafthew Bender & Com pang, In c., a member of the Lexis Nexis G roue. Al I rights reserved. use of this product i subject to the restrictions and terms and conditions of the Mafthew Bender Master Agreement. application to Montana. State ex rel. City of Billings v. Billings Gas Co., 55 Moat, 102,173 P. ; Billings Utility Co, v. Public Service Comm'n, 62 Moat. 21, 203 P. # Montana Citizens' Freight Rate Ass'n v. Board of Railroad Comm#rst 128 Mont. 127, 271 P.2d o , State e rel. James v. Aronson, 132 Mort. 120, 314 l .2d 849x This court has pointed out that it is a legislature function to regulate public utilities and that the legislature can do so through an administrative agency, Too, that the acts of this agency✓ are leg islative and not judicial. Billings Utility Co. v. Pu b I ic service Comr 'n, supra. Being a legislative function of our government, this court is arrays confronted in rate -making oases with the question of how far the court can go in interfering with, or directing the exercise of power, by an equal department of government. We have repeatedly held that there will be no interference with the orders of the Commission sinless: 1 they go beyond the poorer constitutionally given; or, beyond their statutory poorer; or 3 they are based upon a mistake of law. However, ever, questions of fact may be involved in determination of questions of lava so that an order, regular on its face, may be set aside If it appears: 1 that the rate is so lour as to be confiscatory and in violation of the constitutional prohibition itlon against taking property without due process of law or 2 that the Commission acted so arbitrarily and unjustly 44 Mont. 3 as to fix rates contrary to evidence: or without evidence to support it, or that the authority therein involved has been exercised in such an unreasonable manner as to cause It to he within the elementary rule that substance, and not the shadow, determine the validity of the exercise of the power. This rule was first set forth by this court in Billings Utility Company v. Public Service Co m'n, supra, and has more recently been followed in Mato ex rel. Olsen v. Public Service Comm'n, 131 Mont. 104, 308 P-2d 33; Mountain States Telephone and Telegraphy Co. v. Public Service Comm'n., 135 Mont. 170, 338 P,2d o ; Montana Citizens' Freight Rate Assn. v. Board of Railroad Corns, 1Mort. 127, 271 P" 2d 10. In Montana, the elected officials of the Commission, acting within their constitutional power, and in a legislative capacity, are accountable under their oaths of office to the people only, just as are the rnernhers of this court, ad this court gill not interfere so Ion as they follow the laver and the decisions of this court. The forum in which their actions are to be judged is In the minds and consciences of the people, whose servants they are, and who alone can hold them responsible for the manner In which they perform their duties. With the district co rns conclusions of law and findings of fact that the respondents were denied a Bill and fair hearing, and that the due process clauses of our state and Federal Constitution were violated because of the post -hearing audit made by two employees Tees of the Commission, we do not agree: First, this audit was requested by respondents' counsel at the end of the hearing in Bate. Second, a full and complete hearing lasting many days had taken place with both sides given ample opportunity to present all the evidence they had and to cross-examine opponents' witnesses. Third, the Commission gave respondents permission, during Mort. the hearings at Butte, to go into the Company hooks with their expert witnesses. Fourth, in this case, the Commission hired an Independent rate expert, Dr. John V . Kushln from Michigan, an, This employment of an independent rate expert to represent the Mate, seemingly fits the expressions in Mr. Associate Justice R. V. Bottom l 's dissent in State e rel. Olsen v. Public service Comm'n, supra, 1Mont. 104, at p. 118, 308 P.2d 633, at pp. o} 641 , wherein he commented that under our statutes "Thee Commission in expressing Its 2005 Matthew Sender & Company, Inc., a member of the LeAsNexis Group. All rights reserved. Use of this product i subject to the restrictions and terms and conditions of the Matthew Bender Master Agreement. power of regulating rates of a utility corporation must itself rake its due investigation and appraise the value of the utility's properties, determine for itself the costs of operation, allow for depreciation, and designate a rate or rates that allow a fair return on the actual bona fide investment. "It is the duty of the commission to limit and regulate the use of the property, so far as profit and quality of service rendered is concerned. 'When the commission simply sits as an automaton, without exercising its own initiative in determining all these factors by and through its own engineers, examiners, experts, accountants and other assistants provided for the commission by R.C. M.19 7, § 0-1 , and simply takes the testimony of the utility on such natters and questions, the commission is not, in ray opinion, fulfilling its duties and responsibilities to the public under the law of its creation . "By reading the whole of Title 70, Public Utilities, chapter 1, R.C.M. 1 947, it seems clear that the intent of the Legislature was that the State Public Service commission would, through its own agents, make full disclosure of all matters under consideration, so that the members of the Commission could then check and weigh the facts developed by its own doe investigation as against the evidence produced before it by a utility. "It appearing that the Public Service Commission