Reply Brief — Cory v. Western Oil & Gas Ass'n

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| Office-Supreme Court, U.S, }

FILED

(\I FEB 15 1985

No. 84-16 onme“ A STEVAS,

In the Supreme Court

OF THE

United States

OCTOBER TERM, 1984

KENNETH Cory, LEO T. MCCARTHY, AND JESSE R.

HUFF,

members of the California State Lands Commission,

Appellants,

VS.

WESTERN OlL & GAS ASSOCIATION, et al..

Appellees.

On Appeal from the United States Court

of Appeals for the Ninth Circuit

REPLY BRIEF OF APPELLANTS

JOHN K. VAN DE KAmp

Attorney General of the

State of California

N. GREGORY TAYLOR

Assistant Attorney General

DENNIS M. EAGAN

Deputy Attorney General

(Counsel of Record)

6000 State Building

San Francisco, CA 94102

Telephone: (415) 557-3650

Counsel for Appellants

BOWNE OF SAN FRANCISCO. INC * 190 NINTH ST. * SF.. CA 94103 * (415) 864-2300

PARTIES BELOW

Appellees state in their brief (p. i) that Edgington Oil

Company is an additional appellee in this case. Edgington

Oil Company was a named plaintiff in the lawsuit when it

was initially filed in the district court (J.A. 6), but was later

dismissed by stipulation of the parties (J.A. 1, Dkt. No.

21).

TABLE OF CONTENTS

Parties below ... oi «cbs 9005o eee

I. The challenged form of ground rent is not a

charge for the mere entry of goods into the State

II]. There is no discrimination agains™aterstate or

foreign commerce ..............05- ee

III. The State has no mdnopoly on land suitable for

port faciities .. ses ey awaaee OT

IV. The challenged rental mode is a reasonable one

and is in wide use by others; to prohibit its use

by the Commission would force the State to

subsidize interstate and foreign commerce ..

Conclusion ......0+0000085550 ee

TABLE OF AUTHORITIES CITED

Cases

Page

Branti v. Finkel (1980) 445 U.S. 507 ............. )

Cannon v. New Orleans (1874) 87 U.S. (20 Wall.)

a A TE Se RS A ae :

City of Long Beach v. Marshall (1938) 11 Cal.2d 609 8

Commonwéealtht Edisun-Co: =«.- ‘Montana (1981) 453

eT eich swe is Dee cesatecseasene ee Ft ee

Eureka Pipe Line Co. v. Hallanan (1921) 257 U.S. 265 4

Harman v. Chicago (1893) 147 U.S. 396.......... 3

Huse v. Glover (1886) 119 U.S. 543 ............. 3

Mallon v. City of Long Beach (1955) 44 Cal.2d 199 8

Michelin Tire Corp. v. Wages (1976) 423 U.S. 276 !,2

Michigan-Wisconsin Pipe Line Co. v. Calvert (1954)

ME cheb b0< 6 sek 5 00:6-0s 50006 6's 600000 4

Seaipene Co. v. Keokuk (1877) 95 U.S. 80.......... 3,4

Pick Mfg. Co. v. General Motors Corp. (1936) 229

I PURE EG e id ol 5 4-0-6:6 a 6 5.0'0:440.060.000 9

St. Louis v. Western Union Telegraph Co. (1893) 148

" tj}, =P Pe Reucdheace cue wees the eeee 4

Western Oil & Gas Assn. v. State Lands Com. (1980)

105 Cal.App.3d 554 [164 Cal.Rptr. 468], hg. denied

by Cal. “Supreme ie >} ee 14

TABLE OF AUTHORITIES CITED

Page

a Constitution

California Constitution:

pi Pe hy pe 8

a | ieonn

ee |, ee ee eee eo

~. Statutes

Cal. Pub. Resources~Code:

2 § 6312, Cal. Stats. 1974, ch 7. ees

™

he uthorities

Donley, Atlas of Califorma~U 979)... ........4.. 6,7

Kroll, California Cities v. Prop>~13, 3

(No. 6, June og errr er, Perr ery.

