Opinion ID: 1443207
Heading Depth: 1
Heading Rank: 3

Heading: Gross Current Value.

Text: By the Utility's own argument in this court it is admitted that its present value base as submitted reflects actual or estimated cost new of its property on price levels existing December 31, 1949. Mr. Thuerk, the Utility's president testified at the hearing on June 26, 1950, that the company estimated the present value of its property as of December 31, 1949, at a figure which represents adjustment to the present level of the purchasing power of the dollar. At the hearing on June 28, 1950, counsel for the Utility stated for the record: The purpose of this testimony ultimately will lead to the value of this property related to the present value of the dollar. (Emphasis supplied.) Mr. Davis, an employee of Gilbert Associates, Inc., (engineers and consultants), a firm retained by the Utility, testified as an expert on public utility operations expressly to the effect that the basic formula used by the Utility in determining its asserted present value rate base was the original cost of plant in service at December 31, 1949, adjusted to reflect the reduced purchasing power of the dollar at the approximate average levels existing during 1949. Mr. Edgar, a similar expert witness, testified to the effect that various methods were used in repricing the existing properties of the Utility at December 31, 1949, to reflect the purchasing value of the dollar in 1949. The sort of rate base estimate suggested by this testimony has been condemned by the U.S. Supreme Court in West v. Chesapeake P. Telephone Co., 295 U.S. 662, 671, 672, 55 S.Ct. 894, 79 L.Ed. 1640, 1647 (1935) as follows:    To an extent value must be a matter of sound judgment, involving fact data. To substitute for such factors as historical cost and cost of reproduction, a `translator' of dollar value obtained by the use of price trend indices, serves only to confuse the problem and to increase its difficulty, and may well lead to results anything but accurate and fair. This is not to suggest that price trends are to be disregarded; quite the contrary is true. And evidence of such trends is to be considered with all other relevant factors   . In view of the escalator factor inherent in approaching a rate base determination by the methods advanced by the Utility, careful analysis of the record becomes mandatory to determine whether on the proofs and under the circumstances surrounding the Utility and the service rendered by it to the public, the present value rate base as invoked by the Utility affords a just and reasonable basis for evaluation of the company's plant. Upon such an analysis practical limitations impel us to recite only descriptive examples of the evidence and legal principles pertinent thereto, although the entire record is the basis of our conclusion. Before proceeding to a discussion of these significant examples of the evidence, it may be well to point out that in this case a substantial portion of the Utility's property was valued throughout the evidence at the same figure for both the historical cost and the present value rate bases submitted by it. The Utility relied on evidence of historical cost for value of land rights in both bases submitted although it introduced the testimony of its right of way engineer and other evidence of increase in cost of acquisition and development of real estate. It also introduced evidence of plant additions in 1947, 1948 and 1949 which was identical for both bases. Mr. Davis testified in this connection that cost new of the property at present day price levels had fairly stabilized by mid-1948. Approximately $13,000,000 of these additions to property constituting the rate base by either method occurred in the year 1949. This was roughly one-third of the Utility's claimed historical cost value of its existing plant in service on December 31, 1949, which was the basis for both of the rate bases proposed by it. Mr. Davis testified that inflation, for the purposes of this proceeding, would have little effect on the value of this portion of the Utility's property. Further evidence on rate base submitted by the Utility related to projected additions to plant for years subsequent to 1949, and this evidence was applied identically by it in the computation of its historical and present value bases. From this brief summary it is at once apparent that the Utility's current value testimony for determinative purposes affected considerably less than two-thirds of the property valued for its submitted rate bases. Of this approximately 43 per cent of the plant in service on December 31, 1949, had been installed prior to December 31, 1939. It therefore follows that the escalator methods of present value determination resorted to by the Utility in this case and above described were devised to raise to current value, new, the older facilities of the company, some of which were more or less obsolete. In this connection we note that it has been held that the due process clause of the Federal Constitution does not require a rate-making commission to fix rates on the present reproduction value of something no one would presently want to reproduce. Market Street R. Co. v. Railroad Comm. of Cal., 324 U.S. 548, 567, 65 S.Ct. 770, 89 L.Ed. 1171, 1184-1185 (1945). On the other hand, decisions of both courts and utility commissions throughout the country generally appear to recognize the doctrine that in determining rate valuations there should be taken into consideration the fact that a higher level of prices and materials has been brought about by conditions due to the devaluation of the dollar, the recent World War and the current emergency and inflationary economic situation, although with respect to facilities constructed at pre-war or pre-emergency prices the prevailing abnormally high prices of labor and materials should not be taken as the sole criterion or controlling element. See Annotations, 20 A.L.R. 555-589. In this State it has been held that abnormally high prices for labor and material attendant upon an unstable market do not afford a just criterion of the value of property for rate purposes, although reproduction cost less depreciation is an element to be considered. Atlantic City Sewerage Co. v. Bd. of Public Utility Commissioners, supra (128 N.J.L. at p. 367). And valuation based solely on pre-war average prices is unreasonable in the face of a great reduction in the purchasing power of the dollar. Elizabethtown, etc., Co. v. Pub. Utility Commissioners, 95 N.J.L. 18, 19 ( Sup. Ct. 1920). The