failed and omitted to make any independent investigation herein as Mont. 5 is provided for and required by the above statutes, I would reverse the judgment and send the matter back to the commission to enable it to fully perform the duties so imposed upon it and thus allow it to make its own investigation and determination of the Facts and circumstances before approving or allowing any rate increases whatever." Fifth, Commissioner Smith testified that it was a commonly -accepted practice after a hearing for the commission to have their experts check and investigate statements made before they issued an order. Sixth} that the commission was following the law in making such an investigation where they have questions, such an investigation being permissive under our statutes. State ex rel. Olsen v. Public Service comm'n, supra. Seven, the respondents failed to call Mr. Johnson and Mr. Mufich, who made the audit, the most important witnesses as to ghat they did during their independent audit. Eight, under Rule 3.7 of the Commission Mules of Practice. "The Board reserves the right to conduct any independent investigation either before or after hearing to the end that it may be fully informed." (Emphasis supplied.) The Commission has delegated authority by law to establish rules and regulations for the conduct of their affairs; such rules and regulations have the force of law. Mate ex rel. James v. Aronson, 132 Mont. 120, 1402 314 P.2d 849. careful examination of this voluminous record fails to substantiate respondents' contentions and .Judge i a rieidIs findings concerning the post -hearing audits by Commission employees, that the Commission based its judgment upon evidence or information not in the record, Concerning the sufficiency of the evidence, this court has often held that in reviewing the evidence the presumption is that the judgment is correct and every legitimate inference will be drawn by this court to support the findings of the lower court. Mate ex rel. Raw v. city of Helena, 139 Mont. 343, 3 and P.2d 20 Nissen v. western Construction Equip. Co,, 133 Mont. 143, 320 P.2d 997, However, after a careful study of all the testimony presented, we are unable to agree with Judge Hatfield that such a presentation was not made at the hearings before the commission and before his court as would not come within the holding of this court in the Tobacco River Power co. v. Public Service cornm'n, case, 109 Mont. 521, 98 R2d 886, supra. There the court, 109 Mont. at p. 529, 98 P. 2d at p, 890 said in considering section o- 06, R 1947 (then section 3884, R.C.Il .1 # "that considerable latitude is allowed the Public Service Ma Mew Bender & Company, J nc., a member of the Lexi s Nexi s Group. At rights reserved. Use of th is prod u t is subject to the restrictions and terms and conditions of the Matthew Bender Master Agreement. Commission in determining value. Neither the Public Service Commission nor the utility company is limited to or bound by any particular method in arriving at the solution of the question of value. 1t must be borne in mind always that the ultimate fact to be determined is value upon which rates are based, which must of course be dome under proper legal procedure and restrictions. "The cost of reproduction new, less depreciation, is usually regarded one of the most important, if notthe dominant, factor, in the determination or value.* * * Under the section of the Mortara Code just cited, assessment rolls are likewise admissible as evidence of value, but of course are not exclusive* * *. Original cost, assessment values, cost of reproduction never, prudent investment theory, public records mentioned in section 3884, supra, and opinions of value are all means to an end, namely the determination of value. "We can find no error in the procedure of the court In allowing evidence of cost o reproduction new, less depreciation, to be admitted as evidence of value," The district judge carefully considered the evidence produced at Commission hearings and thoughtfully applied the proper ease la to his findings. a recognized the " ubstantial evidence rule" followed by this court in our most recent ewes; State ex rel. Olsen v. Public Service Corr m'n, 131 Mont. 104, 44 Mont. 97) 308 P.2d 633, supra; Mountain States Tel. `el. v. Public Service Comm'n. 135 Mont. 170, 338 1 : d 1044, supra. Where we disagree is with his conclusions that within the record made at the Dearing there is insufficient evidence to sustain the Board's orders. We find the record sufficient to uphold the Board's orders. The complaint filed in district court by respondents seeping to set aside Order No. 2897 had alleged in part: That it allowed Montana Power to use in calculating its rate base certain gas reserves consisting of natural gas in place "under grounds in and to which Montana Power has no property interest other than as a Lessee under an oil and gas lease, PT That it included in the rate base leases on which no royalty was being paid and upon which there was no production. These issues had been carefully analyzed by the Commission in its Order No. 2897. To show the extent and rationale of the Commission we shall quote at length from Order No. 2897. 