U.S. Army Corps of Engineers, Waterborne Com-

merce of the United Siates, Calendar Year 1982:

Part 4, Waterways and Harbors, Pacific Coast,

Pk errr rT errs 6

Part 5, National Summaries................... 2,5

No. 84-16

In the Supreme Court

OF THE

United States

OCTOBER TERM, 1984

oe ~

KENNETH Cory, LEo T. McGarity, AND JESSE R.

HuFF,

members of the California State Lands ‘commission,

Arplan

: WESTERN OiL & mu ASSOCIATION, et =, ~ —

Appellees. i“,

On Appeal-from_the United States Coun

of Appeals for the Ninth-Circuit__

Nias PLY BRIEF OF APPELLANTS

. TR ALLENGED FQRM OF GROUND RENT IS NOT

A CHARGE “HE ENTRY OF GOODS INTO

THE STATE

Without question, “‘a simple charge for € privitege_of

bringing merchandise into the country” would be prohib-

ited under the Import-Export Clause. (See ett Br.,

p. 18, citing Michelin Tire Corp. v. Wages (1976)-423 U.S.

276.) But the type of charge authorized by the challenged

regulation is not premised on the entry of goods into the

political jurisdiction of the State. Even where a tax varying

with the quantity and value of the taxed goods is involved,

such a tax may nonetheless be levied against imports if it is

premised on the provision of governmental services enjoyed

alike by importers and other citizens. (Michelin, supra, 423

]

U.S. at pp. 287, 288-289.) Rent charged for the exclusive

private use of a specific parcel of public property is even

more clearly outside the narrow scope of the constitutional

proscription against imposts or duties on imports. The

existence of this independent quid pro quo forecloses any

assertion that the charge is being made for mere entry of

the goods into the jurisdiction.

Early in their brief, appellees concede that “a person

who has the exclusive use of a piece of the State's property

should pay a fair rental for it....” (p. 6.) It is therefore

surprising to read later statements asserting that the State

Lands Commission (Commission) is attempting to collect

“a “throughput rental’ placed on every barrel of petroleum

brought into the state” (p. 12) and likening the challenged

rental mode to “a simple charge by a state for the privilege

of bringing merchandise in or out of a State” (p. 17).

Not only is the charge tied to the leasing of specific

parcels cf state property, but the vast majority of goods

entering California escape this alleged “tariff. No volu-

metric rent accrues, for instance, when a vessel enters and

traverses state waters and offloads at any of various port

facilities administered by local public entities or private

parties. Los Angeles and Long Beach Harbors a/one handle

approximately 70 percent of the tonnage moving through

California ports.' Neither the goods moving through these

ports, nor the considerable additional tonnage moving

through ports such as San Diego, San Francisco, Oakland,

Sacramento, and Stockton generate any revenue to the

Staté™t is a strange “tariff that has such limited

United States, Calendar Year | 5, National Summaries, p. 18.

A total of 108,158,139 short tons of was moved through Califor-

nia ports in 1982. Long Beach handled 42,010

33,099,929 tons. (/bid.) i

3 a

To reiterate, the only occasion for charging of a volumet-

ric rent by the State is where the loading or offloading

occurs at port facilities that are on state-owned lands

committed by lease to the exciusive use of one of the

State’s less¢es. We are thus not dealing with rights of

transient passage through state waters that overlie state-

owned lands, rights that all members of the public share in

common, free of charge. Rather, we are dealing with the

exclusive appropriation of described parcels of the State's

land for private gain. Similarly, no charge is made for

random anchorage sites, to which any other vessel is equally

entitled.

For these reasons, the oil companies’ reliance upon Can-

non v. New Orleans (4874) 87 U.S. (20 Wall.) 577, and

Harman v. Chicago (1893) 147 U.S. 396, and upon certain

dicta in Packet Co. v. Keokuk (1877) 95 US. 80, is

misplaced.’ Neither Cannon nor Harman nor ihe cited

> Cannon was a Tonnage Clause case and is distinguished in our

opening brief at page 34, footnote 24. The charge by New urleans was

imposed for the mere privilege of entering the port; no special land or

services were provided the plaintiff.