United States Supreme Court has adhered to similar views, holding that when a change in price level has occurred actual experience in the construction and development of the property, especially that experienced in a recent period, may be an important check on extravagant estimates, and that although reproduction cost is a relevant fact it is not an exclusive test, emphasizing the danger in resting conclusions upon estimates of a conjectural character. Railroad Comm. of Cal. v. Pacific G. & E. Co., supra (302 U.S. at p. 398, 58 S.Ct. 334, 82 L.Ed. at p. 325). Compare Willcox v. Consolidated Gas Co., 212 U.S. 19, 29 S.Ct. 192, 53 L.Ed. 382 (1909). The evidence on current value of those portions of the Utility's plant so valued was developed in three major categories. One consisted of accounts (mass distribution and transmission accounts and practically all of the Utility's building, substation and production plant accounts) of physical property (surviving plant dollars) actually repriced at the purchasing power of the dollar in 1949 to reflect either 1949 costs actually experienced by the company or costs which allegedly would have been experienced by the company using material and labor as furnished by suppliers who presently serve the Company and using indirect construction costs and overhead which it actually experienced in 1949. The second consisted of accounts in which surviving original cost dollars were repriced to reflect the purchasing power of the dollar in 1949 by applying developed cost factors based upon studies completed for the accounts for which surviving original cost dollars were repriced at 1949 cost levels using published indices of the firm of Whitman, Requardt and Smith (known as the Handy trends). While the respondent properly recognized the admissibility of evidence of this character, it found that for various reasons little significance could be accorded to it under the circumstances of this case. Its conclusions in this respect find complete support in the record. To illustrate this we shall examine a few of the items discussed by the respondent in its decision. The respondent found that no evidence of reproduction cost of the entire existing plant as a unit was introduced, but that to a substantial extent the unit prices developed by the Utility's experts in this connection reflected piecemeal construction. That the Utility recognized the weakness in this approach appears in part from the endeavor of its witness, Mr. Davis, to explain that lower construction costs of unit construction would be offset by lesser overhead costs on piecemeal construction. There is no evidence in the record to support Mr. Davis' theory on overhead expenses, and there is evidence in the record that the Utility even on relatively small jobs used an overhead loading of 10 per cent on labor and 6 per cent on materials. Mr. Edgar who determined the overhead included in the current value appraisals admitted that he had no experience in ascertaining what the overhead costs would be in reproducing a project of this size and type. The respondent stated that it is common knowledge that for comparable types of construction, engineering and supervision costs are lower percentagewise on larger projects than on relatively smaller ones. We are unable to say that this is not a matter of which judicial notice may be taken. The respondent found that under the Utility's approach to present value the customer is expected to pay a return on a rate base which reflects current costs of materials and labor, while no provision is made for the customer to receive the benefits of construction that would be installed today as compared with past construction. Mr. Allen, vice-president and general manager of the Utility, testified that facilities now being installed are sturdier than older ones and that the company is incorporating improvements in the art developed since the construction period which predated the last war (World War II). There was evidence that inspection and maintenance cost for the next few years on an old 55 MW generating unit is $55,000 per annum, and that such cost on a new 66 MW generating unit is $16,000 per annum. Mr. Davis testified that on the basis of unit cost per kilowatt of the old station as repriced to 1949 levels ($177 per kilowatt) the current cost of the old 55,000 kilowatt plant was $9,735,000, but if the plant had been built at the same unit cost as the new plant (computed to be $159 per kilowatt) the cost of the old plant would have been $8,668,000. He further testified to similar differences in annual cost of operation. This is, of course, illustrative only, but it indicates the danger and injustice to the public in basing a fair value determination on reproduction cost new of older facilities by adjusting actual cost to the current purchasing value of the dollar as attempted by the Utility under the circumstances of this case. The respondent in analyzing the basis of the company's cost study of poles, priced on the basis of cost of installation in 1949, found that the evidence had no value. The reason advanced by the respondent and justified by the record, is that although over 70,000 distribution poles were so priced, only 4,000 had been installed in 1949 and there was no evidence to establish as a fact that these 4,000 poles were so distributed throughout the company's service areas as to reflect a fair cross-section of the excavation conditions associated with the installation of all the company's poles, nor evidence that the poles represented a reasonable cross-section of the whole number of poles in relation to size and type. The respondent observed further that the bogey cost, or average installation factor, used in the Utility's current cost studies was not based upon analysis of the Utility's construction conditions and corresponding construction cost experience but was in fact a bogey-cost study made by the Metropolitan Edison Company at a previous date for its own construction conditions and associated construction costs. There is no sufficient competent relevant evidence of comparability in the record to support the application of this installation factor to the Utility's plant. As to other cost factors, the respondent found that the Utility, although charged with the burden of proof, produced no direct evidence upon which manufacturers' present cost quotations (used in the current cost study) for equipment made some twenty years ago, and superseded by more modern equipment could be supported. This criticism of the evidence is justified by the record.