1 E RATE BASE '"The Company presented the following valuations for the combined natural gas operations for the test year 1962 for the Commission's consideration: 1962 "Reproduction Cost New Depreciated (RCN 118,413,926 "Original cost OC 7 11 , 39 „Original Cost Depreciated c 9,1 3210 "Material and Supplies 416X6 "Working Capital 50�51 9 "In this proceeding much was made of the natural gas leases held by the Company and whether they should be included in the rate base when royalties are not being currently paid. "The protestants argued that under the uniform system of accounts that leases upon which Matthew Bender & company, Inc., a member of the LeAs exis Group. All rights reseed. Use of this product i subject to the restrictions and terms and conditions of the Matthew Bender Master Agreement. royalties were not being paid should be included in the account property held for future use. Accounting -wise this is undoubtedly correct. however? Monts 1981 whether it is in the best interest of the Company and the rate payers to include this account, or part of this account, i` * n the rate base is a matter for the judgment of the Commission.* "The Commission has made a detailed study of the leases in question and finds that most of there are leases adjacent to producing leases. it appears to this Commission that it is only good business acumen for the Company to obtain leases protecting leases already held by the company and that such leases are properly includable in the rate base. "However, the Commission finds some of the leases In question are not properly includable in the rate base. The Commission has deducted from the plant figures submitted by the Company the following -valuations: RCND $ 478,200 0C 35#900 oc 435,900 'Since the close of the hearing the Commission has been advised by the company that they had surrendered leases 94657, 94659 and 94669 to 94679 inclusive. The following reductions were made as a result of this information: oc $ 12 , 300 oC $ 125Y300 "Separation of the Canadian properties from the United States properties was advocated by the protestants. The protestants alleged that with the lower income tax rate in Canada, separating the properties would result in an operating expense reduction for the company's combined operations. The basic premise set forth by the protestants being that a lower rate of return in Canada on production plant and a higher rate of return in the U.S. on production plant, as testified to by Company witnesses, would result in higher earnings and higher income taxes in the United states. The figures to which the witnesses referred were developed as part of a cost of service study. The Commission in setting a rate of return cannot set a rate of return on each component of plant. "The Commission must set a rate of return on the fair value of the Company' s plant used and useful to the public as a whole. {144 Monty 'The protestants also question the Commission's authority to consider any plant for rate base purposes not located within the boundaries of the State of Montana. The Commission has previously taken the position of considering for purposes of establishing a rate base any plant used and useful to the consumers of Montana, geographical location not being a factor. Re Montana rower Company 19 3 24 PU R 3d 321 # RE Montana Dakota Utilities Co. 9 3 PU NS 33; 46. The Commission reaffirms this position in the instant proceedings. "The only question remaining on the subject is then whether a border price should be established or whether the Canadian properties should be considered as part of the Company's properties as a whole and the Canadian operating a cpenses 'rolled in' with the other corn pang operating expenses as shown on Exhibit 10. With a 'rolled in' system as a result of three companies being involved there necessarily follows a duplication of expense in the purchase of gas. The Commission has determined that this duplication of expense was 'washed out' on Exhibit 10. N o evidence was introd uced showing that an establishment of a border price would necessarily result in lower rates to the Montana consumer. "The Commission, after a thorough investigation of the 'separations' theory., is of the opinion that by using the separations' theory with the concomitant border price establishment they would lose control over the Canadian operations. 2005 Ma the r Bender & company, Inc., a member of the LexisNexis Group. All rights reserved. Use of this product is subject to the restrictions and terms and condiUons of the Ma fthew Bender Master Ag reement. "The Commission is further of the opinion that. the'rolled in' theory referred to above is the method by which they can best keep control of the Canadian operations of the Company with the resultant benefits afforded the rate payers. "The protestants also in regard to the plant accounts, questioned the propriety of entering the Pal owl i Labe properties in the books of the company at 10,000,000, the purchase price claimed by the Company. The protestants showed that after a ,000,000 down payment the balance was a non -interest bearing contract of $ 8,000,000 payable at the rate of $ 500,000 per Mont, 2 year for sixteen years. Protestants argued that interest in a transaction of this sort should be implicit and the face value of the contract should be discounted at the prevailing interest rate at the time of entering into the contract. 