In Harman, the City of Chicago imposed a license fee “for the

keeping, use or letting to hire of any steam tug, or barge or tow-boat,

for towing vessels or craft into the Chicago River, its branches or slips

connected therewith.” (147 U.S. at p. 409.) The city tried to justify the

charge as compensation for its periodic dredging of the Chicago River,

but the Court readily distinguished Huse v. Glover (1886) 119 U.S.

543, a case which had validated a toll for use of an improved waterway:

“Nothing of this kind is mentioned for consideration in the

ordinance of Chicago. The license fee is a tax for the use of

navigable waters, not a charge by way of compensation for any

specific improvement.” (/d., ai p. 411.)

In our case, the Commission is charging rent for specific parcels of land

as a landowner. There is no parallel.

For similar reasons, the citation at pages 23 and 24 of appellees’ brief

to certain dicta in Packet Co. v. Keokuk is inapposite. There, the

dicta in Keokuk pertain to charges for the provision of

specific property or services. This Court has held that

where there is an exclusive private apprcpriation of public

property, a special charge to the benefitted party is entirely

proper, regardless of the nature of the commerce in which

the party is engaged. (St. Louis v. Western Union Tele-

graph Co. (1893) 148 U.S. 92, 98-99.)°

Similarly unhelpful are cases such as Eureka Pipe Line

Co. v. Hallanan (1921) 257 U.S. 265, and Michigan-

Wisconsin Pipe Line Co. v. Calvert (1954) 347 U.S. 157.

Each case invalidated an admitted tax, and the incidence of

the tax, not its type or measure, was the sole focus of the

unimproved submerged land to which the Court was referring was not

appropriated to the exclusive use of a particular private company. The

Commission does not suggest that it may charge “rent”—regardiess of

what form that rent may take, fixed or volumetric—for mere transient

non-exclusive anchorage rights. The Commission's leases, in contrast,

provide for exclusive rights in particular lessees to construct wharves on

State property and to berth next to them.

‘In rejecting the assertion that a per-pole charge for use of city

Streets by a telegraph company was a tax rather than a rental charge,

the Court discussed the difference between transient, non-exclusive use

of public property and exclusive use (which justified a rental charge):

“The use which the defendant makes of the streets is an

exclusive and permanent one, and not one temporary, shifting and

in common with the genera! public. The ordinary traveller,

whether on foot or in a vehicle, passes to and fro along the streets,

and his use and occupation thereof are temporary and shifiing. The

space he occupies one moment he abandons the next to be

occupied by any other traveller. This use is common to all

members of the public.... But the use made by the telegraph

company is... permanent and exclusive. It as effectively and

permanently dispossesses the general public as if it had destroyed

that amount of ground.” (St. Louis v. Western Union Telegraph

Co. (1893) 148 U.S. 92, 98-99.)

It is for such an exclusive right of private appropriation, and only for

such a right, that the Commission charges a rental, volumetric or

otherwise.

Court’s inquiry under the Commerce Clause. The question

was whether the incidence of the tax was sufficiently

“local” to escape invalidation under the Commerce Clause.

Neither case stands for the proposition that the States are

prohibited from charging rent for their prop-

erty—volumetric or otherwise—when they allow it to be

appropriated to the private use of persons engaged in

interstate commerce.

ll. THERE IS NO DISCRIMINATION AGAINST INTER-

STATE OR FOREIGN COMMERCE

Appellees do not dispute that the challenged regulation

applies to all types of state property, all types of lessees, all

types of commodities, and all types of commerce; nor do

they dispute that volumetric rents have been negotiated

with persons other than the plaintiff companies regarding

commodities other than petroleum and petroleum products.

Based on a hodge-podge of statements and assumptions for

which they offer no supporting authority, and which have

no basis in the record, they nonetheless conclude that the

regulation is inherently discriminatory.

The nub of appellees’ thesis here is that commodities in

intrastate commerce do not move by vessel, and that only

interstate and foreign commerce is waterborne. The statis-

tics on waterborne commerce compiled by the Corps of

Engineers demonstrate otherwise. The tonnage figures of

the Corps for California ports yield the following percent-

ages, by type of commerce: “internal” and “local” com-

merce (commerce confined to the same inland body of

water or port area, respectively), 13.9 percent; “coastwise”

commerce (oceangoing commerce, both interstate and in-

trastate), 42.2 percent; foreign commerce, 42.4 percent.*

*See U.S. Army Corps of Engineers, Waterborne Commerce of the

United States, Calendar Year 1982, Part 5, National Summaries, p. 18.

The total of the percentages is slightly less than 100 percent because

With particular regard to petroleum and petroleum prod-

ucts, the Corps figures do show considerable quantities of

incoming crude oil, but they also show millions of tons of

refined products being shipped out, much of it in “internal”

commerce.” Among the refined products issuing from the

refineries, some of the highest volumes are in residual fuel

oil, which is the fuel used by numerous power plants along

the California coast. The utility companies receive these

intrastate shipments of fuel oil over wharves located on

lands leased from the State.’

The foregoing statistics demonstrate that foreign and

interstate Commerce are in no way the subject of inherently

discriminatory treatment in the application of the chal-

lenged volumetric rental regulation.

Hil. THE STATE HAS NO MONOPOLY ON LAND SUITA-

BLE FOR PORT FACILITIES

Appellees have manipulated some acreage figures in an

effort to picture the State as having a monopolistic strangle-

hold on port sites along the California coast. Appellees’

purpose is to contrive support for the “tariff” argument

discussed previously and also to displace application of the

“market participant” exception to application of the Com-

merce Clause.

Appellees have taken the vast ocean-covered acreage

owned by the State, extending all the way out to the three-

several of the smaller ports did not report their tonnage by type of

traffic.

> See id., Part 4, Waterways and Harbors, Pacific Coast, Alaska and

Hawaii, pp. 5, 6, 22, 23-24, 25, 26.

° See ibid.; Donley, Atias of California (1979) pp. 88, 102.

” See, e.g., regarding the San Diego Gas & Electric Company lease at

Encina (see map attached as appendix to appellants’ opening brief),

Donley, Atlas of California (1979) pp. 88, 102, and Part 4 of Corps

report on waterborne commerce, footnote 5, supra, p. 9.

mile limit, and then compared the total of that acreage to

the aggregate near-shore acreage owned by private parties

and by some 60 local governmental agencies. Predictably,

they derive a large figure for the percentage of tide and

submerged land that is state-owned.

The problem with such gross acreage comparisons is that

they bear no relation to the much more limited geographic

scope of the market in which the Commission is participat-

ing. The market under discussion is the market for sites

where cargo can be loaded and offloaded. Both for physical

and economic reasoris, such sites are located in near-shore

areas, and usually in the vicinity of population centers.

With specific regard to sites for offloading and onloading

petroleum and petroleum products, the vast majority of

California’s refining capacity is located in the San Francisco

and Los Angeles metropolitan areas. (See Donley, Atlas of

California (1979) p. 87.) That is also where the bulk of the

existing port facilities are located. (See id., pp. 102-103.)

In San Francisco Bay and the Delta, for instance, there are

some 71 commercial/industrial port facilities. (See id., p.

103.) And as it happens, it is in and near Los Angeles and

around San Francisco Bay where most of the tide and

submerged land holdings of private parties and of local

governmental entities are clustered. (See Br. for the Appel-

lants, pp. 6, 20, appendix and map.)

Appellees’ calculations thus bear no relation to market

reality. At best, they are useless; at worst, misleading.