'The commission agrees with the protestants that this contract should be in effect discounted and that the part found to be interest should be removed from the valuation figures submitted by the Company. The Commission believed this necessary to forestall interest creeping into the capital accounts. "it is now necessary to determine what interest rate is applicable. The protestants argue that the interest rate should be that interest rate prevalent in Canada at the time of the transaction. However, it is evident from the history of the Montana -Canadian Gas company that it has depended upon The iontana Power Cony pang for its financing. Therefore, the Commission is of the opinion that it should look at the interest rates available to The Montana Power Company at the time of the transaction. The Commission has Obtained from the records of the Federal Reserve System information that the 'prime' interest rate ranted from 2% In 1950 to % for the year 1952. The time involved is limited to 1950 through 108 because the purchase contract was signed in 1950 and the $ 2,000,000 down payment was made in 1952. Moody's shows that new publicly offered bonds for the same period had a high yield of 3.25% for AAA bonds and a high yield of 3.4% for AA bonds. Therefore, the Commission has determined that this 8,000,000 contract should be discounted at a 3.25% rate, "On an amortization basis this would leave the principal amount of the contract at 6,162,180 and the interest payments over the sixteen year period at ,7,. The commission realizes that using an amortization basis will result in a higher total interest figure than if serial bonds were used. However, with the evidence presented this is the only method possible (144 Mont. 0 to use. The commission therefore reduces the valuation figures submitted by the company by the fallowing amounts: ,, c$ i x838,000 and OCID $ 11838,000. The interest payment for the test ,year would amount to $ 10 1, 000. This could of course have an income tax effect and will be discussed later under Operating Results. "The RCN valuation of the company's gas reserves care in for considerable discussion. The Company revalued their reserves on the basis of a transaction with the State of Montana. This resulted in an increase in valuation of some nine times. The Commission does not believe that valuation by a spot transaction such as this truly reflects the value to the user of the Company's properties. The Commission is well aware that the value of these reserves has increased since the Company obtained possession. However, it feels that this type of valuation is what the Court was referring to in Willcox v. Consolidated Gas Co., 212 U.S. 19, 8 � 29 S. Ct. 192, 200, 53 L. Ed. 382, when it said in holding that the Company was entitled to a return based on the enhanced value of its properties in excess of original cost; '" * *This is, at any rate the general rule. We do not say there may not possibly be an exception to it where the property may have increased so enormously in value as to render a rate permitting a reasonable return upon such increased value unjust to the public.I 'The brief of the Great Falls Gas company interjected another treatment of gas reserves. 05 Matthew Bender & Company, Inc., a member of the LexisNexis Group. AD rights reserved. Use of this product i subject to the restrictions and terms and conditions of the Ma t e r Bender Master Agreement. They argued that natural gas being a wasting asset its value should be removed from the element of value, original cost, as it Is depleted. "The commission is in accord with this reasoning. The Commission has investigated the records of the company and has determined that on December 31, 1962, there would be 5:,000 accrued depletion on production lands. The original cost valuation submitted by the Company will be reduced by this amount. The commission will also reduce the RCND valuation Mont. 2 for gas reserves by $ 6,765,000 as it believes this will then place the revaluation of the gas reserves at an amount not repugnant to fair earnings and corresponding just rates. "Most of the RCN studies by the Company were made with the aid of multipliers developed from the Handy -Whitman Index. A representative of the firm publishing this index made a review of the study of the Company and the figures presented to the Commission were a result of the review and the study. The Commission's a cpert'witness, a graduate engineer, also reviewed this study at the request of the Commission and expressed his approval of the methods used and the results of the study. "The commission however is not satisfied with the manner in which well -drilling costs were reproduced. The Company witness testified that in his opinion the well -drilling costs for the period 1932-34 were above normal. In reviewing the RCN studies, the Commission found that the multiplier used to arrive at RCN values had been applied to these above normal costs as well as the normal costs. The commission believes that these above normal costs should have been normalized before applying the multiplier. Therefore, the Commission finds that the RCN valuation was overstated b $ 808,500. As a result of this finding the RCND valuation is being reduced b 582,400. "The plant figures submitted by the company, other than the above, will be accepted by the Commission. IlThe Company also requested that the rate base include 416,806 for materials and supplies and $ 501,51 o for wonting capital, The tax accruals are sufficient to supply the working capital necessary and the $ 501,510 is disallowed. It has been found in previous cases that normally 0% of the materials and supplies account is used for maintenance and 0% for construction. The Commission will follow precedent and allow $ 208,403 for materials and supplies. "This commission in recent years has used fair value as Mont. 3 opposed to original cost depreciated In determining the rate base in all rate cases where evidence supporting fair value has been introduced. The determination of fair value is always a problem of some magnitude. "The assessed valuation for 1962 of course was not available to the Commission. The 1960 assessed valuation of total properties was $ 29,329,436. This increased to $ 32,707,063 in 1961. "The Commission has considered the elements of value listed above and after giving weight to the valuation changes hereinbefore enumerated and after also giving weight to the