Appellees ultimately acknowledge that local govern-

ments holding grants of tide and submerged lands also

participate in the market for port facilities, but then argue

that they are nothing more than agencies of the State, and

that it is still “the State” that lessees are dealing with when

they obtain leases from local ports. This is nonsense. The

State has absolutely no control over the rates set or negoti-

ated by local ports. In fact, the competition for trade among

California ports (all of which are “state agencies” accord-

ing to appellees) is quite fierce. The local government

tidelands grantees are no more economically deferential to

the State than they are to each other, as is ciear from the

recurrent litigation over the state-local ailocation of royal-

ties from oil produced on the granied land. (See, e.g., City

of Long Beach y. Marshail (1938) 11 Cal.2d 609; Mallon

v. City of Long Beach (1955) 44 Cal.2d 199.) It would

come as a big surprise to both the cities and the State that

“what goes into the pocket of one benefits the other.”

(Appellees’ Br., p. 27.) From neither a legal! nor an eco-

nomic perspective is there any merger of the cities and the

State.

Appellees’ attempt to downplay privately-held tide and

submerged lands as an alternative location for port facilities

is also flawed. The uncertainties that may have existed for a

private tidelands owner in 1972 concerning the ability to

proceed safely with development on tide and submerged

lands (see Appellees’ Br., pp. 26, 30-31) have been largely

dissipated by the subsequent passage of the California

‘Cities are created by special charter (“charter cities”) or are

_ incorporated under general authorizing legislation (“general law cit-

ies”). are accorded autonomy over their local affairs by the California

Constitution (art. XI, §§ 5, 7), and can act in other areas to the extent

not preempted by state legislation. For funding, the cities look predomi-

nantly to local sources of revenue, such as the property tax. It is true

that in the years immediately following the 1978 passage of the

constitutional amendment restricting real property assessments and tax

rates (“Proposition 13”, article XIII A of the California Constitution),

the cities looked temporarily (and not always successfully) to the State

for “bail-out” funds. But the cities are being weaned from this in-

creased economic dependence, and are looking for innovative means of

raising needed funds from purely local sources, such as the sale and

leaseback of public facilities, additional proprietary activities, and new

local taxes and benefit assessments. (See Kroll, California Cities vs.

Prop. 13, 3 Calif. Lawyer (No. 6, June 1983) pp. 28, 30.)

Coastal Act of 1976? and the confirmation by the Legisla-

ture, in 1974, that such owners are entitled to compensation

for “lawful improvements... made in good faith” if ever

the State should wish to devote the land to other uses.'°

Finally, regarding appellees’ strained argument that the

Commission kas a “monopoly” in the context of lease

renewal, we note appellees’ admission that plaintiffs’ refin-

eries have been in existence for some 60 years. (See

Appellees’ Br., p. 30.) This is ample time to write off the

initial and any subsequent capital investment, even assum-

ing that the initial lease term that was obtained was insuffi-

cient in iength to amortize the cost of the adjacent

refinery."

* Cal. Pub. Resources Code, § 30000, et seq. Under the Coastal Act,

private landowners can now apply to the California Coastal Commission

for permission to rake improvements on privately-owned tide and

submerged land. The development policies of the act specificaily

contemplate issuance of permits for “coastal-dependent industrial facil-

‘ ities”, new or expanded port facilities, and new_fapker-facilities. (Cal.

Pub. Resources Code, §§ 30233(a), 30260, 30261.) The 1976 act’s

predecessor, the California Coastal Zone Conservation Act of 1972, was

adopted by initiative act approved November 7, 1972, which was after

the date of the article cited by appellees.

' Cal. Pub. Resources Code, § 6312, Cal. Stats. 1974, ch. 1191, § 1.

'' It was only in the context of lease renewals adjacent to existing

refineries that the Ninth Circuit concluded that the companies “must

use” tidelands administered by the Commission. (J.S. App. A-2.) For

the reasons set forth in our opening brief at page 22, footnote 16 and

accompanying text, this characterization erroneously assumes that the

company has a reasonable expectancy of a lease in perpetuity. This

Court certainly owes no deference to such an erroneous characteriza-

tion, given the circumstance that this case is here following entry of

summary judgment, not after an evidentiary trial on the merits regard-

ing disputed facts. Cases such as Branti v. Finkel (1980) 445 U.S. 507,

508, 511, 512, fn. 6, 513, and Pick Mfg. Co. v. General Motors Corp.