purchase of service lines hereinafter ordered, the Commission sets the projected fair vane of the -Company's combined natural gas United Mates and Canadian properties devoted to the use of the public and actually used and useful for the convenience of the public at g,goo,000 as of December 31, g 2." The foregoing lengthy quotation is set forth to show the very careful attention given to the problem of rate base, The commission determined just what gas leaseholds and gas reserves were used and useful as required by our statute, l .C. M.1947, § o- o (and see Mate ex rel. Olsen v. Public Service commission and Mountain Mates Telephone and Telegraph company, 131 Mont. 272, 309 P.2d 1035). The valuation of the gas reserves was the only evidentiary question on the rate base raised by the district courts order of April 26, 1962, and by the court'findings of fact. The record is 2005 Matthew Bender & Company, Inc., a member of the LexisNexis Group. All rights reserved. use of this product i subject to the restrictions and terms and conditions of the Matthew Bender Master Agreement. abundantly clear that complete, detailed information in the form of testimony and exhibits was introduced. It is true that the subject matter and testimony concerning it is complicated but nontheles it is abundantly clear. s reflected by the commission order previously quoted in part, the commission did not ac ep ..th ....Company.figur.es.at face value but applied...its o . , reasoning and study to reduce the fair value figure of the company from 118,413,926 t $ 8%900,000. Of this reduction, some are spelled out; but as Mont. o to that applying to gas reserves they are not in detail, lease by lease. As to the gas reserved the Commission analyzed ed the mass of evidence as to value and then in the exercise of its discretion reduced the figure by , 65�000. It is interesting to note that protestants' Exhibit 40 listed the leases upon which the company was not paying royalty as being of a value of $ ,1o5, 21. Exhibits 44 and 45 are detailed showings as to the then present status of the leases referred to in Exhibit o.. certainly from such a wealth of information the Commission could, as it did, exercise its discretion in placing its valuation on gas reserves that are actually used and useful for the convenience of the public. The Commission's decision finds support in the evidence and thus the district curt was in error in setting it aside. The writer of this opinion respectfully dissents to the latter conclusion of a majority of this court that the Commission decision finds support in the evidence insofar as the value of gas leaseholds included in the rate base are concerned. The evidence produced by the appellants concerning the gas reserves is not limited to the specific reserves owned by the appellant company or being presently utilized by appellant. A careful examination of the testimony, especially that given by Mr. Woy of the appellant company, indicates some question as to whether or not non -producing leases were included in the rate base. while the appellants argue that sufficient evidence was produced, and that the appellant Commission did cut some 6,765,000 valuation off the Company's gas reserves, I am still of the conclusion that as to the reserves, further clarification should be had as to exactly what was included in the rate base in the field of presently producing leases and those held for future use. I agree with the district court that to charge the present day rate pager for something to be used in the future is placing an undue burden on already burdened rate payers. A public utility is entitled to such rates as will permit it to earn a return on the value of the property employed Mont* 205 by it to the public benefit, but it has no right to profits such as are realized or anticipated from speculative ventures. The value that must be ascertained is the reasonable value of the Fontana Power Company's leases used and useful for the public service at the time it is being used and in the immediate future. I would remand to the district court with instructions to return the case to the Comm ission in order to give it an opportunity to reconsider the evidence on the gas leases used by the commission in its rate -base computations. such reconsideration of the gas leases would be had on notice to The Montana Power company and protestants and be limited to the reserves owned and leased by the Company that were figured into the present rate, and whether or not speculative leases, not presently in use, were used by the Commission in their rate base. In so disposing of the lease question, I would not have held that the Protestants are entitled to a decrease, nor that the company was not entitled to the increase. It may well have been, that upon reconsideration of the entire lease structure of the Company, that a reduction is called for. If such be the result reached, then in Justice, the consumers should be entitled to the reduction as of the date of the Commission's original order. If the testimony did not show that non -user prospective leases were figured into the rate base by the Commission's Order, then the Order would remain unchanged. However, as recited before} a majority of the court has found that there is ample testimony on the leaseholds as to being used and useful to support the Commission. For the foregoing reasons, the judgment of the district curt is reversed and Commission n orders No. 29and 2897A are affirmed. Matthew Bender & Company, Jnc., a member of the LeAsNexis Group. AIJ rights reserved. Use of this product i subject to the restrictions and terms and conditions of the Mafthew Bender Master Agreement.