(1936) 229 U.S. 3, 4, are therefore inapposite. In any case, the lower

courts here did mot state, contrary to the impression created by

IV. THE CHALLENGED RENTAL MODE IS A REASONA-

BLE ONE AND IS IN WIDE USE BY OTHERS; TO

PROHIBIT ITS USE BY THE COMMISSION WOULD

FORCE THE STATE TO SUBSIDIZE INTERSTATE

AND FOREIGN COMMERCE

Concerning the reasonableness of the challenged rental

mode, the existence or nonexistence of a state monopoly

over tide and submerged lands is irrelevant. In a monopoly

situation, if there were unilateral imposition of exorbitant

amounts of rent, that might present a question for resolu-

tion by Congress, or possibly the courts.'* But such a

question could be presented even if the mode of rent used

were the one favored by appellees — a flat annual amount

that is a stated percentage of the appraised fee value of the

land. What if the amount of such a flat rent were set at 90

percent, or even 120 percent, of appraised fee value? Would

plaintiffs or other prospective lesss ; meekly concede that

because the “mode” of rent was legitimate, they had no

recourse? Of course not. Their argument would be that the

dollar amount of the rent was excessive.

This helps focus the issue presented here; and the issue

is not the reasonableness of particular amounts, but the

appellees, that the Commission has a monopoiy on all !ands suitable for

wharves, or that, “because of the location, the State’s lands are

indispensable to the use of the facilities for [interstate and foreign]

commerce.” (Appellees’ Br., p. 5.)

'2 If there were a monopoly, and prospective lessees needing the

lands for port facilities thought that the amounts of rental being asked

were too high, they might ek relief in court on the theory that the

“negative implications” of the Commerce Clause entitled them to

rentals that were “reasonable” in amount. Whether the courts would

engage in such ad hoc determinations of reasonableness is unclear. The

Court has expressed reluctance in the field of taxation of interstate

commerce, for instance, to enter a similar thicket, deferring instead to

Congress. (See Commonwealth Edison Co. v. Montana (i981) 453

U.S. 60%, 627-628.)

a ee hy NR SN rw

reasonableness of the volumetric rental mode in general.

Appelizes say that it is per se prohibited. regardless of

rental amount. They request invalidation of the regulation

that merely authorizes this form of rent.

This is not to say that actual rental! amounts undei

particular Commission leases will not bear scrutiny. If and

when there is a challenge to the reasonableness of specific

rental amounts, the Commission is willing to defend such

amounts in court or in any other appropriate forum.'? We

have noted appellees’ eiforts to color the perception of the

more general issue presented here by putting forward

alleged rates of return on volumetric leases already negoti-

ated. Given the sweeping ban of any volumetric rent sought

by appellees, particular rental amounts are of course irrele-

vant. Apart from their lack of relevancy, however, the

record demonstrates that these figures are inflated; they are

product of bad arithmetic, selective manipulation of

ers, and unwarranted assumptions.“

'> The Commis3¥ap is prepared as well to defend its leasing practices

against attacks on aM other ground—particularly against assertions

that are false. One such figehood is the statement by the oil companies

at page 9 of their brief tha\the Commission demanded a volumetric

rental as a condition of approving an assignment of a lease to Pacific

Refining Company. The truth is ‘Nhat, at the time of the requested

assignment, a firm rental still had not been negotiated with Pacific’s

predecessor; although a firm rental was negotiated contemporaneously

with the assignment, approval of the assignment was not conditioned

upon change of a rental already in place. (J.A. 113.)

'* The principal flaw in appellees’ numbers is their choice of the fee

value figure to be used in calculating a rate of return. Uniformly, they

have used the reduced value figure produced by negotiations with

Commission staff, rather than the fee value determined by the staffs

appraisers. This, of course, produces a higher rate of return. (Compare

Commission appraised values and lower negotiated values (J.A. 114)

with calculations and rental amounts contained in the various deciara-

tions of appellees (J.A. 21, 54, 61, 75). A review of appellees’ calcula-

tions using the lower figures also reveals some bad arithmetic; and the

Another set of statements by appellees that are also both

beside the point and inaccurate are those concerning the

comparable land values used by the Commission’s apprais-

ers and their alleged use of these values regarding sub-

merged lands in “200 feet” of water. It suffices here to say

that Commission appraisers have used the values attributed

by the ports to their wetlands, not the values of “industrial

building site[s] in the adjacent community” (see J.A. 25-

34); that most state sites involve lands immediately_adja-

cent to shore (all five lease sites mentioned in appelle

declarations fit this description); and that, if a particular

State site is indeed located at greater depths than are

mooring sites in a port, that may actually be an advantage,

given the saved cost of the continual dredging that is

necessary to allow passage by today’s deep-draft vessels in

ee shallow waters of enclosed ports (see

“PE125).

Turning to the reasonableness of the volumetric rental

mode per se, appeliees do not really challenge the extensive

evidence contained in the Administrative Record concern-

ing the use of the volumetric rental mode for both im-

proved and unimproved pfvperiy. They do state that the

testimony at the hearings was that “the effect of such a

system of charges would be to discourage commerce”

(Appellees’ Br., p. 6), but the cited pages of the Adminis-

trative Record contain only general objections that the

lessee’s cost of doing business would be increased in an

errors are all on the high side. Correction of these two factors yields

substantial reductions in the calculated rates of return. For instance,

appellees’ highest calculated rates of return, 28 to 29 percent on the

Pacific Refining lease (Appellees’ Br., pp. 9-10) shrink under scrutiny

to 17 to 19 percent. And the calculated returns should be reduced even

further, when it is considered that appellees’ projections for returns in

future years assumed absolutely no increase in land value over a ten-

year period; i.e., a land value negotiated in 1976 was assumed to be

unchanged for purposes of figuring a rate of return in 1980 or 1985.

Be x

ae : eh

indeterminate amount (e.g., J.A. 163, 164, 180, 227, 234),

or a lessee’s calculations of increased rents, which calcula-

tions were based on the fixed rate schedule for various

commodities that was part of the initial staff proposal, but

later abandoned (see J.A. 116-117, 120).

Concerning practices of the ports, appellees again main-

tain that ports may use volumetric charges because of the

additional services they provide. They ignore the extensive

use of such charges for unimproved property by the ports

and others. Further, the additional port services and facili-

ties that they use as examples (dredging, navigational aids,

and breakwaters) are independently charged for in the

form of separate non-volumetric fee called “dockage”

that is applied By the ports solely against the vessel. (J.A.

428, 434, 446, line 23:) The volumetric wharfage charged

by the ports, on the other hand, is one of a number of

charges (also including wharf demurrage and storage) that

are applied against a rate base that includes as a component

raw land valued at its current fair market vaiue. (J.A. 401,

402-404, 411-413, 415, 417, 423-433, 445-449.) We grant

that the ports often (but not always) provide improved

property, but it cannot be gainsaid that a portion of the

wharfage charge even in such situations represents a volu-

metric rent on raw land.

At bottom, appellees’ assertion here seems to be that

there is only one way to obtain a fair return on leased

property and that is by a flat annual rent. The practice of

the ports and many other lessors establishes that the prac-

tice in the rental market is otherwise.

Neither is there anything in the source or nature of the

State’s title to tide and submerged lands that obligates it to

subsidize its lessees by foregoing a rental mode that in some

cases might yield a higher rent than would a fixed rent tied

to appraised fee value. It is true that such lands are held in

trust, but 2ppellees’ statement that the State’s title “is not a

proprietary title” (Appellees’ Br., p. 21) is simply wrong.

This argument that the State is obligated to use its trust

lands to subsidize those engaged in “commerce” was made

by appellees before the Caiifornia court of appeal and was

flatly rejected as inconsistent with established law concern-

ing the nature of the State’s ownership of such !ands.'°

Finally, appellees refer to a general report on rates of

return submitted to the Commission in early 1975. With

certain exceptions regarding large marina sites (for which

the report recommended percentage and gallonage rentals),

the report recommended that a fixed return of 8 percent be

sought for the Commission’s leases. (J.A. 339.) Appellees

focus on a sentence in the report which states that rentals

based on a percentage of gross receipts are not used for

'S The court described the coexistence of a proprietary title and the

State’s trust responsibilities in such lands as follows:

“(T]he State’s ownership in trust lands has a dual nature: the

governmental obligation to protect trust uses of such lands by the

public (the ‘jus publicum’), and the proprietary right, as an

incident of ownership, to obtain compensation for the sale or lease

of such land to private parties (the ‘jus privatum’). Oakland v.

Oakland Water Front Co. (1897) 118 Cal. 160, 183; People v.

California Fish Co. (1913) 166 Cal. 576, 593-594, 596, 599;

Marks v. Whitney (1971) 6 Cal.3d 251, 260; Boston Waterfront

Dev. Corp. v. Comm. (Mass. 1979) 393 N.E.2d 356, 359; Brusco

Towboat Co. v. State (Ore. App. 1977) 567 P.2d 1037, 1044-1045,

affd. in part (Ore. 1978) 589 P.2d 712, 718.) The jus privatum is

the normal right to sell or lease something which is owned; the jus

publicum, however, which cannot be sold or leased, restricts that

normally broad right. When the State leases trust lands, it is

exercising a proprietary function, with the caveat that it cannot

unreasonably impair the public’s trust rights (the jus publicum).

(See ibid.; Athletic Club v. Board of Harbor Commrs. (1933) 130

Cai.App. 376, 386-387; Spalding v. United Stutes (S.D. Cal.

1937) 17 F.Supp. 957, 962, affd. (9th Cir. 1938) 97 F.2d 697.)”

(Western Oil & Gas Assn. v. State Lands Com. (1980) 105

Cal.App.3d 554, 566 [164 Cal.Rptr. 468], hg. denied by Cal.

Supreme Ct. July 2, 1980.)

~~. 15 Pe

“™

industrial leases. (J.A. 324.) Accepting the accuracy of

that statement, it certainly does not address industrial

leases based on volume; and the studies conducted by the

Commissicn’s staff over the subsequent year and a half

developed the numerous examples of volumetric rentals for

the use of unimproved land for industrial purposes that are

discussed in appellants’ opening brief.

Appellees’ point here again is that ground leases must be

limited to a fixed rate of return in order to be “reasonable”,

and that variable rent ground leases are inherently unrea-

sonable—a proposition that is at odds with actual practice

in the rental market for ground leases. The fact that

variable rent leases will often yield returns greater than

fixed-rent leases is simply a truism, not an indictment of the

rental mode. If variable rent leases did not on occasion

produce higher returns, there would be no reason for

employing such an alternative mode of rent in the first

place.

The challenged rental mode is a reasonable one, and

should be upheld. The opposite course—invalidating the

Commission’s regulation and entirely foreclosing the use of

this form of rent, regardless of particular rental

amounts—would force the State in many cases to subsidize

the commercial enterprises of its lessees. Nothing in the

Constitution requires this anomalous result.

- ™

=e, ~ 16

CONCLUSION

For the reasons discussed in this and appellants’ earlier

ief, the decision of the Court of Appeals for the Ninth

Circuit.should be reversed, and the case remanded to the

~~ —“Wistrict court for entry of an order denying the motion of

the plaintiff companies for summary judgment and granting

that of the State-_ands Commission.

$ setfully wubmitted, “Sy

JOHN K~VAN De Kamp